Author Topic: Tha's not how the market works.  (Read 3114 times)

MustacheAndaHalf

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Tha's not how the market works.
« on: March 31, 2020, 10:52:32 AM »
I'd like to contradict a few ways people think the market works.  Hopefully doing it in one place will help more people learn about how the market actually works.  A key idea is anything widely known is already known by the markets.

COVID-19 was a national emergency which requires numerous responses.  One day markets might rise up +4% before Trump makes a speech to the nation... then Trump talks about payroll tax cuts, and says nothing about a state of emergency.  Markets drop down -4%, erasing the earlier gains.  What happened?

Markets probably estimated a 50% chance the government was about to declare a national emergency, and begin rolling out measures to assist hard hit areas.  Instead nothing happened, so on that news, markets dropped.

Days later, same thing: markets rose +4% or +5% before Trump gave a speech to the nation.  This time, President Trump declared a national emergency.  Markets continued on to a roughly +8% gain for the day.  Before Trump spoke, there was a 50/50 chance he'd declare an emergency.  That declaration is worth +8% to markets, so a 50% chance of a +8% rise winds up being a +4% rise in markets.  When the event actually takes place - the President declares an emergency - markets know the chance is 100%, and the rest of the original +8% gets reflected in the stock market.


Those who follow individual stocks have seen the same thing already.  Maybe Apple has their highest earnings on record, but when they announce earnings, their stock price falls.  What happened?  Markets already expected earnings to break the record even more, and were disappointed.  The prediction is already built into Apple's existing stock price.  When the actual earning is known with certainty, if it matches expectations, nothing happens.  If it's disappointing compared to market estimates, the stock drops to reflect the new information.

That's why you can't wait for 3M unemployment claims and expect markets must drop.  Not necessarily true.  If markets expected even higher unemployment, the 3M record claims could still be bad news, but not as bad as markets expected.

I encourage people to make predictions about the market - without money - and see what happens.  If the market often doesn't match your predictions, you just saved yourself some money while learning that stock markets don't work the way you think.

J Boogie

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Re: Tha's not how the market works.
« Reply #1 on: March 31, 2020, 03:42:40 PM »
There's a phrase for this - "It's priced in"

MustacheAndaHalf

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Re: Tha's not how the market works.
« Reply #2 on: March 31, 2020, 07:47:09 PM »
Maybe if everyone who understood markets used that phrased, "it's priced in", we might have an impact on people who don't understand the stock market.  I'll try using that more often.

ChpBstrd

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Re: Tha's not how the market works.
« Reply #3 on: March 31, 2020, 09:07:04 PM »
There's a phrase for this - "It's priced in"

The question is what "it" is.

For example, at a PE ratio of 19.45, I'd say the S&P 500 is "priced in" for a quick resolution of the pandemic, and getting back to business next month or so. But that would just be my opinion. There's no survey with honest answers that could answer the question, which is why we have financial "news" offering explanations for each zig-zag on the chart.

I think investors increasingly have to think for themselves rather than just assuming efficient markets theory means all investments are good deals. Markets have been careening from bubble to bubble for the last 25 years, so some analysis is needed to make decisions about how to find growth or lock in retirement income.

J Boogie

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Re: Tha's not how the market works.
« Reply #4 on: April 01, 2020, 08:44:29 AM »
What "it" is depends on whatever bullish/bearish sentiment someone has when they suggest something.

I think the phrase is quite applicable to market timing, which I'm not a big proponent of - but I am a big proponent of stock picking, and that's where investors thinking for themselves makes more sense.

For example in my trading account I have beat the market handily since I started, and not by being more conservative. I have a preference for extremely competent, relevant, and steady companies like Microsoft, which just so happens to be nearly flat YTD even in this crazy market. (I cannot make the same boast, my trading account is down 15% YTD - but that's better than the S&P which is down 25% YTD)

So the point is that investing nearly any random time makes more sense than trying to time the market, but investing in any random company does NOT make more sense than choosing carefully.

Picking stocks (with a reasonable % of your portfolio) is actually a great way to put your intuitions, willpower, etc to the test. You will learn a lot about yourself - you'll be challenged when you're wrong, bolstered when you're right, and having the S&P as a benchmark keeps you honest so you can't be selective about sharing your winners only and not your losses.



MustacheAndaHalf

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Re: Tha's not how the market works.
« Reply #5 on: April 01, 2020, 10:04:44 AM »
Picking stocks (with a reasonable % of your portfolio) is actually a great way to put your intuitions, willpower, etc to the test. You will learn a lot about yourself - you'll be challenged when you're wrong, bolstered when you're right, and having the S&P as a benchmark keeps you honest so you can't be selective about sharing your winners only and not your losses.
I especially agree with "challenged when you're wrong".  There's a fairly rare type of comedian who tries to get their audience to laugh by offending them.  Having your ego punctured is much cheaper outside the stock market.


