How Do You Know the Markets Aren't Random?

[dangermouseb 10]

Following on from "The Question of Randomness" thread. How do people know the markets aren't random? I'm up for creating some random data to see if someone can show me how they know it's random or not - just for fun... DM

[Adrian 10]

We know the markets aren't random simply because it has been mathematicvally proven.

 

We also know because anyone who has studied markets long enough knows it is obvious.

 

Perhaps the easiest way to show markets aren't random is to look at a simple distribution of daily highs and lows and where in the trading day they occur. If the markets were random, then each hour would have roughly the same nnumber of daily highs and lows. We all know that isn't the case, and isn't the case by a huge margin. So bottom line, markets aren't random. That is just one of a zillion ways markets aren't random. Only economists think markets are random.

[jttpbf 10]

Following on from "The Question of Randomness" thread. How do people know the markets aren't random? I'm up for creating some random data to see if someone can show me how they know it's random or not - just for fun... DM

 

Generating a truly random series of data is a big task. It requires avoiding any possible slant which might be present in the method. A French trading system developer reported how he did it in his book and concluded the markets were random because the series of numbers he derived displayed some occasional trends, just like the ones produced by the markets. I believe he made a logic mistake. Two sytems leading to similar results (markets and randomness generators) are not necessarily identical. This does not minimize the value of the Artificial Inteligence and fuzzy based logic sytem he went on to develop to respond to the challenge of winning with the markets. I believe on the contrary that markets are not random but I have no formal proof of it, only arguments. The most important one is that a "random" generation by definition is one where any one event is totally independent from the previous ones. We all know that on the contrary all traders act wilfully in one of the fiollowing ways: to purchase or to sell quantities which surpass the quantities available at any one or several price levels (which moves prices) or to jump on the bandwagon when a trend develops or to take profits when the prices have reached their personal targets. These three behaivors (there might be more) seem to represent a sufficient number of events to conclude that the basic criterion of randomness is not met.

[Avarice 10]

We know the markets aren't random simply because it has been mathematicvally proven.

 

No it hasn't.

 

In fact there are ever more proponents of the efficient-market hypothesis claiming that future price movements are indeed random in nature and that it is impossible to consistently beat the market over a long period of time.

 

On the other hand the fairly new field of behavioural finance claims that irrational behaviours of market participants have an impact on prices -- which would imply that price movements are not random.

 

But up until now none of these theories have been proven to be correct, so keep searching

[fugu_master 10]

If the markets were random, then how do some trading superstars like those in Market Wizards consistently succeed? They surely are not "lucky" given some of their 10+ year trading histories. Or the super secret algos / HFT... they're taking advantage of an edge.

 

"The market is random" feels like a easy excuse why a trader does not make any money - i.e. you blame an external random force.

 

Roulette is random, but the existence of the 00 is all the edge the casino needs to take a random process and turn it into a guaranteed money maker with enough spins.

[cw30000 10]

Market is random. If it is not random, why is there no 100% winning rate system?

[JS999 10]

Trading is a zero-sum game. This is obvious, and proven. It stems from the fact that a trade is a financial bet that you place against another human being, where only one of you can win. We cannot all trade against one another and make money, just like we can't all play poker against one another and win.

 

In a zero-sum game that is truly random, it is statistically impossible for anybody to make money over any reasonably long period of time. It is also impossible for anybody to LOSE money over any period of time.

 

A zero-sum game that had a random outcome would mean that every trade (or bet) that you placed had a 50% chance of making money, or a 50% chance of losing money, no matter what you did. An example of this would be a betting game where you and I rolled a 6-sided die, and if the numbers came up 1,2, or 3 I would pay you $100 and if it came up 4, 5, or 6 you would pay me $100. If we each started with $1 million and played this game for 100 million years in a row, do you know how much money we would have at the end of this time? Correct, approximately $1 million each. There would be periods of time where I won 30 bets in a row and periods of time where you won 30 bets in a row. There would be NO period of time where that die was rolled and I won 33,678 times in a row. That is, for all intents and purposes, statistically impossible. The universe would come to an end before that occurred.

