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Comment by wpietri | Hacker News Reader

Well put.

I used to work for financial traders. I even used to have a brightly colored coat and a trading floor badge, back when that mattered. I've read The Economist for 20 years. Despite understanding the financial markets better than most, I never trade individual stocks. Everything's in low-load funds; I look at the allocations every year or two.

Why? Because I know what I'm up against. I have friends who are still in the industry, deploying vast computational and financial resources to make money. For any given stock, there are people who follow the company and its markets more closely than I ever will. And all of those people regularly fuck up, losing millions. I'm not interested in stepping to that.

And there's another big reason: it's a giant minefield of cognitive biases and emotional weirdness. For example, you can think of the market as a random walk with an upward bias. Year on year, you're generally up. But day by day, you're can be down nearly as often as up. Because of loss aversion [1], you'll feel the losses more strongly than the gains. Looking at your stocks every day will at least add to your stress levels, and maybe your decisions will get thrown off. (This example is taken from the excellent Fooled by Randomness [2], which I recommend to anybody who wants to trade, or even understand the financial markets.)

I focus my energies on areas where I have a an actual advantage, and I encourage others to do the same.

[1] http://en.wikipedia.org/wiki/Loss_aversion

[2] http://www.amazon.com/Fooled-Randomness-Hidden-Chance-Market...

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Another interesting read in this vein is "Luck Versus Skill in Mutual Fund Performance" by Eugene Fama (who won the Nobel prize in economics this year).[1] He shows that even the most well-informed and intelligent investors cannot predictably outperform the market; some do very well and some do very badly, but this is exactly what you would expect from a large number of market participants pursuing different rational strategies.

[1] http://www.dimensional.com/famafrench/2009/11/luck-versus-sk...

some do very well and some do very badly, but this is exactly what you would expect from a large number of market participants pursuing different rational strategies

This suggests a possible scam (probably not an original suggestion). Set up some large-enough number, maybe 30 or 40, shell investment companies. Each one trades according to a very specific but randomly generated strategy, which it publicly announces in advance. (Some care would have to be taken in generating the strategies, but they should be such that they're expected to match the market, when taken as an ensemble.)

After a few years, some of these strategies will have turned out to be successful, others haven't. Quietly wind down the unsuccessful ones. The successful ones now look prescient: this firm announced in, say, 2008, that the market conditions were such that strategy X is clearly correct going forward. And history has now borne them out: here, five years later, their prediction was right and their portfolio is up 1000%. Of course, there is missing information, that this was just one of 40 shell companies, and overall returns across all companies did not beat the market. But now this successful company can sell investment services/consulting/whatever on the basis of its individual track record.

I suspect actual investment consultants are effectively doing a distributed, non-coordinated version of this, even if not intentionally.

You've just described the hedge fund industry. Well that and insider trading.

This is the basis of well known - potentially hypothetical - scam. Send 2^n emails out, half stating that stock X will go up tomorrow, half stating the same stock will go down. The next day, split the addresses that received the correct prediction in half, and repeat.[1]

[1] http://ask.metafilter.com/216295/Is-this-famous-investment-s...

Derren Brown used this approach to convince people he had a system for predicting the winners of horse races: http://www.youtube.com/watch?v=9R5OWh7luL4

This happens all the time - a firm will make a number of "exploratory" funds, with the losers being rolled into existing funds and the winners "graduating" to being full funds and promoted aggressively by the firm. (At least according to A Random Walk Down Wall Street, a great book that is very relevant to this thread.)

There was a joke story based on the same idea.

A recent grad looking for a job with an investment bank picked 64 banks and sent each of them a letter introducing himself. To a half of them he also added that next week Ford stock will be up and to other half he said it would be down.

Next week, one half of the banks were off the list, because he was wrong. He split remaining banks in half again, sent another letter making his up/down prediction and repeated again for 4 more weeks. After 6 week there was just one bank on the list, but it was the one that saw him make an accurate prediction 6 times in a row. And so he sent them the job application.

That isn't so much a joke as an actual scam that people do. http://scams.wikispaces.com/Stockmarket+Tips

If the investment newsletter business is any indication, he shouldn't stop sending letters to those for whom his predictions were wrong.

This exact result is described by Buffet: http://www.tilsonfunds.com/superinvestors.html

> The successful ones now look prescient: this firm announced in, say, 2008, that the market conditions were such that strategy X is clearly correct going forward.

My bank advised me to invest in "Investment Fund #17": their headline info was that this fund marginally beat market average in each of the last 3 years.

I decided to invest elsewhere.

Darren Brown did a stunt supposedly based on this idea.

https://en.wikipedia.org/wiki/List_of_works_by_Derren_Brown#...

This seems like a foolproof scam because it would be completely legal and guaranteed to work. To make it seem even more legitimate I would set the timeframe to 10 years.

But here's what I don't get. It seems like such a reliable and lucrative scam that there should be dozens of managed funds who have grown by 1000% over the last 10 years. Where are they all?

Good point. But how do you protect yourself from this scam? Do we always have to ignore the track record of every investment fund?

Yes.

I've heard that mutual fund companies do this. After a few years, underperforming funds get closed and good performers diversify their holdings until they perform like index funds -- The few years of luck at the beginning are enough to show higher overall returns.

What if every fund manager had a certain non-zero level of skill - but the market price was such that the mean skill level returned no profit (or the risk free return rate). I guess this is more or less the efficient market hypothesis - except if you follow it through I don't think it says that there is no skill in stock picking - just that the skill is undetectable. Under those conditions a random strategy should do as well as the mean - and the mean return will simply be the average market return.

Good advice.

One of my favorite articles on the persistent mistaking of luck for skill in the investment management industry is "Track Records are Rubbish (or Why Managers are Factors in Drag)" [1]. A short excerpt:

...most managers are really just overconfident, incoherent collections of habits, assumptions, ideologies, and cognitive and emotional biases emanating from the most dangerous black-box of all - the human mind.

Sometimes these habits, assumptions and biases are aligned with the market, and the manager does well. Sometimes the manager is 'out of sync', and he does poorly.

[1] http://advisorperspectives.com/dshort/guest/BP-130108-Track-...

