EMH is a straw man. Few people (even academics) truly believe that the market is completely efficient. However, that doesn’t mean that the market can’t be “pretty efficient,” and that some parts of the market may be more efficient than others. The main message of the EMH is that it is pretty difficult to outperform a buy-hold-rebalance portfolio over the long term, and to remind you that most information that seems relevant about the economy and companies are probably already incorporated into the current price. To outperform the market consistently, you need to have an explanation about why your method processes valid information that other people can’t or don’t incorporate into theirs. People love to slam academics for believing that markets are efficient and that this got the economy into the current mess, but it’s more the students of academics (and particularly non-economist quants) who learned the basics of the EMH and then proceeded to forget that it is simply an assumption to make some of the mathematics more tractable. The more detailed your math gets, the more you tend to need to rely on questionable assumptions about prices, rationality, and behavior. CAPM isn’t perfect, but it does surprisingly well for a 1-factor explanation of stuff, and other stuff like the Fama-French factors contribute only a small incremental improvement on a plain-old CAPM assumption. I’ve heard people complain that the market is either efficient or it’s not… meaning that you can’t say it’s “mostly efficient.” But that is ridiculous. If you have an engine that converts 90% of energy available into useful work vs. another that converts only 40% of energy available to useful work, neither engine is “perfectly efficient,” but if you are trying to get work done, one is definitely more efficient than the other. Similarly, some segments of the market are likely to be more efficient than others in the sense that there may be some segments of the market where there is more relevant information available to be captured and used for generating consistent outperformance.
nocareer Wrote: ------------------------------------------------------- > I do have, however, access to tons of > books (I have around 50 (and with access to > bookstores) and pretty good knowledge about what > materials are out there) and I have been piecing > together strategies and knowledge from these books > in the most logical, systematic, and efficient way > that I can possibly achieve. IMO the most logical and efficient way to do it is to develop rock solid accounting skills and to memorize Michael Porter’s Competitive Strategy, both of which are akin to beating yourself in the head repeatedly with a brick in slow motion for an extended period of time. Can’t say it’s fun, but it works.
neofinance Wrote: ------------------------------------------------------- > Also, I will complement my skills by learning > financial modelling and C++ and as much math > possible. These skills would be always useful in > HFs (generally speaking), correct? No, I would pass on this. You need a competitive advantage, or an “identity,” not a jack of all trades skill set. You won’t be as good at quant and C++ as a quant, so you couldn’t compete there, and you don’t use that stuff in fundamental analysis. At the value investing shop I work for, we have a guy that programs our spreadsheets and runs all the quant stuff. I don’t really know how he does what he does, but he always gets me what I ask for, and I never have to do any programming. The math required for fundamental analysis (the kind used in research and, by extension, portfolio management) is arthimetic and algebra at best – anyone who graduated from second grade should be on track. I don’t want to down play the skill too much, since there is a lot of quantitative intuition that goes into the work, but it’s not stuff you’re busting out your calculator for; it’s more like understanding the context around the numbers and which direction they’re likely to move. Ironically, from what I have seen, most of the heavy lifting in investing is actually qualitative in nature, not quantitative, though you would never know it by popular wisdom. The best (and worst) decisions are all based on big picture thinking, or in understanding the nitty gritty details of a business or transaction. The numbers inform the process, but let’s be honest, everyone looks at the same numbers and the math isn’t hard.
bromion Wrote: ------------------------------------------------------- > IMO the most logical and efficient way to do it is > to develop rock solid accounting skills and to > memorize Michael Porter’s Competitive Strategy, > both of which are akin to beating yourself in the > head repeatedly with a brick in slow motion for an > extended period of time. Can’t say it’s fun, but > it works. Thanks a lot for the advice. I may have been focusing too much of my beginning efforts on learning about market strategies and learning how to trade. Like today, I spend a little time with MACD but it seems like one of those indicators that may be overused by the ‘crowd’. I have all three strat. books (Competitive Strategy, Competitive Advantage, Competitive Advantage of Nations) but didn’t place such a big emphasis on them. I think I will now emphasize more on them.
It depends on what you want to do, nocareer. If you want to “trade,” Porter won’t make much sense. I think the best approach is to pick a discipline and stick to it. If you have both a trading orientation and a value orientation, you’re going to get tangled up in your shorts.
bromion Wrote: ------------------------------------------------------- > It depends on what you want to do, nocareer. If > you want to “trade,” Porter won’t make much sense. > I think the best approach is to pick a discipline > and stick to it. If you have both a trading > orientation and a value orientation, you’re going > to get tangled up in your shorts. I don’t fully understand. So one would just market themselves as a value specialist, growth specialist, macro guy, swing/day trader, trend/swing/position trader, etc.? I have also thought about marketing myself as a certain specialist but from my experience with a generalist analyst he seemed to have focused on swing/positional trading, value, and growth. And the assignments he went after varied…from restaurants to pharm to energy & gas. I don’t want to be a trader (too high risk) but I’ve been learning preliminary TA mainly because it seems to be pretty essential. I was planning on only putting a fraction my personal development efforts here. But yeah, finding a certain niche to dive into has been uncertain for me and I haven’t gotten it figured out yet.
