True zoom began climbing on around Feb. 1st and seems to have continued climbing.
False zoom had a couple little bumps in February, but it only started rising consistently around Feb. 24th, and the spike you’re noticing mostly took place from March 12-20th, over about a week’s time. Then it plummeted, got a hold put on it, and declined once the hold was released to an unprecedented low of $0.70/share.
How big of an error is this?
Market cap is the price of stock multiplied by the number of outstanding shares of stock. Its current market cap is $300.9 million, so at a share price of $.70 cents, it should have about 430 million outstanding shares.
Let’s assume the worst-case scenario: today’s lowest-ever price was the correct price for ZTNO from Feb. 24th on.
In that case, for investors who owned ZTNO at its peak price and held it through to today, they suffered a collective loss of around $9 billion.
The world’s market capitalization is around $78 trillion, so that’s around 0.012% of the world’s market cap.
What’s the strongest defense of the EMH I can offer here?
Even a very strong EMH might allow for occasional fuckups, when we’re talking a tiny fraction of a percent of the world’s publicly traded companies, for about a week’s time, in very weird circumstances. If you go around cherry-picking for missed opportunities in hindsight, you’re sure to find them.
It’s called the Efficient Market Hypothesis, not the Ideal Market Hypothesis. Saying “Asset prices reflect all available information” is not the same as saying “Asset prices reflect all information.” Ground-level economic information, such as the bankruptcy of a small-cap company in a foreign country, might spread at a speed that is proportional to its expected value. Perhaps most or all investors in ZTNO prior to January had such small segments of their portfolio allocated to ZTNO that it didn’t make sense to check whether or not it existed, since presumably the vast majority of listed companies do exist and it probably takes quite a bit of work to check.
Did ZTNO really look like a bad buy at the time to someone who knew it wasn’t the True Zoom? Maybe you noticed early that people were buying because of name confusion, and you bought for that reason, hoping to time the market and sell before the bubble burst. That’s not illogical. Then again, ZTNO is a Chinese videoconferencing company. Maybe you reasonably expected that they, like ZM, would profit from increased demand due to COVID-19. I admit that the company sounds dubious, but that’s not a sure thing.
My small experience with stocks is that the more I look into apparently bonkers violations of the EMH, the more I discover that I just didn’t understand the full context. Search a little harder under the assumtion the EMH is true and you’re just missing something, and there’s a good bet you’ll find an explanation that makes the prices make sense.
Matt Levine covers these mispricings examples all the time in his newsletter, and more importantly, follows them up often. (Followup is important; I notice that Eliezer has not exactly gone around trumpeting Wei Dai’s followup comment where he mentions losing almost all of his coronavirus profits as evidence that maybe the EMH is right after all; nor that any of the people who stated so confidently in late March that “obviously the stock market is going to crater much further, so much for the EMH!” have followed this up and noted that if you had taken their advice to short stocks, you would have lost your shirt.)
The followup usually seems to be that either you could only have made a tiny amount of money, once in a great while, typically measured in low millions, if and only if you owned a ton of the worthless stock in advance and timed your sale right, and that anyone buying into it on the ‘greater fool’ theory is often left holding the bag as either they buy the top by the time they hear of the spike or the penny stock in question may actually be delisted entirely from the exchange due to the shenanigans (in which case then you’re in serious trouble). Not exactly a devastating counterexample.
Followup is important; I notice that Eliezer has not exactly gone around trumpeting Wei Dai’s followup comment where he mentions losing almost all of his coronavirus profits as evidence that maybe the EMH is right after all
When Eliezer posted about my bet, I had only gained 7x my initial bet (and that’s what he posted about), and although I ended up losing 80% of my paper profits (which were 50x at one point) I still gained 10x my initial bet. So him not posting further followup seems fine? And at least from my personal perspective (i.e., where selection bias isn’t an issue) the final outcome still seems to be strong evidence against EMH.
the final outcome still seems to be strong evidence against EMH
It seems to me that the EMH is a spherical cow. In reality, there has to be some process by which market prices comes to reflect new information. And whoever figures it out first, either because they had private information, or because they did better analysis, should make some profit.
And the question might be—is it always the same people who figure it out first, or is there some randomness involved? (Consider a toy model where N people are trading one stock and every day a fairy randomly selects 1 of the N people and tells them some new information about the future value of the stock.)
If there’s a distribution over who has the market-beating analysis on any given day, then with some probability, it’s you. So the question is, what are the odds?
