This is a very good lecture by John Burbank of Passport Capital. I particularly like his explanation of prices:
“Price is all the information that exists in the market…it’s just what people think….price means nothing other than the equilibrium of liquidity…It doesn’t mean it’s good or bad, it’s just where people agree.”
That’s really clean thinking. And it’s very different from something like the efficient market hypothesis which says that all available information is reflected in prices. EMH implies that prices are “right” and that future prices are therefore difficult to predict. Burbank is saying something very different. He’s saying that prices just reflect available information and that that agreed upon price could actually be wrong. This means the collective prices of the world could actually be comprised of irrational agreements.
Now, none of this means the market is easy to predict. In fact, a market made up of totally irrational participants could be more difficult to decipher than a market made up of perfectly rational participants. But the point is, there’s a real danger in believing that “the market” is always “right” because that could lead one to believe any discretionary intervention in the market is irrational. This has huge ramifications for understanding asset allocation as well as public policy. And it’s why I believe the EMH is one of the more dangerous and misleading simplifications in economics and finance.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.