A test of market efficiency can only be done using a model that explains what a stock price should be. That model is always incomplete. The CAPM model in place when Buffett started has been shown to be in need of extension. Once those extensions were made it became clear that Buffett did not violate the efficiency market hypothesis. The model we were using to say what prices "should be" needed revision. This is still true today and will always be true. The market is very close to efficient and the vase majority of those that invest otherwise underperform. Of course that doesn't mean you can't make money by convincing people that you are smarter than everyone else. Have fun.
This is just wrong. As a point of pure logic efficient markets are impossible because otherwise no one would even try to arbitrage. Fama's factor models don't work and he clings to the joint hypothesis idea to avoid facing reality. Anomalies exist, bubbles happen, arbitrage has limits (see momentum and the famous Can Markets Add and Subtract?) and investors are human beings prone to fits of pessimism and optimism in herds (see financial crises). I agree that most people shouldn't even try active investing because they'll underperform but that's because being a good investor like the Renaissance Fund is incredibly challenging and requires knowledge, not because the EMH is true and all available information has been priced in already. You should act like it's true but in reality it can't be.
@@Bill-kk7tz the fact that markets can't be 100% efficient does not contradict the efficient market hypothesis. In fact, Fama does not even argue that markets are 100% efficient. It's just a model. It does not explain every stock movement. But that does not mean that the model is wrong (or that factors do not work).
the efficient market theory is correct in that if everyone invests like warrent buffett, then no one can out perform the market. Even warrent buffett would not get good returns if everyone invests same as him.
You can at times find inefficiencies, but you most likely will not be able to do it over a long period of time. Often your ideas will underperform the market. In the aggregate, and over the long haul, the vast majority of investors will not be able to outperform the market.
@@Pe6ek It's only efficient because people find the inefficiencies and go long/short to push the price toward its true value. Without agents in the market, it wouldn't be efficient.
@@John-thinks Well the argument is that the market is efficient at all times. It doesn't need correcting or to be pushed to its "true value". Its price at any given time reflects its true value. Many people would say Tesla is overvalued right now, but why? Really think about why? You'll find that you can't answer that question. Looking at PE Ratios and year-over-year EBITDA won't give you the answer. Amazon's PE Ratio was very high before it exploded. Technically analysis won't provide you with a crystal ball.
If you hear correctly, the question was how can we find a mentor in these near-efficient markets, but Warren Buffett answered him the theory, changing the subjects and now answering it completely. I may be wrong but can someone explain to me about this ?
The fact completely ignored by the efficient market hypothesis is the role of traders vs investors. Traders make decisions based off of resistance levels, patterns, and candlesticks. They don't go in with a margin of safety in mind. The efficient market hypothesis implies that information determines a stock price, and emotions play a role only in relationship to investors belief of a true prices. In reality the market is the aggregate of the emotions of people. IRRATIONAL EMOTIONS CREATE INEFFICIENCIES. Without somebody to correct inefficiencies the market is not efficient, therefore the same way that the actions of all investors makes a stock efficient, the same can be said to the contrary the actions of all investors makes the market inefficient, hence, there is a group of people correcting the inefficiency
The audio cut out when he was talking about Columbus... it sounds like he way starting to say Columbus was an anomaly and I'm not sure where he was going with that. But the talk of shippers who believe the Earth is flat... everyone knew the Earth wasn't flat in Columbus' day, in fact Columbus was wrong - he thought the world was smaller than was commonly accepted and that therefore he could take a short cut to India. He defintely had luck - If the Americas hadn't been there his crew would have either mutinied or died (my understanding is that they were within about a day of doing so when they spotted land).
Everyone who says the market is efficient just totally ignores the liquidity providers/market makers who have been printing money ever since markets started! Investment banks, Renaissance Medallion fund, Citadel Securities etc. They are the bookies of the markets.
If they were losers you wouldn't have known about them. You're pointing to the few winners and saying: look, winning is possible --meanwhile, the sea of losers isn't in your view. You only notice the winners and assume you can win, when in fact they can be anomalies or organizations with insider information. Look, people win the lottery --it's beatable. Look, people with the world series of poker --average Joe can do it too. Your argument is moot.
@@k4ir0s What you have said doesn't apply to market making, of course some companies are better than others and have survived, but the fundamental thing is that there is an edge in providing liquidity to the punters. Just like the bookies or casinos, would you seriously say they are lucky? Sure someone can buy Tesla and get lucky, but not for market makers/Liquidity providers they have made money every day for decades.
@J Mo No, on average everyone performs exactly like the total market index by definition, so not „anyone (below 1M) can easily beat the market.“ In fact, since a select few people do end up beating the market by a lot (like Warren Buffett), the great majority of those who try to do the same fail. Just like the expected return of 10 fair coin tosses if you bet some constant portion of your money on every coin toss is 0, but the median return is actually negative...