There's a phrase for this - "It's priced in"

The question is what "it" is.

For example, at a PE ratio of 19.45, I'd say the S&P 500 is "priced in" for a quick resolution of the pandemic, and getting back to business next month or so. But that would just be my opinion. There's no survey with honest answers that could answer the question, which is why we have financial "news" offering explanations for each zig-zag on the chart.

I think investors increasingly have to think for themselves rather than just assuming efficient markets theory means all investments are good deals. Markets have been careening from bubble to bubble for the last 25 years, so some analysis is needed to make decisions about how to find growth or lock in retirement income.
Like the financial news, I try to map events to market changes.  Take the overreaction to the oil price war, on March 9, that was corrected the next day, on March 10.  The financial news actually pointed it out, but I couldn't imagine the impact would be mostly gone in 24 hours, so I went ahead.

For me, it's important to respect the efficiency of markets - like with J Boogie tracking stock picks against the S&P 500.  For the past 25 years, U.S. markets had a CAGR of +9% per year (1995-2020 using portfoliovisualizer.com), and beat a very large percentage of active funds.

Even when I timed the market, I feared markets proving me wrong.  I made a detailed plan of all events I expected in the second week, and how I'd respond.  I was market timing on the order of 2 weeks.  Being wrong gets easier and more costly the more time passes.

MustacheAndaHalf

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Re: Tha's not how the market works.
« Reply #6 on: April 04, 2020, 05:03:32 AM »
Just to highlight unemployment again, I briefly looked for estimates of U.S. unemployment, and a couple that are several days old: one from the St Louis Fed (53M, 32% unemployment) and one from Goldman Sacs (26M, 16%).

Let me start with assumptions:
1. markets react to unemployment - maybe not; everyone knows COVID-19 is causing unemployment.
2. markets only know about these two predictions: 26M - 53M unemployment, split equally.

With these assumptions, markets predict the average of 24% unemployment (40M).  If new information comes out supporting 20-30M unemployed, markets go up.  If 40M is priced in, and new information pushes towards 25M, that new information needs to be priced in.  The act of pricing in that good news causes stocks to rise - again assuming markets react to unemployment.

That's also why you see company's report a quarterly loss, and their stock can go up - the loss was expected, but markets thought it would be worse.  Better than expected situations cause stocks to rise.

If markets are efficient, everything we read in the news is already priced in.  New information is only good or bad relative to expectations.  Predicting more unemployment isn't enough - it has to be surprisingly bad information to have a negative impact to stock prices.

Buffaloski Boris

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Re: Tha's not how the market works.
« Reply #7 on: April 04, 2020, 07:16:14 AM »
What we're really talking about here is the Efficient Markets Hypothesis.  A hypothesis that I'm emphatically not a believer in, at least in the short run and in the micro scale.  In the long run and macro scale, I do believe that markets price in existing information on average. So there's something to it. I just don't ascribe much weight to it unless you're looking at the long term, larger scale on average.   

When saying that anything that is widely known is known by the markets, to me that's evident on it's face.  The question though in my view is not so much whether information is widely known, as how does the market use that information?  Let's use the information about the corona virus as an example.  I remember reading about the corona virus hitting China in early to mid January and thinking "this isn't good". The information wasn't secret, it was readily available in parts of the financial press if you were reasonably well-informed.  Yet the market hit it's top in Mid February, and didn't start to crash in reaction until about late February/ early March.  The market had the information, but it failed to understand it's relevance and import until much later. A failure that I shared, to be candid. That the market took 4-6 weeks to synthesize and understand the importance of what was probably the most important financial news of the last 10 years (and perhaps my lifetime) doesn't give much credence to the idea that the markets are efficiently using widely available information.

ender

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Re: Tha's not how the market works.
« Reply #8 on: April 04, 2020, 07:30:52 AM »
What we're really talking about here is the Efficient Markets Hypothesis.  A hypothesis that I'm emphatically not a believer in, at least in the short run and in the micro scale.  In the long run and macro scale, I do believe that markets price in existing information on average. So there's something to it. I just don't ascribe much weight to it unless you're looking at the long term, larger scale on average.   

