No, the AAA rates MBS did very well; 90% suffered no loses. It was the ABS CDOs (Asset Backed Security Colateralised Debt Obligations) that did badly.

Indeed the data you cite shows that it was Aaa rated CDOs that had default rates about 90%. CDOs were backed by mortgages as well.

Extending what you say about MBS to some more accurate statements, the AAA rated MBS had about a 9% or 10% default rate out to 4 years. There are 26 more years of life in those mortgages in which they can still default, going to an even higher cumulative default rate potentially.

Characterizing a 9% default rate on triple-A securities as "did very well" is quite wrong. Historically, triple-A corporate bonds default at 0.6% or less rate, and triple-A municipals default at 0.00% rate. A 9% default rate 15 times higher than the ratings were intended to suggest. And the Baa MBS defaulted at over 80% rate, more than 15 times the ~5% rate on Baa Corporate bonds prior to 2007.

The ratings were CRAP, suggesting a default rate which should have been 1 to 2 orders of magnitude lower.

OK you like EMH so much that you think 9 students from one professor all outperforming for decades is cherry picking and data mining. I think it is finding a small group of people wh oclaim to be learning from someone who has empirically verified methods, and who, when they apply these methods, get the predicted results consistently for decades. I think characterizing this as cherry picking and data mining is at more likely to be a bad explanation for what is being seen than is mine, which is that they are doing what ehy say they are doing, and it is working.

Even a broad index fund is "managed." The conditions for being listed are quite stringent, and involve "survival bias" filters, if stocks fall below a certain value they are delisted. I actually don't think that the difficulty of beating the SP500 is much of a proof of EMH as much as it is a proof that very straigtforward standards applied on a slow timescale capture almost all of the value available from managing a portfolio. I think people investing more broadly than SP500, people investing with people who come in to their living rooms seeking "angel" investors do a lot worse. If the market was efficient in principle, then one wouldn't need the SP500 or even the NASDAQ seal of approval to wind up with results that were at the market mean. If usnig your brain is required to pick SP500 over living room pitch man, then in principle, using your brain is required to get reasonable results.

I think if a proposition of efficiency is to be proved true, ti si not by looking at the average performance of every tom dick and harry and noticing that with mathematical necessity they tend to have the same mean as the market which of course they comprise. I think a proper proof of efficinecy requires showing in detail that there are no consistent outliers of high performance. That funds with decades long records of outperformance occur at the proper rate to be consistent with pure luck. Indeed, to show that while it appears that some people predictably outperform, that for all these actors past performance is no predictor of future performance, and that the hangers on that joined Buffett in the 60s or 70s or 80s or 90s after seeing his record THOUGHT their outperformance was due to their identifying a winner, but that it was consistent with just pure dumb continuous luck.

I think their is a gigantic difference between "we cannot prove that their is alpha" and "the most likely explanation of what we see is that their is no alpha."

As to identifying bubbles that were not bubbles, the only bubbles I have identified are tech,and real estate. I identified a "bubble" in a small company stock (Conductus) where a company with no real products generated excitement by talking about how they were getting in to the cellular industry, driving their stock price from 3 to about 80 before they crashed back down to 3. I shorted them at about 70, took my returns a few weeks later at 60 or so, they proceeded to rise to 80 and then within a year drop back to 2.5. I identified another mispricing in NHCS where numerically they were spinning out a company which was being completely undervalued in their current stock price. I asked others "can this really be true," they said only in general yeah stuff like that happens. I bought a few thousand dollars worth, made the 20% or so return it seemed I was seeing laying on the table a few months later.

The main sense in which the market seems efficient is that the prices are predominantly set using sensible analyses, presumably because those who do not follow a proven technique of picking sensible prices do not survive, so the main component of market efficiency is that the processes for beating the market are broadly exercised and dominating the market. So it is hard to do better than free-riding on that. But does it turn out that some people do better at that process than others? I think the best explanation for what we see is that yes, some do, and that they are a smallish minority is not because they are just the tail of a random distribution, but because of mathematical necessity beating the average significantly can only be done by a minority.

Anyway, thanks for sticking with it and explaining your position to me.

I'd rather use a more powerful EMH-focused definition: a bubble is large price increase which represents an inefficiency in the market which is predictable in advance (not in hindsight), exploitable, and worth exploiting.

I'm happy with that definition. EMH (Efficient Market Hypothesis) for those of you following along at home.

