I’m coming around on the stronger version of the Efficient Market Hypothesis that says, “you can’t buy and sell equities in a way that beats the market in the long run. Just invest in an index fund, pay low fees, and don’t try to pick stocks.” I’m not sure I believe this any more, for a few reasons.
One is that I lived with a guy who traded professionally and we had a series of conversations where he explained about stocks to me, specifically why information-efficient prices don’t automatically imply an unbeatable market.
Another is that the outside-view strong-EMH argument has some vague structural similarities to arguments I hear about poker being unbeatable, with the following facts that seem VERY reminiscent of trading:
The long run is so long and the variance so high that day-to-day performance is basically all noise, and so
Lots of players with losing strategies appear to beat the games, and
Lots of players with winning strategies lose money, even over “long” periods of time, and THEREFORE
Just because someone has won in the past doesn’t mean you can do what they do and make money.
But I know that poker is in fact beatable, I know why it’s beatable, and I know it because of specific facts about the reality of the games & the players. Similarly I suspect that certain facts about real markets and market actors may make them beatable by retail investors.
I’m coming around on the stronger version of the Efficient Market Hypothesis that says, “you can’t buy and sell equities in a way that beats the market in the long run. Just invest in an index fund, pay low fees, and don’t try to pick stocks.” I’m not sure I believe this any more, for a few reasons.
One is that I lived with a guy who traded professionally and we had a series of conversations where he explained about stocks to me, specifically why information-efficient prices don’t automatically imply an unbeatable market.
Another is that the outside-view strong-EMH argument has some vague structural similarities to arguments I hear about poker being unbeatable, with the following facts that seem VERY reminiscent of trading:
The long run is so long and the variance so high that day-to-day performance is basically all noise, and so
Lots of players with losing strategies appear to beat the games, and
Lots of players with winning strategies lose money, even over “long” periods of time, and THEREFORE
Just because someone has won in the past doesn’t mean you can do what they do and make money.
But I know that poker is in fact beatable, I know why it’s beatable, and I know it because of specific facts about the reality of the games & the players. Similarly I suspect that certain facts about real markets and market actors may make them beatable by retail investors.
Still researching this.
“don’t bet against the house, bet against other players”
Of some related interest: Parrondo’s Paradox