When saying that anything that is widely known is known by the markets, to me that's evident on it's face.  The question though in my view is not so much whether information is widely known, as how does the market use that information?  Let's use the information about the corona virus as an example.  I remember reading about the corona virus hitting China in early to mid January and thinking "this isn't good". The information wasn't secret, it was readily available in parts of the financial press if you were reasonably well-informed.  Yet the market hit it's top in Mid February, and didn't start to crash in reaction until about late February/ early March.  The market had the information, but it failed to understand it's relevance and import until much later. A failure that I shared, to be candid. That the market took 4-6 weeks to synthesize and understand the importance of what was probably the most important financial news of the last 10 years (and perhaps my lifetime) doesn't give much credence to the idea that the markets are efficiently using widely available information.

Be careful of survivorship bias.

Many people have had compelling reasons going back to 2013 when I first started caring about money for why a market crash was immenint.


CrankAddict

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Re: Tha's not how the market works.
« Reply #9 on: April 04, 2020, 08:36:44 AM »
What we're really talking about here is the Efficient Markets Hypothesis.  A hypothesis that I'm emphatically not a believer in, at least in the short run and in the micro scale.  In the long run and macro scale, I do believe that markets price in existing information on average. So there's something to it. I just don't ascribe much weight to it unless you're looking at the long term, larger scale on average.   

When saying that anything that is widely known is known by the markets, to me that's evident on it's face.  The question though in my view is not so much whether information is widely known, as how does the market use that information?  Let's use the information about the corona virus as an example.  I remember reading about the corona virus hitting China in early to mid January and thinking "this isn't good". The information wasn't secret, it was readily available in parts of the financial press if you were reasonably well-informed.  Yet the market hit it's top in Mid February, and didn't start to crash in reaction until about late February/ early March.  The market had the information, but it failed to understand it's relevance and import until much later. A failure that I shared, to be candid. That the market took 4-6 weeks to synthesize and understand the importance of what was probably the most important financial news of the last 10 years (and perhaps my lifetime) doesn't give much credence to the idea that the markets are efficiently using widely available information.

I agree with you completely.  Greed and hubris trump facts, it seems.  It's going to take a lot more than an obvious problem to put someone on the sidelines when we're in all-time-high territory and still pushing up.  I read a WSJ article recently about various CFO's who when asked - years ago - about their number one fear had answered along the lines of "a worldwide pandemic that originates in Asia...".  So this whole scenario was on the radar of American business and financial "experts".  And there was certainly plenty of time to see what was happening in China and react.  Where was market efficiency in all of that?

And even putting that missed call aside, how do we expect markets to be able to "price in" something which cannot be calculated?  Nobody has any idea what hit GDP will take, how high unemployment will go, what will happen to inflation, etc.  So might as well keep flipping the coin each day.  When it's announced that 3 million filed for unemployment in 1 week and the market goes up, I have a hard time thinking "well those geniuses must have been expecting 5 million".

bthewalls

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Re: Tha's not how the market works.
« Reply #10 on: April 04, 2020, 09:53:35 AM »
interesting posts...., the more I read the more I realise that going back to the simple investing structure is for me...as outlined in that first MMM articles I read. however, I like to research and learn.....

I buy small and regular.  At times ike this I put extra in and forget about it as I have no plans of selling even in the 10+years scenario minimum.  I admire the serious market timers and day traders, but chrikey, its seems like an awful lot of workand worry!....I wonder over the 10-15 year period does market timing pay any better than 'buy and holders' like me....?

Buffaloski Boris

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Re: Tha's not how the market works.
« Reply #11 on: April 04, 2020, 10:15:13 AM »
interesting posts...., the more I read the more I realise that going back to the simple investing structure is for me...as outlined in that first MMM articles I read. however, I like to research and learn.....

I buy small and regular.  At times ike this I put extra in and forget about it as I have no plans of selling even in the 10+years scenario minimum.  I admire the serious market timers and day traders, but chrikey, its seems like an awful lot of workand worry!....I wonder over the 10-15 year period does market timing pay any better than 'buy and holders' like me....?

On average, market timing doesnít work. That said, you are where you find yourself at the time. I found myself over invested in cash. Now that fate has handed me a bear market with lots of opportunity to make amends, Iíll do so. I really would have been better off I think to have gone 100% equities early on and sing the blues with everyone else. Yeah I would have lost a lot. But I would have started this bear market with much more.


bwall

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Re: Tha's not how the market works.
« Reply #12 on: April 04, 2020, 11:22:09 AM »
What we're really talking about here is the Efficient Markets Hypothesis.  A hypothesis that I'm emphatically not a believer in, at least in the short run and in the micro scale.  In the long run and macro scale, I do believe that markets price in existing information on average. So there's something to it. I just don't ascribe much weight to it unless you're looking at the long term, larger scale on average.   

