buying stocks at random should perform roughly as well as the market as a whole
Except you have higher variance, which is normally something to avoid. Also note that average mutual fund performance is worse than index funds, even without taking fees into account; a similar story is likely true for individual investors.
But I do buy that being a reader of lesswrong dot com gives you inside information about particular sorts of things (of which covid19 was one), and I think betting big on such opportunities makes sense. I think it’s not obvious that this gives you much ability to time the market or make good short-term bets, because it relies on understanding how the market reacts to things.
That is, suppose you have perfect accuracy on how bad covid19 will be; that doesn’t actually tell you all that much about how much the market will drop when. So you might want to sell put options at a wide range of maturities instead of doing so for a single maturity date.
So similarly, if there’s a company that has many irons in the fire and you think one particular bet will or won’t pay off, you’re still exposing yourself to all the other bets the company is making, which will increase the variance of your bet a lot. (I, for example, was long Netflix in 2011 on their DVD business and wanted to be short on their streaming business, since I thought the content owners would renegotiate for a larger share of the pie than the market expected they would, but couldn’t easily figure out how the market was pricing the DVD business and the streaming business, and so wasn’t sure what to do; as it happened, the market thought something like 90% of the value of Netflix was the streaming business, and so I should have been short the stock as a whole.)
Higher variance is worth avoiding (under standard assumptions), but I for one was surprised by how little additional variance one takes on by allocating, say, 10% of one’s portfolio to a single arbitrary bet. In this comment I ballparked it at maybe an extra 0.5% variance.
That said, allocating one’s entire portfolio this way basically requires a rejection of the standard risk-budget assumptions.
(Disclaimer: I’m a financial professional, but I’m not anyone’s investment advisor, much less yours.)
Except you have higher variance, which is normally something to avoid. Also note that average mutual fund performance is worse than index funds, even without taking fees into account; a similar story is likely true for individual investors.
But I do buy that being a reader of lesswrong dot com gives you inside information about particular sorts of things (of which covid19 was one), and I think betting big on such opportunities makes sense. I think it’s not obvious that this gives you much ability to time the market or make good short-term bets, because it relies on understanding how the market reacts to things.
That is, suppose you have perfect accuracy on how bad covid19 will be; that doesn’t actually tell you all that much about how much the market will drop when. So you might want to sell put options at a wide range of maturities instead of doing so for a single maturity date.
So similarly, if there’s a company that has many irons in the fire and you think one particular bet will or won’t pay off, you’re still exposing yourself to all the other bets the company is making, which will increase the variance of your bet a lot. (I, for example, was long Netflix in 2011 on their DVD business and wanted to be short on their streaming business, since I thought the content owners would renegotiate for a larger share of the pie than the market expected they would, but couldn’t easily figure out how the market was pricing the DVD business and the streaming business, and so wasn’t sure what to do; as it happened, the market thought something like 90% of the value of Netflix was the streaming business, and so I should have been short the stock as a whole.)
Higher variance is worth avoiding (under standard assumptions), but I for one was surprised by how little additional variance one takes on by allocating, say, 10% of one’s portfolio to a single arbitrary bet. In this comment I ballparked it at maybe an extra 0.5% variance.
That said, allocating one’s entire portfolio this way basically requires a rejection of the standard risk-budget assumptions.
(Disclaimer: I’m a financial professional, but I’m not anyone’s investment advisor, much less yours.)