In my case I had amassed a small fortune by October of 1999 by simply holding the stock options I had been granted on taking the job 4 years earlier. They were up more than 10X at that point. Actionable? My very intelligent college roommate owned his own financial advising firm. He spent two weeks on the phone with me convincing me that it would be gigantically more sensible to cash out these options and give them to him to invest "in case, in the future, people get up in the morning, put their clothes on, and go outside instead of sitting in front of their PCs all day ordering stuff off the internet." He sent me books to read including this one first published in 1841. This describes witch hunts as well as South Sea, Tulip and other financial bubbles. Jim, my roommate, had been referring to tech as a bubble for a year or two before I talked to him in October of 1999. The action he was taking with his other clients was to simply not get in to tech. This was a horribly unsatisfying strategy until about the middle of 2000 when tech was well into its slide from the top.

By the time I cashed out and handed him the money in about december 1999, the stock had more than doubled again. The human in me wanted to hold on to it because, obviously, this was a stock which kept on doubling. He explained to the rationalist in me that whatever the case for investing that money in something else was at half the price, the case was TWICE as good at twice the price, unless we had learned something quite important and positive about the business in the last two months. Which we hadn't of course. What we had learned is that there was no shortage of "greater fools" willing to buy in AFTER all that price appreciation had already happened on old information that was not changing nearly as fast as the price.

Over the next three years the stock I had sold in December 1999 gave back about 75% of its price gains. Meanwhile, my friend invested my money in REITs, Berkshire Hathaway, banks, and a bunch of other asset classes not even dreamed about by most of my fellow techies. The money I had given him grew by 40% more or less, I don't remember exactly, while the nearly half of my original stock grant I had kept in my employers stock contracted to 20% of its peak value.

So yes, to me the internet bubble appears to have been actionable before it burst. The "investors" who stayed with the bubble, myself included with what started out as nearly half of my fortune and ended as about a tenth of it. The shift of 60% of my money out of the bubble preserved my wealth at a level that may well have been unique among my peers at this company.

I realize you can't get a drug approved with this kind of evidence. But you realize that most of what we "know" is the best model we can come up with in the absence of double blind studies. I've detailed the one best example in my life. I agree it is HARD to act on bubbles, shorting them is scary and fraught with risk, you are betting you can stay solvent longer than the market can stay stupid, which is quite a bet indeed. So bubbles, so spectacularly obvious in retrospect, may be no more reliably useful for making money than is any mispricing, even smaller more temporary ones.

Out of curiousity, are you enough of an EMH'er that you don't believe in mispricings? Or at least not in publicly traded financial securities markets? Do you think it is just a roll of the dice that 9 students of Ben Graham all ran funds which had long term returns above market averages? I think a bubble is just a particular kind of mispricing, a particular kind of inefficiency. It may be no easier to exploit than the other kinds of mispricings, but it is probably not harder to exploit. And shorting is not the only way to exploit bubbles or mispricings, just sticking with a discipline which on average avoids them appears to work for a broad range of investors, including such low-entropy categories of investors as former students of one professor who espoused value investing.

Presumably the book form includes much more detail than space-restricted papers.

I'd hope so, although I can imagine an academic padding things out with irrelevant side detail or other yakkety-yak-yak. In those cases one may as well stick with the papers.

Observing a normal depreciation rate isn't good evidence against a bubble; one has to know prices closer to the event.

It's been a while since I read the book, but doesn't he do exactly that and does compare depreciation from peak prices in places? For example, on pg64 of my copy:

Not based on that quote. That's the same reasoning he uses in his papers. (Your quoted bit appears, almost word-for-word, on pages 550 & 553 of the "Tulipmania" paper.) The flaw is the same; estimating a depreciation rate based on data points 5-6 years apart won't tell you whether there was an abrupt dip that took only a few days or weeks.

learning that there is minimal evidence for what is popularly considered to be a large, irrefutable, historically established, unquestionable bubble should badly damage one's confidence in other claims relating to bubbles since it tells one a lot about what passes for evidence in those discussions.

It is a good example of why one shouldn't take people's claims that something's a bubble at face value. Although I don't think the magnitude of the tulipmania has much bearing on whether tech stocks, Bitcoins, or real estate are/were bubbling; for those last three things, there are time series data that're a lot more relevant than what happened to Dutch tulip bulbs 376 years ago.

(I also wonder whether I updated too much on the basis of one economist's contrarianism. Really, I went too far in my last comment by referring to "a lack of conclusive evidence for a bubble" — it's not as if I've looked for that evidence. I've just taken Garber's word for it.)