"Naturally the disservice done students and gullible investment professionals who have swallowed EMT has been an extraordinary service to us and other followers of Graham. In any sort of a contest - financial, mental, or physical - it's an enormous advantage to have opponents who have been taught it's useless even to try." - Warren Buffet

This quote neatly summarizes what I fundamentally don't accept about this viewpoint. Specifically, most of the article's arguments are those you encounter from Efficient Market Theory which has pervaded our financial education to the point of being accepted as blindly as faith and has lead to a lot of pain & suffering by investors. Here are some key messages from the article which I find incredibly dangerous and damaging:

1) UNLESS YOU ARE "SPECIAL", INVEST IN INDEX FUNDS

Index investing has become a sexy mantra in the era of EMH and passive investing. If you can't beat the market - why not just follow it? At first glance it does seem like a great option as it cuts out middlemen fund managers who seem to invest on chance. However, it's a mantra that is self defeating as more investors adopt it. Although indexing is predicated on efficient markets, the higher the percentage of all investors who index, the more inefficient the markets become as fewer and fewer investors would be performing research and fundamental analysis of equities. At the very extreme, if everyone practiced index investing, stock prices would actually never change relative to each other since everyone would be "all in" [I've loosely paraphrased Seth Klarman's arguments from Margin of Safety but for a much more exhaustive treatise please dive into the novel]

I think a golden rule of investing is you should reject any absolute assessment of a investment vehicles ("gold always goes up", "invest in index funds", "junk bond funds have lower risk at higher return"). Wall Street loves to peddle their latest, shiny investment creations; don't rely on their faith - no matter what you invest in, you better do some damn research on it (even an index fund).

2) STOCK PRICES REFLECT THE CONSENSUS AND GOING AGAINST THE CONSENSUS IS BAD (worded as aggressive in the article)

This is in it's heart is the essence of the efficient market hypothesis - prices are rational and reflect underlying public information. I'm not going to into a huge essay against pricing being rational but history has shown time and again that prices reach irrational exuberance; tulip mania and trading sardines are not merely historical phenomenon. Intelligent Investor by Ben Graham details out some clear cases where stock prices did not reflect anything remotely close to underlying public information. Off the top of my head, there are many examples where passively managed closed end mutual funds traded significantly from their NAV value (which makes little sense). Historical records shows that supply and demand factors (rather than underlying information and rational actors) drive stock market prices.

As a nice hypothetical example, let's think of a change in the S&P 500 where the new stock AWSM pushed out OLDFTHFUL from the S&P 500. Let's assume the changing of the index happened during a lull period in both companies where no material information about the companies was given out (i.e. their economic forecasts were stable during the S&P shuffling). Since everyone was following the "invest in index funds" argument of the author, this triggers billions of purchase orders for AWSM and lots of sell orders for OLDFTHFUL. Naturally one stock rises while the other stock falls even though there has been absolutely no change in the forecast for either company.

3) YOU ARE COMPLETELY BEHIND THE CURVE WHEN INVESTING - DON'T BOTHER UNLESS YOU KNOW INSIDE INFORMATION

Nothing could be the further from the truth. Frankly, it's probably one of the best times to do rigorous stock analysis since 1) we are in a time when most investors embrace the EMT and thus don't bother doing even basic fundamental analysis 2) financial info and SEC filings can be easily acquired through the internet & hacking and financial modeling can be easily done with Excel & programming 3) many of the institutional actors that drive the market are not incentivized to conduct fundamental analysis. Specifically, mutual funds have specific characteristics that prevent them from acting rationally (requirements on diversification, inability to short equities, large fund size, low cash reserves, etc.). Hedge funds have similar issues (20% fee structures which incentivize short term thinking).

Things might not be as rosy as during Ben Graham's time, but don't fool yourself into thinking that doing research into your investments is a waste of time. Any natural scientist will never accept that further research will yield nothing, but for some reason we accept this in the investing world.

4) YOU ARE TRADING AGAINST GOLDMAN SACHS. DO YOU REALLY WANT TO BET AGAINST GOLDMAN?

I hate this perception; Wall Street's business model is largely driven by volume rather than investment acumen. I.e. they make money as long as the market moves, regardless of the direction. Goldman is a giant because they manage the machinery of markets, not because they are expert stock pickers.

Overall, I think the world would do a lot better with this advice: "A stock is a small percentage share of a company. Treat investing your money in an equity exactly as you would treat investing in a business." I think most of the investing mistakes alluded to this article would be prevented by heeding this advice.

I think a blend of your advice and that of the original post is correct.

I agree that the Efficient Market Hypothesis is a load of rubbish repeatedly disproved by the movements of the markets not to mention the impossibility of the assumptions on which it relies (perfect information etc.). However if you are investing from a position of ignorance or sentiment (rather than on the Intelligent Investor basis) then the EMH may as well be true. It is only worth trading when you believe that you have an advantage from such proper analysis. For most people this is pretty much never - which is where the original poster's advice comes in.

So if you do have valuable industry knowledge and the time to glance at the basic company figures OR time to fully analyse the fundamentals of companies in the Intelligent Investor style go ahead you may well come out ahead but do remember that the market can know something you don't and/or remain irrational so you need fairly long time horizons.

My summary is if you have an advantage use it, if not then use index funds.

Where do you get the idea that the EMH assumes perfect information?

In any case, since you are now revealing that the movements of the market disprove the EMH, I take it you've already made your billions by trading your EMH-disproving strategy?

Where do you get the idea that the EMH assumes perfect information?

EMH assumes that the market perfectly translates all information about stocks into prices. In a strong form, that requires perfect information, you can dilute that to almost perfect but just claiming the market is anywhere close rational or efficient is a huge leap given our history of stock markets and bubbles. That claim has been shown to be false in just about every boom bust cycle so far, but to take one specific example - mortgage cdos in the last decade - what about that market was efficient?

I take it you've already made your billions by trading your EMH-disproving strategy?

Disagreeing with the efficient market hypothesis implies nothing about trading or investing competence.

but to take one specific example - mortgage cdos in the last decade - what about that market was efficient?

The existence of apparent bubbles does not contradict the EMH. Scott Sumner has a great post explaining this: http://www.themoneyillusion.com/?p=25011

If you believe the boom&bust cycle shows the market to be irrational, what is the EMH-disproving trading strategy? "The market did something I don't like" is not the same thing as "the EMH is false."

The existence of apparent bubbles does not contradict the EMH.