 

It is statistically possible to get lucky and win the lottery. It is statistically possible to get lucky and win the lottery twice. It is NOT possible to get lucky and win the lottery 97 times in a row. That has never happened, and will never happen to anybody, unless they manage to rig the outcome somehow. There is a greater chance of the entire earth being swallowed by a giant pink space-faring toad in the next 5 seconds than there is of anybody randomly winning the lottery 100 times in succession. The universe will END before this occurs.

 

The amount of people that lose money in the markets day after day is so consistent and so overwhelming that it cannot possibly be random. It is not the equivalent of winning 30 bets in a row in that game I talked about earlier, it is the statistical equivalent of winning 10,000 bets in a row. Every new trader that opens up an account blows through that money quickly and consistently. That money has to be going somewhere in a zero-sum game, it is not being destroyed or burned.

 

It cannot be going to the exchanges or the brokerage houses in terms of fees, because otherwise those companies would eventually end up with all of their customer's money. (This would be the case if the market was truly random with nobody making or losing money, but where people were just bleeding money to the exchanges and brokerage houses with every trade.) Since those companies are not making vast quantities of money that equal all of the losses that most people incur, we know that this is not occurring. Therefore, it MUST be going into the accounts of winning traders - that is the only possibility.

 

Take a look at Las Vegas. Are you seriously so stupid that you believe that the casinos are taking money from their customers because they are just LUCKIER than the people who walk in the doors? Of course not. Those games are statistically rigged, and it is impossible for a casino to lose money if they keep their bet size small enough and place enough bets against enough people. Over millions of bets, the chances of a casino losing money in a year because all the shmucks just got "lucky" is just about exactly ZERO. It is not random, it is because they have an edge. You don't have to find a system that wins on 100% of bets to prove that the market is not random, you just have to understand basic Grade 10 statistics and realize that trading is a zero-sum game in which most people are bleeding out money like water.

 

The way that money is being lost in the markets by a vast majority of participants is very similar to what is going on in Las Vegas. The losing traders are the customers, and winning traders are the house. In fact, I would be that it is being lost faster and more consistently in the markets than people are losing when they walk into a casino. This is for all intents and purposes, statistically impossible in a zero-sum game that has a random outcome for each bet.

 

Ergo, the market is not random. Ever notice how the only people who think the market is random are losing traders who want to make themselves feel better about their lack of skill, or mathematicians who have never traded a day in their lives? I don't know how this stupid theory ever lasted more than 30 seconds, but I can assure you, it is definitely not random, has never been random,and never will be random. There is a lot more that I could say about all this and many other things, but after all this is a zero sum game and there is a limit to how much I feel like helping out my opponents. If you want to be silly and believe that it is all random, by all means go ahead - it is only going to help me even more in taking your money.

[Adrian 10]

@Avarice Yes it ha. End of story. My question to you is, why are you here? Why are you commenting on this thread? Clearly you believe markets are random in which case trading is a pointless exercise for you. Therefore, why would you waste your time being here on this site?

 

@fugu Even if the markets were random, there would still be a distribution curve of big winners and big losers in the markets. Mind you the chance of making money every year for 10+ years is so far at one end of the curve as to be an alm,ost statistical improbablility. And this is what the research constantly shows (despite Avarice's ignorance). It shows the markets regularly have moves that go well beyond the normal gaussian distrtibution, allowing trend followers to make money, when statistically they should not be able to.

 

There are countless studies showing the benefits of using momentum to make money. Fascinatating that Avarice can't find any of them, and naively thinks more research is showing the opposite. Clearly he is reading research by people who are already disbelievers and want to prove their point. Simply because a person cannot find non-randomness, does NOT mean markets are random.

