Efficient Capital Markets Explained
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- Опубликовано: 13 сен 2024
- In every one of my videos I tell you things that hinge on one of the landmark ideas in financial economics, the efficiency of the capital markets. As fundamental as market efficiency is to good financial decision-making, it is poorly understood by most investors.
Referenced in this video:
Efficient Capital Markets: A Review of Theory and Empirical Work - www.jstor.org/...
Louis Bachelier's Theory of Speculation: The Origins of Modern Finance - www.amazon.com...
Efficient Capital Markets - www.econlib.or...
On Persistence in Mutual Fund Performance - onlinelibrary....
Eugene Fama - www.econlib.or...
Buffett's Alpha - papers.ssrn.co...
Profitability, investment, and average returns - finpko.ku.edu/...
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Can we all just take a moment to appreciate the rigor Ben brings to these videos? Bravo.
Thank you! This video in particular took a lot of thinking.
Totally agree. Thank you Ben!
Dude has 222k subscribers, and he hits this one out of the park. Odd that it doesn't have way more views.
Ben is amazing! I am kind of slowly becoming his fan! His clarity of thought is impeccable
I'm young and am about to start investing. Your videos are definitely saving me from naive mistakes. Thank you!
same with me. I almost got sucked into r/wall street bets.
I just wish these videos had been out when I started investing. I made some successful picks early and thought I was good at that. Spolier alert: I was not. Now I'm all index though, and doing good.
Pro Tip: There is no quick and easy way to make a million bucks. The people that tell you that there is are most likely trying to get you to buy their book or attend their class so they can make money off of you. Put in the work. Be dedicated. Be persistent in your work and you will see returns. However, you're not going to "get rich" by opening up a RobinHood account and buying a few stocks. It just doesn't work that way.
From what I have learned, the best way to build wealth is to save a portion of everything you make and to build businesses. Learning to start and grow a business is extremely important. I hope this helps. Best of luck!
@@_matt_howard_ the vast majority of businesses fail. Stick with index fund investing over the long term. It's the proven way.
This is arguably the best video ever recorded on RUclips. Thank you Ben!
If nothing else the best investment video I've seen. The most comprehensive video explaining why index funds are the best investment for most people.
Ben, THANKS for bringing such high quality videos full of complex information in a way that even I can understand. This is the best RUclips channel for investments!
Thanks for watching and commenting!
Hiyaaaa! Nice video you have there! On a similar note; have you thought about " Vidadsmedia Real income "? (should be on google...have a look)? My neighbors wife had some transactions with them and was impressed by their amazing treatment when they shared their knowledge about generating passive income !
As a finance professional i must say, your videos are by far the best on youtube. Thanks alot, you help me explain hard topics to my friends and family.
Thank you!
I just watched this video and the amount of effort and research that you put into your work outshines so much of other youtubers or even professors. Well done and thank you for helping out with this complex topic!
This is simply masterful. A virtuoso performance. Thanks so much for all that you do.
And yes - " The Map is not the territory"
For me he articulates complex information more coherently than anyone else I'm familiar with. Financial economics is generally considered dry, but he actually makes it fairly compelling. All his recent episodes are great, but this is by far his most important. If you understand it, then you know most of what you need to about investing.
After listening to explaining factors to Ben's mom and then watching this, it's all starting to come together.
Thanks for the channel, podcast and portfolio options on your site :)
That’s great! I was worried that both this video and that podcast segment were too abstract. It’s good to know they were helpful.
What a great explanation of an efficient market, and why, for the most part, that is what we have. Your ability to simplify the complex world of investing is very helpful. (I must admit I did back up and listen to a few portions of this video a second time.)
BUT, you know it's easy to be a successful active manager because as soon as you have an underperforming fund you just retire it and create a "successful" one! 😉
Thanks Robin!
I was just looking for additional reason to buy globally diversified low-cost index funds, and I learned the scientific method along the way 😅. Insightful and well-researched video as always!
Amazing video! You never cease to amaze me! Ben is the best portfolio theory content creator in history!
Thank you!
Some of the best and best reasoned advice and instruction on the internet. Congratulations and well done.
Ben, thanks for bringing complicated financial information into more simple and understandable material. Your videos are informative, concise and clear, no wonder you are gaining popularity in RUclips. Way to go, I can't wait for your next video. Cheers,
Thank you, Carlos!
(EMH) explains this phenomenon: current market prices reflect the total knowledge and EXPECTATIONS of all investors, and it is highly UNLIKELY that one investor can know more than the market does COLLECTIVELY. For this hypothesis to hold true, one condition must be met: any new information must be disseminated to the public rapidly and completely so that prices instantly adjust to new data. If this is the case, an investor can CONSISTENTLY beat the market ONLY with the best of LUCK. As behavioral economists Meir Statman puts it, “ The market may be crazy, but that doesn’t make you a psychiatrist.”
Love that quote.
