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Are Markets Too Efficient?

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I'm terrible at a lot of things. Everyone who has witnessed me try to ski has had a belly full of laughs. There's one thing that I'm typically really good at - finding the inefficiencies of systems. Sometimes I'm able to use them to my gain and other times, I'm just too Lazy to implement the idea.

Since I started Lazy Man and Money, the premise behind it would be that I'd figure out smart places to put my money and with minimal effort, it would grow. After all, it is an information age and it seems much more money is made through thoughts and ideas than physical work. The problem is that I simply can't figure out where these places are.

I've figured out the problem though. It's just that the markets are too efficient now. Let's take the housing market, for example. During my parents' generation (baby boomers) and even through the early 90's it seemed as though it was possible to buy a property and rent it for a profit. While real estate is dropping, I haven't seen such a property in years. Maybe with up-coming foreclosures there's an opportunity there, but you can imagine that there are millions of people having the same idea.

In trying to think of other ways to make money, the stock market comes to mind. However, the market is so efficient that monkeys throwing darts tend to do as well as the professionals. The only money to be made there seems to be by buying and holding securities with as low expenses as possible. It's possible that you can time the market and play longer term trends. I've looked into this through some sector plays, but it's still just an educated hunch.

What does this leave me with? It leaves me looking for new markets. By being an early adopter, I like to get in before the market matures and becomes too efficient. This means that I also face increased risk. The best example of this is Prosper.com, an auction house for loans. I see some inefficiency while the membership is small. However, if everyone was a member, lending and borrowing money, I wouldn't be able to take advantage of these inefficiencies.

Have you found any market inefficiencies? If so, how did they work out for you? Do the inefficiencies still exist?

Last updated on December 3, 2006.

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4 Responses to “Are Markets Too Efficient?”

  1. The stock market is only as efficient as the news releases and stock analysts that cover the individual stock. That just means to look into small cap stocks with little or no coverage with low institutional ownership. The king of this kind of investing is Peter Lynch. Check out his book: “One Up on Wall Street”.


  2. I should definitely read more of the investment gurus and Lynch would be amongst them. That said, I don’t feel that I can fully diversify myself in the small cap area.

    I’m reminded of a friend who’d bet on the Internet on small college basketball games. He knew a ton about these teams and did quite well. I think the reason is that he found a less efficient market. There were relatively few people who were experts and could gain a small advantage with his expertise. Multiple that out and he was able to beat the house – at least in the short term. I think he realized that it would be too much work and risk to continue long term, but it definitely has a similar feel.

    So the answer could very well be, is find a niche market and be an expert in it.

  3. Steve says:

    I’m not sure I agree that Prosper is inefficient.

    You may get higher returns, but there is a greater risk associated with them.

  4. I didn’t mean to say Prosper is inefficient, just that it’s not as mature as some markets that have been around longer and have reached a critical mass.

    I realize there are greater risks associated with the returns, but I feel that the returns are still greater than the risks. How does one quantify such things? There are infinite statistics that could show be argued either way. At the interest rates that I’m getting 22+%, I figure that as long as 80% of people pay me I’ll be breaking even. Obviously breaking even isn’t very good, but I’ve been doing better than 80%.

    I don’t think I’ll truly know how well I’ll be doing for at least a year. It is complicated by the fact that I add more money as I go. Using Prosper’s general statistics, it seems like 86% of their loans are current (going from company inception through July) and 90% of their E grade loans are current. Doing a little math (9 * ($50 x 1.22))/10), it looks like it’s about a 10% gain. Maybe you are right Steve, but I don’t think 10% is that bad either.

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