I think you’re understating the amount of private information available to anyone with a reasonable level of intelligence. If you have a decent level of curiosity, chances are that you know some things that the rest of the world hasn’t “caught onto” yet. For example, most fans of Tesla probably realized that EVs are going to kill ICEs and that Telsa is at least 4 years ahead of anyone else in terms of building EVs long before the sudden rise in Tesla stock in Jan 2020. Similarly, people who nerd out about epidemics predicted the scale of COVID-19 before the general public.
The extreme example of this is Venture Capital. People who are a bit “weird” and follow their hunches routinely start companies worth millions or billions of dollars. Every single one of them “beat the market” by tapping private information.
None of this invalidates the EMH (which as you pointed out is unfalsifiable). The key is figuring out how to take your personal unique insights and translate them into meaningful investments (with reasonable amounts of leverage and appropriate stop-losses). Of course, the easier it is to trade something, the more likely someone has “already had that idea”, so predicting the S&P500 is harder than predicting an individual stock. But starting your own company is a power move so difficult that it’s virtually unbeatable.
When you say rest of the world it’s important to keep in mind that it’s not just the average person on the street you are competing with. It’s professional traders.
Every single one of them “beat the market” by tapping private information.
Plenty of Venture Capitalist underform the market. Saying that everyone of them beats the market is not based on real data.
Plenty of Venture Capitalist underform the market. Saying that everyone of them beats the market is not based on real data.
I didn’t say every Venture Capitalist beats the market. Venture Capital in particular seems like a hobby for people who are already rich. I said every founder of a $1B startup beat the market.
I propose the following bet: take any founder of a $1B startup that you please, strip them of all of their wealth, give them $1M cash. What percent of them do you think would see their net-worth grow by more than the S&P 500 over the next 10 years? If the EMH is true, the answer should be 50%. Would you really be willing to bet 50% of them will under preform the market?
Venture Capital in particular seems like a hobby for people who are already rich. I said every founder of a $1B startup beat the market.
There’s a lot of survivership bias in that claim.
What percent of them do you think would see their net-worth grow by more than the S&P 500 over the next 10 years? If the EMH is true, the answer should be 50%.
No, you would only assume that if you bill the capacity of that founder to work at zero. Successful founders have skill at managing companies that distinct from having access to private information.
No, you would only assume that if you bill the capacity of that founder to work at zero. Successful founders have skill at managing companies that distinct from having access to private information.
Care to elucidate the difference between “skilled at managing companies” and “skilled at investing”. Do you really claim that if I restricted the same set of people to buying/selling publicly tradable assets they would underperform the S&P 500?
Care to elucidate the difference between “skilled at managing companies” and “skilled at investing”.
Tennis is not about tapping private information. Management is not about tapping private information.
Do you really claim that if I restricted the same set of people to buying/selling publicly tradable assets they would underperform the S&P 500?
The set of people buying/selling publicly tradable assets is the set of money managers at mutual funds. Those do underperform the S&P 500.
Additionally, the EDH says that all inefficiencies that can be profitably exploited disappear. If I can hire an analysts for 100k that allows me to find an efficiency that makes me 100k I’m not outperforming the S&P 500. The EDH assumes that the price you have to pay to uncover marginal inefficencies is equal to the profits that you can make from the inefficency.
The most skilled analysts likely do get employed by funds, the funds still overall underperform.
I’m still curious if you would be willing to bet against a fund run exclusively by founders of the S&P500Those do underperform the S&P 500.
Oh yeah, I definitely agree that mutual funds are terrible. Pretty sure they’re optimizing for management fees, though, not to actually outperform the market.
I’m still curious if you would be willing to bet against a fund run exclusively by founders vs the S&P 500. Saying the management fee for such a fund would be ridiculously high seems like a reasonable objection though.
For that matter, would you be willing to bet against SpaceX vs the S&P 500?
Private information should be very hard to come by, it is not something that can be learned in a few minutes from an internet search.