Keep the good work brother!!👍🏻
not all stocks are created equal. So either information is traveling fast is one perspective or on another you have companies that "lack" info and you have to do all the research by yourself. On the one hand blue chip stocks have a lot of info (sec filings etc...) and many analyst providing the correct opinion. Efficiency is there. But let's say you are looking at a stock that is OTC pink sheet, where no info es given, no analyst is present, you have to uncover this by yourself. Inefficiency would be present in this grouo of stock, the market does not recognize its value, because you have to gather the data and research it ab initio by yourself and you have to have the expertise to interpret this data
@@jpcorp2274 is your point that some segments of the market are somewhat inefficient and therefore worth the effort going the stock picking path?
@@_Digitalguy Yes! What is your opinion?
Excellent information Ben. As physicians, we are trained in the scientific method. It is refreshing to hear your evidence-based approach to finance and investing. I will be watching your videos regularly. Thank you!
Thanks! I look forward to having you around.
I am here for the second time Ben. This channel is a treasure trove. Thanks for your efforts.
Great video, as usual. Congratulations! It is hard to explain a vast and complex concept, like EMH, in a
Ben, first of all, I would like to thank you your videos and the quality of them. They are incredibly helpful for begginers like me. I would appreciate if you could talk about if you think that it would be great to include other investment strategies (crowlending for example) or it is enough with the index funds. And congratulations for your videos!
Everytime I think about stock picking I imagine Ben going “No no no God no Noooooo” 😂 (reference: Michael from The Office)
Outstanding - simply the best that I have seen on this topic.
Great content Ben, investing with a pro has taught me many factors involving the market. People should know how important it is seeking information from experienced individuals.
One of your best videos to date! But like that is every video!
I can hear a lot of influence from some of your podcast guests, including the explanation you made to your mother and that one doctor guy.
I was feeling a bit hesitant with this one. I thought it might be too academic. I’m glad you thought it was good!
@@BenFelixCSI You explain things in a thoughtful way. I also think that if this is too much lost in the sauce than your other videos are a bit higher level.
Another excellent and extremely important video.
Thank you, and keep up the great work!
I can't tell you how grateful I am that there is a finance channel that presents evidence-based content. e.g. I've always considered dividend investing a novice/ignorant strategy and I'm glad the evidence vindicates my thoughts. I think I agree with everything said on this channel except I'm not sold on the idea that it's not worth trying to pick stocks if you treat it like a profession. I guess I'm still too irrational XD.
In relation to this video, I believe markets are very inefficient when there is very low liquidity. I mean I own small companies with 100% growth rates trading at 5x P.E. purely (In my opinion) because they are 'undiscovered'. Obviously these are high risk, but I reduce the risk as much as possible through comprehensive quality vetting, diversification and capital allocation. I feel like I am exploiting market inefficiency because these companies almost always get discovered eventually as long as there are no structural changes to the business. They're hard to find, but for me they achieve consistent and high returns so I don't see that I will change my mind about the theory of skew in returns etc. I should stop rambling, I could go all day.
Fantastic videos, keep it up!
Lachlan Cuffe I agree, I just stumbled on a Sven Carlin (another youtuber) video that tries to call out Ben Felix.
You could base your stock picking on known factors, but in that case it's still easier to just buy an ETF that does the stock selection/rebalance for you.
@Lachlan it's possible that you are correct, but the data on small cap funds is just as appalling as other asset classes. If we move to less liquid asset classes like private equity the results are similarly discouraging. If you're finding a way to make it work, that's great!
@@BenFelixCSIThanks for the reply. Yeah I see how it would be excluded. To achieve maximum probability of above average returns you work backwards. Start with the research - which doesn't cover small or illiquid assets. But if the data excludes some large areas of the market, then you can't really say it's irrational to think you can beat 'the market' (although in most cases it probably would be), or say that the market is generally efficient given that likely the parts of the market that are inefficient are the ones not covered in the research. Which is to my point about a possible relationship between liquidity and market efficiency.
Love watching your vids and listening to the Rational Reminder podcast!
By the way, at 7:25, the infographic should say 'Three Factor Model' not 'Five Factor Model'.
Keep doing what you're doing!
Also i think he meant conservatively not aggressively as 5th risk factor
You're right. Invest conservatively, not aggressively. CMA. Conservative minus aggressive.
Thanks for another great video, love the content.
This was really helpful, thank you!
You and other proponents of the EMH attribute Buffett's successful stock picking to, among other things, exposure to the factors. However, the man himself and Mr. Munger do not say or believe that. In fact they attribute their amazing returns partly to extreme concentration, something radically different from diversification. It's like a professional nutritionist disagreeing and contradicting a successful, professional runner on why he runs so well. It's not so clear who to believe. Personally, I'll believe the runner, the one who actually does the thing and lives it everyday.
Efficiency can be a spectrum. Small cap stocks and international stocks are much less "efficient" and lots of opportunities exist there to investors willing to look.
I just know it's a bad idea to buy a company like colgate right now with a pe ratio of like 27 while it's earnings are almost stagnant. While Alibaba grows earning by 40% year after year and has a pe ratio of 23, an absolute bargain. I believe the general market is irrationally fearful and ignorant about China, whereas I am not. I put 70% of my entire portfolio into BABA (and am up big so far). That's how confident I am. I've done a lot of research and could write a 10 page paper on all the reasons why. My point is, different people have different areas of expertise and can spot mispriced assets in their area more easily than the general market. This is how one can consistently profit and beat the market. By not trying to be everywhere at once and focus only on what you know.
