In other words, the efficient market hypothesis. There is no way to beat the market.
EMH is the reason I didn’t bother looking. All my money is in index funds, I told my parents to put all their money in index funds, etc. But after stumbling into assets with returns in the 100x-1000x range (or 100% to 500% annualized), twice, it seems time to update a bit.
EMH is over generalization; markets aren’t magical machines that react instantly. Someone notices an opportunity first, and receives nearly all of the benefit. Those 1% are finding gold rushes and making tons of money. The 99% who follow are living off scraps.
The advice you were following comes from a reasonable observation: assume you are drawn randomly from that set, do you find it more likely that you are in the 1% or the 99%? But that totally ignores the fact that there are people beating the market, and indeed there has to be (for every loser there’s a winner).
So how do you beat the market? Assume you the smartest, most bad-ass person on Earth. Don’t trust what other people tell you is a good opportunity, because (a) they are stupid, and (b) if they are not then by the time you heard about it it’s already too late. Look around yourself, do some original calculations (weak inside view), make your own decision, and follow through.
Someone notices an opportunity first, and receives nearly all of the benefit.
It doesn’t follow that they made a correct decision, that given the knowledge available to them they should’ve expected to benefit. Even if they did expect to benefit and did benefit.
But that totally ignores the fact that there are people beating the market, and indeed there has to be (for every loser there’s a winner).
The relevant thing is if you can make yourself more of a winner than the market, not if there are some winners. Lotteries have winners, but you can’t decide to win a lottery.
They don’t receive “nearly all of the benefit”, they are just doing a bit better than the market consistently. This feels like a motte-and-bailey argument, with the motte being the examples of Buffett etc. who in a certain sense seem to be beating the market, but not dramatically, and the bailey being the claim that one can win much more than the market by noticing opportunities early.
(I mentioned lottery as an illustration for the importance of being able to affect the outcome, that mere existence of people beating the market is insufficient. Whether it’s possible to affect the outcome is a separate question that you are now addressing.)
It does follow from repeatability—Warren Buffet and Goldman Sachs are not explained by the lottery analogy.
It doesn’t follow from repeatability. Or rather it doesn’t follow from the existence of examples of repeated success. A normal distribution of returns with repeated play will still lead us to expect at least one investor with Buffet’s track record (if my econ. prof’s math is to believed----I haven’t have cause to look closely).
It would follow from “significantly more repeated success than a normal distribution would predict”.
I do believe that Buffet’s success is more than luck, just not that this particular argument follows.
A normal distribution of returns with repeated play will still lead us to expect at least one investor with Buffet’s track record (if my econ. prof’s math is to believed----I haven’t have cause to look closely).
Buffett claimed at some point that they calculated he was a 3 sigma event, then a 4 sigma, then a 5 sigma, then stopped calculating because it was getting embarrassing.
Berkshire and Goldman don’t just buy-and-hold though; they are a large holding company that actively manages its largest investments and a premier financial services provider respectively.
Genius stock picks are only a part of the story. The more imitable part is finding a genuine business angle that earns the premium.
I never said they buy-and-hold (although sometimes they do—see Coca Cola and See’s candy, for example). The fact that they actively manage their portfolio shows that they are able to pick winners. What they are doing is working.
EMH says the market can be beaten with exceptional information. If anyone is exceptionally informed on cryptocurrencies (in 2011, and maybe 2014), it is certainly Wei Dai.
Yeah, I think this thread gives a lot of false hope to regular people, haha. He’s basically the grandfather of bitcoin. Is it a suprise he got rich of it?
after stumbling into assets with returns in the 100x-1000x range, twice, it seems time to update a bit.
How many assets have you purchased that didn’t turn out to be valuable? A friend just looked up the price on a lego set that had been sitting in his room unopened since he was a kid (right after he opened it and built it...) and found that it was worth ~500x what it originally sold for. But most toys people buy and leave unopened are going to be nearly worthless a decade later.
Some people win the lottery on their first try. Some even win twice. Doesn’t mean that you win on average or that there is a way of consistently winning.
Winning the lottery on your first try, or just frequenting a website that managed to pick a lottery winner on its first try (analogous to how Bitcoin was pretty much the only investment opportunity to be discussed on LW aside from the standard “buy index funds”), is certainly Bayesian evidence for your being able to win the lottery on average. It’s just that the prior for it is so low that you don’t think it’s likely even after updating.
This isn’t the case for EMH, given that even economists disagree among themselves about whether EMH is true, or which form of EMH is true.
On second thought, I’m not sure this is true even in the lottery case. Would you really not buy a ticket if the website that previously picked a lottery winner announced a second prediction?
