Everyone else has already pointed out that you misunderstood what EMH states, so I wont bother adding to their chorus. (Except to say I agree with them).
I will also disagree with:
at most one-in-five people [...] It should therefore probably update us nontrivially away from the possibility that the post author just got lucky.
1 in 5 isn’t especially strong evidence. How many of the other 5 people would you expect to be publishing on the internet saying “You should trade stocks”.
I agree this isn’t a very strong argument. I think theoretically we can probably get a much tighter probability bound than 20% by looking directly at the variance of my strategy, and concluding that given that variance, the probability of getting 600% return by chance (assuming expected return = market return) is <p for some smaller p. But in practice I’m not sure how to compute this variance. Intuitively I can point to the fact that my portfolios did not have very high leverage/beta, nor did I put everything into a single or very few highly volatile stocks or sectors, which are probably the two most common high variance strategies people use. (Part of the reason for me writing this post is that while LW does have a number of people who achieved very high investment returns, they all AFAIK did it by using one of these two methods, which makes it hard to cite them as exemplifying the power of rationality.)
Assuming the above is still not very convincing, I wonder what kind of evidence would be...
Without even checking, I can think of a bunch of assets which 7x’ed since Jan 2020. (BTC/general crypto, TSLA, GME/AMC etc). So yes, I agree this depends on the portfolio you ran.
Personally, I have seen enough people claiming to outperform, but then fail to do so out of sample. (I mean, out of sample for me, not for them) for me to doubt any claim on the internet without a trading record.
Either way, I think it’s very hard to convince me with just ~1.5 years of evidence that you have edge. I think if you showed me ~1k trades with some sensible risk parameters at all times, then I could be convinced. (Or if in another year and a half you have $300mm because you’ve managed to 7x your small HF AUM, I will be convinced).
Without even checking, I can think of a bunch of assets which 7x’ed since Jan 2020. (BTC/general crypto, TSLA, GME/AMC etc).
I figured that’s the first thing someone would think of upon hearing “7x” which is why I mentioned “This was done using a variety of strategies across a large number of individual names” in the OP. Just to further clarify, I have some exposure to crypto but I’m not counting it for this post, I bought some TSLA puts (forgot whether I made a profit overall), and didn’t touch AMC. I had a 0.1% exposure to some GME calls which went to 1% of my portfolio and that’s the only involvement there.
Personally, I have seen enough people claiming to outperform, but then fail to do so out of sample.
Can you please give some examples of such people? I wonder if there are any updates or lessons there for me.
Either way, I think it’s very hard to convince me with just ~1.5 years of evidence that you have edge. I think if you showed me ~1k trades with some sensible risk parameters at all times, then I could be convinced.
I don’t think I’ve done that many trades (depending on how you define a trade, e.g., presumably accumulating a position across different days doesn’t count as separate trades). Maybe in the low hundreds? But why would you need ~1k trades to verify that I was not doing particularly high variance strategies? I guess this is mostly academic though, as it would take a lot of labor to parse my trade logs and understand the underlying market mechanics to figure out what I was doing and how much risk I was taking (e.g., some pair/arbitrage trades were spread across several brokers depending on where I could find borrow). I don’t supposed you’d actually want to do this? (I also have some privacy concerns on my end, but maybe could be persuaded if the “value added” in doing this seems really high.)
Or if in another year and a half you have $300mm because you’ve managed to 7x your small HF AUM, I will be convinced
I’m definitely not expecting such high returns going forward. (“600% return” was meant to be Bayesian evidence to update on, not used to directly set expectations. I thought that went without saying around here...) Obviously there was a significant amount of luck involved, for example as I mentioned the market was particularly inefficient last year. One of the hedge fund managers I follow had returns similar to mine this year and last year, but not in the years before that. I’d guess 20-50% above market returns is a realistic expectation if market conditions stay similar to today’s, and I hope I can still outperform if market conditions go more “out of sample” but I currently have no basis to say by how much.
Also, I’m already starting to feel diminishing returns (is there a more technical term for this in the investing world?) kick in at my AUM level, as I now have to spend multiple days accumulating some positions to the sizes that I want (and they sometimes take off before I finish), or ignore some particularly illiquid instruments that I would have traded in the past.
I figured that’s the first thing someone would think of upon hearing “7x” which is why I mentioned “This was done using a variety of strategies across a large number of individual names” in the OP.
Right, I wasn’t disagreeing with you, just explaining why 7x isn’t strong evidence in my own words.