I didn't find that link at all convincing, in particular the vague handwaving about bitcoin - because that is as-yet unproven and very uncertain I don't think it's a good example - why not use one of the many stock market busts? Booms and busts are not 'apparent bubbles' in any sense, they are all around us, and cause real movements in the markets regularly. They are a great illustration of markets behaving completely irrationally and becoming divorced from any efficient relationship between price and underlying or future value due to euphoria, panic, over-abstraction or obfuscation of assets and risk, monetary stimulus, corruption, cornering, rumour etc, etc. Sudden resets (often overreactions), and wild swings are the result, so much so that many of our markets have circuit-breakers which stop trading to attempt to discourage their natural movements.

There are a whole host of reasons why our markets are not currently anywhere close to perfect or efficient, and to simply assume they are and then attempt to cut the facts to fit the procrustean bed of market theory is not at all convincing. What is dangerous about the EMH to me is that it encourages a sort of worship of markets, which are seen as efficient and all-knowing, and which can never be gainsaid. In fact markets get things wrong all the time, they are pretty irrational quite a lot of the time, they are just the least-bad system we know.

If you believe the boom & bust cycle shows the market to be irrational, what is the EMH-disproving trading strategy?

Again, not believing the EMH is not the same as believing you can beat the market with short term trading, the two concepts are completely unrelated. I have no idea what sort of trading strategy you think would disprove EMH, but we're not talking about trading strategies but models for markets. Personally, I wouldn't trade short-term at all in stock markets, but do invest. I happen to mostly agree with the author here, but again, that has nothing to do with efficient markets.

The EMH is a postulation which makes extraordinary claims about markets in general, it does not need to be disproved, it needs to be proven in the first place by comparison with the real markets it claims to describe. Many leading economists (e.g. Greg B Davies) have pointed out flaws in it, and EMH is far from being a consensus.

Booms and busts are not 'apparent bubbles' in any sense, they are all around us, and cause real movements in the markets regularly.

I'm confused. Sumner showed the EMH predicts exactly this, for a certain distribution of information and returns. How is the real world agreeing with Sumner's model evidence against Sumner's model being correct?

What is dangerous about the EMH to me is that it encourages a sort of worship of markets

The EMH is simply a rule which allows you to turn a statistical distribution of new information into a statistical distribution of price movements. This is what Fama did to get the Nobel prize. A corollary is a "speculators can't make money except by chance" theorem, or in it's weak form, "technical traders can't make money except by chance".

It's not a "markets are benevolent wizards that solve all the problems" theorem. It's not a "no recessions ever occur" theorem. It's not a "prices will never change suddenly" theorem - in fact, it proves the opposite of the latter for certain information distributions. If you argue against these latter claims, you are not arguing against the EMH.

it needs to be proven in the first place

That's not how science works. You prove theorems, the best you can do to theories is fail to disprove them.

Thanks for the response, I think we'll continue to disagree, however perhaps we just have a different evaluation of the efficiency of markets - this is probably a difference of degree, as I doubt you subscribe to the market always being 100% efficient? Specific examples about stock market crashes or extreme movements modelled by EMH would be more persuasive than discussion of Bitcoin, I've attempted to give one below.

Sumner showed the EMH predicts exactly this, for a certain distribution of information and returns.

Assuming you are only talking about the blog post you linked, I can't see any sort of proof there, there are some hypothetical numbers about Bitcoin plucked out of the air, and he then goes on to assert that EMH is true whatever happens. If a theory is true whatever happens, it is not a useful model for thinking about the world.

If you take the EMH to mean that prices perfectly (or near perfectly) reflect information (public and private) about an asset, I'd say that mortgage CDOs (to pick a historical example) provide a perfect example of prices NOT reflecting all information - Goldman Sachs insured them with AIG knowing that the prices were incorrect days before the bust, but the price didn't reflect this. Given the incredibly broad claims made by EMH (market prices efficiently reflect all information), one counter-example of corruption, euphoria etc etc driving prices rather than underlying value is enough to disprove it, if it is a meaningful model of markets which can make useful predictions. That is why people cite booms and busts as evidence against EMH, because sudden changes in value are often completely unrelated to the consensus price as measured several days later or before, they are caused by panic, irrational behaviour (in aggregate, not just individually), or insider knowledge; information is so unevenly spread in markets, and manipulation pays so well (e.g. LIBOR), that they are nowhere near efficient.

Perfect information may not have been the right term.

Steve Keen devotes a the second half of chapter 11 in Debunking Economics to the EMH. The core issues are that the empirical data does not support it and that the maths behind it is all based on the assumptions that everyone can borrow freely at the same risk free rate and secondly that everyone has the same expectations ("homogenity of investor expectations: investors are assumed to agree on the prospects of various instruments - the expected values, standard deviations and correlation coefficients..." - Sharpe 1964 quoted in Debunking Economics 2011.)

That the EMH may be false does not mean that I believe I will necessarily win any more than the fact that Poker is significantly a game of skill means that I would necessarily win. I can be outplayed and/or have luck against me. But I wouldn't play for significant money unless I strongly believed that I had the advantage, the same is true for the market.

What empirical data disagrees with the EMH? I also have no idea why you believe the EMH requires investors to agree on the prospects of various instruments. It doesn't. If it did, the EMH would be a "no one ever trades" theorem.

If the EMH were false, a trading strategy generating above-market (risk-adjusted) returns over the long haul would exist. Claiming such a strategy exists is far more plausible if you've already traded it and won.

Would wide swings in the price of an individual stock on no material news not suggest that perhaps the market pricing is not perfectly efficient? (And if it doesn't, then I don't think anything could. I mean, that is one of the primary means you would prove it is not efficient, so if you reject that, then there's not much else I could offer you.)

The EMH says that the absence of news when news is expected should cause price swings, as well as the presence of news when that news is unexpected. And that the presence of expected news shouldn't cause any price swing.

EMH says more than you can't beat the market. Booms and busts do show inefficiencies.

A trading strategy generating above-market (risk-adjusted) returns may be a proof of the problems in the EMH but it isn't the only one. Also once declared it may no longer be an effective strategy. It also isn't proof because it is impossible to prove that success over n years proves success over n+1 years.

However how about asking Warren Buffet if the EMH is true, would you accept his track record as proof against the EMH? If not what sort of trading strategy/record would you suggest might constitute the evidence that you are asking for.

Going back to my poker example, do you expect me to win the World Series of Poker to prove that Poker isn't just random luck and chance? Is once enough or do I have to repeat it?

The track record of Warren Buffet and a few others is evidence that the EMH is imperfect. The rarity of Warren Buffet-level investors is evidence that it's still pretty accurate.

