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Okay, I've read that book before, A Random walk down wall street.

Funny thing is that this Efficient Market Theory has been "disproven" by the market itself long ago. my fundamental opinion is that the book and its theories are completely useless. Yet time and again, I see people recommending it.

hmm... have I missed something important??? Why do people keep recommending a book that's outdated?

EDIT: no intention to hijack this thread, sorry. just really like to know why

http://en.wikipedia.org/wiki/Efficient_market_hypothesis

Actually, the Efficient Market Hypothesis haven't been "disproven" by the market long ago. Though the EMH has been extensively rewrittened.

This is the way scientific theories work: someone suggests it, everyone try to flame it then others test it in practical and rewrite it. Theory reflects practical, else it'll be rewritten.

Currently, there are many evidence to suggest that the markets are efficient:

-Stock returns follows a Normal Distribution. (which all random systems follows)

-Technical Analysis and Fundamental Analysis have been tested to death and none of their "entries" (where to buy/sell) are better than random.

-Recently, mathematicians modelled the London Stock Exchange to study and better control violatility so as to make investing safer for the public. Their model accurately predicted the bid-ask spread 98% of the time for the past 20 years ONLY when they assume traders are buying/selling at random. If they assume traders aren't buying/selling at random, the model failed to predict practical real life bid-ask spreads at all.

-All major banks/institutions like Merrill Lynch, Bear Stearns, Goldman Sach have quantitative finance departments which brings in billions of dollars of profit every year. This entire field depend on the assumption that the market is random. If the market isn't random, all their models would fall apart and where then did those billions in profit come from?

-Universities and Schools have entire degree/masters/PhD courses devoted to Finance subjects whose cornerstone is the assumption that the market is random. There are currently zero courses whose cornerstone is the assumption that the market is non-random.

I also recommend reading the book "A Non-random Walk Down Wall Street". Its very technical though, like most good books are.

Ok carrotcake, thank you for your reply. Though i seldom utilise TA, i do analyse charts based on the price and volume, and found that some of the logic behind this based on supply and demand, as detailed in the CANSLIM methodology, sounds quite rational to me. I tried applying it to my chart analysis and found it rather accurate. However i'm still not fully convinced that TA works. Maybe it's randomness at work. I dunno. Verdict is still not out as far as the effectiveness of TA is for me.



 As i'm more focused on long term, FA is more important to me. You mentioned that FA is no better than TA. So which method you reckon works?
And if FA don't work, how come Warrant Buffett, Charlie Munger, Peter Lynch and other legendary investors who based their investment methodology on sound business fundamentals, have such a outstanding record of outperforming the market in the long run? Is it randomness at work again?

EMH has many assumptions and some just don't seem practical. Nonetheless the whole book isn't about EMH yah. And its still good for a beginner to at least know what EMH is all about. Didn't expect a reader to eat up everything that just 1 book is saying either.

Furthermore, i personally felt that the book provides a good comprehensive introduction to the various financial instruments. A decent start for a beginner.

At the end of the day, we can always agree to disagree on whether a book is good ornot. But if you have any suggestions on what good books there are...please pray share then.  

Sorry, not supposed to say FA because its too broad a term. My bad.

Warran Buffett is a business man. He actually buy a huge stake in the company and seek to have a part in running the business. He is truly unique.

As for others "FA" practioners, it depends on what exactly their doing when they say FA.

Its too broad and i'll go crazy trying to define what I meant by FA so it was really a big mistake including that term with TA. Valid methods like Buffet's can be categories as FA. Many apologies.

 Yes indeed. He views investing as a form of business ownership of a company, whereas many speculators are less concerned about the fundamentals and just ride on the momentum of the wave carrying the stock, ready to abandon it once their price target is reached or uptrend momentum show signs of reversal.

As for the case of EMH, i read quite a few articles debunking the theory. One of the example is, if the market is truly efficient, nobody would outperform the market in the long run. The price will truly accurately depict the intrinsic value of the stock. Hence no point trying to find an 'undervalued' stock, as the price is already a precise reflection. Something along this line. I can;t recall all the details i read. Anyway you can find these articles quite easily at wallstraits.com

Carrotcake, i;m curious. Since you are into trading, what method do you use since you believe TA is useless? You mention arbitrage before, but don;t think it's available to us, small retail investors right?

 

 No apologies needed. we are all here to learn from each other

Hey alfiee,

Yes i do know Buffett bought over some of the companies he invests in. In fact, he appoints some of the CEOs there. He make sure these CEOs run the company as if they are the owners of the companies, and in a rational and sound way, taking their shareholders' interest at heart. You are right to say his key influence plays a big part in his success, whereas small retail investors cannot totally know the companies they invest in, inside out.