The Truth About Random Walkers

The Mercenary Trader has some fun factoids about one of the most prominent efficient market theorists, Paul Samuelson.  Mr. Samuelson promoted efficient markets, but never believed it himself.  The tone of the article is highly aggrieved and quite a bit of fun to read.  Here’s a great excerpt to whet your appetite:

As background, we all know the arrogance of the Efficient Market Hypothesis, right? Particularly the high and mighty godfathers of EMH. Eugene Fama is on record as saying “God himself” could not dispute the efficiency of markets.

And of those EMH fathers, few were higher and mightier — or more insanely arrogant — than Paul Samuelson, the founder of neoclassical economics…

So here’s the thing that blew me away.

Right at the same time EMH was gaining real traction… and right at the time Paul Samuelson was proclaiming in favor of absolute randomness for the markets…Samuelson was investing his OWN money with Warren Buffett — and with Commodities Corp.

At the very genesis of EMH gaining a foothold as indisputable academic dogma, the guy pounding the table for that dogma was making big side bets with the great investors and traders of the era!

I mean, talk about chutzpah!

Here is this “I’m too brilliant for you to comprehend” S.O.B. telling the entire world that no one can beat the markets — and thus helping to deeply legitimize academic theories that would later be major contributors to systemic crisis through the foolhardy actions of poorly run institutional funds — and at the very same time, the guy is investing his own money in the private belief that markets can be beat!

It’s like the Pope practicing Islam on the side.


So the high priests of EMH never actually believed their own theory. They just got legions of less bright minions to take EMH as diehard gospel, with the final culmination of arrogance + ignorance being Alan “Bubbles Can’t Be Recognized” Greenspan and Ben “Global Savings Glut” Bernanke.

In other words, “one of the most remarkable errors in the history of economic thought” — per the description of Yale professor Robert J. Shiller — was not just an error but a lie.

It’s always been our contention that a well-executed systematic process designed around a strong return factor—whether relative strength or value—should have a good chance to outperform the market over time.  Unfortunately, Bogleheads, some financial journalists, and even some financial advisors now assert the superiority of passive investing.  I wonder if they have ever looked at Ken French’s data or wondered why Paul Samuelson was not putting his money where his mouth was?

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