"When I starting blogging, and started defending the EMH, I faced three anti-EMH arguments:
1. The obviously irrational housing price bubble.
2. The continual success of Warren Buffett.
3. The amazing returns earned by the hedge funds.
All three have subsequently, in the 4 years since he started, been discredited.
He shows a graph from the Economist that allegedly shows the early success of the hedge funds was a fluke. I'm not so sure about that. I think it may be more about a different market. The last 4 years haven't been great for hedge funds, largely I think because it's been a less volatile market. The turbulent bear market of late 2007 to early 2009 was perfect for hedge funds as it was a time with big moves where you can make quick money going long or short.
However, the secret that no one has talked about since then is that there's been a lot of money to be made by just buying and holding stocks for a extended time.
If you had held on to Google for example since March 2009 you would have seen it go up by over 100%, Apple was up by as much as 800% though it's tapered off some now. Still you'd be up big-if you simply were holding on to the stock.
Sumner then attempts to debunk Warren Buffett:
"Then there’s the amazing Mr. Buffett. Once again, the Economist comes to my defense:
Without leverage, however, Mr Buffett’s returns would have been unspectacular. The researchers estimate that Berkshire, on average, leveraged its capital by 60%, significantly boosting the company’s return. Better still, the firm has been able to borrow at a low cost; its debt was AAA-rated from 1989 to 2009.
Yet the underappreciated element of Berkshire’s leverage are its insurance and reinsurance operations, which provide more than a third of its funding. An insurance company takes in premiums upfront and pays out claims later on; it is, in effect, borrowing from its policyholders. This would be an expensive strategy if the company undercharged for the risks it was taking. But thanks to the profitability of its insurance operations, Berkshire’s borrowing costs from this source have averaged 2.2%, more than three percentage points below the average short-term financing cost of the American government over the same period.
A further advantage has been the stability of Berkshire’s funding. As many property developers have discovered in the past, relying on borrowed money to enhance returns can be fatal when lenders lose confidence. But the long-term nature of the insurance funding has protected Mr Buffett during periods (such as the late 1990s) when Berkshire shares have underperformed the market.
These two factors—the low-beta nature of the portfolio and leverage—pretty much explain all of Mr Buffett’s superior returns, the authors find.
So supposedly no one can beat the market over time unless they have cheap short-financing. Even if so, they can still beat it with the financing.
"Then there’s the housing bubble. What goes up . . . stays up 4 times out of 5. That’s right, the housing bubble of 2005-06 was not something that would inevitably burst, as the anti-EMH proponents insist. Indeed if you look at the US, Britain, Canada, Australia and New Zealand, it is the US that is the outlier. All saw big price gains during the boom years, but only the US bubble burst. The other 4 countries still have very high house prices."
It's interesting how he needs to show that you can't beat the market to prove EMH-why have a market at all if you have no chance of winning? Cullen Roche has a thought provoking piece that asks why people hate a rising stock market. It seems counterintutive but doesn't it seem that almost everyone-whether Left or Right-is pretty bearish right now? At least they aren't impressed by the the market that's risen 4 straight years.
Where does this psychology come from? Cullen says that it's because most of us don't get to participate in the gains.
I think that's part of it but not the whole picture. A Sumner will say he doesn't need to be in the market and that over time the market will win and he'll end up no better than when he came in. I don't really agree with that.
I do think there's more to the aversion than missed opportunities. True I would have liked to have participated. However, I was broke and the last 4 years have been very different from the type of market I made money in back in 2008, In 2008 I did short term trades-shorting the bank stocks by buying lots of puts.
The last 4 years have as we noted above, brought back buy and hold. So the gains would not have been as spectacular as 2008. I think though that a lot of people prefer to feel that we're living in an apocalypse and that it will all be over soon. It's a neurotic drive not only that bemoans lost success but neurotically doesn't want success. It would rather worry about how bad things are.