I remember in college, talking with a friend who was in a class on technical investing, and he was mentioning that the class was talking about momentum investing on 7 day and 30 day timescales; I said “wait, those numbers are obviously suspicious; can’t we figure out what it should actually be from the past?”, downloading a dataset of historical S&P500 returns, and measuring the performance of simple momentum trading algorithms on that data. I discovered that basically all of the returns came from before 1980; there was a period where momentum investing worked, and then it stopped, but before I drilled down into the dataset (like if I just looked at the overall optimization results), it looked like momentum investing worked on net.
Part of my suspicion had also been an ‘efficient markets’ sense; if my friend was learning in his freshman classes about patterns in the market, presumably Wall Street also knew about those patterns, and was getting rid of them? I believed in the dynamic form of efficient markets: you could get rich by finding mispricings, but mostly by putting in the calories, and I thought I had better places to put calories. But this made it clear to me that there were shifts in how the market worked; if you were more sophisticated than the market, you could make money, but then at some point the market would reach your level of sophistication, and the opportunity would disappear.
I learned how to invest about 15 years ago (and a few years before the above anecdote). At the time, I was a smart high-schooler; my parents had followed a lifelong strategy of “earn lots of money, save most of it, and buy and hold”, and in particular had invested in a college fund for me; they told me (roughly) “this money is yours to do what you want with, and if you want to pay more for college, you need to take out loans.” I, armed with a study that suggested colleges were mostly selection effect instead of treatment effect, chose the state school (with top programs in the things I was interested in) that offered me a full ride instead of the fancier school that would have charged me, and had high five figures to invest.
I did a mixture of active investing and buying index funds; overall, they performed about as well, and I grew more to believe that active investing was a mistake whereas opportunity investing wasn’t. That is, looking at the market and trying to figure out which companies were most promising at the moment took more effort than I was going to put into it, whereas every five years or so a big opportunity would come along, that was worth betting big on. I was more optimistic about Netflix than the other companies in my portfolio, but instead of saying “I will be long Netflix and long S&P and that’s it”, I said “I will be long these ten stocks and long S&P”, and so Netflix’s massive outperformance over that time period only made me slightly in the black compared to the S&P instead of doing much better than it.
It feels like the stock market is entering a new era, and I don’t know what strategy is good for that era. There are a few components I’ll try to separate:
First, I’m not actually sure I believe the medium-term forward trend for US stocks is generically good in the way it has been for much of the past. As another historical example, my boyfriend, who previously worked at Google, has a bunch of GOOG that he’s never diversified out of, mostly out of laziness. About 2.5 years ago (when we were housemates but before we were dating), I offered to help him just go through the chore of diversification to make it happen. Since then GOOG has significantly outperformed the S&P 500, and I find myself glad we never got around to it. On the one hand, it didn’t have to be that way, and variance seems bad—but on the other hand, I’m more optimistic about Alphabet than I am about the US as a whole.
[Similarly, there’s some standard advice that tech workers should buy less tech stocks, since this correlates their income and assets in a way that’s undesirable. But this feels sort of nuts to me—one of the reasons I think it makes sense to work in tech is because software is eating the world, and it wouldn’t surprise me if in fact the markets are undervaluing the growth prospects of tech stocks.]
So this sense that tech is eating the world / is turning more markets into winner-takes-all situations means that I should be buying winners, because they’ll keep on winning because of underlying structural factors that aren’t priced into the stocks. This is the sense that if I would seriously consider working for a company, I should be buying their stock because my seriously considering working for them isn’t fully priced in. [Similarly, this suggests real estate only in areas that I would seriously consider living in: as crazy as the SFBA prices are, it seems more likely to me that they will become more crazy rather than become more sane. Places like Atlanta, on the other hand, I should just ignore rather than trying to include in an index.]
Second, I think the amount of ‘dumb money’ has increased dramatically, and has become much more correlated through memes and other sorts of internet coordination. I’ve previously become more ‘realist’ about my ability to pick opportunities better than the market, but have avoided thinking about meme investments because of a general allergy to ‘greater fool theory’. But this is making me wonder if I should be more of a realist about where I fall on the fool spectrum. [This one feels pretty poisonous to attention, because the opportunities are more time-sensitive. While I think I have a scheme for selling in ways that would attention-free, I don’t think I have a scheme for seeing new opportunities and buying in that’s attention-free.]
[There’s a related point here about passive investors, which I think is less important for how I should invest but is somewhat important for thinking about what’s going on. A huge component of TSLA’s recent jump is being part of the S&P 500, for example.]
Third, I think the world as a whole is going to get crazier before it gets saner, which sort of just adds variance to everything. A thing I realized at the start of the pandemic is that I didn’t have a brokerage setup where I could sell my index fund shares and immediately turn them into options, and to the extent I think ‘opportunity investing’ is the way to go / there might be more opportunities with the world getting crazier, the less value I get out of “this will probably be worth 5% more next year”, because the odds that I see a 2x or 5x time-sensitive opportunity really don’t have to be very high for it to be worthwhile to have it in cash instead of locked into a 5% increase.