It’s not going to be a uniform distribution over people or predictions. There’s some prior based on what information you have access to, and how good at certain kinds of reasoning you are compared to others, and then you update based on how strong your inside view is. (And over time, you can update on track record.)
Most of the time, it will probably be professionals who do this for a living. But it’s not crazy to me that as an intelligent amateur who consumes lots of information and thinks carefully, it will sometimes be your turn, so to speak.
Btw, it seems like there’s a little bit of a paradox here. Suppose the participants in a market are all well-calibrated about whether they have market-beating information. And in expectation everyone will stumble upon some market beating information at some time or another.
On the one hand, everyone should be able to get market returns, by just investing in the market. But since everyone has market-beating information some of the time (and are well-calibrated), they should actually be able to beat the market, by diverging from the market portfolio only when they have market-beating information.
But then you’d have everyone beating the market, which can’t be possible.
I think the resolution is the same as Zvi’s point in the Sources of Disagreement and Interest (aka Suckers at the Table) section of Prediction Markets: When Do They Work? In the scenario I describe, no one would be able to profit off of their private information. As soon as they go to buy on positive information (or sell on negative information), they’ll find that everyone else (who’s well-calibrated) raises (or lowers) their prices to exactly match. (Or that no one was showing any bids or offers in the first place, since they knew any fills would face adversarial selection.)
In reality, I think the way this works is that you have both suckers (people who are miscalibrated), and also people who are willing to go forego market returns—that is, people who have some natural reason to buy (e.g. new investors) or sell (e.g. in order to spend).
Suppose the participants in a market are all well-calibrated about whether they have market-beating information.
That part seems particularly unrealistic. If that were true, we’d be living in a very different world.
Many large market participants have perverse incentives when trading other people’s money. Their customers would prefer low volatility over optimal Kelley bets, and many would have to panic sell in a drawdown if volatility wasn’t kept under control. You don’t have to be smarter than them to exploit them, since they’re optimizing a different goal: keep their customers happy, instead of making maximum money for them.
And then, most people are irrational. Going by base rates, you should expect other market participants, even big ones, to trade emotionally as well.
You don’t have to be smarter than them to exploit them, since they’re optimizing a different goal: keep their customers happy, instead of making maximum money for them.
Sell puts when implied volatility (IV) is higher than usual, on stocks where the IV tends to exceed the historical volatility (this is most of them, actually).
Whales have to buy puts for more than they’re really worth to protect their customers’ portfolios from scary market volatility.
Buy them back for less than you were paid for them when IV reverts to the mean. It’s like selling insurance. You have to control your bet size and hedge (maybe with a cheaper put, like reinsurance) so you don’t get wiped out when the disaster actually happens, but you’ll get more than enough premium to make up for your losses.
I think it is very relevant to note that you were up 50x at one point and then down to 10x on net after further decisions went sour, because
those further decisions going sour show your decision-making was not that consistently good
such high variance looks much more obviously like ‘gambling’ or ‘taking on an enormous amount of risk’ than ‘it’s fun and easy to seek out alpha and beat the market’
such high variance looks much more obviously like ‘gambling’ or ‘taking on an enormous amount of risk’ than ‘it’s fun and easy to seek out alpha and beat the market’
I know someone else who made the opposite mistake as me and sold their coronavirus puts too early. If you only saw their record, there would be no “high variance”. They just made less money than they could have. It seems to me that the correct lesson from both outcomes is that it’s possible to beat the market (without putting in so much effort as to make it not worthwhile to try), but we haven’t figured out how to time the exits at exactly or very close to the best times.
Thats not fair to mention EMH here, the stock price rally of the last couple months had not much todo with EMH. Unless you include Central Bank adhoc overnight actions into the EMH theory. If the FED would not have stepped in with unprecedented rescue plans we would have a very different SP500 valuation today.
the stock price rally of the last couple months had not much todo with EMH.
I’m not sure exactly what you’re saying here—it sounds like “the EMH didn’t cause the rally”, but I don’t think anyone was crediting the EMH with causing anything?
In any case, the Fed did do what they did. And one could have considered in advance the possibility that they might do so, and priced that into one’s predictions. Central bank ad-hoc overnight actions are absolutely something the EMH covers—if not, the theory would be “markets take into account all available information except that about potential central bank ad-hoc overnight actions”.
Search a little harder under the assumtion the EMH is true and you’re just missing something, and there’s a good bet you’ll find an explanation that makes the prices make sense.
That sounds like confirmation bias.
Search a little harder under the assumption that markets are exploitable, and you’ll start to notice more inefficiencies you could profit from.
