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nopie  1yr ago (text post)   1832 thread views

Do you believe in efficient-market hypothesis (EMH)?

During discussion about things where you had strong opinions and then changed your mind, someone mentioned EMH. Do you believe in EMH and if so is it strong or weak version?

I used to believe EMH but not strongly. The pandemic changed my view because I managed to invest some money when the stock market dived and was clearly influenced by overly pessimistic view of the impact of covid. Some might argue that the market reacted to the irrational government measures, so it is not that the case that the market was mistaken. I still think that investors were equally irrationally pessimistic. I reject the view that this is a hindsight and I was merely lucky. I am not big expert and I did not possess any proprietary information. I had the same information as everybody else, I just didn't let my emotions take over me. This is further confirmed that even today when all the events have passed exactly as predicted, majority of people still maintain their mistaken views that covid was very dangerous to young and non-risk population.

It is the only time when I saw the rest of the society to be so wrong in their views and clearly this was my once-a-lifetime chance. I haven't see any other opportunities for easy money so far but I think that people who are experts in their fields and investors might have been able to find more opportunities.

One of them was found by Michael Burry who definitely saw that the 2008 financial crisis was coming. He wasn't just lucky because he had read and analysed all the documents and had to create special investment instruments to profit for it. In this way, it wasn't easily accessible by laypersons like me who have no time or understanding about investment. Again, most professionals were blinded by collective frenzy.

What is your opinion about EMH?

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As far as I can tell the semi-strong EMH (the only one worth using) says that insofar as markets are zero sum games, they have no winning strategy for average players. This is the type of insight only an economist could consider insightful. You can sometimes "beat" the market when

  1. You're playing a different game - for example certain risk profiles are much more valuable to you relative to others.

  2. You have privately acquired information (either by circumstance or hard work)

  3. You're lucky

The market does sometimes generate what seem like blunderous mis-valuations, but they're hard to mine in advance.

This is the type of insight only an economist could consider insightful.

I hesitate to call something obvious when so many people don't believe it at all.

Fair point. My hot take is that, of the spectrum of things called the EMH, the correct variations are obvious and the non-obvious variations are incorrect. I'm very happy to be educated to the contrary, however.

A lot of people seem to think they can regularly beat the market with skill. Yes, plenty of "regular" people (although only some of them are stupid, others are probably scientists or engineers who are overconfident in their abilities). But it seems like lots of experienced finance professionals are convinced of their own ability to beat the market, even when the evidence shows most of them are over-indexing on luck or are just plain wrong. Some of this is surely marketing by people who know they're full of shit, but I suspect there is a lot of genuine belief because no one wants to accept their job is adding minimal value and they've put tremendous time into studying something but aren't any good at it.

Maybe these people all believe in the EMH for other people and think that they're special, but I would still call that "not really believing in EMH."

I believe in it insofar as the information driving the market is factual. It’s not omniscient, but would run on whatever information is available to people at the time. And the media, especially in the USA isn’t that good; it’s prone to sensationalism, narrative manipulation, and hysteria. I don’t think that means EMH is false everywhere, or even completely false in America (once the media narrative has been accounted for).

The strong version of EMH says that nothing, even insider trading, could generate excess returns. That's obviously, trivially false.

The weak version of EMH just says that technical analysis can't generate excess returns. The existence of successful TA-based hedge funds goes against this pretty overwhelmingly.

However, the existence of a debate at all can imply a sort of weak-weak EMH, which means that markets are fairly efficient, and that beating them is no small feat. It'll require a lot of investigative legwork, above-average intelligence, or both.

What are some successful TA-based hedge funds? I was under the impression that successful trading generally requires features other than price, so this would be a significant update for me.

Quant funds like DE Shaw fit the bill. Quant isn't a perfect analog, but their algorithmic trading definitely isn't fundamental analysis from what I can gather.

Ah okay. I agree that those firms make money but I don’t think I would call what they do technical analysis. In my mind, technical analysis is stuff like drawing lines on charts and squinting until you see patterns that aren’t there. Trading firms run a lot of different strategies but my understanding is that it’s more about anticipating various flows and the state of the order book than purely looking at price charts.

The weak form of the EMH specifically says that you can’t predict future prices based on past price data. I don’t think the existence of DE Shaw contradicts this.

