DiscussMormonism.com

I’m currently reading The Clash of the Cultures: Investment vs. Speculation, by John Bogle. For those who don’t know, John Bogle is the guy who founded the Vanguard Group. Along with Warren Buffett, Peter Lynch, and George Soros, Fortune magazine named him one of the investment industry’s four “Giants of the 20th Century.”

In the book, Bogle talks a lot about some of the themes of this forum: creating wealth verses destroying wealth, whether or not inequality is growing in America, and whether or not “the rich” pay enough in taxes. Here are a few quotes from the book (I’m reading it on Kindle, so I can’t give meaningful page numbers):

It is surely one of the great paradoxes of the day that the largest financial rewards in our nation are received by an investment community that subtracts value from its clients, with far smaller rewards received by a business community that adds value to society. Ultimately, such a system is all too likely to bring social discord to our society and engender a harsh public reaction to today’s record disparity between the tiny top echelon of income recipients and the great mass of families at the base. The highest-earning 0.01 percent of the U.S. families (150,000 in number), for example, now receive 10 percent of all of the income earned by the remaining 150 million families, three times the 3 to 4 percent share that prevailed from 19456 to 1980. It is no secret that about 35,000 of those families have made their fortunes on Wall Street.

...A century ago, President Theodore Roosevelt distinguished between activities with positive utility that add value to our society and activities with negative utility that subtract value from our society. He referred to speculators as “the men who seek gain, not by genuine work, but by gambling.” If trading pieces of paper is akin to gambling, [reference to earlier section in the book he convincingly argued that it is] why should trading profits not be subject to higher rates? Yet we live in an Alice-in-Wonderland world in which even that hedge fund “carry” mentioned earlier is subject to substantially lower rates. Such income is subject only to the minimal taxes applicable to long-term capital gains rather than the higher taxes on ordinary earned income. I can’t imagine how our legislators can continue to endorse such an absurd and unfair tax subsidy, one that favors highly paid stock traders over the modestly paid workers who, by the sweat of their brows and the furrows of their brains, provide the valuable products and services that give our nation the living standards that are the envy of the world.

I'm a huge fan of Bogle (and a Vanguard investor), so I'm definitely going to have to check that out.

It would be interesting to see the tax code being used more precisely to distinguish between "negative" investment and "positive" investment. I suspect the nuances would be a little hard to convey in our sound-bite society.

But I'm sure talking about it would raise a lot of campaign contributions!

Now this is interesting, Analytics; there is a lot to agree with, but a lot I chalk up to apologetics, and then some of it is off in ideology fantasy land. Of course, I'm judging a lot from a small amount of print here and I'm having to guess about some of the context.

Vanguard investments is the instantiation within the real world of the financial economics invented by the University of Chicago school of business. It is founded upon the Efficient Market Hypothesis and related so-called Modern Portfolio Theory. Some time ago, I revealed myself as a dyed-in-the-wool believer in EFM. I can't help but have sympathy for Bogle's views. EFM says that stock prices reflect all available information, therefore, there are limited to no opportunities for arbitrage. Modern Portfolio theory determines desired risk, and then invests in a large portfolio of stocks with comparable variation. This strategy contrasts with the "active" strategy of analyzing companies and buying and selling with hopes to "beat the market". Active trading sells itself on the skills of analysts to beat the market, but EFM, in an long bibliography of statistical studies, argues that the market is "efficient", or, there are no opportunities to profit above the market average with skill; all excess returns are explained by risk exposure and luck. To put it in the most cynical terms possible: All those fund management fees that compensate the "skill" of the fund manger are earned from work that is little more noble than fraud.

I don't know what Bogle means by "subtracting value" here, but he has a huge vested interest in the immorality of active trading, since his bread and butter is selling the passive trading model built upon EFM. In other words, if you invest in Vanguard, you are investing, if you putting money with the other guy, you're speculating. One is good, the other is bad. Representatives of passive trading funds have compared active fund trading to communism. The line of reasoning is that if a fund manager can consistently beat the market, then why have markets? Why not employ similar analysts to determine where capital should be allocated and have a command economy?