How does a boom and bust prove the EMH false? Could you explain the mechanics in detail?

Going back to your poker example, if top players in poker were rare and gains/losses seemed random, that would be evidence that Poker is mostly just luck.

I honestly don't understand the proposition that you are making and whether are are actually disagreeing with my previous post or we just have a language issue. My original point was that the EMH is false but that an individual can use it as a reasonable model and therefore are unwise to trade for profit without a particular reason to believe that they have and advantage.

If you accept that Warren Buffet and a few others are evidence that the EMH is imperfect (rather than the positive examples of long lucky runs - in a large population you would expect some very long lucky runs) then you are acknowledging the EMH is false. The existence of those who can beat the market is proof, the number of them doesn't matter.

Booms and busts are evidence (not proof) against the EMH because efficient accurate prices won't jump suddenly without specific new information about the underlying value of stocks/commodities/derivatives. Given the size of the shifts and that common absence of major news that triggered them I think it is hard to argue that a number of busts are evidence against the EMH. Likewise speculative bubbles that have inflated the value of things to many times their previous value based largely on the expectation of further growth are again evidence (rather than proof) of the flaws in the EMH.

If you are claiming that the EMH is a good approximation to reality but imperfect, we have no disagreement.

That is close to my view.

From the perspective of someone considering playing the market the EMH is a pretty good model. However as an overall macro model of the market it is fairly poor and certainly not something that should be treated as true to then develop further theories on top of. For example I do not believe that markets will always produce the best results and price goods correctly but I am generally sceptical of people claiming to be able to beat the market (such people probably exist but it is hard to distinguish them from the lucky).

Could you explain that second sentence a bit? I don't see how EMH being wrong implies that there's a strategy that beats the market.

Let's say I think the EMH is false, because, I dunno, I think people are irrational and emotional a lot of the time. It doesn't necessarily follow from that that I can beat the market by betting on people being irrational -- irrationality is really hard to predict, people could be irrational in many different directions.

The EMH does not assert that people are rational. The EMH can be true even if every single person is irrational.

http://en.wikipedia.org/wiki/Efficient-market_hypothesis

How it implies there is a strategy to beat the market? Simple. Suppose you have knowledge (e.g., the next iPhone causes cancer) that the market has not incorporated. You can use that knowledge to trade since the people not using that information will give you favorable prices (in this case by shorting AAPL).

Ultimately the problem with the EMH is the name. It's a fairly technical result that most people don't understand. People hear "Efficient Markets Hypothesis", they think it means "markets are magic fluffy bunnies that protect puppies from twisted stomachs and cure inequality", and argue against that.

I'm still confused as to what your ultimate point is. Are you saying that nobody has ever made a bet like that before? I made 4x on TSLA earlier this year. I don't claim to have refuted the Efficient Market Hypothesis, I just saw a situation where most institutional investors had a wrong idea and I thought I could beat them.

You seem to think that "market is sometimes wrong" somehow implies "you can always beat the market". That's not what we're saying. We are saying the market is clearly wrong often, so there exists some space for speculation arbitrage.

>"I made 4x on TSLA earlier this year"

This implies that you made the round trip (ie bought and sold). If not, you've made exactly zero.

So what was it that you saw, that institutional investors missed, that caused you to buy? What changed with the company's prospects in the past year that caused you to sell recently, and book your profit?

Otherwise, you haven't "beaten" anyone.

Yes, I bought TSLA options when the stock was at $30 and sold them for a 4x return. It grew to many more times that, so I could have gotten more.

"So what was it that you saw, that institutional investors missed, that caused you to buy?"

At the time, there was a large distrust in the financial community that Tesla had the production capacity to meet its Q42012 sales goals (I believe it was between 3-5k Model Ss, they ended up selling 6k). It further followed that Tesla failing to meet its sales goals would undermine investor confidence in the company and squeeze TSLA's operating capital in the coming 1-2 year period.

I disagreed with both hypotheses. The funny thing is, my strategy wasn't even smart. I know nothing about Tesla's production capabilities, what the bottlenecks were, or if they were likely to succeed. I assume that information had been priced into the market. Essentially, I bet on Elon Musk. I don't know what the bottlenecks were, I saw the Model S and shit my pants and said "This is awesome" and then I bought options.

I really only have one point to make, which is that if you think TSLA going from $30 to $180 / share in less than a year is a completely random, unguessable market move, well, I don't know what to tell you. It's not to me.

tldr; http://ycombinator.com/munger.html

(just kidding, that one is longer)

This tldr is an extremely interesting essay on wealth, business, and stocks. It is ridiculously long, but takes you amazing places. Definitely worth reading!

Can we discuss it here?

https://news.ycombinator.com/item?id=6837713

> "Suppose you have knowledge (e.g., the next iPhone causes cancer) that the market has not incorporated."

The EMH is based on the assumption that prices perfectly reflect the available information on the underlying. This is mentioned in the second paragraph of the Wikipedia article you quoted. You can't invoke the EMH as a model of the market and then violate one of its core assumptions when defending it.

Please try to follow the logic rather than just the talking points. I'm showing jbooth how (not EMH) => exists awesome trading strategy.

You seem to say this a lot whenever something about EMH get's posted - https://news.ycombinator.com/item?id=6690838

The existence of Warren Buffett disproves EMH.[1] EMH basically says that beating the market is pure luck as everything is priced efficiently. The fact that WB exists, just one person beating the market for 50 years, disproves EMH. I don't personally have to have an EMH-disproving strategy to see that it isn't true.

[1] http://www.investopedia.com/terms/e/efficientmarkethypothesi... "For example, investors, such as Warren Buffett have consistently beaten the market over long periods of time, which by definition is impossible according to the EMH."

Investopedia is incorrect. It is not impossible under EMH for particular investors to consistently beat the market over long periods of time, it is just improbable. Given a large number of investors, however, improbable runs of good and bad luck are near certain to occur somewhere in the system.

This is one of the reasons that it would be very difficult to disprove the EMH even if it were false -- there is no set of outcomes that is strictly inconsistent with the EMH.

"Long period of time" and "50 years" aren't really the same thing in my book. You can get lucky for awhile. At some point it stops being luck. I'm not sure where that line is, but I am confident though that Buffett has crossed it. I'd be willing to bet you'd have a hard time finding anybody credible that would say what Buffett has done is just luck, which is exactly what you are claiming. Once we accept that he isn't just a lucky guy, EMH is disproven.