 

@cw30000 That is the most absurd statement ever and shows a fundamental misunderstanding of what noon-random means. The markets are full of noise, enabling a good trader to only have a small advantage on balance, and generally prevents them from achieving 100% winners. Take blackjack. In the old days it was possible to make money by card counting, but only a fool would think it meant being able to win 100% of hands. One only needs to win > 50% of the time to create and advantage. Same goes in poker. Professional winning players regularly lose hands simply because of the randomness of the cards. But even though the cards are totally random, they still win due to applying their skill.

 

@JS999 Markets are NOT z zero sum game. In futures is is negative as their are trading costs. In equities, well when the markets go up the vast majority of people win, and when they goes down the vast majority lose when wealth is destoyed. The short positions represent only a tiny fraction of the longs here. So once again, please don't make statements saying something is proven when you clearly don't understand what you are saying. This is much of the problem in the world today. Everyone thinks their opinion is fact, when much of the time is isn't.

[JS999 10]

@JS999 Markets are NOT z zero sum game.

 

The difference between zero sum and negative sum is essentially negligible in the context of what we are talking about. Technically poker is a negative sum game too, when you take into account the fact that the house takes a certain amount out of each pot, known as the "rake". This is EXACTLY the same thing as commissions, and is irrelevant in the context of how much money is flowing between the players in both poker and in trading. So for the purpose of this discussion, you can call it zero sum or slightly negative sum, and it's the same thing.

 

In futures is is negative as their are trading costs.

 

So what? It doesn't change anything that I said. Commissions are a negligible effect, and this proven when you look at how fast people are losing money, and how much of that is going to commissions. Most of it is not, and the brokerage houses themselves are not getting all that rich. For all intents and purposes the difference between zero sum and "slightly negative sum" is ZERO in the context of this discussion because the vast majority of the money flow between accounts has nothing to do with commissions. It is fast, consistent, and obvious, and proves the non-randomness of the market. I could prove this to you in 100 different ways, all expanding on what I said, but I don't have the time or inclination.

 

 

In equities, well when the markets go up the vast majority of people win, and when they goes down the vast majority lose when wealth is destoyed. The short positions represent only a tiny fraction of the longs here.

 

Your comment here is wrong, although I am not surprised that you made it. Most people on this planet think like you do, because they don't really understand what is going on in the equities market, and why it is zero sum. I will spend a bit of time explaining this to you, since it's not something that almost anyone is going to figure out on their own and I don't mind giving away a bit of information here.

 

First of all, equities are also zero sum exactly like every other trading market. The reason that most people don't really understand this, is that they haven't spent enough time thinking about it. You are clearly referring to the "buy and hold" theory of the equity markets, where everyone can make money by holding long positions over a period of decades, and seemingly everyone can money. Since most people are long all of the time, it looks to you as though it is not a zero sum game since almost everyone is winning and losing at the same time.

 

The problem here is that there is really no such thing as "buy and hold". If you buy a stock, hold it for your entire life, and NEVER sell it, then you might as well burn that money in the fireplace. If that stock certificate passes down to your children and they also never sell it, then the value to them is zero as well. You can't walk into a car dealership with a stock certificate of Berkshire Hathaway and purchase a Mercedes, as it is not legal tender. They will tell you that you need to SELL it to get it back to cash first. In other words, you must COMPLETE YOUR TRADE before you can use the money.

 

"Buy and hold" is essentially only half of the equation. There are only "buy, hold for a very very very long time, and then eventually, SELL" investors. SOMEONE has to be on the long side of that trade when you eventually get out at the end of your life, which means that SOMEONE has to be willing to buy that stock from you at a higher price than you paid for it. In the case of long-term investors, that "someone" is the next generation of people. In essence, absolutely everyone in the markets is a trader, and whether you are trading for a holding period of 5 seconds or 50 years makes no difference as you must both open AND close a trade to turn that stock value into legal tender at the end of the line.