I agree with many of your conclusions Ben. Dividends are irrelevant, 98% of the general population are best off in well-diversified index funds, mutual funds are crap, examples of individual successful investors are anecdote and not data. What I take issue with is the fatalistic stance that it's impossible for anyone to outperform the market on a risk adjusted bases. I think proponents of the EMH get too lost in the data and cling/search for a system or model to explain everything. They forget that the world in general can be very messy and open to many different yet successful ways of doing things.
I prize empirical research and logical/rational thinking too. But I believe listening to the words of successful investors, Buffet, Munger, Lynch, Graham and following their advice that makes sense to you can also be a good way to go.
You said it yourself in the video. There's no way to prove or disprove it. In that sense it's almost like believing in God. No way to prove or disprove, but the values and decisions it leads one to can be interesting to analyze, successful or not.
Thanks once again for a great video! I always look forward to them.
Of course Buffett would not agree. I think that where this conversation gets interesting is that Buffett achieved an outcome that few others have ever achieved, but with what we now know about how markets work, Buffett's past outcome could have been achieved without the need for extreme concentration. Replicating Buffett's result in a more reliable (diversified) manner should be compelling to anyone. Whether or not the "Buffett factor" approach will replicate his future results in a harder question to answer. The challenge with asking the runner how they achieved their result is that they themselves may not know. I once heard an interview with the (at the time) oldest living woman. She attributed her long life to a daily cup of coffee with whisky. Hmmm a sure recipe for longevity. I can't remember who said this, but some famous investor said something along the lines of the worst thing that can happen to a stock picker is early success. The point of course being that the outcomes are random and if you are lucky (unlucky?) early on, you will be doomed by your own overconfidence for many years to come. I do not think that it is impossible for anyone to beat the market. That would be a foolish statement to make because many people do beat the market. I think that it is nearly impossible for anyone to beat the market (risk adjusted) consistently over an investment lifetime. It will always be possible to identify people who have beaten the market. The distribution of outcomes must have a subset of people/ funds that are successful. The more important question is whether or not success in one period leads to success in future periods. The answer, in most cases, is no. This is the challenge of anyone selecting securities. I wonder if a mirror of yourself who had lost big on BABA would have the same views about the ability of investors to generate consistent alpha. Would you still be as confident? Will you continue to fall on the same side of the distribution on future trades? I suppose we will wait and see!
Thanks as always for the intelligent discussion!
@@BenFelixCSI 1) you think it's possible to achieve Buffett's outcome of 20-50% consistently by being diversified? I think such a result can only be achieved by being concentrated.
2) True, the runner or oldest person may not know the reason for their success and may attribute their speed/longevity to something crazy like whisky or lucky underwear. In such cases, I would screen out the obviously false/superstitious beliefs and focus on things they say that appear sensible, like the quirks of a specific training regimen.
3) I understand your position, and it's a good one. Some people will get lucky and beat the market. Agreed. But you think this applies to all successful (and unsuccessful) people. I do not. I believe at least some of them were destined to succeed or fail.
4) I'm aware of the risks of putting a huge amount into BABA. As you can probably tell I'm still quite young. I know one of the negative contigencies may occur and cause me to lose substantially. If that does happen hopefully I have the integrity and consistency to stick to my guns! That is to say, acknowledge that losing was always a possibility but I took the risk anyway because I believe the good outcomes are a lot more likely than the bad at this point in time.
5) I really enjoy these discussions as well! Though we disagree substantially sometimes, I consider you one of the best if not the best and most well-researched investing channels out there, even more than the other stock-pickers haha ;)
@@BenFelixCSI funny you mention that buffet "would" disagree with you. In another RUclips video he recommended people who managed small capital ( 10 million), to look for low p/e stocks and follow the ben graham school of investing and then he went on to talk about some Korean stocks and just how cheap they were at one point and how he made a killer return by investing in them. It still works, you just have to look at other less developed developed markets. I agree with edric.
@@BenFelixCSI from another perspective what the heck does beating the market even mean. Am I beating the dow index? The Ibex35? The sp500? The Nikkei? The russel?, when someone says besting the market, I just get confused with the generalization and a lack of specificity
@@jpcorp2274 sir I think it mostly refer to beating the S&P500.
I love to have you do a video on currency index ETFs (e.g. UUP, USDU) and why they backtest as such a great portfolio diversifier compared to a global stock portfolio (VT), improving the Sharpe ratio, reducing volatility, lowering portfolio risk, and in some periods, increasing CAGR, especially with rebalancing. They seem to provide even better stock diversification and risk hedging than long term Treasuries. Yet I rarely hear them discussed.
Hi from Russia! I am very glad that i have found your investment channel.
Thanks for your comment, I'll advice you contact my account officer for assistance for saving plan and investment options.
+ 1 ( 6 1 9 ) 6 3 0 - 0 8 4 3
W h a t s a p p m e.