The onus is on the person making an extraordinary claim to provide the evidence, not the other way around.
If you think you’ve found an exploit in the market you should absolutely start from the position that you’re wrong, because… you almost certainly are. This is how anyone ought to behave purely out of naked self-interest—it has nothing to do with confirmation bias.
Is my claim really so extraordinary? EMH isn’t settled: it’s contentious. Many economists seem to believe it, but many traders and money managers reject it. I mean, I feel like there are a number of exploitable anomalies that are open secrets at this point. GARCH forecasts. Pairs trading. Momentum. Mean reversion. Fourier spectral filters. Historical vs implied option volatility. These are not beyond the reach of anyone who can do calculus and write code. There are still more whales than sharks in the market.
If you think you’ve found an exploit in the market you should absolutely start from the position that you’re wrong, because… you almost certainly are.
Bayes says you have to look at both sides of the likelihood ratio to update. I don’t particularly care which one you pick first. You should certainly try to test any edge you think you have, and look for missing information. If you develop a good edge it’s easy to make some profit, but it’s always easier to lose money if you’re careless. But don’t give up before you even try.
You should certainly try to test any edge you think you have, and look for missing information. If you develop a good edge it’s easy to make some profit, but it’s always easier to lose money if you’re careless. But don’t give up before you even try.
Yep, I agree with all of this. I guess I way I would phrase it is that we don’t start with a flat prior: we have mountains of evidence that most investors underperform, and that finding an edge is difficult. Doesn’t mean it’s not possible, and absolutely you should try, so long as you’re taking very careful steps not to fool yourself about performance, benchmarking appropriately, etc.
On the ‘open secrets’ - I’m writing a big effort-post right now, and this is one of my main points of confusion - would appreciate your input once it’s up.
I mean, that’s the ideal case. I’m skeptical that my own efforts, or those of most people, would lead them to profit substantially more than they could have by applying their energies to any other line of work.
This is partly based on my own experience doing a mini history of COVID 19 and the stock market, when I was really convinced that the market had behaved irrationally. It was remarkable to see how long it took me to find disconfirming evidence that made me see that the market was just thinking differently. Based on that experience, I’d want to see a whole lot of work sunk into any attempt to find alpha before I was prepared to believe it was real.
I think that “any other line of work” is putting it too strongly. The thing that most appeals to me about trading is that its returns can scale faster than the time put into it: if you have more money, you can invest more money, unlike an office job that gives you small raises, but still consumes all your time.
It’s the difference between owning a business and working for one. But trading is not the only way to do that. There are many other sources of passive income available, and some of them take even less capital than trading in the stock markets.
I think it’s worth steelmanning the EMH in this case.
Let’s compare ZTNO (the False Zoom) and ZM (the True Zoom) for the last 6 months:
False zoom prices
True zoom prices
True zoom began climbing on around Feb. 1st and seems to have continued climbing.
False zoom had a couple little bumps in February, but it only started rising consistently around Feb. 24th, and the spike you’re noticing mostly took place from March 12-20th, over about a week’s time. Then it plummeted, got a hold put on it, and declined once the hold was released to an unprecedented low of $0.70/share.
How big of an error is this?
Market cap is the price of stock multiplied by the number of outstanding shares of stock. Its current market cap is $300.9 million, so at a share price of $.70 cents, it should have about 430 million outstanding shares.
Let’s assume the worst-case scenario: today’s lowest-ever price was the correct price for ZTNO from Feb. 24th on.
In that case, for investors who owned ZTNO at its peak price and held it through to today, they suffered a collective loss of around $9 billion.
The world’s market capitalization is around $78 trillion, so that’s around 0.012% of the world’s market cap.
What’s the strongest defense of the EMH I can offer here?
Even a very strong EMH might allow for occasional fuckups, when we’re talking a tiny fraction of a percent of the world’s publicly traded companies, for about a week’s time, in very weird circumstances. If you go around cherry-picking for missed opportunities in hindsight, you’re sure to find them.
It’s called the Efficient Market Hypothesis, not the Ideal Market Hypothesis. Saying “Asset prices reflect all available information” is not the same as saying “Asset prices reflect all information.” Ground-level economic information, such as the bankruptcy of a small-cap company in a foreign country, might spread at a speed that is proportional to its expected value. Perhaps most or all investors in ZTNO prior to January had such small segments of their portfolio allocated to ZTNO that it didn’t make sense to check whether or not it existed, since presumably the vast majority of listed companies do exist and it probably takes quite a bit of work to check.