> You can get lucky for awhile. At some point it stops being luck.

No, it doesn't.

There is no length of a run that cannot be luck. If you have a quantifiable expected distribution of results, you can say how improbable it is that you would see a run of a particular size in a given sized universe of data, but the fact that such a run exists in the data doesn't prove that its not luck.

> I'd be willing to bet you'd have a hard time finding anybody credible that would say what Buffett has done is just luck, which is exactly what you are claiming.

Er, no, its not what I'm claiming. In fact, I'm highly skeptical about EMH, to the point of having said that there is no particular reason (except for known-to-be-false assumptions) to assume that it should be true.

On the other hand, I am saying that the claims that it is "disproven" by the existence of runs like Buffet's overstate the degree to which the EMH is even falsifiable.

> Where do you get the idea that the EMH assumes perfect information?

The grounding of the EMH is a consequence of rational actor theory which assumes perfect information.

It could be true without the rational actor theory more generally or perfect information in particular being true, but there is no reason to expect it to be true except the assumption of those theoretical foundations in which it is grounded.

Its difficult to falsify the EMH, since it doesn't actually rule out any outcomes, it just asserts that if market-beating outcomes occur, they are because of luck rather than strategy. As such, there is no result that is strictly inconsistent with the EMH. (Further difficulties arise since, if one rejects the EMH, but still assumes that market participants do efficiently apply the information that is available to them, any market-beating strategy would need to be kept secret to avoid being adopted generally in the market, and thus no longer be market-beating, so any test of EMH has to be able to distinguish between result of luck and results of covert strategy.)

Most professional investors and fund managers do have an advantage using it over naive/amateur investors and yet they rarely beat the market, and when they do it almost never lasts more than a few years. "Use index funds unless your name is Warren Buffet" would be a better summary.

but is right now a good time to buy into an index fund? Or to buy any stock?

Most things revert to the mean, and right now the market is substantially above mean, and that market level is based on other aspects of the world that are currently also out of mean.

Isn't the standard advice to not invest unless you can wait 10 years for the ups and down to average out?

That is common Buffett-style advice. But he also advises that price matters. Matters a lot, in fact.

There are two sides to buffet style advice:

1. Buy bargains when assets are underpriced.

2. Hold those assets for many years.

Also, Buffet buys substantial or controlling fractions of a company, so the other owners can't scrwwo him. If you can't do that, you can't replicate his large scale success.

Not only that - he's able to affect those long-term returns.

>and right now the market is substantially above mean

In what sense is it "substantially" above mean?

the mean of what... itself? historically? how do we judge this?

It's worth noting that that Warren Buffet quote was from an annual letter written in 1988. The retail investing landscape was very different then than now. For quite some time, Buffet has been a strong proponent of index investing. Here's one from that same annual letter, in 1996:

Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expense) delivered by the great majority of investment professionals. Seriously, costs matter.

True, he doesn't say you can't beat the market. But he does say, then and now, that you probably shouldn't bother trying.

Plus, say through in-depth research and know-how, you do manage to beat the market. At best, you've created a part-time job for yourself. Unless you're managing other people's money, or have a 7-figure+ portfolio, I expect the time taken to do the due diligence necessary to consistently beat the market - if indeed such a thing is possible - would end up paying a lower hourly rate than you could earn doing other, more reliable, less zero-sum things.

>Plus, say through in-depth research and know-how, you do manage to beat the market. At best, you've created a part-time job for yourself. Unless you're managing other people's money, or have a 7-figure+ portfolio, I expect the time taken to do the due diligence necessary to consistently beat the market - if indeed such a thing is possible - would end up paying a lower hourly rate than you could earn doing other, more reliable, less zero-sum things.

Of course most people wont suddenly have a 7+ figure portfolio, but will first have a 5+ and then 6+ figure portfolio. Yes I researched something for days when I was only investing $30K and that could be called a low hourly rate job, but I was learning an immense amount and now can do the same research in only a few hours all while dealing with a significantly larger amount so my "hourly rate" keeps going up.

And for what it is worth I am really enjoying the process.

Fair enough - if you enjoy doing it, then it's a hobby and it doesn't matter how much you make. But I certainly wouldn't want to put an entire 7+ (or even 6) figure portfolio in a single stock, or even a handful of them. Say that your analysis is dead-on, but some completely unforeseen event strikes the couple of companies you've invested in. There goes a good chunk of your life savings.

I certainly don't think there's a problem with devoting a small percentage of your portfolio (say 5%) to stock picks, or even a larger percentage split over multiple stocks, if you enjoy doing it. I occasionally do it with 5% too. But with retirement savings, I like to have as many guarantees as possible. By investing globally in index funds, I have as much confidence as possible that unless the world implodes, my savings will grow over the coming decades. If I pick individual stocks, even a decent number of them - holding say 10-15 at a time - and even if I actually AM really good at it, it is entirely feasible that I could lose money in the long term through bad luck alone. So even if I can increase my expected value through stock picking, I also significantly increase my risk.

I find personal finance fascinating too, but I prefer to spend my hobby time studying multifactor investing (regression analysis, etc.) and researching the optimal funds to achieve a moderate small and value tilt, while maintaining low costs and broad diversification.

Rather than a short comment a few different books I could recommend that you might like on this hobby/topic are:

-Your life or your money (personal finance more than investing) -The Warren Buffett Way -The Five Rules for Successful Stock Investing: Morningstar's Guide to Building Wealth and Winning in the Market...

Thanks, I'll take a look. I did read the Intelligent Investor years ago and enjoyed it, but honestly between searchtempest, family, and relaxation time, I'm also pretty happy to have a portfolio that can run on autopilot. :)

My top book recommendation BTW would be the 4 Pillars of Investing by Bill Bernstein.

Ah if you read Intelligent Investor you are ahead of most and The Warren Buffett Way would then just be a light fun rehash read (usually the book I recommend before Intelligent Investor). The Five Rules for Successful Stock Investing at least for me was a good book that explained reading financial reports. I'll check out 4 Pillars of Investing, thanks

Actually Buffet is talking about investing in an index fund VS investing on the advice of an investment professional. He is referring to the same biases of professional investment advisers that the previous poster was referring to. Basically ordinary investors do have an asymmetric advantage over investment advisers and 'professionals'.