1. If selected well, a "value" stock is less risky, not more risky. 2. Assuming efficient market theory is true, what are the odds Stan Druckenmiller posts 30% returns for 30+ years, Buffet, Soros, etc? Not saying they prove or disprove but what are the odds of these performances? 3. Seems they're just changing the theory to explain anomalies and then saying the theory is still correct?
Number 2 could be only a lucky shot. Big Numbers Law. But Number 3 I'm really thinking of. I had the same feeling.
it's kinda talking about "determinism". Everything is determined, and doubting is determined too, then you enter in a huge loop.
If you dont take the theory literally, it allows a handful of extremely talented investors to outperform the market. You need to be an extreme outlier in skills to beat the market (or insider information). But 99.99% of investors cannot beat the market.
Markets are not perfectly efficient. They are driven by humans, after all. But mostly the crowd jointly knows more than any individual.
1. Hinges on prices being wrong, which is at odds with the evidence. If prices are right there is no “margin of safety” based on a well selected stock.
2. An outlier does not support or reject anything. Good story though!
Edit: I missed 3. The specific theory on asset pricing used in the model has been around since 1961, and was more formalized in 2006. It took so long to make the current model because they had not found measures for profitability and investment that could be used in empirical testing. That was the most recent breakthrough. How to measure expected profitability and expected investment.
@@BenFelixCSI Regarding #1. So the price of pets.com was correct, until it wasn't? housing in 2006/2012? S&P in 1987? Uber at its IPO? Lehman Bros. 2008? #2. I think it does support something when it's statistically impossible. Schwager referenced this in Market Wizards #3. IMO, they can't measure how the data the market has access to is interpreted because it's driven by human emotion and irrationality.
I appreciate the response, but I respectfully have a different view.
It's easy to tell this a complex topic to discuss, and you've done your research and thought about these difficult topics logically. I appreciate you synthesizing the enormous amount of information and evidence into a 14 minute video that most people can digest and use practically to make wise investment decisions. I'm on board with investing in index funds and not trying to time the market, due to your videos and other research. However, I have an important question that stems from one of your main conclusions to this video. You said in this video "there is a strong theoretical and empirical case that the five factor asset pricing model is a good model of market equilibrium. Based on this, allocating more capital to the type of stocks that the model predicts to have higher expected returns could be sensible". What are these types of stocks?
Small, cheap, highly profitable companies that invest conservatively.
This may help rationalreminder.ca/podcast/64
I would love for you to explain away the Gamestop fiasco (and short squeezes) in the light of the efficient market theory.
GME is an example of short-term market manipulation. A large number of small investors figured out many large hedge funds were shorting the stock, so the small investors loaded up on it as a way to screw the hedge funds and reap short-term profits. Since the long-term prospects for GME are dire, it will almost certainly plummet eventually, but exactly when isn't predictable.
@@alankoslowski9473 yeah that's not what I meant. I meant that to me this event more or less shows that markets are not efficient.
@@baoboumusic You seem to mistake perfect idealized efficiency with practical efficiency. In practice perfect efficiency is almost never, if ever, achieved.
But evidence shows stock prices are determined by the best available info, so the market is usually efficient. Since the world is dynamic and new info emerges it's not perfectly efficient, but it provides the best, most predictable explanation of how markets work.
Hi Ben ~ been binge-watching your content. Very superb quality! I do have a question: Is it true that the 5-factor model is just a scientific explanation of the equilibrium established by an efficient market and cannot take in account other elements like extreme optimism/fear of investors (hence producing periods of over-evaluation & under-evaluation)? Thanks
How are these explained by the efficient market hypothesis?
beyond meat, tesla, pot stocks 2019, bitcoin, dot com, nifty fifty, tulip mania, amazon with a market cap of 1.2T and PE~100, etc
A lot of excellent content on your channel! Thank you and regards from Germany!👍
If I had found your videos 2 years, I wouldn’t have struggled as much to get my MSc in Finance and Investment 😐
Hey Ben, I have a question for you:
If someone live in a country with a small equity market, did you think that would be a good deal to form actor investing portfolios using portfolios of 25-30 stocks? Let's suppose there is no value, momentum, low vol or quality ETFs.
You should own a global portfolio of stocks from many countries (the easiest way being world ETFs).
Take a look at Ben's video on Home Country Bias. It's a bad idea to only invest in your home country, it's a huge cluster risk. Diversification (spreading risk among many companies, countries, sectors etc) is the only "free lunch" in investing, that is, improving your risk-adjusted returns, in other words, decreasing the probability of bad results.
I watched most of your videos. I don't agree with all you said but still like the way you proved yout point.
So we Indexers need the Active traders to keep the market efficient because we Indexers are not contributing to this important process.
EXCELLENT INTERPRETATION
I agree with what you say BUT the stock market is not only made from wall street. There are also small markets where instead the efficiency of which you speak in the video is not there. For example, I follow some domestic Italian markets where there are only bonds issued to retail investors. In this case the market makers of the banks tend to adopt opportunistic behaviors and to price the securities under their fair value. Retail investors are not able to determine prices correctly and in this way it is possible to take advantage of them and obtain a higher return than expected. Since they are lesser-known domestic markets (e.g. eurotlx.com in Italy), many large investors are excluded and therefore the market can be beaten almost constantly.