Did ZTNO really look like a bad buy at the time to someone who knew it wasn’t the True Zoom? Maybe you noticed early that people were buying because of name confusion, and you bought for that reason, hoping to time the market and sell before the bubble burst. That’s not illogical. Then again, ZTNO is a Chinese videoconferencing company. Maybe you reasonably expected that they, like ZM, would profit from increased demand due to COVID-19. I admit that the company sounds dubious, but that’s not a sure thing.
My small experience with stocks is that the more I look into apparently bonkers violations of the EMH, the more I discover that I just didn’t understand the full context. Search a little harder under the assumtion the EMH is true and you’re just missing something, and there’s a good bet you’ll find an explanation that makes the prices make sense.
Matt Levine covers these mispricings examples all the time in his newsletter, and more importantly, follows them up often. (Followup is important; I notice that Eliezer has not exactly gone around trumpeting Wei Dai’s followup comment where he mentions losing almost all of his coronavirus profits as evidence that maybe the EMH is right after all; nor that any of the people who stated so confidently in late March that “obviously the stock market is going to crater much further, so much for the EMH!” have followed this up and noted that if you had taken their advice to short stocks, you would have lost your shirt.)
The followup usually seems to be that either you could only have made a tiny amount of money, once in a great while, typically measured in low millions, if and only if you owned a ton of the worthless stock in advance and timed your sale right, and that anyone buying into it on the ‘greater fool’ theory is often left holding the bag as either they buy the top by the time they hear of the spike or the penny stock in question may actually be delisted entirely from the exchange due to the shenanigans (in which case then you’re in serious trouble). Not exactly a devastating counterexample.
When Eliezer posted about my bet, I had only gained 7x my initial bet (and that’s what he posted about), and although I ended up losing 80% of my paper profits (which were 50x at one point) I still gained 10x my initial bet. So him not posting further followup seems fine? And at least from my personal perspective (i.e., where selection bias isn’t an issue) the final outcome still seems to be strong evidence against EMH.
It seems to me that the EMH is a spherical cow. In reality, there has to be some process by which market prices comes to reflect new information. And whoever figures it out first, either because they had private information, or because they did better analysis, should make some profit.
And the question might be—is it always the same people who figure it out first, or is there some randomness involved? (Consider a toy model where N people are trading one stock and every day a fairy randomly selects 1 of the N people and tells them some new information about the future value of the stock.)
If there’s a distribution over who has the market-beating analysis on any given day, then with some probability, it’s you. So the question is, what are the odds?
It’s not going to be a uniform distribution over people or predictions. There’s some prior based on what information you have access to, and how good at certain kinds of reasoning you are compared to others, and then you update based on how strong your inside view is. (And over time, you can update on track record.)
Most of the time, it will probably be professionals who do this for a living. But it’s not crazy to me that as an intelligent amateur who consumes lots of information and thinks carefully, it will sometimes be your turn, so to speak.
Btw, it seems like there’s a little bit of a paradox here. Suppose the participants in a market are all well-calibrated about whether they have market-beating information. And in expectation everyone will stumble upon some market beating information at some time or another.
On the one hand, everyone should be able to get market returns, by just investing in the market. But since everyone has market-beating information some of the time (and are well-calibrated), they should actually be able to beat the market, by diverging from the market portfolio only when they have market-beating information.
But then you’d have everyone beating the market, which can’t be possible.
I think the resolution is the same as Zvi’s point in the Sources of Disagreement and Interest (aka Suckers at the Table) section of Prediction Markets: When Do They Work? In the scenario I describe, no one would be able to profit off of their private information. As soon as they go to buy on positive information (or sell on negative information), they’ll find that everyone else (who’s well-calibrated) raises (or lowers) their prices to exactly match. (Or that no one was showing any bids or offers in the first place, since they knew any fills would face adversarial selection.)
In reality, I think the way this works is that you have both suckers (people who are miscalibrated), and also people who are willing to go forego market returns—that is, people who have some natural reason to buy (e.g. new investors) or sell (e.g. in order to spend).
That part seems particularly unrealistic. If that were true, we’d be living in a very different world.
Many large market participants have perverse incentives when trading other people’s money. Their customers would prefer low volatility over optimal Kelley bets, and many would have to panic sell in a drawdown if volatility wasn’t kept under control. You don’t have to be smarter than them to exploit them, since they’re optimizing a different goal: keep their customers happy, instead of making maximum money for them.
