Do you still think that the market is efficient?

If so, then please read this AP story from last Thursday. Fannie Mae, Freddie Mac, and AIG shsres have been on fire, even though they are worthless? Why? Speculation, momentum investing, hope, stupidity,and any number of other reasons have had a hand in this madness.

Or can you tell me why Motors Liquidation Company (MTLQQ.PK) can trade 51 million shares a day on average? For those of you not in the know, Motors Liquidation Company is the dregs that was left over from GM. It's what the government didn't want. The government took control of the good assets.

If some proponent of the Efficient Market Hypothesis can explain this to me, then please leave me a comment. My guess is that they would claim that the market is only efficient in the very long term. Well, what is the long-term? Wasn't Enron perpetrating a fraud for most of the 1990s? Wasn't Bernie Madoff able to fool investors and the SEC for decades?

Fraud is an extreme case though. No theory can adequately account for it. What about a situation where investors simply ignore the facts. Take for instance, the analyst scandals of the Internet boom era and the recent ratings agencies problems. These two groups have pretty thoroughly been proven to be conflicted, conformist, and inaccurate. Yet billions of dollars is still deployed based upon their recommendations. An analyst upgrade or downgrade can still move a stock or bond. Is this a case of collective insanity or just plain laziness? What would it take for equity analysts and the ratings agencies to hurt their credibility?

What about the SEC? Can an agency with limited funds and jurisdiction really police a Wall Street that is truly global-spanning and has billions if not trillions of dollars invested in technology and political influence?

I think that Michael Lewis and David Einhorn said it best in their New York Times op-ed piece from January of this year. It effectively demonstrates how greed, a base human emotion, often distorts market fundamentals. They also touch upon the agency problems that exist within the ranks of the ratings agencies and the SEC.

It seems to me that the EMH overlooks the humans' capacity to deceive themselves and others.

Waterboarding and the market

There's been a lot written and said about waterboarding recently. The US Senate has been the locus of the discussion. Waterboarding is a torture technique that simulates drowning. It's also what investors and traders do to themselves when they follow the market too closely; they're drowning themselves in information. Living and dying with every tumultuous turn of the market is not only painful, but is less than profitable. I can't tell you how many stupid trades I've made based on bad news that ended up being noise. More information doesn't automatically lead to better decisions. Right now I have position in National Oilwell Varco(NOV) that I've been checking just about daily. I'm expecting it to keep pace with the price of oil. While this isn't a bad thesis, it's one that might not be evident on a day-to-day basis. It's completely counterproductive, worse than watching a pot boil or grass grow. So now I'm going to practice what I preach; I'm only going to check the price of stocks I own once a month. Just in case something happens, I'll set price alerts on my E*Trade account. I think that I'll make better decisions and ultimately make more money.