But there's a bit of a paradox with EFM. Milton Friedman himself pointed out the obvious, that if everyone quit trying to beat the market, it wouldn't be efficient anymore. We should proceed carefully. Given EFM, beating the market is little more than speculation and "gambling". But exploiting arbitrage opportunities is the very foundation of a market economy, it might be a self-defeating activity, but this is purposefully so, it's the basis of the market.

I can think of some arguments off the top of my head for not taxing trading profits differently than investment, but I think it's more worth my time to point out that trading profits are zero-sum. For every million made in trading profits, exactly one million is wiped out in trading losses. So for every profiteering millionare on Wall Street, you have your pound of Wall-Street junkie flesh in return, if we're set on balancing the scales of moral justice.

Roosevelt's comments I believe are thoroughly ignorant and rooted in ideology, not real economics. A bolt of lightning doesn't consider the moral worth of a person before it strikes.

To sum up:

1) I'm elated that Analytics quoted a source that relies on the Chicago School's flagship theory to make its case. I shall pray for his conversion.
2) Given the author's arch buisness rivals are "speculators," the legitimate case that EFM makes against the pseudo-science of active trading is a bit overstated, especially in its moral appeal.
3) I think the whole "genuine work" adds real value to stuff is nuts, I can't take it seriously.

Gadianton wrote:Now this is interesting, Analytics; there is a lot to agree with, but a lot I chalk up to apologetics, and then some of it is off in ideology fantasy land. Of course, I'm judging a lot from a small amount of print here and I'm having to guess about some of the context.

Vanguard investments is the instantiation within the real world of the financial economics invented by the University of Chicago school of business. It is founded upon the Efficient Market Hypothesis...

The chapters that I’ve read so far haven’t mentioned EFM. I did a search, and it does come up in Chapter 6. Bogle says he’s often noted that his principles aren’t based on the EMH (as he abbreviates it), but rather on the CMH: Cost Matters Hypothesis. The basic point is that if an active manager charges you 200 basis points to actively manage your portfolio and you can have a passive portfolio managed for only 10 basis points, the passive portfolio has a built-in advantage of 190 basis points. (It seems to me you need modern portfolio theory in order to feel comfortable that your passive portfolio isn’t a piece of $#%!, but he doesn’t seem to be saying that, at least here).

Regarding what he means by subtracting value, he appeals to the inescapable mathematical fact that beating the market is a zero-sum game before costs, and a loser’s game after costs are deducted. It makes me think of a poker room in Vegas--in aggregate, the poker players will take out of the room only the money they take in, less the percentage the house rakes. So sure, in any given year (or hand) there will be winners and losers, but can you pick a mutual fund who will be a winner over the long-term, and will have an advantage over the other players big enough to overcome the house’s rake?

Gadianton wrote:I can think of some arguments off the top of my head for not taxing trading profits differently than investment, but I think it's more worth my time to point out that trading profits are zero-sum. For every million made in trading profits, exactly one million is wiped out in trading losses. So for every profiteering millionare on Wall Street, you have your pound of Wall-Street junkie flesh in return, if we're set on balancing the scales of moral justice.

The difference is, the super-rich have the game rigged so that their computer models that trade stocks within nano-seconds of price changes generate a constant stream of arbitrage profits. So even before an intellectual game of picking stocks can happen between you and me, these arbitrage traders have already sucked some of these profits out of the system. Their guaranteed arbitrage profits mean that you and me, in aggregate, will be losers. Add to that other trading fees that you and me pay and they collect, and I hope you can better see the problem.

Gadianton wrote:Roosevelt's comments I believe are thoroughly ignorant and rooted in ideology, not real economics. A bolt of lightning doesn't consider the moral worth of a person before it strikes.

I disagree. The guy at the bakery who is cooking my breakfast right now adds real value to society. The guys who designed and built the computer on which I'm typing added real value to society. The guys who originally capitalized that company added real value to society. Those of us who are now trading stocks on whether we think the price will go up or down? We're just gambling. It's a necessary casino, because nobody would have capitalized Apple had their not been a market on which their original investment could be cashed out. But that doesn't negate the fact that trading doesn't really add value to anything.