 

The reason that it appears that everyone of a given generation can make money by buying and holding for their whole lives, and the reason that the markets go up in the very long run despite the zero sum nature of trading, has to do with global population growth, and money flow. You see, every succeeding generation is taught to keep shoving money into the markets day after day, week after week, month after month, year after year, all on the long side. We do have periods of time where there are outflows, but they are brief and always reverse themselves. The amount of money flowing into mutual funds over time is MASSIVE, and MUST be put to work on the buy side of the market only according to the rules of the game.

 

Because of this, and because the population of the planet keeps increasing and more people keep showing up and shoving money from other places in the economy into the market, it will continue to go up as long as this is the case. As each older generation eventually sells their stocks at the end of their lives to turn their winnings into cash, it works only because there is a new, larger generation putting money in at exactly the same time. This is the ONLY reason that it works, and this mechanism is so large and so prevalent that it dwarfs the fact that people like me are draining money from the markets with profitable trading.

 

Ever notice how commodities markets are harder to trade than equities? You actually have to time your trades properly in those markets, getting in and out at the right times, because there is no long-term upward bias and they are truly zero-sum. They just go up and down all the time, which means that you won't get bailed out in the commodities market by simply buying and holding. Only equities have this long-term money flow, and this is what allows people with essentially no skill to still make money in the long run, if they are willing to hold a diversified position for many decades.

 

Think of the equities market it like a bucket of water. More and more money is constantly flowing into the top of the bucket, and despite the fact that there are some small holes in the bottom of the bucket that drain cash from the container (i.e. profitable traders), there is so much more flowing in at the top all the time that the overall level is still rising. This is how everyone of a given generation can win... until of course, the music stops and that long-term money flow ceases to exist. This can and will happen when the population of the planet becomes stable and ceases to grow. If we do not cease growing naturally, then we will end up in WWIII sooner of later due to resource constraints, which will of course leave us all with much bigger problems than a market which has ceased to go up.

 

This long-term money flow is the reason why (very intelligently) most people are told to buy and hold and to NOT try to trade. When you trade short-term, you lose the advantage of the easy "edge" of knowing that there will be more people on the planet over the next 40 years who will drive the market higher with the long-term movement of new money into the long side. It means that as a short-term trader, you are now competing against people in your own time frame instead of passing the buck on to the next generation, which is why it is harder, because it is truly zero sum in that environment and you must pit your skill directly against that of other traders. Everyone can make money investing as long as population growth continues, but very few can make money trading, because that is where the zero sum nature of trading is exposed.

 

So essentially, this whole buy and hold thing is just an illusion in the end that is disguising the zero sum nature of trading in the equities markets. If and when there is no new, larger generation that comes along and continually shoves successively larger amounts of money into the long side of the market, that is the point that it will all hit the fan for stocks. If you are still alive at that point, you will all of a sudden see the TRUE zero sum nature of the equities market exposed, and the last generation that buys into the buy and hold mentality will not see the overall market rise in their lifetimes as they expect, as they will become the ultimate "losers" and final "bag holders" in this game. That moment is not now (thankfully for most people), but it is coming... we cannot continue to expand indefinitely inside a finite environment like planet earth, so sooner or later this has to stop.

 

To finalize, the truth is that equities are also zero sum like every other market, but the long-term money flow coming into them over decades and centuries is (for now) disguising this fact to almost everybody, because the ultimate losers in the game haven't shown up yet.

 

(Like I said, you can be picky and call the market slightly negative sum if you want, but it's essentially the same thing in this context. I use the term zero sum because it's easier to say, although it is not _technically_ 100% true... but the effects and observations of everything I said are identical for all intents and purposes since most of the money is not being transferred in commissions and fees).

 

So once again, please don't make statements saying something is proven when you clearly don't understand what you are saying. This is much of the problem in the world today. Everyone thinks their opinion is fact, when much of the time is isn't.