What about momentum and low volatility ?
Thanks for this. Very informative. Was wondering what your views are on the possibility of the duration risk factor having a large role in explaining the significance of the value, quality and profitability factors?
Fantastic explanation!
Thanks for the video Ben, this is very helpful! Which Canadian listed ETF's capture the 5 factors discussed in the video? I only have 80% XAW + 20% XIC right now, but would like more exposure to the other risk factors besides "market".
Market efficiency and the price equilibrium has the market in a position where all stocks are prices almost perfectly in relation to each other. There is no free lunch. If we take the theory seriously then the odds of selecting companies that beat earnings expectations, meet or under perform is impossible to predict.
So why not invest in an index that is equal weight and not market cap. Market cap places more emphasis on the larger companies.
I think he discussed this in another episode. I don't want to speak for him so you should prob watch it, but I think basically he states it's a good idea to hold some small-cap value funds in addition to a cap-weighted total market fund. While small-cap value stocks historically have higher returns, they are also considerably more volatile, so as is oft the case with investing much depends on individual volatility tolerance.
Thank you for explaining this complicated topic, Great video.
Hi Ben, is it possible that some of the world's markets are "less" efficient than others? I.e. could there be some kind of Efficiency Quotient to attribute to markets that could differentiate something like US stocks from Emerging Markets, Bond market, etc., leaving more opportunity for active investors in a subset of them?
It is possible, however the challenges of active management will persist. There is evidence that active management works better in markets like Canadian small caps or emerging market, but it is still a small fraction of active managers that outperform.
I wouldnt say that price changes are random because new information is random (1:54). Information may very well be stochastically dependent. Rather, every non-random information will be anticipated by smart money in an efficient market (Samuelson 1965), so information that is non anticipated in prices cannot be anticipated/ is random and thus price changes are random / unpredictable. You kind of hint to it later.
Fama sometimes wrote that new information is random, I think he was imprecise.
Be that as it may, you are really good at taking a complex topic and breaking it down and explaining it.
Btw.: I still believe that a video about the performance of a factor-tilted portfolio versus a market cap weighted one over the long run as well as over sub periods would be extremely interesting (As discussed on your RR website) :)
I agree your description of the driver of randomness is more precise. Edit: also agree that a video about the expected benefits of factor investing would be good.
I think people are taking it at a very short term perspective. The time variable is not even considered. I get confused with the phrasing. But I think we can categorize inefficiency. Reaction time by eficient information sources, and at the other, the fact that there is no information (you have to gather it, and this takes time). Hence inefficiency would be present in stocks that are off the chart, and not covered by analysts, and where even sec filings are not present. Is this considered "risky"? Well that depends, the sec is not the only entity that regulates businesses. You have state regulatory authorities, etc... they can provide information. I think risk is perspective. And returns are given to more informed and savvy investors.
@@jpcorp2274 in a truly efficient market, competition between savvy investors eliminates profit opportunities almos instantly such that not even they can make much money...
@@gcgrabodan the key term here is "truly" efficient, however reality does not reflect that. In the near future things will change, the more informed Investors become.
JP you have it backwards. More informed investors means less opportunity . Read about the paradox of skill. research-doc.credit-suisse.com/docView?language=ENG&format=PDF&source_id=em&document_id=805456950&serialid=LsvBuE4wt3XNGE0V%2B3ec251NK9soTQqcMVQ9q2QuF2I%3D
Am I the only one who had to watch this several times to fully understand it?
i will watch again this to finish my essay collage
@Ben Felix Are you familiar with Taleb's thesis on complexity and financial models? And, don't passive investors need the existance of active investors to adhere to their decissions? If that's the case, must some people always be doomed to underperform the market?
Thanks for the videos, they are extremely informative!
Thank you so much Ben! You were very helpful.
Maybe you could speak a little slower, in your next video, just a thought.
May God bless you.
Best video so far. Wish I could have explained all that the way you did. What do you think of Malkiel’s dismissal of the factors (smart beta) as just a surreptitious way of charging high fees for what is (according to him) really active management?
A good video. The question that does puzzle me is "how can a market be so extremely inefficient in the short term while being very efficient in the long term?"
I don’t think it is inefficient in the short term. The market reacts to changes in information and preferences. That doesn’t mean that it has to be rational, but information is always in prices. None of these models speak to whether prices are rational or irrational, only that they reflect information accurately.
Always very well explained!!!! Thanks
To all Germans watching this, you can read a lot about this in Gerd kommers book
Tnx Bruder
Amazing video!!
... so what makes sense is to buy a cheap all world index fund (or world and some EM mix) and that’s it. What is the purpose of financial advisors then? ;)
Very little! Except that you should 1) probably add some bonds to the mix depending on your risk appetite and 2) you should consider how much cash you need available and 3) you should consider whether - ethically - you're OK with investing in weapons, carbon fuels, etc. And finally, you 4) want to consider how much tax you pay in making investment decisions.