One of my favorite passages is when Bogle compares his thoughts on the market to those of John Maynard Keynes:

Keynes was deeply concerned about the societal implications of the growing role of short-term speculation on stock prices. “A conventional valuation [of stocks] which is established [by] the mass psychology of a large number of ignorant individuals,” he wrote in 1936, “is liable to change violently as the result of a sudden fluctuation of opinion due to factors which do not really matter much to the prospective yield...resulting in unreasoning waves of optimistic and pessimistic sentiment.”

Then, prophetically, Lord Keynes predicted that this trend would intensify, as even “expert professionals, possessing judgment and knowledge beyond that of the average private investor, would become concerned, not with making superior long-term forecasts of the probable yield on an investment over its entire life, but with forecasting changes in the conventional valuation a short time ahead of the general public.” As a result, Keynes warned, the stock market would become “a battle of wits to anticipate the basis of conventional valuations a few months hence, rather than the prospective yield of an investment over a long term of years.”

In my thesis, I cited those very words, and then had the temerity to disagree with the great man. Portfolio managers, in what I predicted--accurately, as it turned out--would become a far larger mutual fund industry, and would “supply the market with a demand for securities that is steady, sophisticated, enlightened, and analytic, a demand that is based essentially on the intrinsic performance of a corporation, rather than the public appraisal of the value of a share, that is, its price.”

Alas, the steady, sophisticated, enlightened, and analytic demand that I had predicted from our expert professional investors is now only rarely to be seen. Quite the contrary! Our money managers, following Oscar Wilde’s definition of the cynic, seem to know “the price of everything but the value of nothing.” As the infant fund industry matured, the steady, sophisticated, enlightened, and analytic demand that I had predicted utterly failed to materialize, while speculative demand soared. So, six decades after I wrote those words in my thesis, I must reluctantly concede the obvious: Keynes’s sophisticated cynicism was right, and Bogle’s callow idealism was wrong. Call it Keynes 1—Bogle 0.

Gadianton wrote:1) I'm elated that Analytics quoted a source that relies on the Chicago School's flagship theory to make its case. I shall pray for his conversion.

Thanks for the prayers, but I already have a church, and my standard works are The Little Book that Beat the Market written by the son of God himself, Joel Greenblat. I pay my tithing to Value Line.

Analytics wrote:The chapters that I’ve read so far haven’t mentioned EFM.

Sorry A, an 11 hour day yesterday adding value to society, EMH is obviously the correct abbreviation of "Efficient Market Hypothesis." It doesn't matter if he mentions it, EMH defined the passive fund model.

Analytics wrote:So sure, in any given year (or hand) there will be winners and losers, but can you pick a mutual fund who will be a winner over the long-term, and will have an advantage over the other players big enough to overcome the house’s rake?

I can't. And interestingly, this is the test hypothesis of the EMH models. But surely, Joel Greenblat can; Obama could hire Joel and we could get rid of Wall Street altogether.

Analytics wrote:The difference is, the super-rich have the game rigged so that their computer models that trade stocks within nano-seconds of price changes generate a constant stream of arbitrage profits

If this is true, the feats of Greenblat are even more impressive than otherwise, unless he's in on it, of course. but I'm not just going to take the word of a passive fund manager for such a strong claim. How the super rich keep getting richer by playing a zero-sum game with each other -- or setting their computer models against each other -- before a hefty rake makes little sense to me. But, I would need to read his book, or at least track down his sources to better understand the claim.

