Haven’t you noticed that everyone that tells you the markets are efficient are not traders, they don’t invest and are not wealthy.

This is not meant to poke fun at anyone in particular, especially based on economic class, but I would like to set the record straight as to why we all have proof that the markets are inefficient. Markets are not random.

While reading market wizards on a train last night, I once again enjoyed the Larry Hite, Ed Seykota and Michael Marcus interviews which inspired me to write this post. Market Wizards are the best books to bring on short trips, doctor office visits and anywhere else you don’t need to concentrate but gain great insight.

Larry Hite Notes (points below from his interview):
*Larry Hite started Mint Investment Management Company in the 1980’s and averaged an annual compounded return of over 30 percent starting in 1981 (data from time of published book in mid-1988). They began with $2 million in 1981 and managed over $800 million in mid 1988, a very large sum for a futures fund in the late 1980’s. The size of the fund didn’t hinder the consistent results either, making it all the more impressive.* – the original Market Wizards book

Academia (and the like) claim that markets are efficient and argue that if a person or firm can develop a winning system on a computer, so could others, and we would all cancel each other out.

So what’s wrong with this logical argument?

• Well, people develop these systems and people will ALWAYS make mistakes.
• Some will alter their system and jump from system to system as each one has a losing period.
• Others will be unable to resist second-guessing the trading signals

People will never change as human psychology always stays the same, therefore, patterns will exist and the markets will never be random.

Can you argue that people change? You can’t! Examples:

• Tulip craze in Holland in 1637: they sold for 5,500 florins and then crashed to 50, a 99 percent loss
• Crash of 1929, stocks such as Air Reduction traded as high as $233 but then fell to $31, a decline of 87%
• Texas Instruments traded as high as $207 in 1961 but dropped below $50, a 77 percent loss.
• Silver shot as high as $50 in 1980 but fell 90 percent to $5
• During the bubble bust of 2000, stocks such as Cisco (CSCO) reached a peak of $82 but fell to $8.12 for a loss of 90%.

You should be getting the point by now: Humans will NEVER change and markets will form patterns and form booms and bust forever! We (the mass majority) don’t learn from the past because we didn’t live in the past so we will always make the same emotional mistakes regardless of the technological advances in trading.

If markets were efficient, no one and I mean NO ONE could sustain consistent returns in the market year after year. Traders such as Hite, Seykota, Marcus and others would have never been able to make returns of 30% or greater for extensive periods of time (20+ years in some cases). If we were trading random markets, a new master trader would prevail each year, leaving the others to random chances for success. It would be a crap shoot and expectancy would be thrown out the window because nothing would be consistent.

Markets will change but people never will!

I now leave you will some additional quotes from Larry Hite:
“What makes this business so fabulous is that while you may not know what will happen tomorrow, you can have a very good idea what will happen over the long run”

“If you never bet your lifestyle, from a trading standpoint, nothing bad will ever happen to you”

“If you know what the worst possible outcome is, it gives you tremendous freedom. The truth is that, while you can’t quantify reward, you can quantify risk”

“You can lose money even on a good bet (trade). If the odds on a bet are 50/50 and the payoff is $2 versus a $1 risk, that is a good bet even if you lose”

“It is incredible how rich you can get by not being perfect”

“Anyone can sit down and devise a perfect system for the past”