January 24, 2017


Markets Are Right More Often Than You Think (Ben Carlson, Jan. 24th, 2017, Bloomberg View)

In 2015 alone, world equity markets averaged almost 99 million trades, accounting for almost $450 billion a day, according to Dimensional Fund Advisors, Take the SPDR S&P 500 ETF, an exchange-traded fund that tracks the Standard & Poor's 500. Its three-month daily average trading volume for is 88,218,539 shares through mid-January. For 2016, it averaged 104,904,708 shares traded a day, or more than $22 billion in turnover. For the underlying S&P 500 constituent stocks, the three-month daily average trading volume is 600,116,291; the average for 2016 was 641,398,857. Apple itself averages more than 30 million shares traded every day.

Last year my colleague Barry Ritholtz interviewed Burton Malkiel, author of "A Random Walk Down Wall Street," for his Masters in Business podcast. Malkiel explained why it's so difficult to predict where all these trades will take the markets:

What efficient markets are associated with which is wrong is that efficient markets mean that the price is always right - that the price is exactly the present value of all of the dividends and the earnings that are going to come in the future and the price is perfectly right. That's wrong. The price is never right. In fact, prices are always wrong. What's right is that nobody knows for sure whether they're too high or too low. It's not that the prices are always right, it's that it's never clear that they are wrong. The market is very, very difficult to beat. 

I'm not suggesting that markets are perfectly efficient. Anyone who invested during the financial crisis and subsequent recovery could tell you that. Markets will never be completely efficient because humans are making the buy and sell decisions and humans are often wildly irrational. The problem is that far too many investors believe they will know exactly when this irrationality will start or end. The author and behavioral finance professor Meir Statman once said, "The market may be crazy, but that doesn't make you a psychologist."

Posted by at January 24, 2017 7:53 AM


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