dhyun3 Wrote: ------------------------------------------------------- > Great post JDV. Thanks. > > Anyway, for the past few days, I’ve really enjoyed > reading JDV’s posts, and it seems like everyone on > AF knows him and misses him while he was gone. > That said, as a pretty new member on AF, who’s > JDV? (I know it probably doesn’t matter, but I’m > just curious.) > > I searched him and there are more than 7500 posts > from him, much more than Numi. JDV is an occasional academic, occasional hedge fund guy, occasional author, and among other things currently a landlord on a freaking falling apart piece of crap old mansion that I never wanted to begin with and I keep missing the plumber who weighs like 450 lbs and has the plumber’s crack from hell. It’s seriously disgusting. This is the worst job in the world.
I try to separate market efficiency into two parts. 1) Market prices are a weighted average of the participant’s opinions and participant’s use the best information they have at the time to choose to buy/sell. 2) Since market prices incorporate everyone’s expectations, you cannot make risk-adjusted profits. I agree with part 1, but am skeptical about part 2. Anyway, trend following is a subject I have spent a great deal of time studying. First, I would say that there is a literature that shows that incorporating regime-switching of returns and covariances into mean-variance optimization boosts returns (Ang and Bakaert in early 2000s). So to say that an academic can’t identify trends is somewhat ridiculous to me. Second, tests show that market returns aren’t particularly serially correlated (evidence for efficient markets and generally used against trend following). However, there is widespread evidence of skewness, kurtosis, and time-varying volatility and correlation. If an investor is meant to use expected moments in optimization, then periods where correlations and volatilies are high suggest you move to bonds. I think a big source of the risk-adjusted returns from trend-following come from various ad hoc methods to incorporate this into a portfolio.
JoeyDVivre Wrote: ------------------------------------------------------- > dhyun3 Wrote: > -------------------------------------------------- > ----- > > Great post JDV. Thanks. > > > > Anyway, for the past few days, I’ve really > enjoyed > > reading JDV’s posts, and it seems like everyone > on > > AF knows him and misses him while he was gone. > > That said, as a pretty new member on AF, who’s > > JDV? (I know it probably doesn’t matter, but > I’m > > just curious.) > > > > I searched him and there are more than 7500 > posts > > from him, much more than Numi. > > JDV is an occasional academic, occasional hedge > fund guy, occasional author, and among other > things currently a landlord on a freaking falling > apart piece of crap old mansion that I never > wanted to begin with and I keep missing the > plumber who weighs like 450 lbs and has the > plumber’s crack from hell. It’s seriously > disgusting. This is the worst job in the world. Don’t forget, also the only man ever to receive a perfect score in all 3 CFA exams.
former trader Wrote: ------------------------------------------------------- > JoeyDVivre Wrote: > -------------------------------------------------- > ----- > > dhyun3 Wrote: > > > -------------------------------------------------- > > > ----- > > > Great post JDV. Thanks. > > > > > > Anyway, for the past few days, I’ve really > > enjoyed > > > reading JDV’s posts, and it seems like > everyone > > on > > > AF knows him and misses him while he was > gone. > > > That said, as a pretty new member on AF, > who’s > > > JDV? (I know it probably doesn’t matter, but > > I’m > > > just curious.) > > > > > > I searched him and there are more than 7500 > > posts > > > from him, much more than Numi. > > > > JDV is an occasional academic, occasional hedge > > fund guy, occasional author, and among other > > things currently a landlord on a freaking > falling > > apart piece of crap old mansion that I never > > wanted to begin with and I keep missing the > > plumber who weighs like 450 lbs and has the > > plumber’s crack from hell. It’s seriously > > disgusting. This is the worst job in the > world. > > > Don’t forget, also the only man ever to receive a > perfect score in all 3 CFA exams. Damn…
Ignore EMH and instead focus on “everyone can’t be above average”. Just because it’s possible for one person to outperform based on skill doesn’t mean we can somehow all outperform the market, since collectively we are the market. Now deduct fees and you can see why index funds usually best 65% of their competitors. On a side note, S&P has this scorecard report they put out that looks at active managers and their quartile performance history. The latest copy shows how manager quartile rankings are actually worse predictor of future performance than just randomly picking a manager. Once you understand the argument about everyone collectively being the average, you can laugh at people who say “time to stop indexing because it’s a stock picker’s market” or “buy and hold is dead!”. If buy and hold is dead, then who exactly is the general public supposed to sell their stocks to when it’s time to get out, aliens?
