I have a related question about buying stocks. Suppose (for example) that I knew with 100% certainty that the global demand for home robotics would grow tenfold in the next decade.
If this was the only information that I had that wasn’t generally known, is there any action I could take based on this information to reliably make money from the stock market (at least over the next ten years)?
Suppose (for example) that I knew with 100% certainty that the global demand for home robotics would grow tenfold in the next decade.
If you have 100% confidence in something, you then logically should go for maximum leverage, regardless of the risk, and so stock up on derivatives, like options and futures, rather than buy and hold stocks or indices.
But of course people are generally poorly calibrated, so someone who thinks they are 100% right will probably be wrong half the time.
So, from a time savings perspective you would want a fund that specializes in home robotics. If one of those exists, though, that suggests that your knowledge isn’t as unique as you’d like.
What I would probably do is find a news website for home robotics producers- a trade magazine is what used to fill this niche, and might still do so- to have a good idea of how relative companies are doing. This looks like a promising place to start, but that gets you as informed as similar investors, and you’d like to be more informed.
Then, try to keep a portfolio that’s fairly balanced in all noteworthy home robotics companies. I’d probably go the ‘buy and hold’ route- try and keep your portfolio roughly apportioned relative to market share by buying up shares of companies underrepresented in your portfolio every month. This is the ‘indexing’ approach- basically, you trust that the home robotics market as a whole will go up, and that the market is better at predicting who will go up than you will.
If you’re more confident in your ability to predict trends, you want to hold companies relative to their expected market share at the end of your trading period- to use an old example, the first strategy would have you holding lots of Blockbuster and some Netflix and the second strategy would have you holding lots of Netflix and some Blockbuster.
There is a giant obstacle here, though, which is that a large part of the stock price is determined by the financials of the company, which take a relatively large investment of time and energy to understand. If you’re indexing, you basically offload this work to other investors; if you do it yourself, you can have a decent idea of what the companies are worth on the books, and then adjust by your estimate of how well they’ll do in the near future.
If I was keeping my porfolio indexed to the market, wouldn’t I be selling Blockbuster shares each month as Blockbuster lost market share? Why would I end up holding lots of Blockbuster?
I apologize, I was unclear; I’m recommending ‘buy and hold indexing’ where you correct imbalances by buying the stocks you have less of with new investment income, rather than correcting imbalances by selling stocks you have too much of to buy stocks you have too little of. This is a good way to invest for individual investors who have a constant influx of investment funds and who pay trading fees that are a large percentage of their order sizes.
If you have a large pool of capital that you begin with, or you want to actively manage money you’ve already invested, then you may want to actively correct imbalances. It’s helpful to work out the expected value of a rebalancing trade, and make sure that’s larger than the fees you pay (and you may decide to only rebalance once it gets above some larger threshold). Here, you do end up with mostly Netflix- but you bought a lot of Blockbuster when it was expensive, and sold it when it was cheap, whereas the projection investor who knew that Netflix was going to worth 30 times what Blockbuster would be would have put 3% of their money into Blockbuster and 97% into Netflix, and so the majority of their current shares would come from when they put a lot of money into cheap Netflix stock. I haven’t heard about that sort of projection investing playing well with rebalancing- and if I remember correctly, it was designed for allocating a large pool which you have complete access to, rather than doing dollar cost averaging with a constant income stream.
Perhaps buying stock in companies that make microchips? Those home robotics companies are going to be spending a fair amount on microchips to fuel their growth...
Buy Google—if home robotics turns into a thing they’ll probably be running it, whether because they set a bunch of geniuses on the problem or they bought out the company that first started making these robots.
More seriously, I suppose you might be able to extrapolate some other information from that—for example, human servants would be even less useful, and materials/services used to produce robots might become more valuable.
they bought out the company that first started making these robots.
In this case, if you’re one of the people that bought into the company before Google bought it, you can make quite a bit more than if you bought into Google, just like it would have been better to buy into Kiva than to buy into Amazon. This often requires being a venture capitalist or angel investor, though.
Knowledge that domestic robots will be a bigger thing than other people expect doesn’t translate into having comparative advantage at producing domestic robots.
The failure rates for new businesses are closely linked to the tendency of entrepreneurs to try solving problems people don’t actually care about. If you actually had the certainty that Raoul589 implies, your success rate would be way higher.
