Re: Market Efficiency
As part of the course work for a master's degree in economics, I took some graduate courses in finance. One of these was "portfolio management." (I got an A in it.)
Just about everyone in academia believes that markets are "efficient," at least in the sense that there is no reliable way of "beating the market" except -- possibly -- by a little bit. An apparent paradox is that the thing that makes markets so efficient is the efforts of millions of "active" investors to "beat" them (i.e., "beat" each other)!
My father was a stock broker and would probably be happier if I were a drug addict than an advocate of efficient markets. The difference in outlook between financial academics and financial products salesmen is illustrated by this story that I first heard from the professor of the above mentioned portfolio management class.
A stock broker and a finance professor were walking down the street together when the broker spotted a piece of green paper laying on the sidewalk ahead of them. "That looks like a 20 dollar bill" said the broker. "It can't be," said the professor. "If it were, somebody would have already picked it up." :-/
My own belief is that all assets within an asset class are, for practical purposes, always "fairly valued" with respect to each other.
Asset classes do experience temporary periods of distorted valuation relative to each other, but over the long term tend to "revert to the mean" performance that is fundamental for that asset class. John Bogle wrote an excellent paper -- understandable by intelligent non-academics -- on the way that various sub-classes of stocks tend to do this over time.
There are ways of identifying this distortion in relative valuation between asset classes, and I used to think that it was possible to profit from them, but my personal experience proved otherwise. Based on "simple" financial logic rather than sophisticated mathematical theory, I concluded that by reallocating assets, it is possible to reduce the volatility of a portfolio's value, but not to enhance its long-term return. So for people who are accumulating wealth, portfolio rebalancing may be psychologically comforting but won't really affect their long-term wealth. On the other hand, for people who are drawing down their assets, as in retirement, portfolio rebalancing will substantially reduce their chances of prematurely depleting their wealth.