The vlaue of advise is to know what you just said! Most people dont know that or dont believe that if they are told. So they do BS investments. An advisor such as Ben can explain this to you. Via youtube or in person. Edit: And that value Ben just gave you is huge!
I think I need to do a video on what a financial advisor *should* do. Like you point out, it should not be trying to do fancy stuff in the portfolio. I'd probably summarize it as follows:
Understanding the evidence (portfolio theory, financial planning research etc. as basis to give any advice)
Portfolio advice (which index funds and in what allocation)
Tax minimization (where to hold assets, tax loss selling, when to use which accounts)
Financial advice (planning, debt, insurance, saving, spending etc.)
Product allocation (mortgage, annuities, insurance)
Maintaining context (understanding the situation and goals to advise on the above)
Ability to communicate (poorly communicated advice will never be actionable)
Ben Felix It’s really fascinating to me that we appear to be in a relatively new age of disruption for financial planning and advice. I imagine the entrenched active investment firms do not like all this new information that effectively devalues the long-held mystique that they somehow have special knowledge or insight about markets that make their fees and convoluted reasoning worth paying for.
@@BenFelixCSI I'd add managing the differences between accumulation and withdrawal execution, although perhaps you intended that to be included with "maintaining context".
5:46 "Any attempt to test market efficiency is really a test of two distinct hypothesis: a test of market efficient hypothesis and a test of the model of market equilibrium."
The paper Jarrow, Larsson "The Meaning of Market Efficiency" says that this belief is common but claims that it is incorrect (and attempts to explain why).
Hi Ben,
Hope this isn’t a stupid question, but if I have a long-term time horizon (over 30 years) and believe the market is efficient, would you see any problems with going into leveraged ETFs? Given the high probability that market indexes like the S&P will increase over the long-term, why not try to magnify returns if I have the time horizon and risk tolerance? I considered the higher fees of leveraging potentially eating into returns, however, the average return often more than compensates for the increased MER (still below 100bps on most leveraged ETFs).
Thanks for the insight, and keep up the great videos!
Another excellent video, thanks Ben!
Could you make a video on the ETF made of ETFs? Any dangers there? I love this channel, great information.Thanks Ben!
An education as always.
This is true
Very nice video. Excellent quality. One minor comment for clarity. Most discussion is framed in a scientific context. However, you use the term 'theory' in its colloquial context, not in the 'scientific theory' context, and mix it up by switching to 'model' from time to time. I would drop the term 'theory' and just stick with 'model' and/or 'hypothesis'. Hope I don't sound like an annoying pedant. I could very well be wrong.
Hi Ben, I have an unusual question - could you please tell us which hardware and software setup you use to make videos?
What about market inefficiency caused by human behavioral factors?
Thx a lot again!!! I share your videos to friends and family, and we discuss them a lot :)... i make them talk about it :D
Can you please elaborate more on profitability and conservative reinvestment factors? Is it okay if I say for the profitability the ratios like ROE and ROCE should be the relevant criterias?
Another doubt is that how do you relate all factors with the traditional ratio based analysis? Are there some important ratios which will be very helpful to distinguish the companies on the basis of the five factors.
As someone who's starting to invest, I'm getting my mind blown by all these models. There are just so many out there. Should I use these models to find out where to invest, or should I just go and invest in index funds without much thought? If it's the former, from where do I get all the inputs for the data?
The baseline for every investor should be the market, which you can get using a small handful of index funds, or even a single index fund like VT. Adding in exposure to the other risks that the market is pricing into securities increases your expected returns, but also increases the complexity of your implementation. I think step one is to get the market. As your wealth and comfort level with investing increase you could then consider pursuing other risk factors. The data inputs and analysis tools to build a factor loaded portfolio are all available at portfoliovisualizer.com.
Hi there ben, unrelated question:
I know you did videos about TFSAs and RRSPs account, but my question is about unregistered accounts. Given that investing in a total market index etf would require bookkeeping, phantom distribution researching and more, what would you suggest for the common investor who doesn't want to bother with all this additionnal work?
Wow. Another amazing video.
Just curious (and I'm not really sure how'd you test this): Does the publication itself of these famous studies (Fama & French's Five Factor Model for example) have any effect on their own legitimacy? I mean, they add information to the finance, and information has economic/financial value. So, is there any way that potentially influencing how people and professionals look at investing will in fact change the way they invest? Kind of like the financial equivalent to the Heisenburg uncertainty principle... Does measuring these factors change them?
Or am I just out to lunch?
Thanks!
I'm not Ben, but thought I'd humbly offer you my take. New information is a continuous process. Largely due to analysts like Fama and French showing how efficient index investing is there has been a significant move towards index investing in about the past decade or so.
New information market effects is continuous and bidirectional: New information affects behavior of investors, which affects markets, which leads to new information, which affects investor behavior, which affects markets... and on and on and on.
Hi Ben ! First of all, I am sorry if my english is bad, it is not my mother tongue. I am 18 years old and considering becoming a portfolio manager. I am interested in learning more about the path leading to this position and what is it to be a porfolio manager on a daily basis. I hope you can help me, and if your read this message, have a great day !