My preliminary plan has been to keep a basic set of experimental “paper” personal portfolio running ie. where I asset allocate portions to swing/positional trades and the rest to stocks & AA. I have been gently “touching” subjects w/o spending lots of time with them ie.- how to intepret media/political environment, econ & macro sector indicators, trading & TA, FSA, etc. I’ve yet to go after porter and the business strat/competitive strat sector yet. I was hoping to figure out my specialization from exploring that… These elements seem all interrelated and I don’t think that I can put out good analysis without some basic fundamental perception of all of them. Even more heavy to me is the fact that I have to learn Financial modeling (excel/vba) & valuation. I have to get Excel 2010 (I have only excel 03) in order to get on with that. I plan on marketing this to potential employers…not 100% sure if I’m doing all the right things…
My point was that if you don’t have a clear philosophy, you are adrift. By definition, you can’t focus on three strategies at once. So if you’re a value guy, and you see what you perceive to be a good “trading” idea but you’re not as skilled at trading, then your analysis may suffer as you drift from your core philosophy. From what I have seen, the worst losses come when investors get off track from what they are good at (what has worked for them in the past for clearly definable reasons that they understand). For example, I’m a 2-3 year time horizon guy – if you asked me to make money on a swing trade, I’d be lost, and if I tried, I’d probably get burned. Likewise, I look at macro data, but I’m hardly a macro guy, and am in no position to make bets on emerging markets or currencies, etc. In other words, the investment world is vast, be careful you don’t waste your energy flailing around trying to cover everything – I’d pick a style and try to focus on that; you can always branch out later. Learning for the sake of marketing yourself for a job is a somewhat similar situation, but that’s really a separate conversation.
Wow Bromion, thank you for sharing that. Like you, I did not take a single finance / econ course during my undergrad, rather learned a few years after the fact that I very much want to be in this field. This gives me inspiration.
bromion Wrote: ------------------------------------------------------- > My point was that if you don’t have a clear > philosophy, you are adrift. By definition, you > can’t focus on three strategies at once. So if > you’re a value guy, and you see what you perceive > to be a good “trading” idea but you’re not as > skilled at trading, then your analysis may suffer > as you drift from your core philosophy. From what > I have seen, the worst losses come when investors > get off track from what they are good at (what has > worked for them in the past for clearly definable > reasons that they understand). For example, I’m a > 2-3 year time horizon guy – if you asked me to > make money on a swing trade, I’d be lost, and if I > tried, I’d probably get burned. Likewise, I look > at macro data, but I’m hardly a macro guy, and am > in no position to make bets on emerging markets or > currencies, etc. In other words, the investment > world is vast, be careful you don’t waste your > energy flailing around trying to cover everything > – I’d pick a style and try to focus on that; you > can always branch out later. > I think I just addressed some of my planning (it came out the same time as your post). I’m been basically parroting that analyst. It was at a really small firm so maybe that’s why he was a generalist and seemed to have no single deep concentration (unlike sell side analysts that work for ibanks, who tend to be hyperspecialized). Yes, my efforts are pretty wide (a yard wide an inch deep…). I’ve been following the generic fundamental analysis +TA entry/exit method and hitting a bit of everything (and focusing more on certain things that seem to be more essential) to cover “holes” so I’m not an utter moron in any one area and can have, at the very least, a primitive capability to interpret these areas. As someone who has not yet worked full time as an analyst, I haven’t thought of stopping and putting all my efforts in becoming a macro or value guy or swing trader, etc. because I had thought that it entailed for too much hiring risk. I have been assuming that if I manage to get hired somewhere full time eventually that it would either depend on 1. what analyst I interned with beforehand or 2. I have a general skill set and would be “brought to speed” with their needs. > Learning for the sake of marketing yourself for a > job is a somewhat similar situation, but that’s > really a separate conversation. I’m not completely sure what you mean. How is it a separate conversation? Thanks.
If you’re young enough, you don’t necessarily have to have a “niche,” but it still helps for marketing. If you’re looking for a position, it helps to have some kind of thing that others can see has your name on it.
I’m way too young to have a true niche…undergrad was a recent experience. My plan is to post my writings on a blog or, if good enough, into a seekingalpha sort of site.
@ bromion Getting Porter’s book. Any other must-have recommendations for learning accounting or any useful techniques/tools?