Beating the market
August 24th 2006 14:28
Is it possible to beat the market index? Many would say so because the market is efficient in reflecting all relevant information, direct or indirect, so quickly that time is effectively a weapon against earning abnormal returns. On the other side of the argument, the market is not infomation efficient and it is possible to beat the market. Yet both camps were able to prove thier beliefs with substantial concrete empirical data and results. Personally, I am more inclined towards the inefficiency camp because of my belief that the market is not entirely efficient. Perhaps the market is a collective human being and like us, not perfect at all. There are times of highs and lows, being irrational, being practical or just being plain lazy.
In 1973, a book, A Random Walk Down Wall Street, written by Burton Malkiel, a professor of economics at Princeton University, was published spreading the word that the market is, most of the time, unbeatable, and the best way to milk cash from it is through index investing. In other words, mimic the market index to obtain market returns. This proposition has a tremendous impact in the world of finance, effectively loading ammunition for the efficiency camp lead by Eugene Fama of University of Chicago, who created the Efficient Market Hypothesis and later the Fama and French (1992) Three-Factor Model, rivaling the classical Capital Asset Pricing Model (CAPM).
Malkiel was in Australia granting audience to Australian investors belonging to the Vanguard Group, the second largest fund manager in the US, where he sits in the board. His mantra to his audience went "..trying predict which fund managers will beat the market is an impossible task and likens it to trying to find a needle in a haystack. He says most investors, over the long term, are better off investing in the haystack." (Sydney Morning Herald, "Prof offes fund of advice", 23 August 2006)
As the stock market is uncontrollable in the sense of practical experiment,which makes every single trading day a live experiment to test out hypotheses which makes it difficult to prove certain theory right or wrong in a strict sense unlike sold science. However, it is impractical to conduct test this way which is why past data plays an important role in finance research and then let time and market to further prove the test correct in the future.
Back to the market which saw red as banking stocks lead the downfall of -1.86% for the ASX S&P 200 index. Again the interest rate and inflation fear came into play and the flat US housing data added more salt to it.
The Portfolio 1 - EW, like the market, has a value of 9.98% wiped off to a value 8.85% at closing. The total profit shed -15.7% and closed $1436 from $1662 yesterday. Among the profit stocks, MRE and TPI suffered the heaviest losses of -39.8% and -29.63% respectively. The biggest gainers were AVO and IVK with each gaining 225% and 10.64% respectively.
In 1973, a book, A Random Walk Down Wall Street, written by Burton Malkiel, a professor of economics at Princeton University, was published spreading the word that the market is, most of the time, unbeatable, and the best way to milk cash from it is through index investing. In other words, mimic the market index to obtain market returns. This proposition has a tremendous impact in the world of finance, effectively loading ammunition for the efficiency camp lead by Eugene Fama of University of Chicago, who created the Efficient Market Hypothesis and later the Fama and French (1992) Three-Factor Model, rivaling the classical Capital Asset Pricing Model (CAPM).
Malkiel was in Australia granting audience to Australian investors belonging to the Vanguard Group, the second largest fund manager in the US, where he sits in the board. His mantra to his audience went "..trying predict which fund managers will beat the market is an impossible task and likens it to trying to find a needle in a haystack. He says most investors, over the long term, are better off investing in the haystack." (Sydney Morning Herald, "Prof offes fund of advice", 23 August 2006)
As the stock market is uncontrollable in the sense of practical experiment,which makes every single trading day a live experiment to test out hypotheses which makes it difficult to prove certain theory right or wrong in a strict sense unlike sold science. However, it is impractical to conduct test this way which is why past data plays an important role in finance research and then let time and market to further prove the test correct in the future.
Back to the market which saw red as banking stocks lead the downfall of -1.86% for the ASX S&P 200 index. Again the interest rate and inflation fear came into play and the flat US housing data added more salt to it.
The Portfolio 1 - EW, like the market, has a value of 9.98% wiped off to a value 8.85% at closing. The total profit shed -15.7% and closed $1436 from $1662 yesterday. Among the profit stocks, MRE and TPI suffered the heaviest losses of -39.8% and -29.63% respectively. The biggest gainers were AVO and IVK with each gaining 225% and 10.64% respectively.
The profit stocks are highlighted in green
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