alt Hacker News> if a sufficiently large majority of investors believe the hypothesis, they naturally would assume that new information about a stock would very quickly be reflected in its price. They would conclude that since relevant news almost immediately moves the price up or down, and since new developments can’t be predicted, neither can price increases or decreases
This is an oversimplification of how professional investing works.
The vast majority of the dollar value of markets isn’t governed by immediate profit seeking behaviour - it’s people trying to manage money in the context of a real business. Pension fund money is the largest “pot” in the markets at any one time.
Pensions funds aren’t incentivised to maximise returns in any particular quarter/year. Instead, they’re looking to manage risk and ensure consistent returns in the very long term.
Therefore, the “value” they place on various assets is different to what a trend fund or retail investor is thinking about. The price at which they would buy/sell is different.
The market value might “reflect” that information but it could easily create a situation in which short-term, strictly returns-motivated investors might value an asset much more than pension funds or vice versa. That creates opportunity for both to do a non-zero-sum trade and both “make money”.
I’ve seen it elsewhere in this thread but it’s simply not the case that the “markets are a casino”. The vast dollar value of the market is about sharing risk and providing liquidity.
The global bond market are at least 1.5 times the size of the equities market(s).
yes some markets are basically a casino but they’re tiny in comparison.
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But maximizing long term returns means consistently maximizing short term returns. In fact, the larger the capital the larger risk you can take since you can survive longer streaks of bad luck as long as your bets have positive expected value.
> The vast dollar value of the market is about sharing risk and providing liquidity.
This, very well summarized.
I would nuance (but not disagree with) your comments on pension funds though. The thing is PF do not invest themselves, they usually are, or delegate to, funds of funds, which in turn decide on allocation based on the desired risk profile. It could very well happen that the total allocation is the sum of a multitude of individually short term investments, as long as these are diversified enough. I would concede that in practice that is not really feasible though.
These risks profiles are numerous, diverse, and ultimately idiosyncratic. People often forget or don't know about all these risk constraints, because they work in a fund that is bound to a specific risk mandate.
For instance, depending on how your investment vehicule is structured (the regulatory enveloppe through which you sell your fund, which ultimately determines to who you can sell, how you can advertise, how profits are taxed, etc), you can have liquidity constraints (e.g. clients should be able to redempt daily, weekly, ...) risk parity constraints (e.g. per asset class vol budgets, to be respected daily, weekly, etc), exposure budgets (e.g. country, sector, beta, ...), counterparty risk (e.g. minimum number of managers to allocate to, or clearing houses, or custodians), idiosyncratic risks (e.g. an insurance company will need to be neutral against natural disasters, healthcare exposure, etc), ESG, etc