Analytics wrote:I disagree. The guy at the bakery who is cooking my breakfast right now adds real value to society. The guys who designed and built the computer on which I'm typing added real value to society. The guys who originally capitalized that company added real value to society. Those of us who are now trading stocks on whether we think the price will go up or down? We're just gambling

The value is largely invisible to common-sense visualization in a market-based society thanks to the market's proper functioning. The unthanked, invisible hand. A good friend of mine was raised in a communist country. She says that back in the day, milk and bread were literally dirt cheap. So cheap, that if you were thirsty, and just happened to be walking by a shop, grab a bottle of milk, take a few sips, and throw the rest in the street. In fact, parking lots and streets were often littered with the excess bounty central command provided for its citizens. So my question is, how much value is the baker adding to the twentieth loaf of bread baked over and above what the market demands -- one of the loaves destined to be a pollutant, no less?

Now, imagine this scenario: Twenty feet behind one of these command-established shopping marts is a fence that walls off the country from a neighbor. Imagine a hole in the fence. Imagine a savvy shopper grabbing a couple loaves, sneaking through the hole in the fence, and then selling the loafs for a profit. This profit, minus the transactions costs, is the arbitrage profits. In this scenario, who is creating more value, the baker, or the arbitrager? Quite obviously, the arbitrager is. The scenario gets more abstract as transaction costs are reduced by a commodities market, but the principle of arbitrage is no different up until the point of market efficiency, or introducing fraud.

What constitutes gambling anyway? Is Greenblat gambling when he uses a skill-based trading system to beat the market? Why should Greenblat's intellectual property be of less worth than a baker's skill?

Do you believe Bogle, the critic of trading strategy, or Greenblat, Mr. "Magic formula investing?" You can't have both.

Wiki on Greenblat wrote:Formula Investing uses a system that determines portfolio selections through a simple, logical and proprietary quantitative model that chooses stocks based on a combination of their relative cheapness and quality, as measured by earnings yield and return on capital.

Proprietary or not, that's fundamental analysis, it is precisely, active fund management, the nemesis of Bogle. The label Greenblat ascribes to his strategy, "value investing" is meaningless as a point to differentiate his strategy from others, from "good investing" vs. "bad speculating".

Gadianton wrote:

Analytics wrote:The difference is, the super-rich have the game rigged so that their computer models that trade stocks within nano-seconds of price changes generate a constant stream of arbitrage profits

If this is true, the feats of Greenblat are even more impressive than otherwise, unless he's in on it, of course. but I'm not just going to take the word of a passive fund manager for such a strong claim. How the super rich keep getting richer by playing a zero-sum game with each other -- or setting their computer models against each other -- before a hefty rake makes little sense to me. But, I would need to read his book, or at least track down his sources to better understand the claim.

Just to clarify, I’m not claiming that the “superrich” keep getting richer by playing a zero-sum game with each other. I’m claiming they keep getting richer because they play a zero-sum game with middle-class chumps who are in over their heads. Casinos don’t get rich by playing games against each other, but that doesn’t mean they don’t get rich.

Gadianton wrote:

Analytics wrote:I disagree. The guy at the bakery who is cooking my breakfast right now adds real value to society. The guys who designed and built the computer on which I'm typing added real value to society. The guys who originally capitalized that company added real value to society. Those of us who are now trading stocks on whether we think the price will go up or down? We're just gambling

The value is largely invisible to common-sense visualization in a market-based society thanks to the market's proper functioning. The unthanked, invisible hand. A good friend of mine was raised in a communist country. She says that back in the day, milk and bread were literally dirt cheap. So cheap, that if you were thirsty, and just happened to be walking by a shop, grab a bottle of milk, take a few sips, and throw the rest in the street. In fact, parking lots and streets were often littered with the excess bounty central command provided for its citizens. So my question is, how much value is the baker adding to the twentieth loaf of bread baked over and above what the market demands -- one of the loaves destined to be a pollutant, no less?

He isn’t adding value to anything for the loaf he throws away. My point is embedded in a secret that I wouldn’t tell my baker: I’d happily pay $15.00 for the loaf he sells me for $5.00. The $10 between what I would pay and what I do pay is magic manna from heaven and entails wealth creation that falls into my lap. Think of it—my utility in life goes up by $10 by just buying a loaf of gourmet bread! And on the other side of the transaction, the baker would probably be willing to sell me the bread for only $3.00 if he had no other alternative, so he’s getting a few bucks of wealth out of the deal, too.

