RE: Investing

From: gts (
Date: Wed Jun 11 2003 - 13:56:27 MDT

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    Ramez Naam wrote:

    > I'm skeptical of the efficient market theory.

    I was skeptical also, until I learned that I was merely believing in a
    religion promulgated by the high priests of Wall Street.

    It took 12 years as professional investment advisor for me to see the light,
    so I won't expect to convert anyone to market atheism in this thread. But I
    will share my thoughts.

    > It treats all
    > decision makers as rational entities with access to the same
    > information and the same response to that information.
    > None of those three assumptions is correct. Humans are
    > emotional decision makers. There are indeed differences in
    > the information investors have access to. And given the same
    > information, different investors would make different
    > decisions based upon their individual analysis, risk
    > tolerance, and of course that emotional factor listed above.

    I reasoned the same as you, but unfortunately it is impossible to prove your
    assumptions correct in the financial markets. For some reason the market
    behaves as if humans are rational decision makers.

    For example the best prediction of a stock's future price is a function of
    the stock's beta (a measure of its volatility, or more accurately, its
    sensitivity to the volatility of the general market). People pay less for
    high beta stocks because people are rational enough to know to they should
    pay less for investments with greater uncertainty. It is for this reason
    that high beta stocks outperform the market averages. If you're willing to
    assume the higher risks of high beta stocks, you can buy them at a
    substantial discount to their expected future values.


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