I think this post is missing the important part of actually doing this well / being a chosen one, from my perspective. That is, it seems to think of the EMH as something like an on/off switch, where either you think the market is better than you always and so you just blindly trust it, or you think you’re better than the market always, and so you should be actively trading.
But my experience has been about every five years, an opportunity comes by and I think “oh, this is a major opportunity,” and each time I’ve been right. [FWIW I didn’t have this for COVID, because of a general plan to focus on work instead of the markets leading up to the pandemic, and then when I started thinking “oh this will actually be as bad as 1918″ I was too busy trying to solve practical problems related to it that I didn’t think seriously about the question of “should I be trading on this?”; I think the me that had thought about trading based off it would have mostly made the right calls.]
This is, of course, a small sample size, and I’ve made many active trades that weren’t associated with that feeling, whose records have been much worse. Each of the ‘edge’ investments has also had another side to it, and the other side didn’t have the same feeling to guide me. For example, I correctly timed BP’s bottom during the Deepwater Horizon crisis, but then when it recovered my decision of when to sell it was essentially random. I think most of the people who predicted COVID a week early were then not able to outperform the market on the other side, and various things that I’ve seen people say about why they expect a continued edge seemed wrong to me. (For example, someone mentioned that they could evaluate potential treatments better than the market—which I think is true, because I think this person is actually a world-class expert at that specific problem—but I think that ability won’t actually give them an edge when it comes to asset prices. I don’t think anyone thinking just about biology would have correctly predicted the recent bottom or where we’d recover to, for example.)
Nevertheless, I’m pretty convinced that I sometimes have an edge, and more importantly can tell when I have an edge and when I’m just guessing. I think something like 1-10% of rationalists are in this category, or could be if they believed it, much like I think a comparable number of rationalists could be superforecasters if they tried. And historically, knowing to take the “oh, this is a major opportunity” signal seriously, instead of treating it as “just another good idea”, would have made a huge difference, and I think I’ve under-updated each time on how much to move things to be more ready the next time one comes along. Which is the main reason I think this is worth bringing up.
[Like, inspired by his weakened faith in the EMH, Eliezer attempted to time the bottom of the market, and succeeded. It seems better if more people attempt this sort of thing, at an appropriately humble frequency.]
I think I agree with this point and I’m glad you raised it—you might non-trivially beat the market every once in a while, but not all the time. To be clear, I don’t think of the EMH as an on/off switch, and if the post gives that impression, that’s my bad. In fact, the most successful investors I know of wait, wait, wait, and then very occasionally load up when they see a major asymmetry.
But I do still have a couple of reservations. The first is that this would still show up in the evidential standards I’ve suggested? If you match the market most of the time, but every five years you beat it, you’re eventually gonna have a pretty amazing track record, especially as you compound early successes. Note this is more or less the same frequency offered by some anomalies—for example, the momentum strategy I experimented with only outperforms during downturns, but ends up with a super impressive CAGR.
The second question is, how confident are you (‘you’ in the general sense, but also ‘you’ Vaniver if you feel inclined to answer) that knowing the difference between the edge trades and the others actually helps? If it’s a very strong feeling, why trade on all the other occasions when you know you’re guessing?
I think it’s interesting in an academic sense that these edge trades might really exist, but if they still ultimately result in an unexceptional record because of all the usual human foibles, I’m not sure how it practically justifies the suggestion that anyone should do more of this sort of thing?
Each of the ‘edge’ investments has also had another side to it, and the other side didn’t have the same feeling to guide me. For example, I correctly timed BP’s bottom during the Deepwater Horizon crisis, but then when it recovered my decision of when to sell it was essentially random. I think most of the people who predicted COVID a week early were then not able to outperform the market on the other side, and various things that I’ve seen people say about why they expect a continued edge seemed wrong to me.
This is a super important point too. Any investor who is long the stockmarket on a long horizon ultimately has to get back in, which means they have to time the market twice. Personally, I was gobsmacked by the speed of the recovery (or the height of the dead cat bounce, if that’s what it is). April was the stock market’s best month in 30 years, which is not really what you expect during a global pandemic.
Right, April’s rally wasn’t due to “actually, everything is great now”, it was due to “whew, it looks like the most apocalyptic scenarios we were seeing in March aren’t likely, and there’s a limit to how bad it’s going to get”.
I agree with all of this. (And have had similar experiences.)
The opportunity feeling on the way in, and then something much closer to randomness on the way out in particular resonates, and I’m not sure I’d seen that actually written out as a general rule before.