@J Mo But you do realize that you are competing in active management mostly with institutional investors that have more time, money, people, information, etc. than you do (and most of them still perform below-average), right? I mean, you'd expect it to be really easy for hedge funds etc. to outperform the average investor, but they don't.
@J Mo Hedge funds lag the total market index, on average, exactly by the transaction fees that they generate. Actually, the last sentence is not 100% accurate. It is exactly accurate if you replace „hedge funds“ by „active investors.“ „Some do far better.“ Exactly. Some do far better. On average they do just as well as the total market index (ignoring transaction/„friction“). So most do worse than the index. This has nothing to do with skill, etc., it is just the definition of an „average.“ Why is that so hard to understand? Now I’m sorry but your anecdotal evidence „I‘ve done it for 20 years“ is not helpful at all. Maybe you are truly a genius that can squeeze out money intuitively out of every small inefficiency in the market. Maybe you are just lucky. Maybe you are falling for confirmation bias and didn’t beat the market at all. Note that I never assumed the efficient market hypothesis. No matter if the markets are efficient or not, the average investor will, by definition, minus transaction costs, perform on par with the index. Even if the markets are not efficient, you still have to justify why you are one of the „chosen ones“ that is, unlike the majority of active investors, out-performing the index. If the markets are efficient, it can only be justified by luck.
The irony is that Buffett himself has a huge ego and is held up in finance, even though he's accusing academics in finance of that. They call him the Oracle of Omaha for a reason. He likes being on magazine covers. You can tell it gets to him when he starts to attack the academics. Munger's body language shows his own contempt, too. You can't argue with the science and the empirical evidence, and that's the bottom line. Outliers are part of the distribution and are normal. Smart money is part of the distribution and helps create efficient markets - it's part of the framework. The second irony is that people look to Buffett for investing and stock picking advice, even though he says here the average person looks up to and listens to the PhD in economics or finance. Laugh. Unless you're taking this stuff in college and are fortunate enough to have a professor who covers it, you're never going to hear anything about efficient markets. I'm talking about the vast majority of Americans. Less than 50% of the U.S. population has a college degree, and only a small fraction of those graduates have a degree in a field where this subject matter is talked about (economics, finance, investing, and/or business). Of that subset, only a percentage of them will have covered this specific topic and have remembered it. People working and saving/investing for their retirement. They have no idea due to how the financial industry pushes product. In reality, the average laymen looks to Buffett and ignores the sound advice of the academics. For the average investor, using an investing strategy that holds to efficient market theory is an exceptional strategy that will maximize yields at the expense of the industry. Even for the advanced investor it's the winning strategy. The problem is that people think they're smarter than they actually are. Buffett admits this himself by saying he'd rather be lucky than skilled. In reality, very few are. Very, very few, and even then it's more about volume and other tools that most investors don't have.
Yes the common man should by index leave the singel company game to the pro's about 85 % of common stock underperform the general marked 10% of the companies outperform.
Fingolfin3423 your whole rant is about just defending your "years studying" on efficient market. Don't you want to get fame?? What about their years long record. If you want to really criticize something you have to have deep knowledge on the thing. What do you know about value investing?? Which books have you read? Have you tried it??
@@Discordxeroxero6454 The sample size of 1 person is insignificant. Have you taken any college classes on accounting, statistics or mathematics? We need a much larger sample size. Instead of looking at buffet, look at 100000 investors over multiple decades. Buffet will come out as an outlier. With your mindset you have no business managing your own investments. Funny enough, Charlie Munger takes the opposite stance in another video "on Why Most Investors Can’t Outperform the Market". He argues that you cannot beat the market. It seems that these big wig investors change their views depending on their audience -whatever fits their narcissism.
Everyone who says the market is efficient just totally ignores the liquidity providers/market makers who have been printing money ever since markets started! Investment banks, Renaissance Medallion fund, Citadel Securities etc. They are the bookies of the markets.
Nobody: "Mr. Buffet, are financial markets efficient?"
Buffet: "Yes, Earth is flat"
Rekt
Imagine comparing a true fact with a flat earth
A test of market efficiency can only be done using a model that explains what a stock price should be. That model is always incomplete. The CAPM model in place when Buffett started has been shown to be in need of extension. Once those extensions were made it became clear that Buffett did not violate the efficiency market hypothesis. The model we were using to say what prices "should be" needed revision. This is still true today and will always be true. The market is very close to efficient and the vase majority of those that invest otherwise underperform. Of course that doesn't mean you can't make money by convincing people that you are smarter than everyone else. Have fun.
This is just wrong.
As a point of pure logic efficient markets are impossible because otherwise no one would even try to arbitrage. Fama's factor models don't work and he clings to the joint hypothesis idea to avoid facing reality.
