The problem with the efficient market debate is that a timeframe is never specified. Efficient over what timeframe? Without a specific delta-t, "efficiency" is just an abstract concept with no real definition.
Over the micro short-term, markets are clearly inefficient, because arbitrage is possible. However, to do arbitrage, you've got to be exploiting opportunities that often exist only for milliseconds. By the time we get to a 5-second time frame, markets are pretty damn efficient, e.g. it's very hard to "beat the market".
Over the long-term (5+ years) I tend to think markets are also "inefficient", to the extent that I believe fundamental analysis works for those who excel at it. Since short-term traders contribute more heavily to efficient markets than long-term value investors, it's plausible that long-run investors can make expectancy in excess of the market average.
In the time horizons that most traders care about, though-- 5 seconds to 5 years-- markets are pretty damn efficient. Efficient markets do not preclude bubbles and crashes, though.
I agree that efficiency depends on time frame, but I believe that the market will always be more efficient as the time-frame grows. A market is not zero sum. Investors with long-term horizons don't have to beat the market to make money, because wealth is created.
"Since short-term traders contribute more heavily to efficient markets than long-term value investors, it's plausible that long-run investors can make expectancy in excess of the market average."
Why do you think short-term investors create more efficiency than long-term investors?
> I believe that the market will always be more efficient as the time-frame grows. A market is not zero sum. Investors with long-term horizons don't have to beat the market to make money, because wealth is created.
Even if markets do become more efficent as time-frame grows, that's irrelevant because different people consume wealth at different times (a 20 year old saving for retirement in her 50s will consume that wealth at a different time than a 20 year old saving to buy a house in 5 years), they don't know when they'll consume wealth (the first 20 year old above decided when she was 25 that she really did want kids), and wealth creation over time not only isnt uniform, it isn't known. (The US thinks that it is worth a couple of trillion less today than it thought a year ago. It probably is, but no one knows the actual number at either end-point. Germany, France, and the UK lost a lot of wealth between 1938 and 1943.)
Over the micro short-term, markets are clearly inefficient, because arbitrage is possible. However, to do arbitrage, you've got to be exploiting opportunities that often exist only for milliseconds. By the time we get to a 5-second time frame, markets are pretty damn efficient, e.g. it's very hard to "beat the market".
Over the long-term (5+ years) I tend to think markets are also "inefficient", to the extent that I believe fundamental analysis works for those who excel at it. Since short-term traders contribute more heavily to efficient markets than long-term value investors, it's plausible that long-run investors can make expectancy in excess of the market average.
In the time horizons that most traders care about, though-- 5 seconds to 5 years-- markets are pretty damn efficient. Efficient markets do not preclude bubbles and crashes, though.