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Comment by perl4ever | Hacker News Reader

Is picking the rotten apples at the store just as hard as picking the very best?

If you made an index of penny stocks, do you think markets are efficient enough this would be basically as good as an S&P 500 fund? What if you made two indexes, one of penny stocks that pay dividends, and one of those that do not?

I've done this experiment years ago with a stock market simulator utilizing real market data, and it suggested that, no, there is not a price at which total shit is a good investment, or if there is, it's not the market price. Therefore it follows that excluding that shit from your index is potentially worthwhile.

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Penny stocks are usually traded OTC and aren't in any index fund I've seen anyway.

Picking losers is just as hard as picking winners. If you think you know of a loser, just short it. You'll be hard-pressed though, because other people, likely with more info than you, have already done this, and the price has already come down.

Why do you think shorting a stock is (uniformly) just as easy as going long? I don't know where you people get the idea it's symmetric. And the difficulty of shorting a stock varies massively from one company to another, which is a not irrelevant aspect of it. You can't (legally) print unlimited shares yourself to sell short.

If you could you make money shorting rotten apples at the store, visibly rotten apples would no longer exist and you would not be able pick them out at the store.

The EMH applies to stocks, not apples. Your analogy is nonsensical.

Wait, I thought the efficient market position was that the "rotten" companies were all priced correctly. But you seem to be saying there aren't any.

Some recent research showed that the market doesn't even take into account the contents of SEC filings which seems like the minimum for a semblance of efficiency. I have to say, if you are going to take the position that there are no worthless public companies out there, you ought to take a sizeable sample of 10-Ks and just glance at the business description of each.

Also...I'm not an economist or expert, but what I think you are saying is that the EMH only applies even in principle to things you can sell short and that sounds wrong to me.

What does picking apples have to do with trading financial assets?

Analogies are useful to illustrate an idea, but they lack any value when establishing a chain of reasoning (i.e. providing proof that a statement is true).

Analogies always match up in a limited number of ways, so saying that the things in an analogy are different in some ways is not a specific criticism.

Apples are sold in markets. Most of us are not experts on apples any more than stocks. Yet we use what we do know to select from what is available, rather than having faith in market efficiency. Because there is information that the non-expert can easily perceive.

How can that be wrong with stocks? I'm getting the impression people are attributing the difference to the possibility of shorting stocks, but I don't think that is necessary in theory for efficient markets, and selling short is clearly not just as easy as going long, so the symmetry isn't there anyway.

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