Efficient? You Call That Efficient

That’s what some people think. Because the housing market boomed and then busted, they claim that market efficiency has been disproven. “Economists believe that the market perfectly discounts future cash flows. How was the housing market perfect?” But efficient markets aren’t perfect; they’re just hard to beat.

Careful practitioners know this. They know that the market can get it wrong. But they don’t think that the alternative to “the market got it wrong” is “the government can put it right.” If investors are occasionally idiots, then so are bureaucrats and regulators. Lionizing Robert Shiller or Nouriel Roubini because they got it right the last time is no different than the crowd that worshipped Alan “Maestro” Greenspan before and now wants to throw him under the bus.

No, market efficiency is like democracy: it may be the worst way to price assets, except for every other way. Government fiat doesn’t work—communism showed that. But neither does regulation—Reg Q set the maximum interest rate banks could pay depositors during the ‘60s and ‘70s, and it inspired a host of ways to get around it.

Instability is part every living system. People walk by slowly falling forward and catching themselves. If the markets weren’t long-run efficient, investors couldn’t make money; if the markets weren’t short-run inefficient, advisors couldn’t help them.

Stability and equilibrium may make logical sense, but they don’t characterize living systems. Only dead ones.

Douglas R. Tengdin, CFA
Chief Investment Officer
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By | 2014-09-11T11:37:10+00:00 June 17th, 2011|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. –
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