And then, most people are irrational. Going by base rates, you should expect other market participants, even big ones, to trade emotionally as well.
What trades does this suggest?
Sell puts when implied volatility (IV) is higher than usual, on stocks where the IV tends to exceed the historical volatility (this is most of them, actually).
Whales have to buy puts for more than they’re really worth to protect their customers’ portfolios from scary market volatility.
Buy them back for less than you were paid for them when IV reverts to the mean. It’s like selling insurance. You have to control your bet size and hedge (maybe with a cheaper put, like reinsurance) so you don’t get wiped out when the disaster actually happens, but you’ll get more than enough premium to make up for your losses.
I think it is very relevant to note that you were up 50x at one point and then down to 10x on net after further decisions went sour, because
those further decisions going sour show your decision-making was not that consistently good
such high variance looks much more obviously like ‘gambling’ or ‘taking on an enormous amount of risk’ than ‘it’s fun and easy to seek out alpha and beat the market’
I know someone else who made the opposite mistake as me and sold their coronavirus puts too early. If you only saw their record, there would be no “high variance”. They just made less money than they could have. It seems to me that the correct lesson from both outcomes is that it’s possible to beat the market (without putting in so much effort as to make it not worthwhile to try), but we haven’t figured out how to time the exits at exactly or very close to the best times.
Thats not fair to mention EMH here, the stock price rally of the last couple months had not much todo with EMH. Unless you include Central Bank adhoc overnight actions into the EMH theory. If the FED would not have stepped in with unprecedented rescue plans we would have a very different SP500 valuation today.
I’m not sure exactly what you’re saying here—it sounds like “the EMH didn’t cause the rally”, but I don’t think anyone was crediting the EMH with causing anything?
In any case, the Fed did do what they did. And one could have considered in advance the possibility that they might do so, and priced that into one’s predictions. Central bank ad-hoc overnight actions are absolutely something the EMH covers—if not, the theory would be “markets take into account all available information except that about potential central bank ad-hoc overnight actions”.
That sounds like confirmation bias.
Search a little harder under the assumption that markets are exploitable, and you’ll start to notice more inefficiencies you could profit from.
The onus is on the person making an extraordinary claim to provide the evidence, not the other way around.
If you think you’ve found an exploit in the market you should absolutely start from the position that you’re wrong, because… you almost certainly are. This is how anyone ought to behave purely out of naked self-interest—it has nothing to do with confirmation bias.
Is my claim really so extraordinary? EMH isn’t settled: it’s contentious. Many economists seem to believe it, but many traders and money managers reject it. I mean, I feel like there are a number of exploitable anomalies that are open secrets at this point. GARCH forecasts. Pairs trading. Momentum. Mean reversion. Fourier spectral filters. Historical vs implied option volatility. These are not beyond the reach of anyone who can do calculus and write code. There are still more whales than sharks in the market.
Bayes says you have to look at both sides of the likelihood ratio to update. I don’t particularly care which one you pick first. You should certainly try to test any edge you think you have, and look for missing information. If you develop a good edge it’s easy to make some profit, but it’s always easier to lose money if you’re careless. But don’t give up before you even try.
Yep, I agree with all of this. I guess I way I would phrase it is that we don’t start with a flat prior: we have mountains of evidence that most investors underperform, and that finding an edge is difficult. Doesn’t mean it’s not possible, and absolutely you should try, so long as you’re taking very careful steps not to fool yourself about performance, benchmarking appropriately, etc.
On the ‘open secrets’ - I’m writing a big effort-post right now, and this is one of my main points of confusion - would appreciate your input once it’s up.
Sometimes the market is wrong but the barrier to competition is so high that if you try to take advantage of it you run of money.
I mean, that’s the ideal case. I’m skeptical that my own efforts, or those of most people, would lead them to profit substantially more than they could have by applying their energies to any other line of work.
This is partly based on my own experience doing a mini history of COVID 19 and the stock market, when I was really convinced that the market had behaved irrationally. It was remarkable to see how long it took me to find disconfirming evidence that made me see that the market was just thinking differently. Based on that experience, I’d want to see a whole lot of work sunk into any attempt to find alpha before I was prepared to believe it was real.
I think that “any other line of work” is putting it too strongly. The thing that most appeals to me about trading is that its returns can scale faster than the time put into it: if you have more money, you can invest more money, unlike an office job that gives you small raises, but still consumes all your time.
It’s the difference between owning a business and working for one. But trading is not the only way to do that. There are many other sources of passive income available, and some of them take even less capital than trading in the stock markets.