 

This statement is somewhat ironic, given the fact that I am right and you are wrong. In any case, I will probably not be responding too much more to this or any other threads, since I haven't learned a single thing about the markets from anybody else in a very long time, and 99.9% of the discussions on this and all other trading message boards are completely useless for me. When I waste time like this, it really ends up with me lecturing people that 2+2 is really 4, and it gets boring pretty fast. It's also against my own interests to educate any of you about anything, since we are in fact all trading against one another. So It's been fun, and if you want to keep thinking that you know what you're talking about and that you are right and I am wrong, then be my guest. This may very well be my last post. Good luck in the markets... that's the place where we argue for REAL.

[Adrian 10]

@JS999 the discussion on whether markets are zero sum is all very interesting but offtopic to this thread so has little relvance.

 

As to your view that equity markets are zero sum, the same futures markets, is simply wrong. End of story. Most people, as you put it think in this manner because well, it is fairly obvious that it is zero sum, whether you are a buy and hold or just a trader. Really is irrelevant the time frame being held. But as I said this is offtopic to the htread and has no relevance here.

 

The topic is are markets random. The question has been asked a millions times around the world. Economists will give you one answer, simply because they do not know how to look at a market. Research by traders shows a completely opposite viewpoint. The answer as to who is right is obvious, because the hedge fund industry are the ones generating the postive returns year after year based on their research that markets are not random.

[MightyMouse 12]

@JS999 the discussion on whether markets are zero sum is all very interesting but offtopic to this thread so has little relvance.

 

As to your view that equity markets are zero sum, the same futures markets, is simply wrong. End of story. Most people, as you put it think in this manner because well, it is fairly obvious that it is zero sum, whether you are a buy and hold or just a trader. Really is irrelevant the time frame being held. But as I said this is offtopic to the htread and has no relevance here.

 

The topic is are markets random. The question has been asked a millions times around the world. Economists will give you one answer, simply because they do not know how to look at a market. Research by traders shows a completely opposite viewpoint. The answer as to who is right is obvious, because the hedge fund industry are the ones generating the postive returns year after year based on their research that markets are not random.

 

It is very difficult to use the hedge fund industry as a yardstick since they do not all trade the same markets or take the same risk. If you did break them down by risk and market, you'd find that, on balance, per dollar risked, they underperformed the markets they traded. And, you'd certainly learn that their positive returns are not quite what they are promoted to be. Such findings do not support your theory of non-randomness and does bring to light the fact that markets are negative sum.

[Adrian 10]

Actually my findings do support the theory (and btw it isn't my theory). Even when we take into consideration the funds that fall by the wayside and out of the track record of th ehedge fund indices. The fact they trade different markets is irrelevant. IF they trade futures markets, how can they be underperforming a zero sum market? And if they trade equities, well, how can they not outperform when you see the S&P basically having gone nowhere in 10 years. Have hedge funds done the same? LOL I do not mean tobe rude, but if someone wants to believe markets are random then good luck to them. My advice is to them is to unsubscribe from this website (why are they even here to start with?) and put all your money in a zero risk, zero interest tbill. It has already been proven statistically that positive hedge fund returns (the ones that actually do some good trading research) are not a fluke. Like begets like in statistical talk. If you truly believed in random markets then here's some more investment advice. Put your money into all those hedge funds that are in drawdowns equal to or greater than any they have seen in the past. See how you go : )

[MightyMouse 12]

Actually my findings do support the theory (and btw it isn't my theory). Even when we take into consideration the funds that fall by the wayside and out of the track record of th ehedge fund indices. The fact they trade different markets is irrelevant. IF they trade futures markets, how can they be underperforming a zero sum market? And if they trade equities, well, how can they not outperform when you see the S&P basically having gone nowhere in 10 years. Have hedge funds done the same? LOL I do not mean tobe rude, but if someone wants to believe markets are random then good luck to them. My advice is to them is to unsubscribe from this website (why are they even here to start with?) and put all your money in a zero risk, zero interest tbill. It has already been proven statistically that positive hedge fund returns (the ones that actually do some good trading research) are not a fluke. Like begets like in statistical talk. If you truly believed in random markets then here's some more investment advice. Put your money into all those hedge funds that are in drawdowns equal to or greater than any they have seen in the past. See how you go : )

 

If you want to data-mine the data to find results that support your hypothesis, then if they trade different markets is irrelevant; however, if you want to comprehensively examine the hedge fund industry, it is relevant and you will find that, on balance, they do not outperform the markets they trade.