Well, okay, that also assumes that you’re competent enough to run a business, which I suppose many people aren’t. Also Raoul might not actually know anything about making robots. So yeah, that makes sense, gwern.
Certainty is irrelevant, even if you are certain you still have serious problems making any use of this knowledge; there is no convenient stock named RBTS you can just buy 500 shares of and let it appreciate.
Example: in retrospect, we know for certain that a great many people wanted computers, operating systems, social networks etc—but the history of computer / operating system / social networks are strewn with flaming rubble. Suppose you knew in 2000 that “in 2010, the founder of the most successful social network will be worth >$10b”; just how useful is this knowledge, really? Do you have the capital to hang out a VC shingle and throw multi-million-dollar investments at every social media thing that comes along until finally in 2010 you know for sure that Facebook was the winning ticket? I doubt it.
Suppose that you are literally certain (you’re not just 100% confident, you actually have special perfect information) about the future tenfold growth in demand for home robotics. Are you claiming that there is literally no way of using this information to reliably extract money from the stock market? This surprises me.
Would you expect Vaniver’s indexing to at least reliably turn a profit? Would you expect it to turn a large profit?
Are you claiming that there is literally no way of using this information to reliably extract money from the stock market? This surprises me.
I’ll reuse my example: if you knew for certain that Facebook would be as huge as it was, what stocks, exactly, would you have invested in, pre-IPO, to capture gains from its growth? Remember, you don’t know anything else, like that Google will go up from its IPO, you don’t know anything about Apple being a huge success—all you know is that some social network will some day exist and will grow hugely. The best I can think of would be to sell any Murdoch stock you owned when you heard they were buying MySpace, but offhand I’m not sure that Murdoch didn’t just stagnate rather than drop as MySpace increasingly turned out to be a writeoff. In the hypothetical that you didn’t know the name of the company, you might’ve bought up a bunch of Google stock hoping that Orkut would be the winner, but while that would’ve been a decent investment (yay!) it would have had nothing to do with Orkut (awww!); illustrating the problem with highly illiquid markets in some areas...
Would you expect Vaniver’s indexing to at least reliably turn a profit? Would you expect it to turn a large profit?
Depends on the specifics. Suppose the home robotic growth were concentrated in a single private company which exploded into the billions of annual revenue and took away the market share of all the others, forcing them to go bankrupt or merge or shrink. Home robotics will have increased—keikaku doori! - yet Vaniver’s fund suffered huge losses or gone bankrupt (reindex when one of the robotics companies suffers share price collapses? Reindex into what, exactly? Another one of the doomed firms?). Then after the time period elapses and your special knowledge has become public knowledge, the robotics company goes public, and by EMH shares become a normal gamble where you could lose money as easily as make it.
(Is this an impossibly rare scenario? Well, it sounds a lot like Facebook, actually! They grew fast, roflstomped a bunch of other social networks, there was no way to invest in them or related businesses before the IPO, and post-IPO, I believe investors have done the opposite of profit.)
In case it’s not clear: I’m not trying to contradict you; I am trying to get advice from you.
Suppose that you got a mysterious note from the future telling you that the demand for home-robotics will increase tenfold in the next decade, and you know this note to be totally reliable. You know nothing else that is not publicly known. What would you do next?
Do more research. Is this even nonpublic knowledge at all? The world economy grows at something like 2% a year, labor costs generally seem to go up, prices of computers and robotics usually falls… Do industry projections expect to grow their sales by <25% a year?
If so, I might spend some of my hypothetical money on whatever the best approximation to a robotics index fund I can find, as the best of a bunch of bad choices. (Checking a few random entries in Wikipedia, maybe a fifth of the companies are publicly traded, so… that will be a pretty small index.) But I wouldn’t be really surprised if in 10 years, I had not outperformed the general market.
I’d advise finding a market bottleneck, like ColTan mining. You’ll see any technology that can replace tantalum capacitors from further away than you’ll manage to see software or design shifts.
By “you know this note to be totally reliable” I assume you mean you have a fair idea how it got there (eg you just built a time portal. with the intention of sending through financial advice, and a hand, bearing the same tattoo you have, pushed through with the note) and not that you’re psychic and literally know things with 100% certainty? IOW you have a high probability estimate that it’s genuine, but not an infinitely high one (seems more realistic and applicable if nothing else.)
