I would worry in a lot of these cases that there’s some risk that your model isn’t taking account of, so you could be “picking up pennies in front of a steamroller”. Not in all cases though − 70-200% isn’t pennies.
But things like supposedly equivalent assets that used to be closely priced now diverging seems highly suspicious.
Most of the risk premium in investing is for negative skewness risk; it’s compensation for the fat tail. And this includes the basic “buy and hold the stock index” strategy. Penny-picking isn’t something to avoid. It’s the investor’s bread and butter. Because compensation for risk is compatible with the EMH, opportunities are not hard to find. The pennies can more than add up to the cost of occasionally getting run over, but only if you survive getting run over with enough left to keep playing the game. That means one must diversify as much as possible and not bet over Kelly.
But all of that is just a foundation of smart beta. To do any better, one has to find the alpha: actual market anomalies incompatible with the EMH. One doesn’t always know which is which.
Gilch made a good point that most investing is like “picking up pennies in front of a steamroller” (which I hadn’t thought of in that way before). Another example is buying corporate or government bonds at low interest rates, where you’re almost literally picking up pennies per year, while at any time default or inflation could quickly eat away a huge chunk of your principle.
But things like supposedly equivalent assets that used to be closely priced now diverging seems highly suspicious.
Yeah, I don’t know how to explain it, but it’s been working out for the past several weeks (modulo some experiments I tried to improve upon the basic trade which didn’t work). Asked a professional (via a friend) about this, and they said the biggest risk is that the price delta could stay elevated (above your entry point) for a long time and you could end up paying stock borrowing cost for that whole period until you decide to give up and close the position. But even in that case, the potential losses are of the same order of magnitude as the potential gains.
Agreed—conditional on the EMH holding, I think the most likely explanation is that you’re taking on risk you’re not aware of. If this is indeed the case, I’d expect a traditional financial advisor to be able to pick up on it very quickly, and so I’m curious what such a person has to say.
If that’s not the case, my guess is that the quants on wall street are bogged down in some kind of inflexible process that prevents them from targeting the opportunities you’re going for. That feels like a stretch, though. Or maybe it’s some kind of knowledge that’s illegible to a trading bot?
Personally, this is still an update in the direction of “I should be browsing obscure financial subreddits”
I would worry in a lot of these cases that there’s some risk that your model isn’t taking account of, so you could be “picking up pennies in front of a steamroller”. Not in all cases though − 70-200% isn’t pennies.
But things like supposedly equivalent assets that used to be closely priced now diverging seems highly suspicious.
Most of the risk premium in investing is for negative skewness risk; it’s compensation for the fat tail. And this includes the basic “buy and hold the stock index” strategy. Penny-picking isn’t something to avoid. It’s the investor’s bread and butter. Because compensation for risk is compatible with the EMH, opportunities are not hard to find. The pennies can more than add up to the cost of occasionally getting run over, but only if you survive getting run over with enough left to keep playing the game. That means one must diversify as much as possible and not bet over Kelly.
But all of that is just a foundation of smart beta. To do any better, one has to find the alpha: actual market anomalies incompatible with the EMH. One doesn’t always know which is which.
Gilch made a good point that most investing is like “picking up pennies in front of a steamroller” (which I hadn’t thought of in that way before). Another example is buying corporate or government bonds at low interest rates, where you’re almost literally picking up pennies per year, while at any time default or inflation could quickly eat away a huge chunk of your principle.
Yeah, I don’t know how to explain it, but it’s been working out for the past several weeks (modulo some experiments I tried to improve upon the basic trade which didn’t work). Asked a professional (via a friend) about this, and they said the biggest risk is that the price delta could stay elevated (above your entry point) for a long time and you could end up paying stock borrowing cost for that whole period until you decide to give up and close the position. But even in that case, the potential losses are of the same order of magnitude as the potential gains.
Agreed—conditional on the EMH holding, I think the most likely explanation is that you’re taking on risk you’re not aware of. If this is indeed the case, I’d expect a traditional financial advisor to be able to pick up on it very quickly, and so I’m curious what such a person has to say.
If that’s not the case, my guess is that the quants on wall street are bogged down in some kind of inflexible process that prevents them from targeting the opportunities you’re going for. That feels like a stretch, though. Or maybe it’s some kind of knowledge that’s illegible to a trading bot?
Personally, this is still an update in the direction of “I should be browsing obscure financial subreddits”