I'm almost certain that funds like DE Shaw use stuff like SMA, EMA, Bollinger Bands, and other TA indicators in their purchasing decisions.

more about anticipating various flows and the state of the order book

Unless they're front-running, I don't see how they'd do stuff like this without using the order book's recent history... and the order book is just a more in-depth explanation of price, so most people would call it a form of technical analysis. Really, any form of extremely short-term trading is almost certainly going to be using TA a lot. What else would they use? FA stuff doesn't work well for intraday trading.

The fact that they use sma and ema does not mean that it is what makes them earn money. If I use both astrology and science for agriculture, I will make money (astrology is useless, thus it is harmless) but it won't prove anything about astrology.

And what he is saying is that there are strictly more informations in the order book than in the price.

This has the garden gnomes problem of "ok, so what ARE they using?"

Let's arbitrarily assume that TA indicators are either not used in their trading strategies at all, or are simply used to confirm preconceptions of better indicators. I doubt this is really the case, but I'll entertain the notion for the sake of the argument.

In that case, what are the better indicators they're using? To use your example, what's the "science" here? They have to be using some other indicators that enables long-run success of short-term intraday traders. Whatever those indicators are, they're still going to prove the weak version of EMH incorrect.

What if they developped their own indicators? Would it count as special knowledge or as proving EMH incorrect? Genuinely asking

If their indicators are performing well over long periods of time, and are primarily based on price data (past and/or present) to predict future movements, then that would prove the weak form of EMH to be incorrect.

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There's definitely some nonsense in TA, but bundling only the bits you don't like and discarding it as "technical analysis" while leaving in the other stuff as "quantitative analysis" seems like cherrypicking. In any case, no matter what you call their strategy, some firms and individuals have long-run success in intraday trading which is a pretty clear indication that even the weak version of EMH doesn't always hold.

May it be that intraday trayding is profitable because the market is overall bullish? Are they still profitable in a bear market? Or do you have any kind of proof that they are beating the market? To reuse this comparison, in a bull market you can trade with astrology and still make money. Still genuinely asking, I'm seriously interested to know.

I'm not sure of the exact performance of any particular fund or investing house, but the general consensus I've seen is that hedge funds, especially short term ones, typically beat benchmarks during sideways or downward markets, but underperform benchmarks during upswings.

At this point I have a bookmark of 2013 piece by Noah Smith who I think nailed it when it comes to explanation of what EMH is and why it holds. There must be something scissor-like in EMH, be its bad naming, the fact that everybody has some intuitions about economy, that it is popular to shit on Economics as a pseudoscience or that it attracts obnoxious lefties who for sure see red when they read Efficient and Markets in the same sentence. Anyways, even a lot of smart people have dumb take on it, especially around coronavirus like Eliezer Yudkowsky or they just think it means that there is no profit to be made like recently in this interview with Connor Leahy.

EMH is not about free market economy delivering Pareto efficient outcomes. It does not mean that nobody can have any novel profitable idea. It does not mean that there are no crashes ever. Also please give the authors some credit, these counterarguments are so basic that they should immediately signal that your idea is flawed. Of course authors of EMH knew that market crashes happen and they also knew that there are businessmen out there who have new profitable idea, even one-man startups. Give them some credit.

To me EMH and its constant bashing rings similar to how every now and then somebody - smart or stupid - comes up with this incredible way of how to beat a casino. Now of course you know that this somebody now reinvented Martingale Strategy of doubling the bet when losing. Now have fun convincing them that they are not the first one to come up with the idea, and that they should maybe put more work in thinking about it - before betting their house on it.

I see in this way. Yudkowsky and markets were right that we shouldn't have trashed economy over covid. That the governments of many countries did it anyway just shows unpredictable human nature. The experts who had actual expertise in dealing with pandemics in different settings were clearly against such widespread restrictions. At some point they were sidestepped and the panicking “the-sky-is-falling” guys took over and the rest is history. The winners were those who kept cool. Even after the crash the markets recovered nicely.

My thought is not about how one can become rich by playing market but what is the added value from market players. I understand that it indirectly helps to allocate capital to more efficient industries. If market collectively goes into the wrong direction, we need contrarians who can see it clearly and help to make necessary corrections.

The EMH just says that there are enough such contrarians already, so you don't have to worry. Which to me sounds very strange. It is like saying that no one should bother inventing a new drug because there are already many pharma companies doing that and their success rate is very low.