Can you please give some examples of such people? I wonder if there are any updates or lessons there for me.
Yes, but I don’t think there’s a huge amount of value in doing that. If you spend any time following stock touts on twitter / stock picking forums etc you will see these people quickly.
To be clear, I have no interest in dissuading you from trading. You’ve smashed it—you have confidence in your edge—go wild. I’m more cautioning people from following you thinking this is easy. Financial markets are extremely competitive and hard. It’s easy to mistake luck for skill and I don’t want other people losing money they can’t afford. I generally find posts like this are net-negative EV.
But why would you need ~1k trades to verify that I was not doing particularly high variance strategies?
I wouldn’t with something like that. However, assuming 250 trades each done on 5% of your capital, you’d need to be returning >15% on every single trade to return 7x. My experience say that’s unlikely, but ymmv. If that is the case then yes, you have serious edge and please take my money. (Especially if those are after tax returns!).
I don’t supposed you’d actually want to do this? (I also have some privacy concerns on my end, but maybe could be persuaded if the “value added” in doing this seems really high.)
I’m not sure what the value would be for me doing it? I’m not sure adding my word saying “I think this guy is legit because I saw a track record” would bring much value to either of us. I guess if I worked for a fund which might have interest in hiring people then I guess I might. But at the times when I have been in those roles, if someone turns up and makes implausible claims about returns, I politely show them the door.
I’d guess 20-50% above market returns is a realistic expectation if market conditions stay similar to today’s, and I hope I can still outperform if market conditions go more “out of sample” but I currently have no basis to say by how much.
I wish you the best of luck. I have never achieved anything close to those levels of returns, but would sorely love to do so.
If you spend any time following stock touts on twitter / stock picking forums etc you will see these people quickly.
The people I follow generally don’t advertise their track record? For the hedge fund manager I mentioned, I had to certify that I’m an accredited investor and sign up for his fund letters to get his past returns. For the ones that do, e.g., paid services on SeekingAlpha that advertise past returns, it has not been my experience that they “then fail to do so out of sample” (at least the ones that passed my filter of being worth subscribing to).
I generally find posts like this are net-negative EV.
Personally, I wish I had seen a post like this 10 years ago. My guess is that there’s at least 2 or 3 people on LW who could become good traders if they tried. Even if 10 times that many people try and don’t succeed, that seems overall a win from my perspective, as the social/cultural/signaling and monetary gains from the winners more than offset the losses. In part I want LW to become a bigger cultural force, and clear success stories that can’t be dismissed as “luck” seem very helpful for that.
Especially if those are after tax returns!
Pre-tax.
I have never achieved anything close to those levels of returns, but would sorely love to do so.
Maybe try some of my tips, if you haven’t already? :)
(You’re not wrong, but I wanted to flag: the way I read John’s comment, the word “nontrivially” already admitted this. If he thought it was strong evidence I’d expect him to have used a stronger word. Nothing wrong with adding clarification, but I don’t particularly think you’re disagreeing with him on this point.)
Everyone else has already pointed out that you misunderstood what EMH states, so I wont bother adding to their chorus. (Except to say I agree with them).
I will also disagree with:
1 in 5 isn’t especially strong evidence. How many of the other 5 people would you expect to be publishing on the internet saying “You should trade stocks”.
I agree this isn’t a very strong argument. I think theoretically we can probably get a much tighter probability bound than 20% by looking directly at the variance of my strategy, and concluding that given that variance, the probability of getting 600% return by chance (assuming expected return = market return) is <p for some smaller p. But in practice I’m not sure how to compute this variance. Intuitively I can point to the fact that my portfolios did not have very high leverage/beta, nor did I put everything into a single or very few highly volatile stocks or sectors, which are probably the two most common high variance strategies people use. (Part of the reason for me writing this post is that while LW does have a number of people who achieved very high investment returns, they all AFAIK did it by using one of these two methods, which makes it hard to cite them as exemplifying the power of rationality.)
Assuming the above is still not very convincing, I wonder what kind of evidence would be...
Without even checking, I can think of a bunch of assets which 7x’ed since Jan 2020. (BTC/general crypto, TSLA, GME/AMC etc). So yes, I agree this depends on the portfolio you ran.
Personally, I have seen enough people claiming to outperform, but then fail to do so out of sample. (I mean, out of sample for me, not for them) for me to doubt any claim on the internet without a trading record.