Anomalies exist, bubbles happen, arbitrage has limits (see momentum and the famous Can Markets Add and Subtract?) and investors are human beings prone to fits of pessimism and optimism in herds (see financial crises).
I agree that most people shouldn't even try active investing because they'll underperform but that's because being a good investor like the Renaissance Fund is incredibly challenging and requires knowledge, not because the EMH is true and all available information has been priced in already. You should act like it's true but in reality it can't be.
@@Bill-kk7tz the fact that markets can't be 100% efficient does not contradict the efficient market hypothesis. In fact, Fama does not even argue that markets are 100% efficient. It's just a model. It does not explain every stock movement. But that does not mean that the model is wrong (or that factors do not work).
the efficient market theory is correct in that if everyone invests like warrent buffett, then no one can out perform the market. Even warrent buffett would not get good returns if everyone invests same as him.
thats simple reversion to the mean....
Charlie munger’s shoulder pads are trading at a very high multiple in this video. Expect a market correction in the near future.
Rofl
That was one hell of a correction
Even if it's an efficient market, I can still outperform the market, because without me finding the inefficiencies, the market will not be efficient.
You can at times find inefficiencies, but you most likely will not be able to do it over a long period of time. Often your ideas will underperform the market. In the aggregate, and over the long haul, the vast majority of investors will not be able to outperform the market.
This is the version of the EMT that I subscribe to too.
But if it's already efficient, as you write, that's an impossibility.
@@Pe6ek It's only efficient because people find the inefficiencies and go long/short to push the price toward its true value. Without agents in the market, it wouldn't be efficient.
@@John-thinks Well the argument is that the market is efficient at all times. It doesn't need correcting or to be pushed to its "true value". Its price at any given time reflects its true value. Many people would say Tesla is overvalued right now, but why? Really think about why? You'll find that you can't answer that question. Looking at PE Ratios and year-over-year EBITDA won't give you the answer. Amazon's PE Ratio was very high before it exploded. Technically analysis won't provide you with a crystal ball.
If you hear correctly, the question was how can we find a mentor in these near-efficient markets, but Warren Buffett answered him the theory, changing the subjects and now answering it completely. I may be wrong but can someone explain to me about this ?
This is so simple and such a common sense, why don't people, school and these funds get it...
6 sigmas of luck to 6 sigmas of skill, rofl !
The fact completely ignored by the efficient market hypothesis is the role of traders vs investors. Traders make decisions based off of resistance levels, patterns, and candlesticks. They don't go in with a margin of safety in mind. The efficient market hypothesis implies that information determines a stock price, and emotions play a role only in relationship to investors belief of a true prices. In reality the market is the aggregate of the emotions of people. IRRATIONAL EMOTIONS CREATE INEFFICIENCIES. Without somebody to correct inefficiencies the market is not efficient, therefore the same way that the actions of all investors makes a stock efficient, the same can be said to the contrary the actions of all investors makes the market inefficient, hence, there is a group of people correcting the inefficiency
thanks for the insight fellow human.
It's not true that TAists don't have a margin of safety in mind. 700 moving average is a great margin of safety lol
Is capital market zero sum game in a span or let’s one minute?
What is the name of course at University of Florida ?
The audio cut out when he was talking about Columbus... it sounds like he way starting to say Columbus was an anomaly and I'm not sure where he was going with that. But the talk of shippers who believe the Earth is flat... everyone knew the Earth wasn't flat in Columbus' day, in fact Columbus was wrong - he thought the world was smaller than was commonly accepted and that therefore he could take a short cut to India. He defintely had luck - If the Americas hadn't been there his crew would have either mutinied or died (my understanding is that they were within about a day of doing so when they spotted land).
Maybe he was saying something else, but why argue ? Flatearthers are dumb tho.
Great content
Everyone who says the market is efficient just totally ignores the liquidity providers/market makers who have been printing money ever since markets started! Investment banks, Renaissance Medallion fund, Citadel Securities etc. They are the bookies of the markets.
If they were losers you wouldn't have known about them. You're pointing to the few winners and saying: look, winning is possible --meanwhile, the sea of losers isn't in your view. You only notice the winners and assume you can win, when in fact they can be anomalies or organizations with insider information. Look, people win the lottery --it's beatable. Look, people with the world series of poker --average Joe can do it too. Your argument is moot.
@@k4ir0s What you have said doesn't apply to market making, of course some companies are better than others and have survived, but the fundamental thing is that there is an edge in providing liquidity to the punters. Just like the bookies or casinos, would you seriously say they are lucky? Sure someone can buy Tesla and get lucky, but not for market makers/Liquidity providers they have made money every day for decades.
Is that wine?
Is this why Buffett are telling everyone to buy index funds? Less competitors?