 

You seem to be making an assumption that you should not trade if you think that markets are random. I do not agree with your assumption if this is what you are assuming.

[Adrian 10]

@MM I'm not doing any data mining. I'm merely relying on the brilliance of others and their research that I have witnessed over the past 30 years. I'm not interested in 'comprehensively examining the hedge fund industry'? Why on earth would I? And what has it got to do with this thread? I just gave it as an obvious real life example which largely proves that markets are not random. Plot the monthly returns of hedge funds and see for yourself. Don't take my word for it. Plot the volatility. Plot the trends of hedge fund returns versus the market. There are many ways one can prove markets are not random. Its been done before. I'm not an academic or any kind of genius, but I know what I know, based on solid research of others, my own eyes and experience, and facts (factual fact...not opinions). Simply because you read a research report that says markets are random does NOT mean they are random. It merely proves that that person was unable to find non-randomness in the way they tested.

 

I've finished posting guys. It is obvious from everyones posts that they 'need' to believe markets are random, perhaps to justify their own failings, who knows. I responded to the original poster who asked if markets are random or not. I can tell him, with 99.99% confidence that markets are anything but random, and it can be shown in hundreds of different ways. You can either benefit from that knowledge or choose not to.

[MightyMouse 12]

@MM I'm not doing any data mining. I'm merely relying on the brilliance of others and their research that I have witnessed over the past 30 years. I'm not interested in 'comprehensively examining the hedge fund industry'? Why on earth would I? And what has it got to do with this thread? I just gave it as an obvious real life example which largely proves that markets are not random. Plot the monthly returns of hedge funds and see for yourself. Don't take my word for it. Plot the volatility. Plot the trends of hedge fund returns versus the market. There are many ways one can prove markets are not random. Its been done before. I'm not an academic or any kind of genius, but I know what I know, based on solid research of others, my own eyes and experience, and facts (factual fact...not opinions). Simply because you read a research report that says markets are random does NOT mean they are random. It merely proves that that person was unable to find non-randomness in the way they tested.

 

I've finished posting guys. It is obvious from everyones posts that they 'need' to believe markets are random, perhaps to justify their own failings, who knows. I responded to the original poster who asked if markets are random or not. I can tell him, with 99.99% confidence that markets are anything but random, and it can be shown in hundreds of different ways. You can either benefit from that knowledge or choose not to.

 

You are data mining. You may not be aware, but the research you quoting is not solid research. Plotting hedgef und returns are meaningless unless we plot all hedge fund returns and plot their returns across all markets that they trade.

 

What sense does it make to plot all hedge funds who were long gold if we don't plot the hedge funds that were short gold or gold neutral?

[Adrian 10]

??? LOL You just contradicted yourself MM. When did I say we should plot selective hedge fund returns of those who were only long gold? That is the silliest thing I have ever heard, And even more absurd is your attempt to suggest that that was what I was suggesting. Then you go on to effectively agree with me by saying the results are only meaningful if you plot all hedge fund returns. I think you have lost the plot. The only reason I gave the simplistic hedge fund exmaple is to make it easy for readers to relate rather than going into some high level quant discussion which is a bit beyond me anyway. Read Edgar Peters book as a start. It seems though that even dumbing things down isn't enough.

[Tams 20]

Following on from "The Question of Randomness" thread. How do people know the markets aren't random? I'm up for creating some random data to see if someone can show me how they know it's random or not - just for fun... DM

 

the market is a reflection of human activities (buying and selling).

 

if you think people buying and selling based on random decisions,

then the market will be random.

[Adrian 10]

People act in ways that are anything but random. That is why a huge disproportion of daily highs or lows are created on the open. Emotion rules.