Regarding beating the market. Are there any funds that have beaten the Russell 2000 Value (IWN)? I’m referring to small cap value managers.
IARdude Wrote: ------------------------------------------------------- > Ignore EMH and instead focus on “everyone can’t be > above average”. Just because it’s possible for one > person to outperform based on skill doesn’t mean > we can somehow all outperform the market, since > collectively we are the market. Now deduct fees > and you can see why index funds usually best 65% > of their competitors. On a side note, S&P has this > scorecard report they put out that looks at active > managers and their quartile performance history. > The latest copy shows how manager quartile > rankings are actually worse predictor of future > performance than just randomly picking a manager. > > Once you understand the argument about everyone > collectively being the average, you can laugh at > people who say “time to stop indexing because it’s > a stock picker’s market” or “buy and hold is > dead!”. If buy and hold is dead, then who exactly > is the general public supposed to sell their > stocks to when it’s time to get out, aliens? Lake Wobegon? ; )
ShintreH Wrote: ------------------------------------------------------- > Regarding beating the market. Are there any funds > that have beaten the Russell 2000 Value (IWN)? I’m > referring to small cap value managers. Of course.
JoeyDVivre Wrote: ------------------------------------------------------- > […] Markets being “wrong” doesn’t contradict EMH. Actually, yes it does, even for the weak and semi-strong forms of EMH. The whole point of EMH is to say that all (!) markets are priced efficiently/correctly. If the markets are “wrong”, then a sharp investor can achieve excess returns (not just due to luck) and therefore outperform the market in the long run. More obviously, EMH says nothing about many price-influencing ideas/mechanisms, such as behavioral finance and market microstructure problems like time-varying liquidity.
jmh530 Wrote: ------------------------------------------------------- > I try to separate market efficiency into two > parts. 1) Market prices are a weighted average of > the participant’s opinions and participant’s use > the best information they have at the time to > choose to buy/sell. 2) Since market prices > incorporate everyone’s expectations, you cannot > make risk-adjusted profits. > > I agree with part 1, but am skeptical about part > 2. I don’t understand what you mean wrt part 1. Market price is set by the last trade, or in the case of illiquid markets, the mid of the bid-ask spread (which the last price may not fall within). In either of these cases, the marginal buyer and seller are setting the price. Think of an eBay auction. There may be 50 bidders on an item, but it’s what the top bidder is willing to pay that sets the market price. This highest bid will be (of course) higher than the “weighted average” buyer opinion. Likewise the offer will be lower than the “weighted average” seller opinion. And you cannot combine these unknown buyer and seller distributions via something simple like a weighted average.
mwvt9 Wrote: ------------------------------------------------------- > ShintreH Wrote: > -------------------------------------------------- > ----- > > Regarding beating the market. Are there any > funds > > that have beaten the Russell 2000 Value (IWN)? > I’m > > referring to small cap value managers. > > Of course. Which ones?..
justin88 Wrote: ------------------------------------------------------- > I don’t understand what you mean wrt part 1. > Market price is set by the last trade, or in the > case of illiquid markets, the mid of the bid-ask > spread (which the last price may not fall within). > In either of these cases, the marginal buyer and > seller are setting the price. > > Think of an eBay auction. There may be 50 bidders > on an item, but it’s what the top bidder is > willing to pay that sets the market price. This > highest bid will be (of course) higher than the > “weighted average” buyer opinion. Likewise the > offer will be lower than the “weighted average” > seller opinion. And you cannot combine these > unknown buyer and seller distributions via > something simple like a weighted average. Obviously I mean it metaphorically and not literally. I think point 1 is non-controversial. It’s just stating a fact, but not saying whether or not the distributions are correct or not. It may seem counter-intuitive, but theoretically you can actually have an efficient market where there are no trades. You might say not everybody has a distribution, but their portfolio implies a distribution. If you add up everybody’s portfolio and get the market-cap weights, you can find the implied returns of the market if you have the covariance matrix (and under some assumptions). It’s not exactly a weighted average, but it is a decent way to think think about it. Regarding your other point responding to JDV, I think JDV is correct here. During the internet bubble, stocks were overpriced, but the EMH guy would just say that it reflected the distribution of investor views. They would say it was still efficient and they do not mean to say that the price is always right. People mistakenly make that second leap when talking about efficient markets, which is incorrect.