For me the usefulness of EMH is to curtail your hubris. At the very basic level - if you know nothing about let's say deodorant market, you probably should not feel the superiority of your insight after you read a news article about how the whole market is going to crash in a month. Or to word it alternatively, from all possible decisions you can make in large variety of areas and over long period, if you follow the market then you will be "right" much more often than you are going to be wrong.

EMH is information processing claim. As an analogy, imagine that you have a gas in some chamber and you will select one molecule of gas and then measure it's energy. If you know the temperature of the gas (an equivalent of market price) then you can make an informed bet about it. You will be sometimes wrong but it will be hell of a lot better performance compared to random number, or number based on "gut" feeling. Now maybe you can expend a lot of resources to get more information about the gas, about the chamber and so on - but the the downside is that it will only work temporarily as your information (e.g. more precise gas temperature measurement etc.) will be incorporated into the future.

I like that analogy with the gas chamber quite a bit.

Comparison with gas in a chamber is really strange. Avogadro number (the number of molecules in 1 mole) is 6×10^23 and that amount of gas will occupy about 22 Liters. The number of humans is no more than 10^10. We definitely cannot use gas example to provide intuitive understanding about markets.

Renn tech existing is probably the best argument against EPH. Renn Tech being closed to non employees suggests that the opportunity is pretty small.

Don’t forget that there’s a whole industry of firms like Rentech that trade with their own money and get consistently good results, albeit usually not as good as medallion. Sometimes people even start new ones :)

My impression from having worked at one of these firms long ago is that the famous, highly liquid markets (e.g. US equities) are indeed very competitive and efficient. If the price moves out of line you will need some serious advantages in modeling or microstructure to be the one to profit off of it. Probably the right thing to say is that the EMH is “almost true.”

What I mean by this:

  1. Markets aren’t magically efficient; they’re the sum of lots of people thinking really hard about the world and making bets. These people aren’t omniscient, but they don’t have to be to make money (the traders I worked with got stuff analogous to OP's COVID examples wrong sometimes but their trading was still profitable on the whole).

  2. If you are some combination of smart and well resourced, you can be one of these people (in a +EV way).

  3. (2) is pretty hard but not impossibly so, as demonstrated by the fact that lots of people manage to do it

  4. There are some markets where this is easier than others for various reasons like less competition

Should you yolo your life savings in the next time there’s an event like COVID where you think the market is wrong? Probably not, unless you’re extremely confident and also think you’re very well calibrated on that confidence. But on the other hand, I think it is not always right for all people to say “oh well, EMH” and use that as an excuse to never bet on anything. Maybe (not investment advice) think about how confident you are and then bet some fraction of Kelly.

Then again, if your goal is to get rich probably a better thing to do than trying to beat very competitive markets is to take advantage of (4) and build a business that takes advantage of some market that is not so efficient (generalizing this to include stuff that doesn’t look like a stock market at all).

Should you yolo your life savings in the next time there’s an event like COVID where you think the market is wrong?

It is impossible to tell. The next time when we get a pandemic, it will not be the same as COVID. We don't know if it will be the case when people get overreact or the case when the risk ir real and measures like lockdowns and travel restrictions are effective and need to be implemented. We don't even know whether markets will be so wrong then.

But the idea is that everybody knows something that other people don't. Sometimes it gives you opportunity to make better bets on the stock market. Should you use this opportunity? EMH says that we shouldn't because the current price already includes the publicly available information that you have but other people don't.

Yeah I’m saying that you shouldn’t do this because it’s terrible risk management and probably bad in expectation. Are there worlds where the bet pays off handsomely? Sure, but you probably won’t end up in one of those worlds.

No, the overreaction to the pandemic was a terrible risk management, instead of understanding it and acting contrary to the government's recommendations during this time. The same probably applies to the activities in the market during times when you clearly see the world being collectively afflicted by wrong decisions.

I don't need the EMH to avoid doing things that are clearly reckless and most likely leading to ruin. But apparently many people need something that is softer on their ego. Instead of saying to them – don't overestimate your ideas, you probably know less whether the potential investment opportunities are good deals or not – we have to tell them soft lies about the EMH. It is like saying that you are a genius instead of an idiot but other investors are geniuses too and they have already cornered the market so you have very little chance to be the first. :)

When I learned that US embassy workers were having unexplained brain damage, many people ascribed that to “sonic weapons” from unknown attackers. The most likely explanation however was that it is probably coincidence and more likely it was mass psychogenic illness. This Havana syndrome is still unresolved but if there was a way to bet on this, the correct way would be to bet against sonic weapons.