I am confused about how to invest in 2021.
I remember in college, talking with a friend who was in a class on technical investing, and he was mentioning that the class was talking about momentum investing on 7 day and 30 day timescales; I said “wait, those numbers are obviously suspicious; can’t we figure out what it should actually be from the past?”, downloading a dataset of historical S&P500 returns, and measuring the performance of simple momentum trading algorithms on that data. I discovered that basically all of the returns came from before 1980; there was a period where momentum investing worked, and then it stopped, but before I drilled down into the dataset (like if I just looked at the overall optimization results), it looked like momentum investing worked on net.
Part of my suspicion had also been an ‘efficient markets’ sense; if my friend was learning in his freshman classes about patterns in the market, presumably Wall Street also knew about those patterns, and was getting rid of them? I believed in the dynamic form of efficient markets: you could get rich by finding mispricings, but mostly by putting in the calories, and I thought I had better places to put calories. But this made it clear to me that there were shifts in how the market worked; if you were more sophisticated than the market, you could make money, but then at some point the market would reach your level of sophistication, and the opportunity would disappear.
I learned how to invest about 15 years ago (and a few years before the above anecdote). At the time, I was a smart high-schooler; my parents had followed a lifelong strategy of “earn lots of money, save most of it, and buy and hold”, and in particular had invested in a college fund for me; they told me (roughly) “this money is yours to do what you want with, and if you want to pay more for college, you need to take out loans.” I, armed with a study that suggested colleges were mostly selection effect instead of treatment effect, chose the state school (with top programs in the things I was interested in) that offered me a full ride instead of the fancier school that would have charged me, and had high five figures to invest.
I did a mixture of active investing and buying index funds; overall, they performed about as well, and I grew more to believe that active investing was a mistake whereas opportunity investing wasn’t. That is, looking at the market and trying to figure out which companies were most promising at the moment took more effort than I was going to put into it, whereas every five years or so a big opportunity would come along, that was worth betting big on. I was more optimistic about Netflix than the other companies in my portfolio, but instead of saying “I will be long Netflix and long S&P and that’s it”, I said “I will be long these ten stocks and long S&P”, and so Netflix’s massive outperformance over that time period only made me slightly in the black compared to the S&P instead of doing much better than it.
It feels like the stock market is entering a new era, and I don’t know what strategy is good for that era. There are a few components I’ll try to separate:
First, I’m not actually sure I believe the medium-term forward trend for US stocks is generically good in the way it has been for much of the past. As another historical example, my boyfriend, who previously worked at Google, has a bunch of GOOG that he’s never diversified out of, mostly out of laziness. About 2.5 years ago (when we were housemates but before we were dating), I offered to help him just go through the chore of diversification to make it happen. Since then GOOG has significantly outperformed the S&P 500, and I find myself glad we never got around to it. On the one hand, it didn’t have to be that way, and variance seems bad—but on the other hand, I’m more optimistic about Alphabet than I am about the US as a whole.
[Similarly, there’s some standard advice that tech workers should buy less tech stocks, since this correlates their income and assets in a way that’s undesirable. But this feels sort of nuts to me—one of the reasons I think it makes sense to work in tech is because software is eating the world, and it wouldn’t surprise me if in fact the markets are undervaluing the growth prospects of tech stocks.]
So this sense that tech is eating the world / is turning more markets into winner-takes-all situations means that I should be buying winners, because they’ll keep on winning because of underlying structural factors that aren’t priced into the stocks. This is the sense that if I would seriously consider working for a company, I should be buying their stock because my seriously considering working for them isn’t fully priced in. [Similarly, this suggests real estate only in areas that I would seriously consider living in: as crazy as the SFBA prices are, it seems more likely to me that they will become more crazy rather than become more sane. Places like Atlanta, on the other hand, I should just ignore rather than trying to include in an index.]
Second, I think the amount of ‘dumb money’ has increased dramatically, and has become much more correlated through memes and other sorts of internet coordination. I’ve previously become more ‘realist’ about my ability to pick opportunities better than the market, but have avoided thinking about meme investments because of a general allergy to ‘greater fool theory’. But this is making me wonder if I should be more of a realist about where I fall on the fool spectrum. [This one feels pretty poisonous to attention, because the opportunities are more time-sensitive. While I think I have a scheme for selling in ways that would attention-free, I don’t think I have a scheme for seeing new opportunities and buying in that’s attention-free.]
[There’s a related point here about passive investors, which I think is less important for how I should invest but is somewhat important for thinking about what’s going on. A huge component of TSLA’s recent jump is being part of the S&P 500, for example.]
Third, I think the world as a whole is going to get crazier before it gets saner, which sort of just adds variance to everything. A thing I realized at the start of the pandemic is that I didn’t have a brokerage setup where I could sell my index fund shares and immediately turn them into options, and to the extent I think ‘opportunity investing’ is the way to go / there might be more opportunities with the world getting crazier, the less value I get out of “this will probably be worth 5% more next year”, because the odds that I see a 2x or 5x time-sensitive opportunity really don’t have to be very high for it to be worthwhile to have it in cash instead of locked into a 5% increase.