In this email I explain why i bash EMH, or the efficient market hypothesis, and give some advice.

You dont have to agree, but I owed it to you since I degrade it so often. Economics is foremost a social science. Compared to the hard sciences, economics is in an infantile stage, or early dialectic. The modern view of economics was developed by adam smith in his "wealth of nations" in 1776. His concept of invisible hand is the crux of the book, as well as modern capitalism and economics. The theory of the invisible hand is a generalization that people pursuing their self interest creates a perfect resource allocation, or equilibrium. Future economists with "physics envy" followed up on equilibrium and created pseudo-scientific models. The axiom of rational expectations says that a persons expectations are equal to true statistical expected value. As to say, when a girl goes shopping, her purchase corresponds exactly to statistical expected value. Furthermore, statistical expected value in itself is illusory, as it is the random variable we would expect over an infinite sample divided by the

average. How often is there an infinite sample size? I will admit, post-modern and econometrics have created some complex models; but as the saying goes, garbage in-garbage out. Another reason economics is psedo-science is that it is modeled after Newtonian physics, which is erroneous. Newton was observing physical matter with no thought process. As soros has recognized with his reflexivity theory, humans have a feedback loop between causation and cognition, which cause boom bust cycles(aka far from equilibrium). It is no coincidence that economic models dont predict the future; which is clear when even alan greenspan says no one could have predicted the housing collapse. Modern financial theory drew from economics in the 1960s. Its paradigm has been the EMH. EMH is the view that the market is always correct either through all public past, public current, or all information. That it predicts the future in an infallible manner. But this is a paradox. The mechanism for creating an accurate price of a security comes from market participants searching for positive npv. If everyone believed in the EMH, then fundamentals would be

abandoned, causing the security to be mispriced. CAPM is said the discount rate used in the EMH paradigm. It states that a more risky security should have a higher discount rate. That is a rational statement, but its methodology is not. Below is the formula. Expected return = risk free rate + beta x (market premium risk free rate) Beta is essentially the volatility contrasted to the market. Meaning we are defining the risk of a stock by its price movement. This is retarted. Let me provide two examples. 1. A recently public tech company has came out with one service that is not yet monetized. Mangement claims it will be no problem and that they have many great ideas in the pipelinepeople are excited. Say they IPOd at $20 and given the economic cycle of many other industries that constitute the market risk, its relative volatility has been equivalent to the market, providing a beta of 1. This means that for a non-monetized business, in an industry prone to creative destruction, it has the same riskiness as the overall market(You could use the NASDAQ).

2. There is a bluechip in the food production industry that has had a large selloff due to a housing and financial sector bubble. Many of its shareholders are older and have been using the dvd reinvestment plan for years. Due to the income-needs to finance retirement, many sell. This creates a greater volatility relative to the market. Essentially what is happening is that a business thats been around for years and is going nowhere has a stock that is a good value, but CAPM says its expensive. In 2004, the creators of CAPM stated that the failure of the CAPM in empirical tests that most applications of the model are invalid. Sadly its still taught as fact in finance courses. And you should not think for yourself-let the ivory-tower guys handle it Post modern finance has recently created behavioral finance and the adaptive hypothesis theory. Im not gonna discuss it, but it is a step forward from modern finance theory. Ive bashes a lot of the theory thus far but have yet to give any solution. I dont have one particular solution because each persons risk tolerance and investment acumen is different. But for those that have the ability and desire for

risk, the right mind(analytical, critical thinking, emotional intelligence), and time to invest should have a more concentrated portfolio. Think about it, how many billionaires were involved in 100 businesses? You can decrease diversifiable risk away largely with 15 companies. You dont need the 500. What matters is that you know the business. Think of it in terms of a zero-sum game. If you are selling then someone is buying. Why? What might you be missing? What is your hypothesis? What is your valuation of the stock? Are you being conservative in your estimates? How does your hypothesis differ than the market? You need to be able to answer these questions. A good way to get an edge is to specialize in a specific area. Perhaps the industry you work in. perhaps a hobby of yours-which peter lynch advocates. Perhaps a specific situation that companies face.