It's somewhat amusing to see Apple throw away market leadership now, just like it did in the 80s

[Asher]

No they don't. People make money because the value of future consumption is lower than the value of present consumption. I invest in index funds, and "make money" on them; am I outsmarting the market? Are the people selling to me suckers?

Some people, of course, do make money outsmarting the market (or trying to). Those are the people who guarantee that the rest of us can't.

edit: people also make money because they are buying risk, but that's not a transfer, that represents mutual gains from trade

I don't think we're talking about the same thing.

If I buy a stock at $10, I expect its value to be higher than $10 in the future. I'm trying to predict the future price when making an investment decision. The market has no concept of a future price. It's not as smart.

This is perhaps our fundamental disconnect -- when I talk about investing, I'm talking about future returns. You are talking about present value. Stocks like AAPL bake in the potential for future returns into the present value. But the guess of future returns is anyone's guess. The market's guess is just the consensus of a large group of people. And I'm not convinced the consensus of a large group of people who don't know much about the business environment of Apple at all is a particularly correct consensus.

[KrazyHorse]

Kuci and the EMH are right (or at least close enough to right that he is justified in generally laughing at people who think they can stock pick)

[Kuciwalker]

I don't think we're talking about the same thing.

If I buy a stock at $10, I expect its value to be higher than $10 in the future. I'm trying to predict the future price when making an investment decision. The market has no concept of a future price. It's not as smart.

This is perhaps our fundamental disconnect -- when I talk about investing, I'm talking about future returns. You are talking about present value.

If you are deliberately trying to pick stocks, perhaps. Why do you seem to think that stocks are somehow totally different creatures from index funds, corporate bonds, etc.? They are all just securitized income streams.

When I invest, I am doing it for future returns too. I just happen to think that the securities I buy are probably worth exactly what I'm paying. But since I don't want to consume all of my income now, and would prefer to defer some of it into the future, and additionally I'm willing to take on a little risk in return for the chance of more consumption, I invest.

[Kuciwalker]

Kuci and the EMH are right (or at least close enough to right that he is justified in generally laughing at people who think they can stock pick)

Yeah, I dropped the "the EMH is obviously not actually true, it's just more true than any other theory of asset prices" caveat a few pages back to cover my ass.

[Asher]

Kuci and the EMH are right (or at least close enough to right that he is justified in generally laughing at people who think they can stock pick)

The EMH is far from the consensus. In fact, many people are now questioning as a result of the assumptions Kuci et al are making being pretty much responsible for the mess we've been in the past 3-4 years.

It should be clear that the market is not fully rational, so we cannot predict or completely accurately model it. Assertions like the EMH are essentially rules of thumb.

[Kuciwalker]

People who believe in the EMH are incapable of creating bubbles. Only people who think they're smart enough to pick stocks can create bubbles.

[Asher]

What's amusing to me is I'm just now reading the EMH wiki. And the criticisms section sounds pretty familiar (and I swear I've not read any articles on the EMH explicitly, I was going on intuition):

http://en.wikipedia.org/wiki/Efficient_market_hypothesis

The financial crisis of 2007–2010 has led to renewed scrutiny and criticism of the hypothesis.[34] Market strategist Jeremy Grantham has stated flatly that the EMH is responsible for the current financial crisis, claiming that belief in the hypothesis caused financial leaders to have a "chronic underestimation of the dangers of asset bubbles breaking".[2] Noted financial journalist Roger Lowenstein blasted the theory, declaring "The upside of the current Great Recession is that it could drive a stake through the heart of the academic nostrum known as the efficient-market hypothesis."[3]
At the International Organization of Securities Commissions annual conference, held in June 2009, the hypothesis took center stage. Martin Wolf, the chief economics commentator for the Financial Times, dismissed the hypothesis as being a useless way to examine how markets function in reality. Paul McCulley, managing director of PIMCO, was less extreme in his criticism, saying that the hypothesis had not failed, but was "seriously flawed" in its neglect of human nature.[35]
The financial crisis has led Richard Posner, a prominent judge, University of Chicago law professor, and innovator in the field of Law and Economics, to back away from the hypothesis and express some degree of belief in Keynesian economics. Posner accused some of his 'Chicago School' colleagues of being "asleep at the switch", saying that "the movement to deregulate the financial industry went too far by exaggerating the resilience - the self healing powers - of laissez-faire capitalism."[36] Others, such as Fama himself, said that the hypothesis held up well during the crisis and that the markets were a casualty of the recession, not the cause of it.