I have a related question about buying stocks. Suppose (for example) that I knew with 100% certainty that the global demand for home robotics would grow tenfold in the next decade.
If this was the only information that I had that wasn’t generally known, is there any action I could take based on this information to reliably make money from the stock market (at least over the next ten years)?
If you have 100% confidence in something, you then logically should go for maximum leverage, regardless of the risk, and so stock up on derivatives, like options and futures, rather than buy and hold stocks or indices.
But of course people are generally poorly calibrated, so someone who thinks they are 100% right will probably be wrong half the time.
So, from a time savings perspective you would want a fund that specializes in home robotics. If one of those exists, though, that suggests that your knowledge isn’t as unique as you’d like.
What I would probably do is find a news website for home robotics producers- a trade magazine is what used to fill this niche, and might still do so- to have a good idea of how relative companies are doing. This looks like a promising place to start, but that gets you as informed as similar investors, and you’d like to be more informed.
Then, try to keep a portfolio that’s fairly balanced in all noteworthy home robotics companies. I’d probably go the ‘buy and hold’ route- try and keep your portfolio roughly apportioned relative to market share by buying up shares of companies underrepresented in your portfolio every month. This is the ‘indexing’ approach- basically, you trust that the home robotics market as a whole will go up, and that the market is better at predicting who will go up than you will.
If you’re more confident in your ability to predict trends, you want to hold companies relative to their expected market share at the end of your trading period- to use an old example, the first strategy would have you holding lots of Blockbuster and some Netflix and the second strategy would have you holding lots of Netflix and some Blockbuster.
There is a giant obstacle here, though, which is that a large part of the stock price is determined by the financials of the company, which take a relatively large investment of time and energy to understand. If you’re indexing, you basically offload this work to other investors; if you do it yourself, you can have a decent idea of what the companies are worth on the books, and then adjust by your estimate of how well they’ll do in the near future.
If I was keeping my porfolio indexed to the market, wouldn’t I be selling Blockbuster shares each month as Blockbuster lost market share? Why would I end up holding lots of Blockbuster?
I apologize, I was unclear; I’m recommending ‘buy and hold indexing’ where you correct imbalances by buying the stocks you have less of with new investment income, rather than correcting imbalances by selling stocks you have too much of to buy stocks you have too little of. This is a good way to invest for individual investors who have a constant influx of investment funds and who pay trading fees that are a large percentage of their order sizes.
If you have a large pool of capital that you begin with, or you want to actively manage money you’ve already invested, then you may want to actively correct imbalances. It’s helpful to work out the expected value of a rebalancing trade, and make sure that’s larger than the fees you pay (and you may decide to only rebalance once it gets above some larger threshold). Here, you do end up with mostly Netflix- but you bought a lot of Blockbuster when it was expensive, and sold it when it was cheap, whereas the projection investor who knew that Netflix was going to worth 30 times what Blockbuster would be would have put 3% of their money into Blockbuster and 97% into Netflix, and so the majority of their current shares would come from when they put a lot of money into cheap Netflix stock. I haven’t heard about that sort of projection investing playing well with rebalancing- and if I remember correctly, it was designed for allocating a large pool which you have complete access to, rather than doing dollar cost averaging with a constant income stream.
At a guess, I’d say you should buy stock in companies working on home robotics.
Right. Is there no more sophisticated strategy though?
Perhaps buying stock in companies that make microchips? Those home robotics companies are going to be spending a fair amount on microchips to fuel their growth...
Buy Google—if home robotics turns into a thing they’ll probably be running it, whether because they set a bunch of geniuses on the problem or they bought out the company that first started making these robots.
More seriously, I suppose you might be able to extrapolate some other information from that—for example, human servants would be even less useful, and materials/services used to produce robots might become more valuable.
In this case, if you’re one of the people that bought into the company before Google bought it, you can make quite a bit more than if you bought into Google, just like it would have been better to buy into Kiva than to buy into Amazon. This often requires being a venture capitalist or angel investor, though.
I suppose buy Google is a less sophisticated strategy, at that. As well as a joke.
Start a company developing domestic robots and make a success of it. Then (optionally) take it public.
Knowledge that domestic robots will be a bigger thing than other people expect doesn’t translate into having comparative advantage at producing domestic robots.
Given the failure rates for new businesses, that doesn’t sound like a very reliable strategy.
