I’m not sure whether I can pick stocks better than the market. But if I can, then money is more valuable to me in that world, since I have better-than-market opportunities in that world but only par-with-market opportunities in the EMH world. So I should buy stocks that look good to me, at least for a while, to check whether I’m in the world where I can do that, because it’s a transfer from a world where money is less valuable to me to one where money is more valuable.
I think this argument goes thru if you assume market returns are equal in both worlds, which I think I think.
I agree market returns are equal in expectation, but you’re exposing. yourself to more risk for the same expected returns in the “I pick stocks” world, so risk-adjusted returns will be lower.
According to Michael Dickens, if you pick like 50 and they’re not too correlated it’s not actually all that much more risk. Which sort of makes sense—it’s like how you can accurately estimate population averages of stuff by taking a relatively small random sample and looking at the sample average.
An argument for stock-picking:
I’m not sure whether I can pick stocks better than the market. But if I can, then money is more valuable to me in that world, since I have better-than-market opportunities in that world but only par-with-market opportunities in the EMH world. So I should buy stocks that look good to me, at least for a while, to check whether I’m in the world where I can do that, because it’s a transfer from a world where money is less valuable to me to one where money is more valuable.
I think this argument goes thru if you assume market returns are equal in both worlds, which I think I think.
I agree market returns are equal in expectation, but you’re exposing. yourself to more risk for the same expected returns in the “I pick stocks” world, so risk-adjusted returns will be lower.
According to Michael Dickens, if you pick like 50 and they’re not too correlated it’s not actually all that much more risk. Which sort of makes sense—it’s like how you can accurately estimate population averages of stuff by taking a relatively small random sample and looking at the sample average.