That Tesla is far ahead in EV technology than other car producers it is not private information, so it won’t give you any advantage in trading its stock. There are many other aspects to building a successful car company than just the technological aspects, and Tesla could still very well fail there. It seems also that you implying that January 2020 rise in Tesla price is due to the market suddenly realizing the Tesla lead, but there could many alternative explanations. In fact, it is a highly shorted stock, so for sure your position is debated by many smart people.
Venture capitalists do have access to private information, from financials to getting to known the founders, to internal metrics/datasets on what makes a company successful.
I agree that to be a successful entrepreneur you need to tap private information/build edges. To me it doesn’t look trivial/nor easy at all: there are orders of magnitude more intelligence people than rich intelligence people.
Private information should be very hard to come by, it is not something that can be learned in a few minutes from an internet search.
I think we have different definitions of private information.
I have private information if I disagree with the substantial majority of people, even if everything I know is in principle freely available. The market is trading on the consensus expectation of the future. If that consensus is wrong and I know so, I have private information.
Specifically, when Tesla was trading at $600 or so, it was publicly available that they were building cars in a way that no other company could, but the public consensus was not that they were therefore the most valuable car company in the world.
Similarly, SpaceX is currently valued at $44B according to the public consensus. But I would be willing to be a substantial sum of money that they are worth 5-10x that and people just haven’t fully grasped the implications of Starlink and Starship.
When you think about private information this way, in order to have private information all you have to do is:
1) Disagree with the general consensus
2) Be right
Incidentally, those are precisely the skills that rationality is training you for. Most people aren’t optimizing for the truth, they’re optimizing for fitting in with their peers.
To me it doesn’t look trivial/nor easy at all: there are orders of magnitude more intelligence people than rich intelligence people.
Very few intelligent people are optimizing for “make as much money as possible”. A trivial example of this, almost anyone working in academia could get a massive pay raise by switching to private industry. In addition, people can be very intelligent without being rational, so even if they claim to be optimizing for wealth they might not be doing a very good job of it. There are hordes of very intelligent people who are goldbugs or young earth creationists or global warming deniers. Why should we expect these people to behave rationally when it comes to financial self-interest when they so blatantly fail to do so in other domains?
I’m not even sure I buy the idea that there are more intelligent people than rich people. The 90% percentile for wealth in the USA is north of $1M. Going by the “MENSA” definition of highly intelligent, only 2% of people qualify. That means there are 5x as many millionaires as geniuses.
I think you’re understating the amount of private information available to anyone with a reasonable level of intelligence. If you have a decent level of curiosity, chances are that you know some things that the rest of the world hasn’t “caught onto” yet. For example, most fans of Tesla probably realized that EVs are going to kill ICEs and that Telsa is at least 4 years ahead of anyone else in terms of building EVs long before the sudden rise in Tesla stock in Jan 2020. Similarly, people who nerd out about epidemics predicted the scale of COVID-19 before the general public.
The extreme example of this is Venture Capital. People who are a bit “weird” and follow their hunches routinely start companies worth millions or billions of dollars. Every single one of them “beat the market” by tapping private information.
None of this invalidates the EMH (which as you pointed out is unfalsifiable). The key is figuring out how to take your personal unique insights and translate them into meaningful investments (with reasonable amounts of leverage and appropriate stop-losses). Of course, the easier it is to trade something, the more likely someone has “already had that idea”, so predicting the S&P500 is harder than predicting an individual stock. But starting your own company is a power move so difficult that it’s virtually unbeatable.
When you say rest of the world it’s important to keep in mind that it’s not just the average person on the street you are competing with. It’s professional traders.
Plenty of Venture Capitalist underform the market. Saying that everyone of them beats the market is not based on real data.
I didn’t say every Venture Capitalist beats the market. Venture Capital in particular seems like a hobby for people who are already rich. I said every founder of a $1B startup beat the market.
