One thing I would add is that the EMH also suggests it’s often not super high cost to deviate: small investors can lose out by paying extra fees and taxes, spending time out of the market, and taking too much or too little over risk (and especially too much uncompensated risk from under diversification), but given the EMH they also can’t actively pick equities with expected underperformance.
It doesn’t suggest that. Factually, we know that a majority of investors underperform indexes.
When there’s an event that will cause retail investors to predictively make bad investments some hedge fund will do high frequency trades as soon the event becomes known to be able to trade the opposite site of the trade.
All events that cause more retail investors to buy a stock then it cause retail investors to sell the stock needs some hedge fund or bank to take the opposite side of the trade and likely that hedge fund or bank is in the trade because it has models that suggest it’s a good trade for them.
A hedge fund that provides liquity to trades is going to make as much money under EMH as it cost to do the market making when it competes with other hedge funds.
It worth noting that a targeted date index fund does make predictable trades where someone needs to do the market making and will likely make a small profit for doing the market making.
It doesn’t suggest that. Factually, we know that a majority of investors underperform indexes.
Absolutely, I mean that when you break out the causes of the underperformance, you can see how much is from spending time out of the market, from paying high fees, from excessive trading to pay spreads and capital gains taxes repeatedly, from retail investors not starting with all their future earnings invested (e.g. often a huge factor in the Dalbar studies commonly cited to sell high fee mutual funds to retail investors), and how much from unwittingly identifying overpriced securities and buying them. And the last chunk is small relative to the rest.
When there’s an event that will cause retail investors to predictively make bad investments some hedge fund will do high frequency trades as soon the event becomes known to be able to trade the opposite site of the trade.
I agree, active investors correcting retail investors can earn normal profits on the EMH, and certainly market makers get spreads. But competition is strong, and spreads have been shrinking, so that’s much less damaging than identifying seriously overpriced stocks and buying them.
Active investors need to spend money to hire analysts, build computer models and high-frequency trading computers.
Let’s say it costs $10 dollar/per trade to do the analysis to be able to do a trade with a retail investor that nets the hedge fund $10.10. Even when there’s no strong competition with other hedge funds over that $0.10 of profit, the retail investor is still screwed by a significant $10.10.
It doesn’t suggest that. Factually, we know that a majority of investors underperform indexes.
When there’s an event that will cause retail investors to predictively make bad investments some hedge fund will do high frequency trades as soon the event becomes known to be able to trade the opposite site of the trade.
All events that cause more retail investors to buy a stock then it cause retail investors to sell the stock needs some hedge fund or bank to take the opposite side of the trade and likely that hedge fund or bank is in the trade because it has models that suggest it’s a good trade for them.
A hedge fund that provides liquity to trades is going to make as much money under EMH as it cost to do the market making when it competes with other hedge funds.
It worth noting that a targeted date index fund does make predictable trades where someone needs to do the market making and will likely make a small profit for doing the market making.
Absolutely, I mean that when you break out the causes of the underperformance, you can see how much is from spending time out of the market, from paying high fees, from excessive trading to pay spreads and capital gains taxes repeatedly, from retail investors not starting with all their future earnings invested (e.g. often a huge factor in the Dalbar studies commonly cited to sell high fee mutual funds to retail investors), and how much from unwittingly identifying overpriced securities and buying them. And the last chunk is small relative to the rest.
I agree, active investors correcting retail investors can earn normal profits on the EMH, and certainly market makers get spreads. But competition is strong, and spreads have been shrinking, so that’s much less damaging than identifying seriously overpriced stocks and buying them.
Active investors need to spend money to hire analysts, build computer models and high-frequency trading computers.
Let’s say it costs $10 dollar/per trade to do the analysis to be able to do a trade with a retail investor that nets the hedge fund $10.10. Even when there’s no strong competition with other hedge funds over that $0.10 of profit, the retail investor is still screwed by a significant $10.10.