Now, if the governments in many countries would wrongly become convinced that it was sonic weapon, it would seem that you lose the bet. But eventually the truth comes out and the bet against sonic weapons has much higher chance to be right.

Covid was something similar to this. When due to human nature collectively we have markets going into wrong direction, you may or may not be able to profit from it but in any case you need to take stance and try to correct the delusion that is harming all of us. If you can it directly by placing winning bets, that's preferrable because it might help other people to realize sooner that their thinking is faulty. Granted such cases are rare, or non-existent for most people.

I assumed that the "unexplained brain damage" was caused, not by "weapons", but by surveillance devices. Enemy countries tend not to be concerned about health when they need to do some spying and the process has them sending out radio waves at windows, or reflectors, or hidden bugs.

And the government probably isn't going to publicize it if they discover it, either.

I don't think that the government knows what caused the brain damage. Was it even “caused” apart from natural progression of certain disorders?

Here is very important thing – people hate uncertainty. That's why they are more likely to believe far-fetched theory about sonic weapons than reject this theory and be left with no explanation.

Well, I had read Krugman's “End This Depression Now” explaining why stimulus in certain conditions is needed. I read the book because I was going through personally depressive period in my life but the book had some insights anyway. Krugman was proven right with sufficient evidence that I was surprised that so many experts still disagreed with him and demanded austerity policies instead. Nevertheless, even the staunchest critics have to admit that stimulus worked better during economic contraction, so it was no-brainer that the governments faced with economic contraction during covid pandemic would try to use stimulus too. I didn't believe that it will be very effective because unlike normal conditions people were prevented from spending money. The government had little choice though because they had to make sure that people who were forced out of work by their policies can still pay rent, buy food etc.

Incidentally, the lack of spending opportunities also gave me chance to invest some money. I expected that other people would do the same and it seems that eventually they did. But when I saw stock market taking a dive, it made no sense. I didn't expect to make a quick profit, I thought that recovery would take longer time. I believed that eventually everybody would get covid and then all the restrictions will be shown useless. Even the most totalitarian governments would have to admit that their policies are futile. Once restrictions are gone, people would quickly restart economic activities and stock market would rise.

Scott wrote that the stock market dive actually happened due to automatic selling. Many funds set automatic scripts to sell when the price reaches certain low threshold to prevent from further losses. Selling moved the price even lower with more and more funds initiating automatic selling.

You are missing the main reason why the stimulus was too much this time. It was simply because the government acted in contradictory ways and prevented people spending money. The fact that different restrictions continued after most elderly had received vaccine was the biggest unforced error.

I am not sure I believe that. The reason of the crash and everything that followed was solely due to the government's mistaken actions. I don't know specifically about the US, but the life in 2021 was far from normal and it was also solely due to the government's mistaken actions. It would be strange if it had no deleterious effect on the economy.

The government was trying to whitewash the negative effects on people.

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EMH is very close to true almost all of the time. How often do you think opportunities like the one you identified with COVID come about? How confident do you think it was reasonable to be that you would come out ahead? 80%? 95%? 99.5%? It's possible to come out ahead, just like it's possible to beat Stockfish in chess (AlphaZero did so) but you should generally believe that if you think you have identified, on your own, a better move, that you are wrong. Is it literally impossible? No, but it's not likely. Don't forget, the EMH refers to risk-adjusted returns: You can beat the stock market if you're willing to accept high risk. The only way to get a good grasp on what your risk actually is, would be to make more bets. Without knowing exactly what bets you made or when, I can barely even speculate on specifics, but I think you should seriously consider the possibility there were substantial risks you didn't consider and got somewhat lucky on.

Michael Burry is actually a good example--he faced ruinous amounts of risk and almost lost everything.

On the other hand, if you think that this was a once-per-generation opportunity, and wouldn't regularly make such bets, then that sounds like an agreement that EMH is true at least most of the time (or at least that identifying such opportunities is very hard, which amounts to the same thing).