[KrazyHorse]

I don't think we're talking about the same thing.

If I buy a stock at $10, I expect its value to be higher than $10 in the future. I'm trying to predict the future price when making an investment decision. The market has no concept of a future price. It's not as smart.

What the ****ity ****? Are you out of your ****ing mind?

This is perhaps our fundamental disconnect -- when I talk about investing, I'm talking about future returns. You are talking about present value.

Yes, the risk-adjusted present value of ALL FUTURE RETURNS.

The market's guess is just the consensus of a large group of people. And I'm not convinced the consensus of a large group of people who don't know much about the business environment of Apple at all is a particularly correct consensus.

The market price is the not a consensus. It is an aggregated quantity where the number of securities demanded and the number available for purchase are equal. If the market as a whole was so deluded then somebody like yourself would be able to make a killing by investing your money in various tech stocks. Moreover, if it was known that somebody with tech knowledge like yourself was able to outpick the market, other people would give you money to invest for them and thereby earn supernormal returns for themselves. Yet entities that exist to do precisely this kind of thing (you may know them as "actively managed mutual funds") show no such ability, according to the mass of available empirical data.

[KrazyHorse]

The EMH is far from the consensus. In fact, many people are now questioning as a result of the assumptions Kuci et al are making being pretty much responsible for the mess we've been in the past 3-4 years.

It should be clear that the market is not fully rational, so we cannot predict or completely accurately model it. Assertions like the EMH are essentially rules of thumb.

Are you out of your ****ing mind? IF THE MARKET WAS PREDICTABLE THEN THE EMH COULD NOT POSSIBLY BE TRUE.

[KrazyHorse]

By the way, PIMCO is largely an ACTIVELY MANAGED MUTUAL FUND OF FIXED INCOME SECURITIES

Pop quiz: what would happen to active money managers if people believed in the EMH? What sort of people do you think active management draws?

[KrazyHorse]

As soon as somebody equates the EMH with the ability to predict future behavior of markets I know they are way out of their depth...

[Kuciwalker]

Hey, without the EMH I wouldn't be able to predict the spot price of oil a year from now!

[Asher]

What the ****ity ****? Are you out of your ****ing mind?

Where's the rest of the quote? The market clearly doesn't know what the future price of a stock would be. Or even have a good idea.

Yes, the risk-adjusted present value of ALL FUTURE RETURNS.

This is the part of the quote you left out, I'd already addressed this. Yes, the market's guess at future returns is in the price.

The market price is the not a consensus. It is an aggregated quantity where the number of securities demanded and the number available for purchase are equal. If the market as a whole was so deluded then somebody like yourself would be able to make a killing by investing your money in various tech stocks. Moreover, if it was known that somebody with tech knowledge like yourself was able to outpick the market, other people would give you money to invest for them and thereby earn supernormal returns for themselves. Yet entities that exist to do precisely this kind of thing (you may know them as "actively managed mutual funds") show no such ability, according to the mass of available empirical data.

Warren Buffett?

The problem is no one can reasonably explain where Apple's future growth is coming from. No one. Yet the stock price is so high because people believe it'll continue.

I don't think any one person can accurately predict every stock, quite obviously. But it is fairly easy to see some stocks that are absurdly priced as people get carried away.

[Hauldren Collider]

I've heard the argument from an especially liberal father of a friend of mine that economists are all wrong because they are all in on this big conspiracy involving economics textbooks and hedge funds in collusion to convince people to bail out AIG and invest in Fannie Mae.

At one point I commented that people enter into transactions only when they think they are mutually beneficial and he said "Oh great, next he's going to tell us he believes in trickle-down economics!"

[Asher]

As soon as somebody equates the EMH with the ability to predict future behavior of markets I know they are way out of their depth...

Read the nuance -- the EMH falls under the "model" category, not predict.