The Orange Path

Learning to Love Insider Trading - WSJ.com

Here's a hot tip: Want to keep companies honest, make the markets work more efficiently and encourage investors to diversify? Let insiders buy and sell, argues Donald J. Boudreaux.

via online.wsj.com

Three cheers for short-sellers

Felix Salmon, Reuters, Aug 7th 2009

Is there any downside to short-selling? Not really: the authors say that “there is no evidence that short selling exacerbates a downward price spiral when the misconduct is publicly revealed”.

Yes, the market is efficient

Chris Dillow, Stumbling and Mumbling, August 6th 2009

Figures from Trustnet show that, over the last five years, only a minority of unit trusts in the UK all companies sector (91 of 254) have out-performed an index-tracker fund.
This means that the key prediction of the EMH is correct - it is incredibly hard to beat the market.

John Authers: Why sitting tight is sometimes right

Financial Times, Feb 15th 2008

Further, there are good arguments based on “churning”. It costs money every time you make a trade. That eats away at your investment. Leaving things as is can be very cheap. So a bias towards inactivity makes economic sense.

Behavioural finance provides a more profound reason. Humans suffer from an activity bias. Inactivity embarrasses us. When there are problems, our instinct is not just to stand there but to do something.

Efficient markets: paradox or red herring?

Chris Dillow, Stumbling and Mumbling, Jan 5th 2009

Equity hedge funds have done poorly and the majority of UK all companies unit trusts have under-performed tracker funds in the last five years. This suggests that it’s much harder to spot mispricings than claimed.

Insider Trading

Library of Economics and Liberty, David Henderson, November18, 2008

The news that the feds are charging Mark Cuban with "insider trading" raises an interesting issue: what's wrong with insider trading?

Stocks & coins

Index Fund Advisors:

In                       a study by Walter Good and Roy Hermansen, 300 college students'                       guesses of the outcome of ten coin tosses were simulated. The                       performances of 300 mutual fund managers were tabulated for                       ten years (1987-1996) from the Morningstar Principia database.                       The number of years that they were rated in the top fifty percent                       of fund managers were then counted and compared to the simulated                       ability of college students to correctly guess the outcome of                       the flip of a coin. The nearly identical results are shown below.

The Welfare of American Investors

Henry Manne, Wall Street Journal, June 13 2006 (pdf)

The new approach would suggest that it is undesirable to have laws discouraging stock trading by anyone who has any knowledge relevant to the valuation of a security. Thus, assembly-line workers, administrative assistants, office boys, accountants, lawyers, salespeople, competitors, financial analysts and, of course, corporate executives (government officials are another story) should all be encouraged to buy or sell stocks based on any new information they might have.

Open secrets

Malcolm Gladwell, The New Yorker, Jan 8th 2007

Osama bin Laden’s whereabouts are a puzzle. We can’t find him because we don’t have enough information. The key to the puzzle will probably come from someone close to bin Laden, and until we can find that source bin Laden will remain at large.

The problem of what would happen in Iraq after the toppling of Saddam Hussein was, by contrast, a mystery. It wasn’t a question that had a simple, factual answer. Mysteries require judgments and the assessment of uncertainty, and the hard part is not that we have too little information but that we have too much. The C.I.A. had a position on what a post-invasion Iraq would look like, and so did the Pentagon and the State Department and Colin Powell and Dick Cheney and any number of political scientists and journalists and think-tank fellows

Can You Beat the Market? It's a $100 Billion Question

Mark Hulbert, New York Times, March 9 2008

"INVESTORS collectively spend around $100 billion a year trying to beat the stock market. That’s the finding of a rigorous effort to measure the total costs of Americans’ efforts to surpass the returns they would have received by simply holding a stock index fund. The huge price tag helps explain why beating a buy-and-hold strategy is so difficult."