One of them was found by Michael Burry who definitely saw that the 2008 financial crisis was coming. He wasn't just lucky because he had read and analysed all the documents and had to create special investment instruments to profit for it. In this way, it wasn't easily accessible by laypersons like me who have no time or understanding about investment. Again, most professionals were blinded by collective frenzy.

He took a lot of risk to make so much money even with his 'insider' information. He came close to losing everything ,so his bet was not as surefire as the hype would make it seem. Taking a lot of risk for a large return is consistent with an efficient framework.

Isn't the point of markets to help to allocate capital by transferring risk?

It's part of the risk.

The point is that he was right that things are going to get ugly and was not just lucky. Whether he succeeded to make money on that or not, is immaterial.

The whole discussion I started is also not about how one can become rich. It is about the maximum benefit for the society. I believe stock market is very beneficial for all of us but sometimes it fails and we should make a system that reduces failures.

I managed to invest some money when the stock market dived and was clearly influenced by overly pessimistic view of the impact of covid.

Great. Now do it 100 more times over the course of your life without blowing up and losing everything on a bad bet.

More seriously, you should never forget that YOU (and anyone else) IS the market. By making your bet just so, you inserted into the market your prediction that the Covid economy would rebound (or what-have-you), thus helping the market update it's information slightly in the 'correct' direction, and you were rewarded quite well for it.

So what EMH is saying isn't that there's literally no way you can beat the market. There are times when you may actually have special insights or particular information that hasn't disseminated to the larger population and by trading on this info you are helping make the market more efficient, and getting to profit for it. This is the process that actually makes the markets, in aggregate, more efficient than any one person would be alone.

So in my view, the only real key to 'winning' against markets is being aware of when you're actually a first mover who has information that has not been 'priced in,' vs when you're just reacting as part of the crowd to information that the market already reflects.

For example, back in Bitcoin's early days I made some highly profitable trades on Coinbase because very few people even knew what Bitcoin was, and one of the easiest things to predict is "as more people become aware of Bitcoin, demand will increase and thus the price will increase." So it was easy for me to see events that would raise Bitcoin's profile and expect to see the price go up in response.

Easy-Peasy when the information asymetry is THAT large. But that's way less possible now that Bitcoin is well known across the board.

That precisely is my understanding too. But why not play the market with the same attitude in every case? I saw a big issue of market going into the wrong direction without being an expert in this because it was so obvious. But many people are experts and they know about about multiple smaller cases where it makes sense to invest with smaller but sufficiently good returns. The fact that they help to correct the market and bring it back to equilibrium just means that you need to be an expert. Why make a theory that basically says – if you are not an expert, don't pay in the market and simply invest in index funds?

Just a thought: maybe investing has attracted too many non-experts that it becomes like a mass delusion that they all believe that they know how to beat a market and we need some warning for those people?

There are times when you may actually have special insights or particular information that hasn't disseminated to the larger population

Even trickier: your special insights have to overcome any countervailing information you lack.

For the first stock I picked, I was a customer who saw the high quality of an otherwise-flailing company's upcoming product, I beat the market there, and I saw my investment quadruple.

For the second, I was a customer who saw the high quality of another company's product ... but I didn't see the high cost that was delivering that product at a loss. In the end I just felt lucky that someone more competent at cost-reduction bought them out of bankruptcy, so I only lost my investment rather than the product I liked. Also I picked these stocks in parallel rather than serial, which was a valuable lesson in diversification and eventually pushed my IRAs etc. towards index funds rather than more yuppie-lotto-tickets.

The point is that I wasn't a savvy investor for that first stock, either, I was a lucky one. I had the same information and the same ignorance in both cases, it just turned out that the ignorance only bit me once. If it hadn't, I might have come away thinking I was savvy...

Right, but somebody out there presumably had the missing info you lacked and may have traded on it, which would have nudged the price towards a 'sane' level.

And indeed, I'd guess that opening up a position on it does incentivize you to start seeking out information about the company so as to better understand your risks.

Obviously everyone's somewhat exposed to the black-swan type risks, where no matter how much info you possess you still get sideswiped because of something that wasn't really even part of the calculus.

Also I picked these stocks in parallel rather than serial, which was a valuable lesson in diversification and eventually pushed my IRAs etc. towards index funds rather than more yuppie-lotto-tickets.

Yeah, in a sense these are the 'free rider' options, you're not really contributing information to the market, you're just placing a broad bet that everyone else will keep the market updated and operational since you're just holding for the long term.