When saying that anything that is widely known is known by the markets, to me that's evident on it's face.  The question though in my view is not so much whether information is widely known, as how does the market use that information?  Let's use the information about the corona virus as an example.  I remember reading about the corona virus hitting China in early to mid January and thinking "this isn't good". The information wasn't secret, it was readily available in parts of the financial press if you were reasonably well-informed.  Yet the market hit it's top in Mid February, and didn't start to crash in reaction until about late February/ early March.  The market had the information, but it failed to understand it's relevance and import until much later. A failure that I shared, to be candid. That the market took 4-6 weeks to synthesize and understand the importance of what was probably the most important financial news of the last 10 years (and perhaps my lifetime) doesn't give much credence to the idea that the markets are efficiently using widely available information.

+1.

The market 'priced in' COVID 19 very very poorly, until it had no other alternative but to re-adjust.

If past history is any guide, my guess is that it will over-shoot to the down side again, 'over-pricing in' the negative news. Just as it 'over-priced in' the good news in Feb. and hit new highs.

ender

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Re: Tha's not how the market works.
« Reply #13 on: April 04, 2020, 07:25:15 PM »
And even putting that missed call aside, how do we expect markets to be able to "price in" something which cannot be calculated?  Nobody has any idea what hit GDP will take, how high unemployment will go, what will happen to inflation, etc.  So might as well keep flipping the coin each day.  When it's announced that 3 million filed for unemployment in 1 week and the market goes up, I have a hard time thinking "well those geniuses must have been expecting 5 million".

You'd have to be living under a rock to not be expecting huge unemployment as a result of shutting down major portions of your economy entirely.

3 million filing for unemployment seems high, because it is, but anyone surprised by that needs to just look at the news.

MustacheAndaHalf

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Re: Tha's not how the market works.
« Reply #14 on: April 04, 2020, 11:05:03 PM »
Speaking of survivorship bias, U.S. stock markets did not crash during MERS or SARS (not -24% YTD, like now).  Relying on those outbreaks, the impact to the U.S. seemed distant.  That's the context most people had for COVID-19, a distant outbreak unlikely to impact the U.S.

Even proponents of efficient markets have to admit there are anomalies - proponents say efficient markets learn and adapt to anomalies.  To me, March 2020 was such an anomaly.  For our lifetimes, markets didn't have to deal with exponential growth - it wasn't on the radar.  Markets panicked at exponential growth in COVID-19 cases, watching key economic activity in U.S. come to a full stop.  Markets didn't have people who studied it, didn't monitor data predicting it, and panic resulted.


Buffaloski Boris - You said markets aren't efficient in the short term.  And March 2020 certainly shows you have a point!  Do you exploit the short-term flaws in the market?  If you say flaws exist, but you don't see an obvious way to make money, I would say markets efficiency is good enough.

DaKini

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Re: Tha's not how the market works.
« Reply #15 on: April 05, 2020, 07:50:03 AM »
I want to also point out that probably the market thought that the pandemic wonít become a pandemic at the time before the crash. The market adjusted quite fast at the moment it became probable that this wonít be contained in Asia alone but spread around the globe AND that the fresh cases around the globe canít be contained either.
It had to be in march where the impact quickly got clear, so i see no problem in the hypothesis not being valid.

Put the other perspective into the room: why didnít sell much more people if it has been so clear that the hypothesis is so wrong in february? The answer is, because nobody knowed, that is, abailable information was priced in and that was that it wonít be as big as a deal it turned out. When that became evident (new information) all did run to the exit, which made the price adjusting quickly.
That is exactly what is to be expected from the hypothesis as i understood it.

MaaS

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Re: Tha's not how the market works.
« Reply #16 on: April 05, 2020, 09:52:04 AM »
The idea that everything is priced in right now is ridiculous. There are no models for this. Everyone is guessing.

Also, if two 50% probability events of equal weight are "priced in" it means that neither event is priced in if it happens.


bthewalls

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Re: Tha's not how the market works.
« Reply #17 on: April 05, 2020, 10:16:54 AM »
i cant help wondering what happens US/global economy with increasing unemployment, corporation debt, lowering production, decreased revenue generation, etc. etc. could this not spiral?

there could be a prolonged recession here, are we to just assuming the market re-inflates after this....is this being nieve or am I missing something?

maybe im being pessimistic and everything will continue on fine....

harvestbook

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Re: Tha's not how the market works.
« Reply #18 on: April 05, 2020, 01:24:16 PM »
I'm personally prepared for the economic effects to last at least two years and a total of 60 percent drop off the highs. I'm not doing much about it except to keep buying. Maybe I will write down my guesses even though I'm not acting on them, just to prove yet again that nobody knows.

ender

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Re: Tha's not how the market works.
« Reply #19 on: April 05, 2020, 03:04:29 PM »
I'm personally prepared for the economic effects to last at least two years and a total of 60 percent drop off the highs. I'm not doing much about it except to keep buying. Maybe I will write down my guesses even though I'm not acting on them, just to prove yet again that nobody knows.