What were we talking about again? Oh yea. In aggregate, the fund managers return to their clients less money than the clients would have earned in aggregate, had they simply invested in index funds. So all of the work that the funds do only transfers some wealth from the folks who put up the capital to the ones who managed the funds. In aggregate, all their work did was redistribute who keeps the gains. [Redistribution instead of wealth creation? Droopy should be outraged!]

Gadianton wrote:Now, imagine this scenario: Twenty feet behind one of these command-established shopping marts is a fence that walls off the country from a neighbor. Imagine a hole in the fence. Imagine a savvy shopper grabbing a couple loaves, sneaking through the hole in the fence, and then selling the loafs for a profit. This profit, minus the transactions costs, is the arbitrage profits. In this scenario, who is creating more value, the baker, or the arbitrager? Quite obviously, the arbitrager is. The scenario gets more abstract as transaction costs are reduced by a commodities market, but the principle of arbitrage is no different up until the point of market efficiency, or introducing fraud.

I understand your point, I think. If I want to purchase 100 more shares of AAPL at this instant, the arbitragers are earning their keep and providing me with value by ensuring that when I pull the trigger at Fidelity for $542.2401 per share, I am in fact getting the very best price available anywhere (to the hundredth of a penny! )

But what if the bread-arbitrager needs to cut a hole in the baker’s wall in order to make these transactions (It’s an innocuous hole the baker isn’t even aware of 99.5% of the time)? But 0.5% of the time it causes the bakery to explode (right after the arbitrager escapes). How much value is the bread arbitrager providing then?

Gadianton wrote:What constitutes gambling anyway? Is Greenblatt gambling when he uses a skill-based trading system to beat the market? Why should Greenblatt's intellectual property be of less worth than a baker's skill?

I would say yes, Greenblatt is gambling. If somebody has the skill to make a living at gambling, God Bless America! But on the other hand, is that really a good thing? Bogle makes some really salient points about this, from how the way we trade stocks causes serious problems with corporate governance, to whether it is can be good for the country long-term if our best and brightest prefer to make killings on the market as opposed to becoming engineers that deal with more tangible problems.

Gadianton wrote:Do you believe Bogle, the critic of trading strategy, or Greenblatt, Mr. "Magic formula investing?" You can't have both.

Perhaps I’m a cafeteria investor, LOL. Philosophically, I agree with almost everything I’ve heard both of them say.

I do reject the efficient market hypothesis, CAPM, and all the rest (really, “all investors are rational mean-variance optimizers, meaning that they all use the Markowitz portfolio selection model”??! Give me a break).

But still, I hedge my bets. My 401(k) is heavily bent towards index funds, while my IRA and brokerage account are full-throttle, single-stock picks based upon value investing.

If you think I’m contradicting myself, I encourage you to interrogate me and expose the alleged inconsistencies.

Gadianton wrote:

Wiki on Greenblatt wrote:Formula Investing uses a system that determines portfolio selections through a simple, logical and proprietary quantitative model that chooses stocks based on a combination of their relative cheapness and quality, as measured by earnings yield and return on capital.

Proprietary or not, that's fundamental analysis, it is precisely, active fund management, the nemesis of Bogle. The label Greenblatt ascribes to his strategy, "value investing" is meaningless as a point to differentiate his strategy from others, from "good investing" vs. "bad speculating".

“Value investing” is a subset of fundamental analysis, but it isn’t fundamental analysis itself. But are you sure you understand Bogle’s point? In his latest book, he spends all of his time bemoaning trading for short-term gains, not complaining about fundamental analysis. His main call is for market participants to be long-term investors rather than short-term speculators. Isn’t fundamental analysis a long-term investing strategy?

Bogle and Greenblatt agree on almost everything I’ve read. They both agree that day-to-day price changes aren’t driven by a steady, sophisticated, and enlightened analysis of the actual values of companies, but rather by short-sighted emotional and irrational decisions. Both of them agree that mathematically, everybody can’t beat the market. And both of them agree that over the long term, prices take an erratic path trending towards their true value.

