Question

A free market professor (someone who believes totally in free markets) says in an argument that the market may not be short-term efficient, but it is long-term efficient. What would you say to counter that argument I.e. if the market is short-term inefficient then it is long-term inefficient.

Answer 1

SOLUTION

THE MARKET IS SHORT-TERM INEFFECIENT THEN IT IS LONG TERM -INEFFECIENT

Most of the inefficiencies In the market In the short term are computerized by the trading algorithms and this area is highly competitive. All the markets can go both to the long ad short with restrictions, and have the ability to harness significant leverage to their capital to take advantage of discrepancies. In the short term, the market is much more likely to e efficient and the commission per trade return is higher making it more difficult to make a profit. Is where the statistics that 95%-97% of short term traders comes In , because making a gross profit is not sufficient. You have to overcome the trade commissions as well.

At the long term time frame we start bringing In the Titanic's of the world: large mutual funds, and log term hedge funds, pension funds. at the fundamental level, these funds have the greatest leeway to make decisions whether they use quantitate or qualitative research. this makes the fundamental game very competitive ad also more difficult to make profit.

However the technical level, the possibilities are for more promising.Most of these agents cannot go short, and even if they do less it is often for less money and on the largest stokes.They often have significant constraints on position sizing and also on sector composition. Furthermore they are significantly restricted from market training and dynamic asset allocation in the conventional sense whether by regulations, or investment mandate.

The percentage of funds that are permitted to perform these sorts of activities is very small , and they still have much flexibility in making major bets. Thus in macro sense ,the market is very likely to be inefficient. This is why relative strength strategies are also successful across asset classes or market stocks.