The failure rates for new businesses are closely linked to the tendency of entrepreneurs to try solving problems people don’t actually care about. If you actually had the certainty that Raoul589 implies, your success rate would be way higher.
Well, okay, that also assumes that you’re competent enough to run a business, which I suppose many people aren’t. Also Raoul might not actually know anything about making robots. So yeah, that makes sense, gwern.
Certainty is irrelevant, even if you are certain you still have serious problems making any use of this knowledge; there is no convenient stock named RBTS you can just buy 500 shares of and let it appreciate.
Example: in retrospect, we know for certain that a great many people wanted computers, operating systems, social networks etc—but the history of computer / operating system / social networks are strewn with flaming rubble. Suppose you knew in 2000 that “in 2010, the founder of the most successful social network will be worth >$10b”; just how useful is this knowledge, really? Do you have the capital to hang out a VC shingle and throw multi-million-dollar investments at every social media thing that comes along until finally in 2010 you know for sure that Facebook was the winning ticket? I doubt it.
Ahh good point. I mean, hence the argument to start your own company. But right, you won’t necessarily win.
Suppose that you are literally certain (you’re not just 100% confident, you actually have special perfect information) about the future tenfold growth in demand for home robotics. Are you claiming that there is literally no way of using this information to reliably extract money from the stock market? This surprises me.
Would you expect Vaniver’s indexing to at least reliably turn a profit? Would you expect it to turn a large profit?
I’ll reuse my example: if you knew for certain that Facebook would be as huge as it was, what stocks, exactly, would you have invested in, pre-IPO, to capture gains from its growth? Remember, you don’t know anything else, like that Google will go up from its IPO, you don’t know anything about Apple being a huge success—all you know is that some social network will some day exist and will grow hugely. The best I can think of would be to sell any Murdoch stock you owned when you heard they were buying MySpace, but offhand I’m not sure that Murdoch didn’t just stagnate rather than drop as MySpace increasingly turned out to be a writeoff. In the hypothetical that you didn’t know the name of the company, you might’ve bought up a bunch of Google stock hoping that Orkut would be the winner, but while that would’ve been a decent investment (yay!) it would have had nothing to do with Orkut (awww!); illustrating the problem with highly illiquid markets in some areas...
Depends on the specifics. Suppose the home robotic growth were concentrated in a single private company which exploded into the billions of annual revenue and took away the market share of all the others, forcing them to go bankrupt or merge or shrink. Home robotics will have increased—keikaku doori! - yet Vaniver’s fund suffered huge losses or gone bankrupt (reindex when one of the robotics companies suffers share price collapses? Reindex into what, exactly? Another one of the doomed firms?). Then after the time period elapses and your special knowledge has become public knowledge, the robotics company goes public, and by EMH shares become a normal gamble where you could lose money as easily as make it.
(Is this an impossibly rare scenario? Well, it sounds a lot like Facebook, actually! They grew fast, roflstomped a bunch of other social networks, there was no way to invest in them or related businesses before the IPO, and post-IPO, I believe investors have done the opposite of profit.)
In case it’s not clear: I’m not trying to contradict you; I am trying to get advice from you.
Suppose that you got a mysterious note from the future telling you that the demand for home-robotics will increase tenfold in the next decade, and you know this note to be totally reliable. You know nothing else that is not publicly known. What would you do next?
Do more research. Is this even nonpublic knowledge at all? The world economy grows at something like 2% a year, labor costs generally seem to go up, prices of computers and robotics usually falls… Do industry projections expect to grow their sales by <25% a year?
If so, I might spend some of my hypothetical money on whatever the best approximation to a robotics index fund I can find, as the best of a bunch of bad choices. (Checking a few random entries in Wikipedia, maybe a fifth of the companies are publicly traded, so… that will be a pretty small index.) But I wouldn’t be really surprised if in 10 years, I had not outperformed the general market.
I’d advise finding a market bottleneck, like ColTan mining. You’ll see any technology that can replace tantalum capacitors from further away than you’ll manage to see software or design shifts.
By “you know this note to be totally reliable” I assume you mean you have a fair idea how it got there (eg you just built a time portal. with the intention of sending through financial advice, and a hand, bearing the same tattoo you have, pushed through with the note) and not that you’re psychic and literally know things with 100% certainty? IOW you have a high probability estimate that it’s genuine, but not an infinitely high one (seems more realistic and applicable if nothing else.)