The World of Inefficient Stock Markets

“Let us not, in the pride of our superior knowledge, turn with contempt from the follies of our predecessors. The study of errors into which great minds have fallen in the pursuit of truth can never be uninstructive… Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, one by one… Truth, when discovered, comes upon most of us like an intruder, and meets the intruder’s welcome… Nations, like individuals, cannot become desperate gamblers with impunity. Punishment is sure to overtake them sooner or later.”

Charles MacKay, Extraordinary Popular Delusions and The Madness of Crowds, 1841

My prior post on Charts and Technical Analysis is here: http://csinvesting.org/2017/01/04/chartists-and-technical-analysis/

The point is to realize that charts are a tool but using them to predict is a fools’ game.   You can try to find disconfirming evidence,but make sure the sample size is a large one.   More on market inefficiency from Bob Haugen.

5 responses to “The World of Inefficient Stock Markets

  1. “The point is to realize that charts are a tool but using them to predict is a fools’ game.” If they don’t have predictive value, would you advise dispensing with charts altogether in favor of something that has at least some predictive value? There are only so many hours in the day after all …

    Nick de Peyster
    http://undervaluedstocks.info/

  2. The secret to investing lies between thy ears. Hint: behavioral finance.

    Start with reading Andrei Shleifer: Inefficient Markets: An Introduction to behavioral finance.

    Focus on momentum and regression to the mean. Thank God it is difficult or else it would not be fun.

  3. Hey John
    I wonder what’s your thoughts on the caricature you posted above: “I’ll bet there’s a way to monetize it”? isn’t it the same approach as Nassim Nicholas Taleb chooses with his barbell strategy? I wonder if you could show me the way to see how he chooses the options he wants to buy against the market to profit from black swans (big or small) in the market? any good and inclussive reading you might suggest?
    thanks

  4. Good question! I can’t speak for Mr. Taleb, but you can go hear and read ALL his books, view his lectures and posts, and ponder what he says. http://www.fooledbyrandomness.com/. All the while, you should understand how YOU can apply his lessons. 90% of investing is knowing who you are. Yes, if you don’t have the skill or method that has an edge, then all the discipline in the world and self-knowledge won’t help you. But self-knowledge will be critical in choosing a philosophy for investing and method that could work for you.

    I would read the Big Short by Michael Lewis. Then focus on the guys who bought way out of the money options. Page 103 Cornwall Capital (Jamie Mai and Charlie Ledley). Charlie, “In public markets you have people focused on quarterly earning rather than the business franchise. You have people doing things for all sorts of insane reasons.” How do you find then take advantage HUGELY mispriced bets. Start with $3 Lose 70 cents, lose 60 cents, lose $1, then make $10. Not easy to emotionally handle unless you understand the probabilities of your approach.

    Read on this site: the writings of Michael Burry. Burry did NOT think investing could be reduced to a formula or learned from any one role model. The more he studied Buffett, the less he though Buffett coulde be copied; indeed THE LESSON OF BUFFETT WAS: TO SUCCEED IN A SPECTACULAR FASHION YOU HAD TO BE SPECTATULARLY UNUSUAL.

    If you are going to be a GREAT INVESTOR, you have to fit the style to who you are–Burry.

    Then read the DAO OF CAPITAL by Mark Spitznagel (he worked with Taleb)

    OK, then let me know how you are doing. The reading/study will take a few weeks of intensity. Good luck.

    Google: The Psychology of misjudgment by C. Munger. UNDERSTAND it thoroughly. Don’t just read it. Hint: tatoo on your forehead: INCENTIVES MATTER.

  5. I forgot to mention: also read the research here: http://www.universa.net/research.html

    Spitznagel’s book is hard reading. You may also want to go to http://www.mises.org and look up and read Carl Menger’s Principles of Economics and Von Mises Human Action and also the Study Guide. Also works by Bastiat, The Bastiat Collection.

    You will see Spitznagel’s bibliography in his book.

    In fact, I need to REREAD the Dao of Capital since I am fuzzy on some concepts.

    Just keep in touch with me regarding you learnings!

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