I propose the following bet: take any founder of a $1B startup that you please, strip them of all of their wealth, give them $1M cash. What percent of them do you think would see their net-worth grow by more than the S&P 500 over the next 10 years? If the EMH is true, the answer should be 50%. Would you really be willing to bet 50% of them will under preform the market?
There’s a lot of survivership bias in that claim.
No, you would only assume that if you bill the capacity of that founder to work at zero. Successful founders have skill at managing companies that distinct from having access to private information.
Care to elucidate the difference between “skilled at managing companies” and “skilled at investing”. Do you really claim that if I restricted the same set of people to buying/selling publicly tradable assets they would underperform the S&P 500?
Tennis is not about tapping private information. Management is not about tapping private information.
The set of people buying/selling publicly tradable assets is the set of money managers at mutual funds. Those do underperform the S&P 500.
Additionally, the EDH says that all inefficiencies that can be profitably exploited disappear. If I can hire an analysts for 100k that allows me to find an efficiency that makes me 100k I’m not outperforming the S&P 500. The EDH assumes that the price you have to pay to uncover marginal inefficencies is equal to the profits that you can make from the inefficency.
The most skilled analysts likely do get employed by funds, the funds still overall underperform.
Oh yeah, I definitely agree that mutual funds are terrible. Pretty sure they’re optimizing for management fees, though, not to actually outperform the market.
I’m still curious if you would be willing to bet against a fund run exclusively by founders vs the S&P 500. Saying the management fee for such a fund would be ridiculously high seems like a reasonable objection though.
For that matter, would you be willing to bet against SpaceX vs the S&P 500?
Private information should be very hard to come by, it is not something that can be learned in a few minutes from an internet search.
That Tesla is far ahead in EV technology than other car producers it is not private information, so it won’t give you any advantage in trading its stock. There are many other aspects to building a successful car company than just the technological aspects, and Tesla could still very well fail there. It seems also that you implying that January 2020 rise in Tesla price is due to the market suddenly realizing the Tesla lead, but there could many alternative explanations. In fact, it is a highly shorted stock, so for sure your position is debated by many smart people.
Venture capitalists do have access to private information, from financials to getting to known the founders, to internal metrics/datasets on what makes a company successful.
I agree that to be a successful entrepreneur you need to tap private information/build edges. To me it doesn’t look trivial/nor easy at all: there are orders of magnitude more intelligence people than rich intelligence people.
I think we have different definitions of private information.
I have private information if I disagree with the substantial majority of people, even if everything I know is in principle freely available. The market is trading on the consensus expectation of the future. If that consensus is wrong and I know so, I have private information.
Specifically, when Tesla was trading at $600 or so, it was publicly available that they were building cars in a way that no other company could, but the public consensus was not that they were therefore the most valuable car company in the world.
Similarly, SpaceX is currently valued at $44B according to the public consensus. But I would be willing to be a substantial sum of money that they are worth 5-10x that and people just haven’t fully grasped the implications of Starlink and Starship.
When you think about private information this way, in order to have private information all you have to do is:
1) Disagree with the general consensus
2) Be right
Incidentally, those are precisely the skills that rationality is training you for. Most people aren’t optimizing for the truth, they’re optimizing for fitting in with their peers.
Very few intelligent people are optimizing for “make as much money as possible”. A trivial example of this, almost anyone working in academia could get a massive pay raise by switching to private industry. In addition, people can be very intelligent without being rational, so even if they claim to be optimizing for wealth they might not be doing a very good job of it. There are hordes of very intelligent people who are goldbugs or young earth creationists or global warming deniers. Why should we expect these people to behave rationally when it comes to financial self-interest when they so blatantly fail to do so in other domains?
I’m not even sure I buy the idea that there are more intelligent people than rich people. The 90% percentile for wealth in the USA is north of $1M. Going by the “MENSA” definition of highly intelligent, only 2% of people qualify. That means there are 5x as many millionaires as geniuses.