Hence, it may not be your intention, but you are using Buffet's quote to make the exact opposite point of what Buffet himself originally intended. And he has often spoken on this subject. See also Mohnish Pabrai and his book 'The Dhandho Investor'.

Yes, I realize he is talking about index funds vs high cost mutual funds or paying an adviser for stock picks. And I agree that direct investing in stocks should be superior to high-cost mutual funds. (In fact, even if we did believe in the EMH, that would only mean the expectation is roughly the same as an index fund, just with a lot more volatility.)

Still, the default advice of the supposed world's greatest stock picker is to stick with index funds. It's not, "Here are my rules of thumb for picking great stocks," or something along those lines. (I strongly suspect that Graham's advice would have been the same if index funds had been an option in his time.) That suggests to me that at the very least, he clearly believes that picking stocks is difficult. So sure, Warren Buffet, someone who you would expect to be highly biased toward stock picking, doesn't completely rule it out. But he doesn't endorse it in general either.

I still think it's incredibly dangerous for anyone to follow "default advice". If you have had the luck of having investable savings (most of the world doesn't so consider yourself very lucky), please do yourself a favor and educate yourself on your financial goals and options.

Great counter-point. Just to be clear, I'm not knocking that index funds are a good investment option - I'm knocking the often repeated mantra that if you are going to be lazy, invest in index funds.

The the truth is, you can't be lazy - it's simply not an option. It's the burden of having savings. You need to research your investment decisions and understand your financial goals even if you decide you want a passive investment strategy. Why? Here are a few scenarios where investing the majority of your savings in index funds probably won't make sense:

i) You are approaching retirement age and will be living off your savings in the next few years. You have saved just enough to live out your expected lifetime. ii) You are a young hacker and will be bootstrapping with your friends in a few years (sounds familiar?). You are close to saving enough to pay for your personal burn & even server costs for a year.

i) & ii) are clear cases where the users need liquidity and are unable to handle index fund volatility.

No one lazy would realize this. The truth is those who decide they don't want to actively manage a portfolio still need to understand a lot of things (savings accounts, CDs, annuities, bonds, treasuries, etc.) before they decide to jump into index funds.

Essentially, I think investing is a part time job regardless of your strategy. It's the burden of having savings.

Absolutely. Index funds reduce the burden, but don't absolve you of making decisions. Asset allocation, as you say, is still hugely important. So is geographical diversification.

> Although indexing is predicated on efficient markets, the higher the percentage of all investors who index, the more inefficient the markets become as fewer and fewer investors would be performing research and fundamental analysis of equities.

Burton Malkiel (of "Random Walk Down Wall Street" fame) responds [1]:

FORTUNE: What if everyone owned index funds? What would happen to returns then?

MALKIEL: There's a paradox about this. It's actually the professionals' reacting immediately to news that makes the stock market efficient. So it's theoretically possible that if 99% of the market were indexed, indexing would stop working. There'd be no one left to make the market efficient. But only about 10% of money is indexed now. I'd say we could have half of the money in the market indexed, and there would still be plenty of people to make it efficient.

[1] http://money.cnn.com/magazines/fortune/fortune_archive/1999/...

Worth noting that the amount of money in index funds has risen to 24% as of 2012. [1]

[1] http://www.pbs.org/wgbh/pages/frontline/business-economy-fin...

Stock markets are all about aggregating information about the state of the economy to discover its 'true' state at the current time. A trader makes money, on average, when they have knowledge that the market doesn't about a stock's valuation. By trading based on that information, they introduce it into the market, marginally changing the share price towards a value that incorporates their information.

When a trader's prediction is proven correct (assuming it is), they pocket an amount of money proportional to how incorrect the market was when they made their trade and how much of a risk they took (i.e, how much money they traded), thus being rewarded for the value of the new information.

Thus, the market is not efficient, but it asymptotically approaches perfect efficiency as the volume of trades increases. It's never 100% efficient but indexers assume it's close enough and that incentive of discovering the remaining inefficiencies is not worth the cost and risk. These days, that should be the case for most, if not all, individual traders.

If I understand things correctly, an index fund will end up reducing the efficiency of the market. But this is not necessarily a bad thing: it means that, as the portion of invested money that's in indexed funds increases, the value of new information that a non-index trader introduces to the market increases.

This creates a greater incentive for someone to discover and trade based on new information. The tension there will create an equilibrium point at some point below 100% indexed, meaning that the markets will never switch entirely to indexing.

>"A trader makes money, on average, when they have knowledge that the market doesn't about a stock's valuation"

That may be true for an investor, but it is completely false when speaking of a trader. A trader need not know the underlying stock to make a profit consistently. The uninformed continue to think trading and investing are the same. They are nothing alike.

Good point... I confused the terms there. I was referring to an investor whenever I said 'trader' in my previous comment.

The truth is we don't know at what point index funds will disturb the efficiency of the market. Malkiel makes a guess at 50% although I think he has an overtly optimistic view of how much rational professionals drive the market.

Regardless, let's suppose the mantra is "invest all your money in index funds until it breaks 50% after which bad things may happen". Do you think that if we manage to hit that 50% in the future, anyone will actually actively try to stop people from investing in index funds? Effectively there would be a lot of money very rich index fund managers who will be pushing to increase their fund sizes even further.

So it's possible for extreme irrational exuberance to cause even index funds to harm the market.

Despite Warren Buffet's quote, what he actually does with his investments is nothing at all like stock picking -- he acquires substantial fractions of companies and then uses that control (and his personal brand) to change how those businesses and the markets they operate in run.

He's not picking companies whose values will go up, he's picking companies he can cause to increase in value by owning them. This is something non-billionaire investors can do, too, but probably not for publicly traded companies.

This doesn't sound anything like my understanding of Warren Buffett, this sounds more like Carl Icahn.

You've described the opposite of what he does. It is widely known that Buffett does not interfere with a newly acquired company's strategy, management, or overall market. His bets are sure bets currently -- as they are.

He wasn't talking about their management processes, he was talking about their capital structure. And he was right. A lot of the acquired companies have high ROIC, because Berkshire Hathaway at its core is a big insurance company and Buffett's investing is there to increase the book value by investing the float.

This is great. Hats off to you sir. I've come to the conclusion that some people are wired the way they are, and there's no changing them. It's also like Buffett says (don't remember the actual quote): either Graham's teachings will resonate with you instantly or they never will.