EDIT: See also my comment here for some discussion of how I think this works. And see my reply to Eliezer here for some heuristics regarding when an opportunity might be real.
I think this post is missing the important part of actually doing this well / being a chosen one, from my perspective. That is, it seems to think of the EMH as something like an on/off switch, where either you think the market is better than you always and so you just blindly trust it, or you think you’re better than the market always, and so you should be actively trading.
But my experience has been about every five years, an opportunity comes by and I think “oh, this is a major opportunity,” and each time I’ve been right. [FWIW I didn’t have this for COVID, because of a general plan to focus on work instead of the markets leading up to the pandemic, and then when I started thinking “oh this will actually be as bad as 1918″ I was too busy trying to solve practical problems related to it that I didn’t think seriously about the question of “should I be trading on this?”; I think the me that had thought about trading based off it would have mostly made the right calls.]
This is, of course, a small sample size, and I’ve made many active trades that weren’t associated with that feeling, whose records have been much worse. Each of the ‘edge’ investments has also had another side to it, and the other side didn’t have the same feeling to guide me. For example, I correctly timed BP’s bottom during the Deepwater Horizon crisis, but then when it recovered my decision of when to sell it was essentially random. I think most of the people who predicted COVID a week early were then not able to outperform the market on the other side, and various things that I’ve seen people say about why they expect a continued edge seemed wrong to me. (For example, someone mentioned that they could evaluate potential treatments better than the market—which I think is true, because I think this person is actually a world-class expert at that specific problem—but I think that ability won’t actually give them an edge when it comes to asset prices. I don’t think anyone thinking just about biology would have correctly predicted the recent bottom or where we’d recover to, for example.)
Nevertheless, I’m pretty convinced that I sometimes have an edge, and more importantly can tell when I have an edge and when I’m just guessing. I think something like 1-10% of rationalists are in this category, or could be if they believed it, much like I think a comparable number of rationalists could be superforecasters if they tried. And historically, knowing to take the “oh, this is a major opportunity” signal seriously, instead of treating it as “just another good idea”, would have made a huge difference, and I think I’ve under-updated each time on how much to move things to be more ready the next time one comes along. Which is the main reason I think this is worth bringing up.
[Like, inspired by his weakened faith in the EMH, Eliezer attempted to time the bottom of the market, and succeeded. It seems better if more people attempt this sort of thing, at an appropriately humble frequency.]
I think I agree with this point and I’m glad you raised it—you might non-trivially beat the market every once in a while, but not all the time. To be clear, I don’t think of the EMH as an on/off switch, and if the post gives that impression, that’s my bad. In fact, the most successful investors I know of wait, wait, wait, and then very occasionally load up when they see a major asymmetry.
But I do still have a couple of reservations. The first is that this would still show up in the evidential standards I’ve suggested? If you match the market most of the time, but every five years you beat it, you’re eventually gonna have a pretty amazing track record, especially as you compound early successes. Note this is more or less the same frequency offered by some anomalies—for example, the momentum strategy I experimented with only outperforms during downturns, but ends up with a super impressive CAGR.
The second question is, how confident are you (‘you’ in the general sense, but also ‘you’ Vaniver if you feel inclined to answer) that knowing the difference between the edge trades and the others actually helps? If it’s a very strong feeling, why trade on all the other occasions when you know you’re guessing?
I think it’s interesting in an academic sense that these edge trades might really exist, but if they still ultimately result in an unexceptional record because of all the usual human foibles, I’m not sure how it practically justifies the suggestion that anyone should do more of this sort of thing?
This is a super important point too. Any investor who is long the stockmarket on a long horizon ultimately has to get back in, which means they have to time the market twice. Personally, I was gobsmacked by the speed of the recovery (or the height of the dead cat bounce, if that’s what it is). April was the stock market’s best month in 30 years, which is not really what you expect during a global pandemic.
Historically the biggest short-term gains have been disproportionately amidst or immediately following bear markets, when volatility is highest.
Right, April’s rally wasn’t due to “actually, everything is great now”, it was due to “whew, it looks like the most apocalyptic scenarios we were seeing in March aren’t likely, and there’s a limit to how bad it’s going to get”.
I agree with all of this. (And have had similar experiences.)
The opportunity feeling on the way in, and then something much closer to randomness on the way out in particular resonates, and I’m not sure I’d seen that actually written out as a general rule before.
EDIT: See also my comment here for some discussion of how I think this works. And see my reply to Eliezer here for some heuristics regarding when an opportunity might be real.