Why would you keep buying now if you think it'll drop 60% from the highs?

marty998

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Re: Tha's not how the market works.
« Reply #20 on: April 05, 2020, 03:42:41 PM »
I'm personally prepared for the economic effects to last at least two years and a total of 60 percent drop off the highs. I'm not doing much about it except to keep buying. Maybe I will write down my guesses even though I'm not acting on them, just to prove yet again that nobody knows.

Why would you keep buying now if you think it'll drop 60% from the highs?

Because if they don't buy, you'll jump on them for being a "market timer"  ;)

The market can go up or down in the short term. Most of us keep buying regardless.

VaCPA

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Re: Tha's not how the market works.
« Reply #21 on: April 05, 2020, 04:48:10 PM »
The idea that everything is priced in right now is ridiculous. There are no models for this. Everyone is guessing.

Also, if two 50% probability events of equal weight are "priced in" it means that neither event is priced in if it happens.
Yeah, the next month or so is a complete unknown. Obviously there are some things that are expected, like high unemployment. But there's no way the market can price in things that it doesn't know, and there is no much unknown about how this will play out. I'm having a really hard time following the 'priced in' line of thought I keep seeing

Buffaloski Boris

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Re: Tha's not how the market works.
« Reply #22 on: April 05, 2020, 07:52:14 PM »
Speaking of survivorship bias, U.S. stock markets did not crash during MERS or SARS (not -24% YTD, like now).  Relying on those outbreaks, the impact to the U.S. seemed distant.  That's the context most people had for COVID-19, a distant outbreak unlikely to impact the U.S.

Even proponents of efficient markets have to admit there are anomalies - proponents say efficient markets learn and adapt to anomalies.  To me, March 2020 was such an anomaly.  For our lifetimes, markets didn't have to deal with exponential growth - it wasn't on the radar.  Markets panicked at exponential growth in COVID-19 cases, watching key economic activity in U.S. come to a full stop.  Markets didn't have people who studied it, didn't monitor data predicting it, and panic resulted.


Buffaloski Boris - You said markets aren't efficient in the short term.  And March 2020 certainly shows you have a point!  Do you exploit the short-term flaws in the market?  If you say flaws exist, but you don't see an obvious way to make money, I would say markets efficiency is good enough.

COVID's impact has yet to fully play out. I still don't believe that the equity markets have fully priced in the implications of the economic hits that are coming. The markets will sort it out at some point, just not yet.   

I do see ways to make money with short term market inefficiencies but I don't personally exploit them to any real extent. Why: if I were 30 years younger and really, really wanting to spend lots of time hunched over a Bloomberg terminal, I might do it. That lifestyle doesn't appeal to me. There is also the problem that if you're going to do this as a career you've got to be on your game All. The. Time.  You have to be consistently right about predicting human behavior day after day.  There are people who have beaten the markets consistently. Very few. And from what I can tell, those who do live and breathe this stuff at the cost of their personal life. No thanks.   

I think that your best bet over the space of a lifetime is to simply be invested. That's not to say you can't sometimes beat the market, that you can't see trends or market inefficiencies, or that you can't get lucky. 

MustacheAndaHalf

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Re: Tha's not how the market works.
« Reply #23 on: April 06, 2020, 08:16:08 AM »
The idea that everything is priced in right now is ridiculous. There are no models for this. Everyone is guessing.

Also, if two 50% probability events of equal weight are "priced in" it means that neither event is priced in if it happens.
I didn't follow your example of two events being priced in.  Do they happen at the same time?  What is the mix of good and bad news in the two events?


Events I saw in person may be anecdotal now, but they go to your point about events and priced in.  In the week of Mar 9-13, there were two days where markets knew President Trump was about to make a special announcement.  The first time, stocks rose +4% before his speech, and he talked about payroll cuts for employers during a global pandemic.  After the speech, markets dropped back down.  To me, this shows markets expected good news, and were disappointed.  Later in the week, same thing happened: another news conference, another +4% climb before the speech.  This time, President Trump declared a national state of emergency.  After that speech, markets continued rising to about +8% or so for the day.

Markets expect an emergency - the COVID-19 outbreak - to be met by a Federal response, and a declaration of an emergency in particular.  The rise and fall of markets near these speeches, to my mind, was the market estimating an event, then pricing in that it didn't happen.  Same thing when it did happen.