So what EMH is saying isn't that there's literally no way you can beat the market.

Right. the EMH allows for some people to do so well that it appears as skill. The normal distribution of returns means some will have a lot of wins and appear skilled.

I think it's a fantastic rule of thumb but it's not like a fundamental law of the universe or anything.

My friend, who should know, says:

So I would say that most people think about the efficient markets hypothesis as saying an investments return should mostly be static or that it should be not possible to beat returns consistently. The textbook definition is that it reflects all information. People think that this breaks down because of numerous observed behavioural traits that affect the market and generate opportunity in value stocks. But I do not like to think about it this way because I think we should just look at what a market is literally. Are prices reflecting the demand for an item efficiently at this time, relative to substitutes and alternatives? I think it usually does. And because we are dealing with deep uncertainty, I just don't buy that a price deviating significantly from long run expected future earnings is evidence of inefficiency.

I could make this explanation clearer. I just have alot of problems with people ascribing meme stocks etc to inefficiency when the market isn't for some abstract return basket but for real social phenomenon. The question should be about supply and demand for different investments. When everyone wants to invest you will naturally get overpriced bubbles the same way when everyone likes to buy sneakers. But the phrasing of the efficient market hypthesis leads people to believe that because supply and demand for investments fluctuate and people devote capital to inferior substitutes during times of shortage, that they are behaving irrationally. I might have a problem with the formulation of the efficient markets hypothesis maybe.

I think the EMH is basically true under most "normal" conditions. It can be false in cases where the market has failed to "price in" a certain piece of information (as with your pandemic crash example), or in cases where there is some large enough distorting factor which the broader market can't correct - an example of the latter case would be the whole thing with WallStreetBets and GameStop. Not an example is the thing with WallStreetBets and Bed Bath and Beyond (BBBY) -- because they are creating new shares of their meme stock to sell into their expected bankruptcy, the market is able to act on the information it has there to extract money from uninformed HODLers.

with WallStreetBets and Bed Bath and Beyond (BBBY) -- because they are creating new shares of their meme stock to

Maybe. Momentum effects possible exist which may run counter to the EMH. I think if a stock break out with huge volume and tons of hype, like with GME in early 2021, the odds are probably greater than 50/50 of it continuing.

Wouldn't meme stocks be a case of market manipulation, except that it is not done by a one person or a coordinated group of persons but by a more loosely group?

The problem of "normal" conditions is that you cannot define them in advance.

My understanding is that legally, meme stocks are not a type of market manipulation -- you are allowed to own shares "because you like the stock".

But yeah, I think the truth or falsity of the EMH is a figure/ground style of thing. Some people hear "anyone who can predict market mispricings at better than chance levels can make a ton of money" and conclude "and therefore it's not possible in the general case" and others hear "anyone who can predict market mispricings at better than chance levels can make a ton of money" and conclude "and since I see a market mispricing, that means I can make a ton of money".

And the market prices are made out of the assessments of the second kind of person.

Clearly people can be wrong in very correlated ways, even very smart people, even for very long periods of time, even without any 'structural issues'. The sense that 'if I disagree with the market, the market must be right, because math', is often wrong. But big markets eg the stock market do price assets and coordinate economic activity pretty well!

The EMH is like how many physics models will ignore things like air resistance and friction. No one is claiming that air resistance and friction do not exist, but they are sometimes negligible and it's often simpler to get insight into a problem when you disregard these things.

Nobody (as far as I know) claims the EMH is literally true, but it's often close enough to being true that is serves as a useful simplifying assumption when trying to understand markets.

I would say no because EMH assumes actors that are capable of efficiently reacting to market information instantly, when in reality people take time to reach decisions and are prone to errors in logic, for example over- or under-reacting to information.

The EMH would make it impossible to be a successful trader long-term whereas I believe these people do exist even if most day traders fail.

That said, I think the market tends to be more efficient than most individuals, which is why most day traders fail and most money managers don't beat the market long-term. It seems to take a lot of PhDs and a lot of investment to beat the market long-term (e.g. Renaissance Technologies).

The market can approach efficiency by punishing bad investors, but each bad investor distorts the market before he finally runs out of money and disappears. And you never run out of bad investors, so it's constantly distorted, and the distortions can affect other people who aren't the bad investors.

Also, as you noted, responding to government interference isn't market inefficiency.

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