As somebody who has started businesses, the "investing your money in an equity exactly as you would treat investing in a business" strikes me as great advice if you have plenty of time, and bad advice if you don't. Investing in a business is very hard work.

I know people who do pick stocks exactly as you describe, and they do just fine. But they spend a lot of time and attention on it, and they have years of expertise. The question for me isn't, "Can I do the same," it's, "Can I do something better with my time?" For me, the answer is yes. Trading stocks is making money, but it isn't creating value. I'd rather focus on creating value.

In theory, I get your "What if one day nobody traded stocks? Index funds would be doomed!" point. But in practice I don't think we're near that point. There still seem to be plenty of business news, plenty of business reporting, plenty of people fussing about individual stocks. Indeed, it seems like way more than we need. I don't feel obliged to add to their number.

I think there are a few opportunities to make money in the market that don't violate the weak efficient market hypothesis. I look for opportunities where there's too much money or market sentiment for Wall Street traders to make things efficient, so the EMH doesn't strictly apply:

1) Index market timing. This is easy: allocate your funds among multiple indices Boglehead style, and if an index's P/E is too big, divest from it. This strategy beats the market with almost zero effort. There's tens of trillions of dollars of market cap out there, there's not enough money on Wall Street to reverse the polarity of that.

2) Large stocks subject to large negative sentiment. AAPL when it was at $400, BP, etc.

3) Large stocks subject to large, wildly varying market sentiment, like TSLA. I'm a little afraid to try this with real money, but have been paper trading it with success. You have to have a good mental model of how mass psychology works, and it's easy to get that wrong and lose a lot of $$$.

If you are investing for the long-term (i.e. holding for years) then who is your competition? Mutual funds and hedge funds are totally focused on their quarterly returns. Traders are measured in much shorter time frames. How many professional investors are investing for years? Warren Buffett, university endowments and pension funds [1], rich family funds, and other niches you don't hear about on CNBC. Perhaps the reason index investing works is because it forces people to invest for the long-term and avoid all the cognitive errors you mentioned.

[1]: Most of these are run by morons. They are suckers for Wall St. sharks in expensive suits.

So how does your argument affect stock options? Once a company IPO'ed they aren't much different from stock from any other company. Do you suggest to sell them as soon as they vest?

Modulo some tax considerations (specifically, you want to sell them when they'll count as long term capital gains), yes, sell them as soon as you can. Keeping your company stock for a publicly traded company is silly for both the reason above and for another reason that goes one step beyond it: you didn't even pick it!

Think of it this way: look at all the employee stock you hold and ask yourself, "would I ever buy this much stock from this company if I didn't work here?" Of course not. The only reason you have it at all is because you got it in a stock grant or bought it at a substantial employee discount. But now that you have it, it's the biggest individual position you have in the whole market. Where you happen to work is a totally arbitrary consideration relative to where your money should be, so this is a really silly state of affairs. There's just no sound reason for you to be holding it just because someone happens to have given it to you; past events are irrelevant to your present decisions. So execute your options as soon as they vest and buy into no-load ETF or something.

"Where you happen to work is a totally arbitrary consideration relative to where your money should be..."

It is actually worse than that. To diversify and reduce your financial risk, your money should be concentrated away from where you work. (Otherwise, for example, if the company goes bankrupt, you lose both your savings and your job!)

Depends on what you consider your risk tolerance to be; you could equally say you're doubling down on the success of the company: "when this place takes over the world, it'll help my career and increase my savings". The real problem is considering your employer part of your investment strategy, combined with the craziness of regular people picking stock market winners, per the article and GP's point.

> Keeping your company stock for a publicly traded company is silly for both the reason above and for another reason that goes one step beyond it: you didn't even pick it!

That's not quite true: you certainly picked which company to work for, and who'd choose to work for a company they don't believe will be successful?

But greeneggs has it right: you don't want to put yourself into a situation where you lose both your job and your biggest investment tanks.

>and who'd choose to work for a company they don't believe will be successful?

Majority of yahoo employees since 2004-ish? Or Blackberry after 2009?

There are plenty of reasons to work for a company that you don't personally think will be successful:

1. You believe in their mission (e.g working for a newspaper even though that industry is in real trouble) 2. You have constraints around when and where you can work - limited to a certain town, need part-time work 3. They offer a high salary for your specific skills - sure, they might be out of business in a few years but you can make good money for the moment

You probably know a lot more about the company you work for than other companies you might invest in, so that might be one reason to prefer their stocks

Trading stocks as you said is not for everyone, you should try investing in individual stocks if you can read the 10K.

I'm interested in learning more about quant-like involvement in the market, just kind of as a hobby for cold winter nights. Would you say the odds are so bad even that would be foolhardy? I don't need to make money, just have something interesting and not loose too much money.

If it is in fact purely an academic exercise, I'd recommend doing this using a paper account. Many brokers will allow you trade on a paper account to satisfy your curiosity without putting your wealth at risk.

There are, broadly speaking, three kinds of quant funds that trade equities -

1. High frequency trading firms with sub-millisecond latency, who make their money from the bid-offer spread. You can't compete here.

2. Medium term traders who will hold a position for somewhere between hours and weeks. They tend to be looking for statistical regularities to exploit. If they find one, they don't expect it to persist for long - the typical 'half life' of a strategy is around six months. It's not impossible for an amateur to compete here, but be aware that there are thousands (tens of thousands?) of people for whom this is a full time job. Many (most?) of them have backgrounds in quantitative finance, have worked at funds and large investment banks, have PhDs in physics, mathematics, computer science etc. So you should ask yourself why you think you will be able to compete.

3. Long-term traders who are either stock picking, or actively managing a portfolio that might include stocks, bonds, commodities, currencies etc. Some of them are just trying to beat the market, and some are looking for absolute return. All the points in the OP article apply to this case.

you should ask yourself why you think you will be able to compete.

I don't want to win, I just want to be in the race (and not lose too terribly much). Much the same as how people like to run in marathons they know they can't win. I suspect it would be an interesting blend of things that I like.

It's definitely an interesting area. However, I would start with paper trading (as other comments have suggested), as it is extremely easy to lose a lot of money in quant trading if you're not careful.

There's plenty of "academic interest" to be had without risking any real cash.

Sure, paper trading is a given for at least part of, if not all, of the endeavor.