I think other events were going on at the same time - markets dropped heavily before one speech, so some recovery could just be markets dealing with an overreaction.  The earlier speech was also close to the time when markets were trying to price in the oil price war, so the rise can partly be from that.  It's always going to be noisy in the stock markets, but I think events are priced in with probability and impact.

J Boogie

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Re: Tha's not how the market works.
« Reply #24 on: April 06, 2020, 08:26:47 AM »
The idea that everything is priced in right now is ridiculous. There are no models for this. Everyone is guessing.

Also, if two 50% probability events of equal weight are "priced in" it means that neither event is priced in if it happens.

Uncertainty is priced in.


:)

J Boogie

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Re: Tha's not how the market works.
« Reply #25 on: April 06, 2020, 08:39:10 AM »
What we're really talking about here is the Efficient Markets Hypothesis.  A hypothesis that I'm emphatically not a believer in, at least in the short run and in the micro scale.  In the long run and macro scale, I do believe that markets price in existing information on average. So there's something to it. I just don't ascribe much weight to it unless you're looking at the long term, larger scale on average.   

When saying that anything that is widely known is known by the markets, to me that's evident on it's face.  The question though in my view is not so much whether information is widely known, as how does the market use that information?  Let's use the information about the corona virus as an example.  I remember reading about the corona virus hitting China in early to mid January and thinking "this isn't good". The information wasn't secret, it was readily available in parts of the financial press if you were reasonably well-informed.  Yet the market hit it's top in Mid February, and didn't start to crash in reaction until about late February/ early March.  The market had the information, but it failed to understand it's relevance and import until much later. A failure that I shared, to be candid. That the market took 4-6 weeks to synthesize and understand the importance of what was probably the most important financial news of the last 10 years (and perhaps my lifetime) doesn't give much credence to the idea that the markets are efficiently using widely available information.

I think to some degree the market prices in erratic human behavior.

For example, the fundamentals don't support hoarding TP. There is nothing about COVID19 that makes you need more TP nor is any facet of COVID19 particularly disruptive to TP MFG and distribution.

But as soon as it became clear some were speculating that TP availability would decrease, everyone became incentivized to become a TP hoarder lest they run out of TP.

There are a few reasons it might be somewhat valid to consider hoarding it - it's the last thing you want to be without if you can't leave your house and it doesn't spoil. And there is no one single canned food item that is universally regarded as the food to have during a shutdown.

Unrelated, I didn't bother hoarding TP. I have a surplus shelf full of baby wipes, mainly from frequent miscommunications between me and my wife about what I needed to get from costco.

I'm looking forward to finishing our last roll of TP, using a wipe is head and shoulders better than TP in terms of performance and user experience.


ericrugiero

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Re: Tha's not how the market works.
« Reply #26 on: April 06, 2020, 09:25:04 AM »
It seems like the market prices in what it knows but it does so inaccurately.  Also, there are so many people trying to predict the future and/or react to the market that once a little run starts in either direction it tends to take off. 

For example, the market didn't price in the Covid19 effect very early on.  I remember thinking that it would have an effect on the world economy and being surprised that the market hadn't dropped.  Of course, I wasn't sure enough to do anything about it (which I regret now with the benefit of 20/20 hindsight).  But, once the market STARTED to drop, everyone panicked and the actual drop was much quicker that it "should" have been.  A more "accurate" drop would have started sooner and been more gradual. 

In my non-expert opinion the market responds to actual facts as well as trying to predict the future.  That future prediction is what leads to much of the erratic up and down behavior. 

At this point, the only reaction I feel comfortable making is trying to put a little extra in the market while it's "on sale".  I don't want to overdo that because it could be a while before it comes back and I need to keep a good emergency fund. 

vand

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Re: Tha's not how the market works.
« Reply #27 on: April 06, 2020, 09:33:06 AM »
This thread is genuinely hilarious =)

bwall

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Re: Tha's not how the market works.
« Reply #28 on: April 06, 2020, 10:37:49 AM »
I do see ways to make money with short term market inefficiencies but I don't personally exploit them to any real extent. Why: if I were 30 years younger and really, really wanting to spend lots of time hunched over a Bloomberg terminal, I might do it. That lifestyle doesn't appeal to me. There is also the problem that if you're going to do this as a career you've got to be on your game All. The. Time.  You have to be consistently right about predicting human behavior day after day.  There are people who have beaten the markets consistently. Very few. And from what I can tell, those who do live and breathe this stuff at the cost of their personal life. No thanks.   