[MightyMouse 12]

??? LOL You just contradicted yourself MM. When did I say we should plot selective hedge fund returns of those who were only long gold? That is the silliest thing I have ever heard, And even more absurd is your attempt to suggest that that was what I was suggesting. Then you go on to effectively agree with me by saying the results are only meaningful if you plot all hedge fund returns. I think you have lost the plot. The only reason I gave the simplistic hedge fund exmaple is to make it easy for readers to relate rather than going into some high level quant discussion which is a bit beyond me anyway. Read Edgar Peters book as a start. It seems though that even dumbing things down isn't enough.

 

You are right it is silly. That was the point. If you plot all hedge fund returns you will not come up with the results that you came up with as some sort of support of markets being non random. If you didn't do the research yourself then you are simply passing along misinformation.

 

On balance hedge funds do not out perform markets. Cabese?

[Adrian 10]

@MM I never pass along misinformation as you call it. But happy to let you drift along with flawed knowledge of the facts. It took me 5 seconds to find this URL:

 

Hedge Funds: Higher Returns Or Just High Fees?

 

Outcome? Hedge Fund returns 1994-2009 8.93% vs SP500 6.46%

Volatility? Hedge Funds 8% versus SP500 15.5%.

 

Of course numbers vary widely within that time frame, and individual funds vary even more, but as a whole, over a fair amount of time, the outcome is as expected. Even if we adjust for those funds which dropped out of the index, hedge funds generate a quantum better risk adjusted return. If you wish to continue to to hold your view so your ego and belief system are maintained, feel free to do so. Know though that ultimately only you will be the one to suffer.

[SIUYA 11]

Random question of the day - why is it many people will involve themselves in a discussion - get all heated up and distracted from the original question and yet at the same time not provide a working definition for which the discussion can revolve around.?

 

 

How do I know the markets aren't random?

 

I dont - but I dont care ....either way.

I assume they are not random (as I dont believe that each and every subsequent price point is independent from those that have preceded it. So it is not a casino)

 

All I need to know is how can I profit out of the market fluctuations regardless of whether those fluctuations are random or not.

[Adrian 10]

@SIUYA The answer to your question is because we are human, and humans are fundamentally flawed emotional creatures. Creatures that have egos and belief systems that they feel they need to protect, even if they know they are wrong and have been proven so. Most people's belief systems are wrong in so many different ways, but if you attempt to question them on it they will become defensive or simply run away. I have observed this for decades. I would suggest that less than 1 in a 100 people are capable of questioning their own belief systems, and changing it if they discover they are wrong. Most people think they are open minded, but they aren't. So this is why a topic can so easily head off in a tangent for all the wrong reasons.

 

Actually you should care if the markets are random or not. If they were truly random, no method would ever be able to make money consistently, and you definitely would not have a chance of reliably achieving good risk adjusted returns, which ultimately should be the goal of every trader/investor. It would be like playing routlette with 18 black and 18 red numbers only. There is no mathematical way to make money in such a situation.

 

Since we do thankfully know that markets aren't random, we can say that is is possible to make money over time.

[MightyMouse 12]

@MM I never pass along misinformation as you call it. But happy to let you drift along with flawed knowledge of the facts. It took me 5 seconds to find this URL:

 

Hedge Funds: Higher Returns Or Just High Fees?

 

Outcome? Hedge Fund returns 1994-2009 8.93% vs SP500 6.46%

Volatility? Hedge Funds 8% versus SP500 15.5%.

 

Of course numbers vary widely within that time frame, and individual funds vary even more, but as a whole, over a fair amount of time, the outcome is as expected. Even if we adjust for those funds which dropped out of the index, hedge funds generate a quantum better risk adjusted return. If you wish to continue to to hold your view so your ego and belief system are maintained, feel free to do so. Know though that ultimately only you will be the one to suffer.

 

You are comparing apples to oranges to support your thinking. You need to look at the funds that traded the S&P to compare the hedge fund returns to the S&P. If on balance all hedge funds outperformed the S&P with lower volatility, then you would have something. Otherwise, what you are describing is completely meaningless and is also subject to survival bias.

