Dollars and Jens
Friday, December 21, 2007
re: re: efficient markets
I'd like to call attention to one more quote, from the last page of that article:
"In a perfect world, there wouldn’t be any stockbrokers," he says. "There wouldn't be any mutual fund managers."Absolutely false. This gives me a chance to clarify the hyperefficiency comment; if everyone simply invested in index funds, throwing money at all issues in proportion to their size based only on their having been registered with the SEC, you would see stock prices utterly uncorrelated with the companies' underlying value. If a couple people then started picking over the carion, they'd make an absolute killing, and start to nudge the stocks of valuable companies higher and those of less valuable ones lower. They would reduce the returns from simply getting a stock stamped by the SEC and placed in the public market, and would start to increase the incentives of building a valuable business. If more people did that, the activity would become less lucrative, but would continue to improve the correlation between building a good business and the financial rewards that come from it.
It is quite plausible to me that, so long as the human race exists and has stock markets, there will be more than enough people trying to seek out market inefficiencies, and that the market will be, at least in broad terms, efficient enough that the bulk of people will have index investing as their best option.