+1

About 15 years ago I tried currency trading. Leveraged at 20:1, so with my $5000 I could leverage $100,000, go either long or short. A 1% market move would translate into $1000 swing in my position. It was fun, until it wasn't fun.

I remember a non-farm payroll report coming out. I knew the numbers would be light and I took my position accordingly. The numbers were released and were great numbers and the market moved against me. I had to sell at a steep loss. I knew I was right, though. When the numbers were re-adjusted two weeks later, they indeed showed a loss, not a gain. I'd been right after all. But, by then the market had moved on and didn't care. I learned a lesson that will last for the rest of my life. I have no desire to trade currency since then.
Stock trading is much, much easier than trading currencies. Or, to put it another way, anyone who wants to be a good stock trader should first try and trade currencies for six months or until you Lose your entire stake, whichever comes first. Then go to stocks and never look back.

Davnasty

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Re: Tha's not how the market works.
« Reply #29 on: April 06, 2020, 11:22:27 AM »
I'm personally prepared for the economic effects to last at least two years and a total of 60 percent drop off the highs. I'm not doing much about it except to keep buying. Maybe I will write down my guesses even though I'm not acting on them, just to prove yet again that nobody knows.

Why would you keep buying now if you think it'll drop 60% from the highs?

Humility perhaps.

I think I know a lot of things but I also know lots of other people know more than me.

Davnasty

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Re: Tha's not how the market works.
« Reply #30 on: April 06, 2020, 11:34:09 AM »
The idea that everything is priced in right now is ridiculous. There are no models for this. Everyone is guessing.

Also, if two 50% probability events of equal weight are "priced in" it means that neither event is priced in if it happens.
Yeah, the next month or so is a complete unknown. Obviously there are some things that are expected, like high unemployment. But there's no way the market can price in things that it doesn't know, and there is no much unknown about how this will play out. I'm having a really hard time following the 'priced in' line of thought I keep seeing

No one is saying that future events are priced in, information is priced in. Information is known.

Think in terms of betting odds. If all available information tells us that a horse has a 10% chance of winning then 10:1 odds are fair. A $1 bet with a $10 prize is the correct price based on all available information. If that horse ends up winning then the correct price of the bet is suddenly $10 and if it loses the correct price is $0 but obviously that couldn't be priced in until the race was run.

VaCPA

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Re: Tha's not how the market works.
« Reply #31 on: April 06, 2020, 11:44:44 AM »
The idea that everything is priced in right now is ridiculous. There are no models for this. Everyone is guessing.

Also, if two 50% probability events of equal weight are "priced in" it means that neither event is priced in if it happens.
Yeah, the next month or so is a complete unknown. Obviously there are some things that are expected, like high unemployment. But there's no way the market can price in things that it doesn't know, and there is no much unknown about how this will play out. I'm having a really hard time following the 'priced in' line of thought I keep seeing

No one is saying that future events are priced in, information is priced in. Information is known.

Think in terms of betting odds. If all available information tells us that a horse has a 10% chance of winning then 10:1 odds are fair. A $1 bet with a $10 prize is the correct price based on all available information. If that horse ends up winning then the correct price of the bet is suddenly $10 and if it loses the correct price is $0 but obviously that couldn't be priced in until the race was run.
I guess my general point is what does it matter saying known information is priced in, when there is so much unknown right now. This is a pretty unique situation that we haven't really been through before. Even once the virus is contained we're going to have to see the ripple effects on the economy from an unprecedented economic shutdown. Your analogy isn't great because a horse race is a controlled environment that is recreated repeatedly. It's more like the odds they're giving you on that horse are 10:1 but you don't know what racetrack it's racing on, who it's racing against or what the rules of the race will even be

Davnasty

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Re: Tha's not how the market works.
« Reply #32 on: April 06, 2020, 11:48:27 AM »
For example, the fundamentals don't support hoarding TP. There is nothing about COVID19 that makes you need more TP nor is any facet of COVID19 particularly disruptive to TP MFG and distribution.

In a way, there is. People aren't using more tp but they are using more at home. All of the toilet paper previously being used in schools, offices, stores, restaurants has been replaced by home use so people actually do need to buy more. Enough toilet paper is still being produced but the giant rolls of 1-ply used in public dispensers aren't designed for home use, retail stores aren't set up to sell them, and they're typically made in different facilities so the entire supply chain would need to be redesigned to get that toilet paper to the end users. no pun intended.

Certainly some people are guilty of hoarding, but most likely the hoarding was triggered by scarcity due to increased buying. Not entirely irrational.

Davnasty

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Re: Tha's not how the market works.
« Reply #33 on: April 06, 2020, 12:06:18 PM »
The idea that everything is priced in right now is ridiculous. There are no models for this. Everyone is guessing.

