On outguessing the market: With only public information, can someone (expect to) determine better times to invest into diversified funds? Specifically, is it a good idea to use the “being greedy when others are fearful and fearful when others are greedy” heuristic?
You could alternatively think that hedge funds don’t have enough trading volume to shift the prices so far that the heuristic stops working. Imagine a market composed of a thousand idiots, one hedge fund, and you, each participant having roughly equal resources. If all the idiots make some mistake, the hedge fund will get there before you and profit from it, but unless it’s leveraged 1000:1 (which would be … brave) there are likely still profits for you to take by exploiting the same mistake.
In reality there are a lot of hedge funds and some of them have an awful lot of money, but they’re still no more than ~1% of the market.
No because hedge funds would already be doing this, and you would have to think you were better at it than them.
Consider funds that close out their positions by the end of every day. They’re implicitly being as fearful as possible (in a world with just cash and stock), which is not obviously the optimal approach to long-run timing.
Specifically, is it a good idea to use the “being greedy when others are fearful and fearful when others are greedy” heuristic?
I would say “yes, but.” Really, the value comes from predicting a change before anyone else does it—saying “ah, the greed has spread as far as it can, and so now the only possible place for us to go is back towards fear, and that will happen all at once” or “ah, the fear has spread as far as it can, and so now the only possible place for us to go is back towards greed.” (In my experience, fear is more contagious than greed.)
But always disagreeing with the herd is reversed stupidity, not intelligence.
Caveat 1 is that your implied model is continuous growth of the underlying investment (say, the US stock market represented by S&P500) with more-or-less constant trend. Given this, you should buy if you think the current price dropped below the long-term trend (e.g. 2008) and sell if you think the price rose above the same trend. If this model is correct, the trading strategy will work (we’re ignoring risk for the time being). But if the model turns out to be wrong, well then...
Caveat 2 is that you’re implying that you have a considerably longer time horizon than other market participants. Hedge funds might play a similar game, but they have to deliver returns to investors and a hedge fund which just bleeds money for months and years with nothing but a promise that someday it will redeem itself will not last long. There are investment entities which can take a very long-term view (e.g. sovereign funds), but they are not the rule.
I think you can win using this strategy—but it requires a lot of patience. Certainly years—with the possibility of decades. You’d have to be sure of your strategy and sure of your belief in your strategy, changing tact when offside is the worst thing you can do if you are playing a deep value game.
It remains a winning strategy because of that cost.
On outguessing the market: With only public information, can someone (expect to) determine better times to invest into diversified funds? Specifically, is it a good idea to use the “being greedy when others are fearful and fearful when others are greedy” heuristic?
No because hedge funds would already be doing this, and you would have to think you were better at it than them.
You could alternatively think that hedge funds don’t have enough trading volume to shift the prices so far that the heuristic stops working. Imagine a market composed of a thousand idiots, one hedge fund, and you, each participant having roughly equal resources. If all the idiots make some mistake, the hedge fund will get there before you and profit from it, but unless it’s leveraged 1000:1 (which would be … brave) there are likely still profits for you to take by exploiting the same mistake.
In reality there are a lot of hedge funds and some of them have an awful lot of money, but they’re still no more than ~1% of the market.
Consider funds that close out their positions by the end of every day. They’re implicitly being as fearful as possible (in a world with just cash and stock), which is not obviously the optimal approach to long-run timing.
Even if most funds did this, it would only take a few attempting to take advantage of this to eliminate any profit opportunity for non-hedge funds.
I would say “yes, but.” Really, the value comes from predicting a change before anyone else does it—saying “ah, the greed has spread as far as it can, and so now the only possible place for us to go is back towards fear, and that will happen all at once” or “ah, the fear has spread as far as it can, and so now the only possible place for us to go is back towards greed.” (In my experience, fear is more contagious than greed.)
But always disagreeing with the herd is reversed stupidity, not intelligence.
Yes, with caveats.
Caveat 1 is that your implied model is continuous growth of the underlying investment (say, the US stock market represented by S&P500) with more-or-less constant trend. Given this, you should buy if you think the current price dropped below the long-term trend (e.g. 2008) and sell if you think the price rose above the same trend. If this model is correct, the trading strategy will work (we’re ignoring risk for the time being). But if the model turns out to be wrong, well then...
Caveat 2 is that you’re implying that you have a considerably longer time horizon than other market participants. Hedge funds might play a similar game, but they have to deliver returns to investors and a hedge fund which just bleeds money for months and years with nothing but a promise that someday it will redeem itself will not last long. There are investment entities which can take a very long-term view (e.g. sovereign funds), but they are not the rule.
I think you can win using this strategy—but it requires a lot of patience. Certainly years—with the possibility of decades. You’d have to be sure of your strategy and sure of your belief in your strategy, changing tact when offside is the worst thing you can do if you are playing a deep value game.
It remains a winning strategy because of that cost.