Contents
Stock Market Crushes
Markets Are More Than Simply Irrational—They Can Be Mean
Photographic Evidence: Scientific Evidence of Sentiment Predicting Stock Price Changes
Some People Get Rich by Selling High and Buying Low
Photographic Evidence: Predicting Coin Flips
A Hypothesis Masquerading as a Theory
Sell the Fads, Buy the Outcasts
An Instinct for Losing Money
If Warren Buffett's success in the past was luck, then the efficient markets hypothesis suggests that for next year he is not expected to outperform the market or a dart-throwing monkey. In this thought experiment the "winner" who produces 10 heads in a row has exactly a 50% chance of producing an eleventh head on the next coin flip, the same odds as a loser who produced 10 tails in a row.
Professor Thaler has created a money management firm (run with Russell Fuller) that seeks to systematically exploit irrational market opportunities. The firm makes investment decisions guided by the findings of behavioral finance. Although the firm is young, the results are interesting; as of the end of 2003, the firm's six funds are outperforming their benchmarks by an average of 8.1% a year. 19 To which the true believers argue that the performance of these funds, like the performance of Warren Buffett, is luck and not skill.
No one can really know if a particular performance is due to skill or luck. However, the interesting point is that the efficient markets hypothesis cannot be proven false by any investor's performance. Regardless of how many more good years Warren Buffett or Fuller-Thaler have, defenders of the efficient markets hypothesis can argue that superior performance is sheer luck.
It wasn't me.