jmh, I value your opinion from your previous posts, but I don’t agree with you here. The internet bubble is a classic example of behavioral finance, which flies in the face of the EMH. Also, saying that prices reflect the distribution of investor views is just Markets 101, not the EMH. “Efficiency” in the EMH means the price IS right, given all information available. However we’ve also agreed the current price is largely a popularity contest…
But aren’t all market prices the result of popularity contests? I think we are mistaking intrinsic value for price. The tech bubble was the result of the sum of investor expectations on the particular stocks, that they were unrealistic is a different story…
Well I was trying to explain what EMHer’s believe. If you asked Gene Fama, he would argue the internet bubble doesn’t invalidate EMH and that efficient markets don’t mean correct prices. This is a good discussion: http://www.princeton.edu/~ceps/workingpapers/91malkiel.pdf
Well, if EMH doesn’t mean ‘correct’ prices, what does ‘efficient’ mean then? EMH still means that variation in one’s performance is 100% due to luck. Said another way, there is no skill involved so there is no way to outperform in the long run. This is obviously nonsense if prices are incorrect for prolonged periods of time.
EMH means: “since market prices incorporate everyone’s expectations, you cannot make risk-adjusted profits.” That doesn’t necessary mean “correct” prices.
jmh I have to differ with you here as well: -emh in weak form means all historical publicly available information is reflected in the current price. -semi strong form would entail all historical publicly available information and prices will essentially instantly change to reflect current information > I would interpret this to mean that TA and trends would now be worthless b/c it’s all reflected in the current price, so nothing to trade on here -Finally Strong form efficiency implies the above two as well as all private non public information is reflected in the current price --so as you see nothing about expectations in here, I believe that’s term structure of interest rates, comon’ man you’re better than that -that’s level 1 stuff 
I think the internet bubble and the real estate bubble, and a bond bubble (unless you’re Alan Greenspan or Friendly Ben) are pretty damn obvious as they are occurring I mean when you have pe’s above 30, home prices and household wealth to debt ratios well above 4 std deviations from a historical average, and Friendly Ben coming on TV stating that he wants inflation at 2% and I’m suppose to be happy with a ten year at 2.5%? Please. If you accept the above then you accept that prices can and do deviate from what your estimate of intrinsic value reflects and thus above market returns are available. Oh yeah I’m pretty sure that piece of shite paper I referred in the first place states the same thing only in that bullsh*t academic jargon that hardly anyone understands, except of course academics (I suppose this is one way to ensure job security)
ShintreH Wrote: ------------------------------------------------------- > mwvt9 Wrote: > -------------------------------------------------- > ----- > > ShintreH Wrote: > > > -------------------------------------------------- > > > ----- > > > Regarding beating the market. Are there any > > funds > > > that have beaten the Russell 2000 Value > (IWN)? > > I’m > > > referring to small cap value managers. > > > > Of course. > > Which ones?.. We have used DFSVX for almost a seven years. It has crushed the Russell 2000 Value since its inception (March of 1993) 11.3% vs. 9.53%. Ten year performance is 9.02% vs. 7.72%. Different time periods will show different results, but it is basically due to the expression of the “value premium”. When value does well the DFA fund excels. When it doesn’t DFA’s fund doesn’t do as well because it is more “valuey” than the Russell. My firm believes that exposure to small caps and value are priced risk and eventually it pays off (Fama-French three factor model). Many don’t believe in this model. Ironically it is a passive fund, but my firm mainly uses passive funds. I am sure you can find more using Morningstar.
@Andrew3032 I’m trying to EXPLAIN what academics think about EMH, not DEFEND it. For instance, semi-strong form efficiency means you can’t earn risk-adjusted excess returns from past historical prices or fundamental information. That doesn’t mean it says prices never deviate from intrinsic value or anything like that.