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Efficient Market School of Economics December 3, 2008

Posted by shaferfinancial in Uncategorized.
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To simplify this groups argument a little, we can say that efficient market theorist  believe markets are efficient and in constant equilibrium, therefore priced correctly and future movements are always random.  Since information is readily available to everyone there is no advantage had by anyone, therefore no way of “beating” the market.  For this reason they insist that investing in index mutual funds is the way to maximize returns by minimizing risk.

Interestingly, Warren Buffett pointed out, “observing correctly that the market was frequently efficient, they [the efficient marketers] went on the conclude incorrectly that it was always efficient.”  And George Soros commented that he had found the workings of the efficient market theorist, with their complex equations, to be more like the medieval scholastics calculating the number of angels able to stand on the head of a pin than like those of the eighteenth-century rationalists.

Why post on this?  Well, the efficient marketers have a hard time explaining asset bubbles and extreme bear markets like we are in now.  If all the information is out there to correctly price an asset, then why do people buy expensive assets one year and then sell them another when they are cheap?  And they have a hard time explaining people like Warren Buffett and George Soros who have made billions by beating the market, something that the efficient marketers insist is impossible in the long run.  Also the 1980s designers of derivatives were efficient marketers and designed a trading strategy called portfolio insurance that was suppose to be a fail-safe investment strategy that brought on the 1987 crash in the stock market.  And of course the failed derivatives of mortgage backed securities were designed by these same folks and we are now living through the nightmare of that failure.

Now, we are starting to see the crack in their indexed funds recomendation.  So if you are still on the indexed mutual funds route, you might want to consider the history associated with their main proponents or more truthfully the failures associated with index mutual fund proponents!  Beware of the leaders you are following!

Just food for thought! 



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