Well, no, it’s more like, “I won the lottery twice (figuratively), last time with the help of Less Wrong. I’m not sure how to do it again, but if I encourage LWers to think in that direction, maybe they’ll find and point out the next opportunity too.”
Gold has also been discussed as an investment opportunity, as has high frequency trading. More broadly discussed have been things like “start a company that does (X)”.
Goldman Sachs is not lucky to be profitable year-after-year. But you are not Goldman Sachs. They have hard-to-reproduce advantages (“moats”) in terms of social and organisation capital, client and peer relationships, political access, intellectual property, etc, etc. And Goldman Sachs can’t just effortlessly expand—they can’t just decide “Right, let’s make more money, let’s find new arbitrages.” They are at the scale and profitability they are for a reason. And even Goldman Sachs was lucky, to get to its current position. When Goldman Sachs was founded, the odds were against it becoming what it is today. If you found an investment bank today, you are unlikely to be as successful as Goldman Sachs.
Or, to put it in more down-to-earth terms: giving up on your education to become a professional footballer is a bad move for almost everyone, and a very risky move even for the highly talented. This is in no way negated by the fact that Zlatan Ibrahimovic earns millions every single year.
“The odds were against them” doesn’t mean they were lucky. It means they beat the odds. They made their own luck, as the saying goes. Frequentism doesn’t apply here. They are picking winners, not pulling them randomly from an evenly distributed set.
In other words, the efficient market hypothesis. There is no way to beat the market.
Yes, that is my line of reasoning and I was going to mention the emh, but after some introspection, I am not so sure if this collective pre-market [so to say] is actually very efficent due to the limited number of players among other things (although it might very well be, and I could argue that it should be).
Getting into deeper theory now. Is the EMH dependent on the number of participants? It most certainly is contingent on the flow of information. But even then, we see the EMH at play with regard to startups in the VC stage: After correcting for risk, they don’t make any more money. I argue that these companies are in a pre-market stage.
Then again, my argument is not contingent on the efficiency of any one price. If you invested a little bit in everything that pops up in your inbox and after five years gives you a risk-adjusted return higher than the average market I’d be highly surprised. So I’d be willing to accept that there are plenty of inventions and products in the pre-market stage that are wrongly priced, but as a whole the price is very correct near zero.
In other words, the efficient market hypothesis. There is no way to beat the market.
Or even shorter: $\alpha = 0$
EMH is the reason I didn’t bother looking. All my money is in index funds, I told my parents to put all their money in index funds, etc. But after stumbling into assets with returns in the 100x-1000x range (or 100% to 500% annualized), twice, it seems time to update a bit.
EMH is over generalization; markets aren’t magical machines that react instantly. Someone notices an opportunity first, and receives nearly all of the benefit. Those 1% are finding gold rushes and making tons of money. The 99% who follow are living off scraps.
The advice you were following comes from a reasonable observation: assume you are drawn randomly from that set, do you find it more likely that you are in the 1% or the 99%? But that totally ignores the fact that there are people beating the market, and indeed there has to be (for every loser there’s a winner).
So how do you beat the market? Assume you the smartest, most bad-ass person on Earth. Don’t trust what other people tell you is a good opportunity, because (a) they are stupid, and (b) if they are not then by the time you heard about it it’s already too late. Look around yourself, do some original calculations (weak inside view), make your own decision, and follow through.
It doesn’t follow that they made a correct decision, that given the knowledge available to them they should’ve expected to benefit. Even if they did expect to benefit and did benefit.
The relevant thing is if you can make yourself more of a winner than the market, not if there are some winners. Lotteries have winners, but you can’t decide to win a lottery.
It does follow from repeatability—Warren Buffet and Goldman Sachs are not explained by the lottery analogy.
They don’t receive “nearly all of the benefit”, they are just doing a bit better than the market consistently. This feels like a motte-and-bailey argument, with the motte being the examples of Buffett etc. who in a certain sense seem to be beating the market, but not dramatically, and the bailey being the claim that one can win much more than the market by noticing opportunities early.
(I mentioned lottery as an illustration for the importance of being able to affect the outcome, that mere existence of people beating the market is insufficient. Whether it’s possible to affect the outcome is a separate question that you are now addressing.)
It doesn’t follow from repeatability. Or rather it doesn’t follow from the existence of examples of repeated success. A normal distribution of returns with repeated play will still lead us to expect at least one investor with Buffet’s track record (if my econ. prof’s math is to believed----I haven’t have cause to look closely).
It would follow from “significantly more repeated success than a normal distribution would predict”.
I do believe that Buffet’s success is more than luck, just not that this particular argument follows.