Furthermore, they both agree that there are very few advantages to investing in vehicles other than index funds. In The Little Book that Beat the Market, it’s Greenblatt who says (after discrediting stock brokers and hedge funds), Not surprisingly, after subtracting fees and other expenses, the vast majority of mutual funds do not beat the market averages over time….since, after taking into account fees and other costs, most other investment choices leave you with much lower returns than index funds, many people who have carefully studied the issue have concluded that settling for average returns is actually a pretty good alternative. In fact, over the last 80 years, average returns from the stock market have meant returns of over 10 percent per year. Not too bad at all.

Greenblatt and Bogle both came to that conclusion. In the preceding analysis, there are two business opportunities that present themselves. Bogle, of course, went into the index fund business. Greenblatt saw that the short-term emotion-based market swings presents an opportunity for the disciplined investor to beat the market.

Analytics wrote:Just to clarify, I’m not claiming that the “superrich” keep getting richer by playing a zero-sum game with each other. I’m claiming they keep getting richer because they play a zero-sum game with middle-class chumps who are in over their heads.

This is an argument that is made against "the guru investors" like Greenblatt all the time. The Gurus have a career-based interest in market efficiency being false. If market efficiency is true, then investing is a crapshoot. If it's false, then laymen are taking on an army of financial experts and hoping to beat them in a complex, competitive game with big money at stake, by following "a few easy steps".

Analytics wrote:In aggregate, the fund managers return to their clients less money than the clients would have earned in aggregate, had they simply invested in index funds. So all of the work that the funds do only transfers some wealth from the folks who put up the capital to the ones who managed the funds. In aggregate, all their work did was redistribute who keeps the gains.

Absolutely. EMH is the argument for the index fund. An index fund manager has a moral right AND a financial incentive to accuse active fund managers of "stealing," so all the merrier. :) From a EMH/passive perspective, it would be like hiring an expert to spin the roulette wheel for you, and then paying him a commission for it no matter what the outcome.

Thanks for bringing up Droopy, now we're bringing out the heavy artillery. Droopy wouldn't be outraged, because Droopy would not accept the premise, as one who follows the Austrian School. The Austrians, along with most "leftists" reject market efficiency. They publish papers against market efficiency in their journal, and many active fund/hedge fund managers are, in fact, die-hard Austrians, including a nephew of Cleon Skousen's. Now, are you sure you're not ready to convert?

Analytics wrote:when I pull the trigger at Fidelity for $542.2401 per share, I am in fact getting the very best price available anywhere

It depends on what you mean by "best". If you mean lowest, then certainly not, it would be better to find the share in a market where the stock goes for less. If it goes for $542.2401 on the NYSE and $420 at AMEX, then you buy at AMEX. Your demand ticks the price up to say 420.1$ and the surplus ticks NYSE down to $542.23. You make a handsome arbitrage profit. Well, with all that profit, why not repeat? You buy/sell buy/sell, you just can't get enough of this, but your own funds can't get the job done fast enough. So you create a fund, and leverage the power of a mob of investors to buy from AMEX and dump at NYSE. You take a generous fund management fee out of their profits, but they are happy about this because they are making some big money themselves. Apple is happy, because with two different prices for their stock in two different markets, they aren't sure how to put a business plan together because they aren't sure what they are worth; now they are getting a better idea.

As you continue to buy and sell, the greater volume begins affecting the prices more significantly, until the price in both markets converge at 480$. Up to this point, you've been arbitraging the market and providing everyone with value. But you don't stop there, you keep doing what you've been doing, charge your fees, and as the fund loses money, you're still in the black. The investors begin to complain, but you convince them it's a bear year and to stick with it. The arbitrage ended at the point where the market became efficient at $480. After that, there is no arbitrage going on, only promises of arbitrage, and you continue to rake well-intentioned folks over the coals who don't believe in market efficiency: they've seen the books at the store about beating the market and the ads on late-night TV, they have faith you're their guy to make a come back. But as you know, the money tree is on empty, so you move from trading yourself, to writing books and doing seminars.

