A Distracted Walk with Fundamental Analysis | Hacker News Reader

A Distracted Walk with Fundamental Analysis

portfolio.construction

57 pointstheocs10 comments

The “article” is trying to do a basic refutation of the efficient market hyppthesis (EMH), but there’s really not much meat here. In fact this looks like pretty weak content marketing in order to sell a product (and the tone is little ranty - Eugene Fama is just “someone in academia”???). The author’s argument is that the EMH doesn’t really work because we can’t assume information spreads instantly - which is true, okay sure, but that’s actually not a core claim Fama postulated in the EMH.

While we’re at it, what’s the point of quantifying your pedagogy using the mathematical formalisms if you don’t explain any of the variables? More importantly none of the conclusions are rigorously defended, which is suspect since there are half-baked attempts at quantifying the ideas. The author presents an under-specified equation and then basically sums up his argument by saying, “well this seems like a stretch, because everyone wouldn’t receive the same information and act simultaneously, right?”

But that’s not what the EMH postulates! Informational efficiency does not require simultaneity. Either the author doesn’t actually understand the EMH or isn’t attempting to refute it in good faith. Even if the model doesn’t perfectly map real world markets, it’s not so simple than you can just rhetorically debunk it like this.

I think this[1] is a much more substantive and nuanced article on the same topic. It was coauthored by Cliff Asness, who has the following qualifications:

1. He has a PhD in finance/economics from the University of Chicago. His dissertation was focused on value momentum.

2. His advisor was Eugene Fama himself. He’s famously disagreed with (or at least critiqued) his mentor’s work.

3. He founded AQR Capital Management, one of the most successful hedge funds in the world. As can be expected, he’s now a billionaire.

4. He still regularly publishes research and hosts a commentary blog in which he critiques the research of others.

Asness obviously doesn’t believe in the EMH, but his take is much more balanced than an outright refutation.

_________________________

1. https://www.aqr.com/-/media/AQR/Documents/Insights/Journal-A...

Thanks for the link, that's a really interesting article about the Shiller vs Fama debate, though I'm not sure I agree with the conclusion that EMH is fundamentally sound - irrational mispricing a la Shiller seems to me much more plausible than some sort of rational pricing of systemic risk as an explanation for the extreme oscillation of prices around the expected value from future returns.

You can discount any article that claims to refute the efficient market hypothesis unless the author includes a bit about how they have already arbitraged this deficiency away and are currently sitting on a multi-billion dollar pile of money.

So uhh, given that he's got billions of dollars, there may actually be something there. Then again, the core skill of hedge funds is to convince people to let you manage their money, which is somewhat different than actual investing skill, so it's still unclear.

> You can discount any article that claims to refute the efficient market hypothesis unless the author includes a bit about how they have already arbitraged this deficiency away and are currently sitting on a multi-billion dollar pile of money.

That's not really fair at all, actually. In general it's perfectly reasonable to prove something non-constructively. There's no a priori reason to assume that a disproof of the efficient market hypothesis would be accompanied by a formula which can generate arbitrary amounts of money for its user. Finance is far more complicated than that.

> So uhh, given that he's got billions of dollars, there may actually be something there. Then again, the core skill of hedge funds is to convince people to let you manage their money, which is somewhat different than actual investing skill, so it's still unclear.

That Asness has accumulated billions of dollars in personal wealth is really only one dimension of why I'd say he's particularly qualified to comment on it. In my opinion, it's not even the most compelling - I'd say the fact that he received a doctorate under Fama and is involved in the academic community is a much more resounding affirmation of his arguments.

As for AQR's performance, it's a fair point that most hedge funds don't have a great return. But if you're looking for constructive examples to argue against the EMH, you can just cite Renaissance, Bridgewater, Soros, Baupost, Citadel, DE Shaw or Two Sigma.

Wouldn't any advocate of the efficient market hypothesis argue that he's simply part of the market?

Alternately, any person profiting off of arbitrage disproves it. :)

"Incorporate this however you’d like, either as some future value bonus or future discount factor risk, but the mood of the masses must to be included. And with that, what might be a good investment opportunity in isolation, isn’t."

The paragraph above is the final conclusion of the post. It strikes me this is largely a restatement the following words of wisdom attributed to the economist John Maynard Keynes: The market can remain irrational longer than you can remain solvent.

In some ways this is similar to being way too early with a technical innovation. The lack of traction or uptake in the market can last longer than your runway. I've been there.

> I’ve shown that with simple changes to the definition we can make technical analysis a viable approach.

Wow, someone give this guy a Nobel Prize...

The author thinks that randomness is just a simplification: no, it is the statement of lack of information about the future.

Random (in markets) does not mean “following a uniform distribution”. It means modelled by a random variable (which is a technical term).

I expected this to be about some killer feature for Excel for layout, or users preferring to do their layout in a grid, or something like that. I've seen a lot of documents written in Excel that seemed more appropriate for Word instead.

In fact, the title used for submission here ("More fiction is written in Excel than Word") is a twitter link from halfway through the article.

The linked article's title is "A Distracted Walk with Fundamental Analysis", which seems a much more appropriate title for the content.

Yes. We changed the title back.

The HN guidelines say: "Please use the original title, unless it is misleading or linkbait; don't editorialize."

https://news.ycombinator.com/newsguidelines.html

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