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The Hardly Efficient Market

Posted By Barry Ritholtz On March 23, 2005 @ 6:35 am In Markets | Comments Disabled

I got my first iPod (a Press loaner from Apple) the first week they came out. It was a transcendant experience, and I pounded the table to nearly everyone I knew that this was a huge winner. It made Apple stock, trading then at a pre-split price of $18, with $13 in cash, absurdly cheap. Yet AAPL traded essentially flat from that late 2001 intro until its breakout in 2004. In late ’02/early ’03, the stock was $15.

For those who believe in the efficient market thesis [1] — an increasingly discredited [2] theory that states markets (nearly) instantaneously reflect all available data — kindly explain this chart to us:

click for larger chart

graphic courtesy of the NYT [4]

I told practically everyone I knew. From my mom to my co-workers to various fund managers, I went over the Apple iPod story til I was blue in the face (I eventauly came to be bored to tears with it).

The response? I heard every excuse as to why Apple was now irrelevant, the stock was "dead money," why the company couldn’t make money, and why Dell was going to put them out of business. Then came the ubiquitous statement that it was impossible to compete with Microsoft. Some of Wall Street’s dead fish analysts even suggested that Apple put out a Windows box based on an Intel CPU. (Can you imagine?)

My favorite comment came from someone who told me that since the market had valued Apple at a low price, it sees the reason that I don’t (What are you, smarter than the entire market?). Apple’s stock price, according to this perspective, was a fait accompli. There’s an old Econ joke on the subject:

Two economists are walking down the street. One sees a $20 dollar bill lying on the sidewalk, and says so.

"Obviously not," says the other. "If there were, someone would have picked it up!" 

That’s a perfect example of bad theory costing you money.

As we stated previously in The kinda-eventually-sorta-mostly-almost Efficient Market Theory [1], markets do usually get there — not always [5], but most of the time, and not right away, but eventually [6].

Incidentally, the Efficient Market theory is the prime motivator behind indexing, which has been a losing propostion over the past few years (but I think thats more a function of market cap weighting than inefficient markets).

Expect to hear about this theory’s decline in the coming years . . .

To Cut Online Chatter, Apple Goes to Court [7]
NYT, March 21, 2005

Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2005/03/the-hardly-efficient-market/

URLs in this post:

[1] efficient market thesis: http://bigpicture.typepad.com/comments/2004/11/the_mostlykinda.html

[2] discredited: http://online.wsj.com/article/0,,SB109804865418747444,00.html

[3] Image: http://www.ritholtz.com/blog/wp-content/uploads/2013/04/ipod_apple_chart.jpg

[4] NYT: http://www.nytimes.com/imagepages/2005/03/21/business/21apple.chart.html

[5] always: http://bigpicture.typepad.com/comments/2004/01/iowa_and_predec.html

[6] eventually: http://bigpicture.typepad.com/comments/2004/10/presidential_fu.html

[7] To Cut Online Chatter, Apple Goes to Court: http://www.nytimes.com/2005/03/21/technology/21apple.html?ex=1269061200&en=1d0d7c80991f571f&ei=5090&partner=rssuserland

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