 

This is taken from your article:

 

"A timely strategy is also critical. The often-cited statistics from CSFB/Tremont Index in regard to hedge fund performance during the 1990s are revealing. From January 1994 to September 2000 - a raging bull market by any definition - the passive S&P 500 Index outperformed every major hedge fund strategy by a whopping 6% in annualized return.

 

Read more: http://www.investopedia.com/articles/03/121003.asp#ixzz1ezgZ5VHU"

Edited November 28, 2011 by MightyMouse

[Adrian 10]

@MM You seem to be trying to pretend to talk high level, but all your comments are contradictory, wrong, and simply confusing and distorting for other readers of this thread. The comments add nothing, and just ceate confusion. You need to gather your thoughts and express yourself more clearly, as your interpreations of what I write are just amazingly bad an erroneous.

 

Of course I am comparing apples to oranges. Hedge funds aren't replicating the S&P500 index. Hedge Funds trade all sorts of things. People invest in them as a diversification away from long equity only investments. And in some cases people invest in them exclusively because of their tight risk controls (in the better managed ones anyway) and their return/risk characteristics. So your completely wrong to say I need to compare hedge funds that only trade the S&P. Our goal is to establish if markets are random or not and can hedge fund mangers out perform our main investment vehicle of long equities. Clearly they do. End of story. Only a fool looking to create an argument would suggest otherwise. Of course you can also do as you suggest and just look at those hedge funds tha tonly trade equities. That would not be a flawed approach bby any means.

 

Then you go on to state that if ALL hedge funds outperformed with lower volatility I would have something LOL. Are you kidding? I'm sure I am misinterpretating your statement as only an idiot would ever expect every hedge fund to outperform on a risk adjusted basis. And if you bothered to read my commentary properly you will se eI made mention of survivorship bias. Why I waste my time replying to these comments from people who pretend to know what they are saying, but clearly don't is beyond me. You know it is not a bad thing to adm it ignorance on something. A person will gain a great deal more respect than someone who pretends to know. In fact the latter type, get zero respect from me.

 

And lastly, you quote a passge from the URL article I gave.. Why did you quote it? I am sure you are trying to prove you are right and I am wrong LOL. If you believe that showing hedge funds underpeformed in a massive equity bull market proves that hedge funds cannot outperform and therefore markets are random, you truly are an insecure fool, desparate for attention to cover up your own poor trading record. When a market, any market, goes into a massive bull trend, then is no strategy (assuming no leverage) that can outperform a buy and hold for the length of the bull trend. These are generally rare events though, that by definition do not last. It is hilariously fascinating that you put the quote in but never commented on it.

 

Backk to you MM. Pelase write a new reply that shows you don't understand what you are saying. Amuse the followers of this thread. SIUYA will be laughing as well, as you attempt to look for every excuse under the sun to prove that the factual research out there is all wrong and you are the only one who is right. LOL secretly though, we both know you agree with what I right, and that markets aren't random, and that enables the better investment managers (whatever their specialist area) to regularly generate excellent risk adjust returns. If you don't believe in this, put your money in a range of funds that have underperformed for at least 5 years, and share with us which ones you chose, as you wil now tell us that these funds should return towards a mean return of zero. Of course even if markets were random, that logic would be wrong as well, as the law of large numbers takes hold. But that is another disscusiion altogether that has no relevance here.

[dangermouseb 10]

Goodness me this thread is going nowhere fast.

 

I'd like to know what thought processes / evidence people use to decide that market's aren't random. I would like to understand their line of reasoning and whay they come to their conclusions.

 

A question of everyone who's stated a "fact" - would you be willing to provide links to the research that supports your fact?

 

At least that way we can all evaluated the "evidence".

 

Examples include "it has been proven...", "it is obvious..", etc.

 

Personally I'm not interested in peoples opinions per se but in the process by which the come to those opinions.