Also, if two 50% probability events of equal weight are "priced in" it means that neither event is priced in if it happens.
Yeah, the next month or so is a complete unknown. Obviously there are some things that are expected, like high unemployment. But there's no way the market can price in things that it doesn't know, and there is no much unknown about how this will play out. I'm having a really hard time following the 'priced in' line of thought I keep seeing

No one is saying that future events are priced in, information is priced in. Information is known.

Think in terms of betting odds. If all available information tells us that a horse has a 10% chance of winning then 10:1 odds are fair. A $1 bet with a $10 prize is the correct price based on all available information. If that horse ends up winning then the correct price of the bet is suddenly $10 and if it loses the correct price is $0 but obviously that couldn't be priced in until the race was run.
I guess my general point is what does it matter saying known information is priced in, when there is so much unknown right now. This is a pretty unique situation that we haven't really been through before. Even once the virus is contained we're going to have to see the ripple effects on the economy from an unprecedented economic shutdown. Your analogy isn't great because a horse race is a controlled environment that is recreated repeatedly. It's more like the odds they're giving you on that horse are 10:1 but you don't know what racetrack it's racing on, who it's racing against or what the rules of the race will even be

Known information is the best anyone ever has to go on. The point in saying it's priced in is to recognize that unless you have information that the market does not have you can't out predict it, at least statistically speaking.

In the horse race analogy let's say the horse in question outperforms on a wet track. If it rains, his chances will increase to 50%. There's an 80% of rain. Rather than improving his odds by the full 40% a wet track would provide you would give him only 80% of that boost. 80% x 40% = 32%.

Based on known information his odds are now 42% and bets can be placed accordingly.

Each additional unknown can be priced in likewise based on what we do know.

VaCPA

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Re: Tha's not how the market works.
« Reply #34 on: April 06, 2020, 12:13:47 PM »
you can't out predict it, at least statistically speaking.
I think everyone is pretty much saying the same thing differently

ChpBstrd

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Re: Tha's not how the market works.
« Reply #35 on: April 06, 2020, 01:44:03 PM »
The idea that everything is priced in right now is ridiculous. There are no models for this. Everyone is guessing.

Also, if two 50% probability events of equal weight are "priced in" it means that neither event is priced in if it happens.

This is true. If market pricing was perfect, there would be some static expected rate of return from stocks, and prices would fluctuate based on expected and discounted free cash flow to equity, so that expected and discounted FCFE/price would always equal the expected rate of return. The variables requiring guesswork include the cash flows, discount rate, and an appropriate expected return on risky assets.

Maybe this is the process for a handful of value investors or hedge funds, but Iíll go out on a limb and say most retail investors think in one of two modes: (1) I think stock prices will go up/down because of my reasons, or (2) I am strategically holding a fixed asset allocation regardless of price.

The first thought process is literally guessing. The second is an attempt to outsource the guesswork to the crowd.

In EM theory, enough participants in the crowd are doing analysis so that sale prices will reflect the midpoint of all estimates, where the buyer thinks the seller is underestimating the sharesí value and the seller thinks the buyer has overestimated the value.

But what if very few market participants are doing the math? What if thought modes 1 and 2 cause prices to rise to levels that cannot be supported by any reasonable analysis or current information? Many participants using an analytical approach to factor in all available information would sell, because prices rose above their median estimates of fair value. With them out of the market, you only have people doing guesswork and people relying on other people to do guesswork. What follows is a run-up in the price, and/or a crash, and itís not based on a change in information.

J Boogie

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Re: Tha's not how the market works.
« Reply #36 on: April 06, 2020, 04:08:28 PM »
For example, the fundamentals don't support hoarding TP. There is nothing about COVID19 that makes you need more TP nor is any facet of COVID19 particularly disruptive to TP MFG and distribution.

In a way, there is. People aren't using more tp but they are using more at home. All of the toilet paper previously being used in schools, offices, stores, restaurants has been replaced by home use so people actually do need to buy more. Enough toilet paper is still being produced but the giant rolls of 1-ply used in public dispensers aren't designed for home use, retail stores aren't set up to sell them, and they're typically made in different facilities so the entire supply chain would need to be redesigned to get that toilet paper to the end users. no pun intended.

Certainly some people are guilty of hoarding, but most likely the hoarding was triggered by scarcity due to increased buying. Not entirely irrational.

You're totally right. Man, the delta between 1-ply and a wipe is just night and day.

How are we still OK with 1-ply in our institutions? How many of us would probably have remnants of it in our crosshairs if not for covid19?