Either way, I think it’s very hard to convince me with just ~1.5 years of evidence that you have edge. I think if you showed me ~1k trades with some sensible risk parameters at all times, then I could be convinced. (Or if in another year and a half you have $300mm because you’ve managed to 7x your small HF AUM, I will be convinced).
I figured that’s the first thing someone would think of upon hearing “7x” which is why I mentioned “This was done using a variety of strategies across a large number of individual names” in the OP. Just to further clarify, I have some exposure to crypto but I’m not counting it for this post, I bought some TSLA puts (forgot whether I made a profit overall), and didn’t touch AMC. I had a 0.1% exposure to some GME calls which went to 1% of my portfolio and that’s the only involvement there.
Can you please give some examples of such people? I wonder if there are any updates or lessons there for me.
I don’t think I’ve done that many trades (depending on how you define a trade, e.g., presumably accumulating a position across different days doesn’t count as separate trades). Maybe in the low hundreds? But why would you need ~1k trades to verify that I was not doing particularly high variance strategies? I guess this is mostly academic though, as it would take a lot of labor to parse my trade logs and understand the underlying market mechanics to figure out what I was doing and how much risk I was taking (e.g., some pair/arbitrage trades were spread across several brokers depending on where I could find borrow). I don’t supposed you’d actually want to do this? (I also have some privacy concerns on my end, but maybe could be persuaded if the “value added” in doing this seems really high.)
I’m definitely not expecting such high returns going forward. (“600% return” was meant to be Bayesian evidence to update on, not used to directly set expectations. I thought that went without saying around here...) Obviously there was a significant amount of luck involved, for example as I mentioned the market was particularly inefficient last year. One of the hedge fund managers I follow had returns similar to mine this year and last year, but not in the years before that. I’d guess 20-50% above market returns is a realistic expectation if market conditions stay similar to today’s, and I hope I can still outperform if market conditions go more “out of sample” but I currently have no basis to say by how much.
Also, I’m already starting to feel diminishing returns (is there a more technical term for this in the investing world?) kick in at my AUM level, as I now have to spend multiple days accumulating some positions to the sizes that I want (and they sometimes take off before I finish), or ignore some particularly illiquid instruments that I would have traded in the past.
Right, I wasn’t disagreeing with you, just explaining why 7x isn’t strong evidence in my own words.
Yes, but I don’t think there’s a huge amount of value in doing that. If you spend any time following stock touts on twitter / stock picking forums etc you will see these people quickly.
To be clear, I have no interest in dissuading you from trading. You’ve smashed it—you have confidence in your edge—go wild. I’m more cautioning people from following you thinking this is easy. Financial markets are extremely competitive and hard. It’s easy to mistake luck for skill and I don’t want other people losing money they can’t afford. I generally find posts like this are net-negative EV.
I wouldn’t with something like that. However, assuming 250 trades each done on 5% of your capital, you’d need to be returning >15% on every single trade to return 7x. My experience say that’s unlikely, but ymmv. If that is the case then yes, you have serious edge and please take my money. (Especially if those are after tax returns!).
I’m not sure what the value would be for me doing it? I’m not sure adding my word saying “I think this guy is legit because I saw a track record” would bring much value to either of us. I guess if I worked for a fund which might have interest in hiring people then I guess I might. But at the times when I have been in those roles, if someone turns up and makes implausible claims about returns, I politely show them the door.
I wish you the best of luck. I have never achieved anything close to those levels of returns, but would sorely love to do so.
The people I follow generally don’t advertise their track record? For the hedge fund manager I mentioned, I had to certify that I’m an accredited investor and sign up for his fund letters to get his past returns. For the ones that do, e.g., paid services on SeekingAlpha that advertise past returns, it has not been my experience that they “then fail to do so out of sample” (at least the ones that passed my filter of being worth subscribing to).
Personally, I wish I had seen a post like this 10 years ago. My guess is that there’s at least 2 or 3 people on LW who could become good traders if they tried. Even if 10 times that many people try and don’t succeed, that seems overall a win from my perspective, as the social/cultural/signaling and monetary gains from the winners more than offset the losses. In part I want LW to become a bigger cultural force, and clear success stories that can’t be dismissed as “luck” seem very helpful for that.
Pre-tax.
Maybe try some of my tips, if you haven’t already? :)
(You’re not wrong, but I wanted to flag: the way I read John’s comment, the word “nontrivially” already admitted this. If he thought it was strong evidence I’d expect him to have used a stronger word. Nothing wrong with adding clarification, but I don’t particularly think you’re disagreeing with him on this point.)