Are Markets Rational?

[atlas888]

I do not know who are the people who put out analysis. I was reading Yahoo Finance. Monday the market fell big time. The headline was the US dollars getting stronger, and oil and commodities price fell. It was taken as a negative. Yesterday the meme was they are worried that the US Dollars may be getting weaker and inflation will be a risk, the market fell even more. Rational? The present stock market is not for investment, it is manipulated as a trading market. People sell,and buy or buy and sell after holding the positions for only minutes or hours.

 

[yakers]

Rational? The present stock market is not for investment, it is manipulated as a trading market. People sell,and buy or buy and sell after holding the positions for only minutes or hours.

So do you hold any stocks? Aren't bonds just as suspect? Where/how do you invest if you don't think the market is rational?

I hold a few stocks but mostly balanced mutual funds and index funds. I don't trust individual stocks but, if I think about it, I must trust the market on a macro level over time. If I didn't I don't know what I would do sto save/invest.

 

[yakers]

Delete duplicate

 

[TromboneAl]

Here's some happy campers.

Great Wall Street Movie

I wonder if all the traders are like that? All "Noo Yawkas." I grew up near there and recognize the "Noo Yawka" personality type (as in "Hey, Frankie's got an earring. Hey, show 'em the earring Frankie. Frankie!").

That could explain a lot!

 

[Gone4Good]

Aren't bonds just as suspect?

They're way worse, especially corporates and munis.

 

[audreyh1]

The markets are only rational over very long periods of time.

In the short term they often becomes very irrational - look at oil, housing, etc. We see this over and over again.

The only way I know how to invest rationally in markets which are irrational most of the time is to use asset allocation and rebalance periodically, and to keep a few years of cash on hand for living expenses for when things get seriously out of whack and I don't want to have to sell low to meet my immediate needs.

Audrey

P.S. And last year things almost irrational with cash as well! You never know what is going to bite you next!

 

[freebird5825]

I wonder if all the traders are like that? All "Noo Yawkas." I grew up near there and recognize the "Noo Yawka" personality type (as in "Hey, Frankie's got an earring. Hey, show 'em the earring Frankie. Frankie!").

That could explain a lot!

Ditto, grew up in Rockland County.
I especially loved the part where the taller guy was trying to give the shorter guy a kiss on the cheek. These guys are too funny!

 

[Independent]

I like this piece by Larry Swedroe:

Can Market Inefficiencies Be Exploited? - CBS MoneyWatch.com


Even if the market is irrational, few have shown an ability to successfully take advantage of that irrationality...

I agree with this. Since humans aren't completely rational, markets probably aren't. But, I don't know how to profit from that fact. I'm no better than the next guy at figuring out when prices are driven by economic reality and when they're driven by excesses of optimism and pessimism. Nor can I figure out which investment manager is smart enough to tell the difference.

I see one glimmer of a possibility. Maybe the US stock market follows a very long cycle of pessimism and optimism - something like 35 years. If we can identify highs and lows with P/E ratios, then we know when to buy and when to sell. The problem is that the cycle is so long that you only have one chance to buy low and one chance to sell high in your entire investing life. And, to take advantage of that, you have to reject all conventional wisdom at the time. That's tough.

 

[calmloki]

So do you hold any stocks? Aren't bonds just as suspect? Where/how do you invest if you don't think the market is rational?
.

Don't know about Atlas88, but we have a few dollars in index funds and stocks, and most of our money in rental property (rent is a dividend i feel i can influence), and, to a lesser extent, in property loans. On the property loans we loan at a substantial LTV rate, fairly short term, and husky interest rate. I like investments i can see. Simple mind, simple plan. I wouldn't trust my lunch money with the crew in the upper video.

 

[Hamlet]

I believe that it is against the rules to short an IPO for some period of time (90 days?).

I remember looking into this exact arbitrage at the time, but you couldn't actually short the PALM stock.

I checked and checked my arithmetic, then scratched my head asking how the public could be so stupid. Arbitraging by shorting Palm and go long 3Com would be safe, but as Palm just started trading, it would not be so easy as there were not so many shares out there.

 

[spazz]

The markets are only rational over very long periods of time.

In the short term they often becomes very irrational - look at oil, housing, etc. We see this over and over again.

The only way I know how to invest rationally in markets which are irrational most of the time is to use asset allocation and rebalance periodically, and to keep a few years of cash on hand for living expenses for when things get seriously out of whack and I don't want to have to sell low to meet my immediate needs.

Audrey

P.S. And last year things almost irrational with cash as well! You never know what is going to bite you next!

One of Shiller's arguments that markets, in the long run, are in fact irrational was to just look at the non-correlation between dividends and stock price movements. Dividends have more or less increased over the past 100 years (with little variance). However, looking at the long term stock price movements of an index - say the S&P, prices tend to be all over the map (large variance). This does not seem to show that investors are acting rational in the long term