No bc it’s the second best thing
Because most can't beat the market, and practically noone can with massive sums
@J Mo No, on average everyone performs exactly like the total market index by definition, so not „anyone (below 1M) can easily beat the market.“ In fact, since a select few people do end up beating the market by a lot (like Warren Buffett), the great majority of those who try to do the same fail.
Just like the expected return of 10 fair coin tosses if you bet some constant portion of your money on every coin toss is 0, but the median return is actually negative...
@J Mo But you do realize that you are competing in active management mostly with institutional investors that have more time, money, people, information, etc. than you do (and most of them still perform below-average), right?
I mean, you'd expect it to be really easy for hedge funds etc. to outperform the average investor, but they don't.
@J Mo Hedge funds lag the total market index, on average, exactly by the transaction fees that they generate. Actually, the last sentence is not 100% accurate. It is exactly accurate if you replace „hedge funds“ by „active investors.“
„Some do far better.“ Exactly. Some do far better. On average they do just as well as the total market index (ignoring transaction/„friction“). So most do worse than the index. This has nothing to do with skill, etc., it is just the definition of an „average.“ Why is that so hard to understand?
Now I’m sorry but your anecdotal evidence „I‘ve done it for 20 years“ is not helpful at all. Maybe you are truly a genius that can squeeze out money intuitively out of every small inefficiency in the market. Maybe you are just lucky. Maybe you are falling for confirmation bias and didn’t beat the market at all.
Note that I never assumed the efficient market hypothesis. No matter if the markets are efficient or not, the average investor will, by definition, minus transaction costs, perform on par with the index. Even if the markets are not efficient, you still have to justify why you are one of the „chosen ones“ that is, unlike the majority of active investors, out-performing the index. If the markets are efficient, it can only be justified by luck.
The contamination is still there especially with Instagram now
truly the best response to emh I've heard
If these two are not an anomaly, then why aren’t there more?
plot twist, warren's cheating
The irony is that Buffett himself has a huge ego and is held up in finance, even though he's accusing academics in finance of that. They call him the Oracle of Omaha for a reason. He likes being on magazine covers. You can tell it gets to him when he starts to attack the academics. Munger's body language shows his own contempt, too. You can't argue with the science and the empirical evidence, and that's the bottom line. Outliers are part of the distribution and are normal. Smart money is part of the distribution and helps create efficient markets - it's part of the framework. The second irony is that people look to Buffett for investing and stock picking advice, even though he says here the average person looks up to and listens to the PhD in economics or finance. Laugh. Unless you're taking this stuff in college and are fortunate enough to have a professor who covers it, you're never going to hear anything about efficient markets. I'm talking about the vast majority of Americans. Less than 50% of the U.S. population has a college degree, and only a small fraction of those graduates have a degree in a field where this subject matter is talked about (economics, finance, investing, and/or business). Of that subset, only a percentage of them will have covered this specific topic and have remembered it. People working and saving/investing for their retirement. They have no idea due to how the financial industry pushes product. In reality, the average laymen looks to Buffett and ignores the sound advice of the academics. For the average investor, using an investing strategy that holds to efficient market theory is an exceptional strategy that will maximize yields at the expense of the industry. Even for the advanced investor it's the winning strategy. The problem is that people think they're smarter than they actually are. Buffett admits this himself by saying he'd rather be lucky than skilled. In reality, very few are. Very, very few, and even then it's more about volume and other tools that most investors don't have.
Aren't the imperical evedince of Mr buffet DYSTROYING the market for almost 50 consecutive years enough for you?
Yes the common man should by index leave the singel company game to the pro's about 85 % of common stock underperform the general marked 10% of the companies outperform.
Fingolfin3423 your whole rant is about just defending your "years studying" on efficient market. Don't you want to get fame?? What about their years long record. If you want to really criticize something you have to have deep knowledge on the thing. What do you know about value investing?? Which books have you read? Have you tried it??
How do you learn about investing strategies that hold to efficient market theory?
@@Discordxeroxero6454 The sample size of 1 person is insignificant. Have you taken any college classes on accounting, statistics or mathematics? We need a much larger sample size. Instead of looking at buffet, look at 100000 investors over multiple decades. Buffet will come out as an outlier. With your mindset you have no business managing your own investments. Funny enough, Charlie Munger takes the opposite stance in another video "on Why Most Investors Can’t Outperform the Market". He argues that you cannot beat the market. It seems that these big wig investors change their views depending on their audience -whatever fits their narcissism.
Everyone who says the market is efficient just totally ignores the liquidity providers/market makers who have been printing money ever since markets started! Investment banks, Renaissance Medallion fund, Citadel Securities etc. They are the bookies of the markets.
EMH merely states that market prices reflect all publicly available information. It does not state that the price is “ right”.
@@kenthughes4396 thank you
@@kenthughes4396 This point is what people don't understand
@@kenthughes4396Which can't be true as a basic point of logic as Stiglitz showed decades ago. This isn't hard or even worth debating...