Hi Ben - Amazing videos! Learned a lot and have been recommending you to friends. One question I have: how to know if a index fund with better expected risk-returns is worth the extra fee. For example, I understand that having a total stock market index fund is better than having a S&P500 index fund as you have more diversification. Is it however worth paying let's say an expense ratio of 0.20% vs 0.05%? Thanks!!
Hey Ben, what are your thoughts on the efficient frontier? Do you think a 100% equity portfolio is fine for someone in their late 20s or is at least a small allocation to bonds preferable.
Also, one argument I hear is that if you have an allocation in bonds, you can transfer that to equities in a bear market to capitalize on low prices. How is this different than timing the market?
Could you do an Episode on Emerging Market Bonds in hard currency (ETFs). There is recent research that indicated it might be a valuable way to diversify portfolios. Would be interested in a Video. Great channel by the way...and I am not even Canadian =)
Hi, Ben! Please tell, what part of the stock portfolio should be US stocks ETFs? I want to have some exposure to the World-ex-US because of CAPE ratio, but I don't know how much...
And by the way, what about Russell 2000 Value ETF, is it a good decision for the factor exposure?
I thinks it's remarkable, but great that Michael Scofield is making these high quality videos after his time in prison!
That's not a @20 bill on the ground
Question; When we say news (i.e. external events) are "random", does that mean in this model, the probability of tech stocks increase by 2% today is equal to the probability of the railroad stocks increase by 2% on the same day based on the news? edit: amusing the 5 factor measures are the same (size of two companies, B/E etc).
In another word there is no difference between the stocks A & B? Also the stock price are stationary? e.g. the year is not an input whether 1900 or 2020 or 2050?
excellent
Reading the title, I was expecting a video about why the markets are efficient. That is also an interesting topic for the future. Thanks for the video Ben
You can approach the same problem with agent based modeling. The minority games, El Farol Bar problem, could be simulation of the invisible hand.
Thanks for your awesome videos!:) Can you do a video about risk adjusted return? For example a portfolio where you have 120% stocks and 80% bonds, but where you in sum have the same risk like with a portfolio of 60% stocks and 40% bonds? I dont know the numbers, but i hope you understand what i want to say:) John Bogle for example says in a video the best portfolio is a 2 or 3 times levered ETF, where someone helps you out for some time (lend money?!) if things go downwards.
Quote from Charlie Munger: “I have a name for people who went to the extreme efficient market theory - which is ‘bonkers’. It was an intellectually consistent theory that enabled them to do pretty mathematics. So I understand its seductiveness to people with large mathematical gifts. I just had difficulty in that fundamental assumption did not tie properly to reality”
what does this Charlie Munger know about investing?
@@KenLongTortoise ahahah, seriously?
I couldn't help but think of munger and buffet while watching this video lol
Does that mean that under no circumstances ever would you recommend picking individual stocks? And the only scientific proper approach is buying low cost index funds? Btw I'm a regular listener to your podcasts and thank you for your hard work!
I think it depends on what kind of outcome you are aiming for. If you want a wide dispersion of outcomes (maybe really good, maybe really bad) with a negative expected outcome overall, then picking stocks is the right choice. If you want a reliable outcome (less dispersion) then it's hard to argue with broad diversification and low costs. Thanks for watching the videos and listening to the podcast!
Where does irrational investor behavior/sentiment and bad information fit in? Bad information I think is handled by EMH: as better information becomes available, the market will adjust prices, but what about sentiment? If enough of the market believes a thing is true, despite all objective evidence to the contrary, does EMH process that belief as if it were information? Or does EMH require that only information that is objectively true be relevant?
Hi Ben, great fan. What do you think about leveraging your etf portfolio? (100% market if you are okay with compensated maximum risk)
The problem for me is markets are unpredictable, so the 3 factor modell can only be tested for past time frames. Who knows if these return explaining factors will persist in future.
That's true, but while individual stock returns are random, the return of the overall market has been consistent and fairly predictable. BTW there are now 5 model factors.
Hi Ben, I've been contributing to my company RSP for 10 years now. They match me up to 5% of my salary. It seems like a no-brainer to me to fund those plans. Is there something I'm missing? They are all actively managed but I essentially double profits.
Thank you for the video!
If day to day changes in stock prices were random, we wouldn't expect to see any day traders who make consistent profit. But in your podcast, I heard about a study of statistics of the Brazilian futures market, where 0.5% of day traders had a stable positive result. So, changes in stock prices are not really random, there are some patterns, but you have to be a genius to use them, right?
If you have a bunch of people trying to predict randomness, some of them will be able to do it. The hard part is determining whether they were lucky or skilled/ geniuses. We also have to remember what success looks like; here is the study you mentioned:
_We show that it is virtually impossible for an individual to day trade for a living, contrary to what course providers claim. We observe all individuals who began to day trade between 2013 and 2015 in the Brazilian equity futures market, the third in terms of volume in the world, and persisted for at least 300 days: 97% of them lost money, only 0.4% earned more than a bank teller (US$54 per day), and _*_the top individual earned only US$310 per day with great risk (a standard deviation of US$2,560)._*_ Additionally, we find no evidence of learning by day trading._
papers.ssrn.com/sol3/papers.cfm?abstract_id=3423101
@@BenFelixCSI You are right! But we have people like Jim Simons, who made billions of dollars by trading and using patterns. It's hard to say that it's just luck, right?..
