The marginal investor doesn't give a shit
So I found out who the marginal investor is: a high frequency trading computer. He makes approximately 60% of all US equity trades. Now the whole CAPM is based on the fact that the marginal investor holds a diversified portfolio and that he will demand a higher return from a stock if it correlates more strongly with his diversified portfolio. Now first of all I don't think that the high frequency trader has a diversified portfolio and second he really doesn't give a shit about a stock's beta, but rather trades on technical strategies. So the whole beta thing is no longer valid and the CAPM cannot be applied and the whole DCF is no longer useful (if it ever was). Am I right?
I figured out that he must live close to the stock exchanges, because he has no time to lose. So that's where I was looking and yea, I found the phantom. Basically he is pretty cool, I mean he knows the price of everything but the value of nothing. And he just doesn't give a shit.
does he rock fresh suits? a baller watch? please fill us in!!!
So he's an economist?
This is an interesting question, I don't know the answer but I'll add that equities are being traded and valued almost as often as currency. Realize that the time horizon for (most) HFT is disconnected from any big picture understanding, so longer time periods beyond the split second machine activity snap all of that stuff back to relevancy. The machine will win every time on the split second execution, but simply can't actually VALUE what something is worth.
How the fuck do the failures of CAPM make DCF analyses useless?
The marginal investor never gave a shit. And HFT wouldn't operate without the person who is the real marginal investor, since they all work on technicals. They just amplify what the marginal investor does (assuming some sort of aggregate trading strategy among HFT the leans towards momentum). The markets just become more irrational with HFT taking up more and more of total daily volume. Higher highs and lower lows, good for smart investors who actually know what a company is worth.
I bet the Chinese and the Russians use their super duper computers to scalp the markets. The fastest robot wins.
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