Analytics wrote:"But what if the bread-arbitrager needs to cut a hole in the baker’s wall in order to make these transactions..

This is where I'm losing you. Are you saying the market makers are profiteering in transaction costs? There is surely some truth to this, and to the extent the market is being "churned" over and above market efficiency, it is "unfair". But your comment about the explosion I can't place. And I'm struggling to differentiate between the problem with what might be a fine line between "market making profiteering" and "arbitrage profiteering".

Analytics wrote:If somebody has the skill to make a living at gambling, God Bless America! But on the other hand, is that really a good thing? ... if our best and brightest prefer to make killings on the market

If the market is not efficient, there's apparently a lot of work yet to be done, and people usually do make a killing in inefficient markets until they become efficient, so in your scenario, I applaud these young people. However, in the real world, I am thankful the IT industry was exploding when I was 24, which provided me a way out from working in an efficient market, my internship with a stock trading Guru, and moving into an inefficient market, where young people with half a brain could get jobs making far more money than they rightly deserved. My Guru helped me make the decision. He told me he could get me to Wall Street, but I would be fired, because studying the market on Wall Street is like reading the scriptures on a mission, when you could be out tracting. I was not ready to make 200 phone calls a day and pressure people. See, Wall Street, better than anyone, knows the market is efficient.

After your conversion, we can stand together and expose the hedge fund managers, and slowly, the market for fund managers will become competitive to the point where passive portfolios with low fees are the rule. Until then, "the little books" out there will only encourage people to think that the ordinary "little" person can beat big bad Wall Street at their own game, and so they get in on the action, whether directly through eTrade, or through managed funds that sell a winning philosophy they convert to. Sure, maybe one out of the thousands of trading schemes based on fundamentals, technicals, market psychology, counter market psychology, migration patterns of geese, or any hybrid scheme in between has legitimately beat the market at some time. Then again, maybe there is one true religion out of the thousands, and that one message that just seems to click with our general views and lifestyle -- and different strokes for different folks you know -- and when further considering the massive potential payoffs involved, we are tempted to make an exception. And this will keep ALL of the religions alive and happy for decades or even centuries to come. So I will happily throw all the trading books in the fire along with the holy books of the world and leave it at that. I realize most people will keep their favorites. But it's kind of interesting because market gurus will denounce market efficiency like preachers denounce atheism, but when pressed, they'll concede that market efficiency is nearly true, they, after all, believe in only one more God than the atheist does.

Analytics wrote:I do reject the efficient market hypothesis, CAPM, and all the rest (really, “all investors are rational mean-variance optimizers, meaning that they all use the Markowitz portfolio selection model”??! Give me a break).

Fine. But just to point it out, EMH is real economics, with a real body of literature behind it that includes extensive empirical studies, and it is taught at real universities and business schools, including MIT, and is a standard subject of finance and financial economics textbooks. This does not mean that it is any more true than Keynesian economics or monetarism, which are also part of standard econ curriculum, and also hotly controversial. No doubt the two books you've recommended are interesting, but the work of Chicago will long outlive them. Even as an industry practitioner, in an industry that rejects EMH by and large, one may distinguish one's self as a Chartered Financial Anaylst. What's on the tests to earn the prestigious title of CFA? Among other things, a lot of this: CAPM, and likely none of this: "The Little Book..."

It sounds to me like you're judging a good chunk of the framework of financial economics as not worthy of your time based on a couple of sentences you've read that rub you the wrong way. Just to point it out, all people are rational "mean-variance optimizers" in the world of Keynes as well, at least as it would be taught from a text at MIT, even if those precise terms aren't used. I may start a separate post explaining this at another time. It is my opinion, however, that to properly evaluate the theory, you'd need to invest more time into understanding it. Not saying you SHOULD, as I think economics is a boring subject, just sayin'.

I think the other questions you had are more or less answered above but might come back to it later.