The Medallion fund was/is probably not luck. I don’t have an answer for it though (to be fair, I don’t think many people know exactly what they’re doing). That’s kind of like my example about the grandpa living to 98 despite being a smoker though. Just because it happened doesn’t mean trying to replicate it is a good idea.
@@BenFelixCSI Thanks Ben! When someone tells me about a successful stock picker, I constantly cite Jeanne Calment as an example. She was the oldest man on the Earth EVER (122 years), and she smoked almost all her life, until she was 117. I think it is the best example of "Bad decisions can lead to good results".
Itsme Or....you shouldn’t judge a process by it’s outcome.
Whoa! @ 12:33 you say '...there is no way to exploit random stock price changes to generate higher average returns...'
Did I hear that right?
One invests in an index fund because one expects it to follow a growth path over time. The theoretical value of that holding can be estimated ahead of time and a theoretical value line can be tabulated. Using this information, an investor can contribute more funds during periods of under-performance and trim back periods of over-performance. This is similar to re-balancing where the investor makes infrequent adjustments periodically, expect the investor is periodically adjusting his or her position on the Capital Market Line as opposed to holing a portfolio within the efficient frontier. Given enough sequences, the return from such a stagey should be higher than the index fund itself.
This, of course, assumes the investor is comfortable with leverage (which the are if they have loans like a mortgage, HELOC, or margin account), and if they have somewhere productive to park funds after periods of over-performance (like towards their home equity or other debts). There is such a thing as having too much capital in only one asset class -- that's when it's your only asset class.
Easier said than done, but a sensible approach for the disciplined. Apologies for the long post, but when I hear 'there's no way' that gets me thinking.
You’re talking about “value cost averaging” I believe, which has limited supporting evidence. I think I talked about some of the relevant evidence here ruclips.net/video/w_aOERmUWdA/видео.html
But what does Fama say about GME going 🚀🚀🚀 ?
GME is an example of short-term market manipulation. A large number of small investors figured out many large hedge funds were shorting the stock, so the small investors loaded up on it as a way to screw the hedge funds and reap short-term profits. Since the long-term prospects for GME are dire it will almost certainly plummet eventually, but exactly when isn't predictable.
How much did you lose?
good video!
The Efficient Market Hypothesis is a pivotal and crucial model that underpins the entire field of finance. It also paves the way for a new breed of investors. I think if market efficiencies exist it would be difficult to know when they exist and which segment of the market they exist in making them fairly random. What are your ideas on Warren Buffet's performance in an efficient market? I think Buffet was skilled at identifying value stocks that bear more risk. Hence, his return can be more accurately explained using the Fama French Factor Model.
He touches on in this vid and goes in more detail in others. Essentially your last 2 sentences are correct. Historically value, esp small cap value, have outperformed the market but are more risky since they're oft temporarily (usually) depressed and are significantly more volatile. That's why he recommends investing in the total market, with a moderate factor slant towards small cap value.
Geez. It seems like the more I learn, the more hacking into the stock exchange seems like a worthwhile pursuit.
Hi Ben. Very informative vid. I have a question about stock picking. If its true that stock picking is largely a pointless activity, how do you account for the existence of hedge funds? Are they simply preying on wishful thinking that they can deliver superior returns. Do they have resources that allow them to locate and capitalise on genuine market inefficiency. Are they being fed insider information that provides an edge. If the market is truly random why is insider trading illegal?
Hedge funds are designed to deliver uncorrelated returns, hopefully with less risk than the stock market. They are not proof that stock picking is a worthwhile activity. The vast majority of hedge funds trail a 60/40 stock/bond portfolio. Some hedge funds win big. It's somewhat similar to traditional active management. Investors like the opportunity for large gains even if it comes with a high probability of a loss. The track record of hedge funds, on average, does not suggest that they have any special resources or information. Except Jim Simons at Renaissance Technologies. Nobody knows what they're doing, but they do have an edge that nobody else has.
Prices are random because new information is random. New information is available to insiders before it is available to the public. For those with insider information a layer of randomness has been removed.
Well Hedgefunds have different strategies. Some.focus on industry experience, others on the ability of the manager to interpret information, and gain new insights from it, and others, that rely on sofisticared technologies like Jim Simmons, and also several PHDs. I think that this provides them with an edge to exploit out opportunities. Granted more infeciency was present in warren buffets day, since there were fewer hedgefunds then, but as of late there has been an explosion I'm hedgefunds to a point that opportunities are less present for those.managing a lot of money. However those managing little, I think there are a lot of opportunities, but again expertise and talent in interpreting data in new ways will be of high utility.
Scientific models applied to the dismal science? How does negative interest rates affect the rationality of the market?