Well the same questions still hold, don't they. Let's say short-term trading is a zero sum game (it probably isn't, but it's not much in the plus, either - I'd like to be proven wrong though). Then the question becomes - what do you think you have to bring to the game that will put you ahead of the bottom 50%. Or bottom 25%, if you can stomach losses that big. Keep in mind that 90, 95% or so of the people playing your game are professionals with large institutional backing, advanced degrees and years of experience.

You could argue that the bottom 50% are just the suckers - but of course, those who are worse than them have already been selected out. So the 'losers' you're competing with are either the newcomers, or those who did well in the past but are having a bad spree now.

What is going to be your strategy? If you're just going to apply Black-Scholes, well there are 1000's of people already doing that much better than you ever will. So you need a unique approach - either industry insight that you can quantify somehow, an unexplored statistical approach you know more about than most others.

I don't know what my strategy would be, because I need to learn more. I'm still trying to decide if I ought to pursue it.

I expect that you will learn a lot, and much of it will be interesting. Some of it will even be applicable outside of finance. Almost certainly you will lose money (through fees and buying data, if nothing else). If you're okay with that, then go ahead.

There's an interesting guide with some suggested reading at

http://quantivity.wordpress.com/2010/01/10/how-to-learn-algo...

Sure, and I meant it as a rhetorical question. It's just that that is the first question you need to answer for yourself. For me, I could not objectively (even with the most positive assumptions about boundary conditions) answer it 'yes', or even 'maybe'. But still, apart from the strategy, the question remains - what do you have that few others have. You can answer that for yourself even without having a concrete strategy worked out.

So you need [...] an unexplored statistical approach you know more about than most others.

I have one that I am trading profitably and for which I have written a scientific paper which could be published (i.e. I can reasonably explain why the approach works and nobody found it yet).

Still searching for an investor in that space to scale it up; if anyone has ideas or knows who could be interested in seeding such strategies i would be glad about a mail (see profile for contact).

If you're interested in learning more (shameless plug), I run a quantitative finance information site.

I've linked directly to the articles on quant trading: http://www.quantstart.com/articles#algorithmic-trading

I don't pay enough attention to know, honestly. I know people who invest their own money and put a fair bit of time into it; they seem to survive just fine. But they're either angel investors or long-term value investors, and those don't seem like what you're looking for.

If you just want a hobby, have you considered just doing it as a game? You don't actually have to execute the trades.

If you want to do real money, you might consider whether you think you are prone to a gambling addiction. I've seen some very smart people think they had a great system for beating the market get hooked on the gambling aspect and lose a lot of money. One of them ended up mishandling other people's money; they were lucky to stay out of jail.

Let's please stop this parade of ignorance! Trading is not investing! You can make or lose money with both. That's where the similarities end. One deals with the value of businesses, the other deals with psychology and gambling theory. The two are really nothing alike.

I've been actively investing for about seven years now. I pick my own stocks, and my time frame is generally six months to two years. I consistently win using a simple strategy that is essentially a mix of Peter Lynch's 'buy what you know,' Warren Buffett's value investing, and my own preference for under-the-radar or turnaround plays. I never buy hot stocks, and I almost always take a contrarian macro approach. This works well for me. I've averaged about 15% a year since 2006, vs the market's roughly 6%. I used to think that perhaps I was just being 'fooled by randomness,' and I still suspect that my luck will run out on every new pick, but it never does, or hasn't yet. Occasionally I'll make the wrong decision, but that's the exception, and I have rules in place to minimize the effect of bad decisions when they occur.

Probably the most difficult thing about learning how to invest was mastering my emotions. Investing was incredibly stressful in the beginning, and to say that I waged a war against my own emotions in order to subjugate them so that I could invest properly sounds melodramatic, but that's essentially what happened. Now that I've distilled what I know into a fairly simple system, I don't stress nearly as much over my investments. I have simple rules that I follow, and I've found that as long as I follow them, I stay pretty stress-free, and my picks do pretty well. As soon as I deviate from those rules, however, I begin feeling uncomfortable, my emotions begin swelling up, and that affects my decision-making process. I have a rule for when that happens as well: sell, retreat and regroup.

I keep reading that it's practically impossible to beat the market, but I've done it every year since I began investing. Maybe that's just luck, or maybe I'm just the exception, I don't know, but it honestly isn't even that difficult to do any more. After I put the initial time in to learn the ins and outs of the game (hours perhaps in the thousands) and learned the discipline necessary to invest without letting my emotions and biases get the best of me, it all seems pretty simple. That said, I don't think most people are willing to put in this level of effort into learning the game, and I think that's what separates those who should buy index funds and those who successfully pick individual stocks. It's not impossible to beat the market, but it takes a LOT of effort to get to the point at which it can be done regularly without hastening one towards an early death due to heart failure. Most people's only foray into the marketplace is a purchase of some penny stock that their brother's friend's sister's cousin's broker may have recommended. They lose, and decide to let the professionals handle it. Others put in the time to learn about DCF, the relevant ratios, various investing strategies, etc, but they never learn to master their emotions, and they usually end up doing almost as good as the market, but with much higher levels of stress. Those people end up adopting an ETF strategy. A few expend the effort to cultivate both the knowledge and the discipline to use it effectively, and are able to pick successfully as a result.

My two cents.

DCF ?

Discounted Cash Flow, a fairly common type of asset analysis. Also used by Warren Buffett.

Yes! People want a prescriptive approach, and then they are surprised when they get a random walk. Once you use your brain and develop a meta-approach that you understand why it works (and doesn't), surprise, you beat the market.

"I've read The Economist for 20 years. Despite understanding the financial markets better than most..." outch..

"For example, you can think of the market as a random walk with an upward bias." outch again. If you think of the market as a "random walk" (a well defined mathematical concept) AND have read Taleb, you might want to read him again.

It's exactly like a random walk except that once in a while the walker gets teletransported.

It's unfair of you to pick the first quote and ignore his mentioning that he worked in finance.

>"If you think of the market as a "random walk" (a well defined mathematical concept)"

Random walk with a drift is how the trend is described.

Great. If you know a little tiny bit about finance then you know that stock prices are not a random walk (with drift or without). A random walk would give you a standard distribution. In reality you are dealing with a fat tail distribution.

So I should take financial advice from a random anonymous internet dude who doesn't understand quoting and can't spell "ouch"?

I said, "can think of", because you can think of it that way for the purposes of the point. I needed an easy phrase to convey the short-term twitching of the market. If you have a better phrase that sets up Taleb's point, go ahead and suggest it.

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