360 VR VLOG – Market Cycles with Efficient Market Hypothesis and Fractal Market Hypothesis


EMH – Efficient Market Hypothesis
– impossible to beat the market
– all possible information is reflected in the stock price at the moment in time
– this is called market efficiency
– essentially means that it’s impossible to buy undervalued stocks and -sell @ an inflated price, meaning getting gains. Those gains are still fair market price as they are.
– in this theory, it’s impossible to outperform the markets
– the only way to win in the market is to make riskier and riskier investments
– this completely removes any value in fundamental / technical analysis
– where is the win? – passive portfolio, small gains

Benoit Mandelbrot – 1979
– observed the world to act in a fractal nature
– created fractal geometry
– first to use computer graphics cards in 1979 to show fractal geometric images on a computer
– showed that the visual complexity can be created by simple rules within the system
– essentially meaning, there is a degree of order within chaos

FMH – Fractal Market Hypothesis
– formalized by Edgar Peters in 1991
– analyze daily randomness of market
– market is stable when comprised of investors of different investment horizons
– this means, the more diversified the market is, the more stable it is
– markets are fractal
– technical analysis is possible in so much that patterns of fractals repeat themselves along time frames
– meaning, history repeats itself

– 2 key things effect FMH according to Edgar Peters
– liquidity
– investment horizons
– again, the markets are stable when there are short term and long term investment horizons
– at this point, information on the market is relatively shared and understood by all investors in the market
– “we agree that it’s all good.” – short term investors make small gains, long term investors don’t care
– when investors, en masse, change their investment horizons, you’ll see long term investors move towards short term horizons, resulting in a downward trend and potentially a collapse
– this is due to information permeation in the market. when information is interpreted or understood differently, it creates dissonance in investment horizons

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