Buffett claimed at some point that they calculated he was a 3 sigma event, then a 4 sigma, then a 5 sigma, then stopped calculating because it was getting embarrassing.
Here is his contemporary, fuller argument.
Buffet’s track record is well beyond what chance would allow.
Berkshire and Goldman don’t just buy-and-hold though; they are a large holding company that actively manages its largest investments and a premier financial services provider respectively.
Genius stock picks are only a part of the story. The more imitable part is finding a genuine business angle that earns the premium.
I never said they buy-and-hold (although sometimes they do—see Coca Cola and See’s candy, for example). The fact that they actively manage their portfolio shows that they are able to pick winners. What they are doing is working.
EMH says the market can be beaten with exceptional information. If anyone is exceptionally informed on cryptocurrencies (in 2011, and maybe 2014), it is certainly Wei Dai.
To be more precise, weak-form and semi-strong-form efficiency can be beaten with exceptional information. Strong-form efficiency can not.
Yeah, I think this thread gives a lot of false hope to regular people, haha. He’s basically the grandfather of bitcoin. Is it a suprise he got rich of it?
How many assets have you purchased that didn’t turn out to be valuable? A friend just looked up the price on a lego set that had been sitting in his room unopened since he was a kid (right after he opened it and built it...) and found that it was worth ~500x what it originally sold for. But most toys people buy and leave unopened are going to be nearly worthless a decade later.
Some people win the lottery on their first try. Some even win twice. Doesn’t mean that you win on average or that there is a way of consistently winning.
Winning the lottery on your first try, or just frequenting a website that managed to pick a lottery winner on its first try (analogous to how Bitcoin was pretty much the only investment opportunity to be discussed on LW aside from the standard “buy index funds”), is certainly Bayesian evidence for your being able to win the lottery on average. It’s just that the prior for it is so low that you don’t think it’s likely even after updating.
This isn’t the case for EMH, given that even economists disagree among themselves about whether EMH is true, or which form of EMH is true.
On second thought, I’m not sure this is true even in the lottery case. Would you really not buy a ticket if the website that previously picked a lottery winner announced a second prediction?
You won the lottery twice. So is what you’re saying I should now invest in all the stuff you are investing?
Well, no, it’s more like, “I won the lottery twice (figuratively), last time with the help of Less Wrong. I’m not sure how to do it again, but if I encourage LWers to think in that direction, maybe they’ll find and point out the next opportunity too.”
Gold has also been discussed as an investment opportunity, as has high frequency trading. More broadly discussed have been things like “start a company that does (X)”.
I guess Goldman Sachs is just damn lucky?
Goldman Sachs is not lucky to be profitable year-after-year. But you are not Goldman Sachs. They have hard-to-reproduce advantages (“moats”) in terms of social and organisation capital, client and peer relationships, political access, intellectual property, etc, etc. And Goldman Sachs can’t just effortlessly expand—they can’t just decide “Right, let’s make more money, let’s find new arbitrages.” They are at the scale and profitability they are for a reason. And even Goldman Sachs was lucky, to get to its current position. When Goldman Sachs was founded, the odds were against it becoming what it is today. If you found an investment bank today, you are unlikely to be as successful as Goldman Sachs.
Or, to put it in more down-to-earth terms: giving up on your education to become a professional footballer is a bad move for almost everyone, and a very risky move even for the highly talented. This is in no way negated by the fact that Zlatan Ibrahimovic earns millions every single year.
“The odds were against them” doesn’t mean they were lucky. It means they beat the odds. They made their own luck, as the saying goes. Frequentism doesn’t apply here. They are picking winners, not pulling them randomly from an evenly distributed set.
Yes, that is my line of reasoning and I was going to mention the emh, but after some introspection, I am not so sure if this collective pre-market [so to say] is actually very efficent due to the limited number of players among other things (although it might very well be, and I could argue that it should be).
Getting into deeper theory now. Is the EMH dependent on the number of participants? It most certainly is contingent on the flow of information. But even then, we see the EMH at play with regard to startups in the VC stage: After correcting for risk, they don’t make any more money. I argue that these companies are in a pre-market stage.
Then again, my argument is not contingent on the efficiency of any one price. If you invested a little bit in everything that pops up in your inbox and after five years gives you a risk-adjusted return higher than the average market I’d be highly surprised. So I’d be willing to accept that there are plenty of inventions and products in the pre-market stage that are wrongly priced, but as a whole the price is very correct near zero.
What’s your source for that? A quick google search turns up widely varying numbers.
This is what I was thinking of, but it isn’t exactly my claim.
I think you mean (and even shorter): $\φ = 1