The investment universe is very large; it’s hard for one fund to cover all of it
Large investment funds have inertia associated with any large company
I think both points are ~wrong / unimportant for EMH.
Whilst the investment universe is large, so are the number of eyeballs on it. There are many funds all specialising so whilst you might not be competing with Bridgewater in your microstock world, you may be competing with some other funds.
Whilst each fund is structured differently, typically individual portfolio managers have a lot of autonomy within their mandate. If they change their mind about a position they can move very quickly. (Ignoring the size issue from the next paragraph). Bureaucracy can be a factor in some funds, but that’s typically not what limits people.
Investment size floors
I think the argument (as you’ve written it) doesn’t really make a huge amount of sense. (Saying that each person needs to find $x/per hour etc). Whilst not all trades scale, lots do, so finding a $10 opportunity is not necessarily easier or harder for a large fund than a $1mm opportunity. Some other advantages of scale which you’re glossing over:
Access to investments not available to smaller investors (allocations in issuance, private deals, products unavailable to retail investors, co-location etc)
Execution edge—your trade is typically being managed by hand, theirs can be managed by algos written by professionals; they can watch the market 24⁄7 to find the small edge in some weird basis you know nothing about.
A seat at the table—don’t like the way the board is handling a company you own? Phone them up / get your own board seat. Want to understand something about a company you might invest in? Have a chat with the head of IR / CEO etc
Small edges being meaningful—squeezing out another basis point on a big investment makes a big difference in $ terms. (You sort of address this later)
meaning that they’d need to be 20x as efficient as you in identifying them.
Consider the HFT—they are trying to place trades to earn pennies and they are much more than 20x as efficient as you at identifying those opportunities. (I don’t think HFTs are particularly interesting to consider when thinking about “competition” in an EMH sense, but I think it’s a good illustration about how much more efficient funds can be than you).
To be sure, a small investor still must compete against other smart, small investors for whatever edge there is to be found. But now we’re basing the EMH, with respect to these small-time and strange investments, on the intelligence of people more or less like you and me.
I don’t think this is quite the right interpretation. Can you describe to me a concrete trade which looks like: 20% return on $1000. (All the ones I can think of tend to be just as amenable to professionals). The other issue of playing in the “micro-investment” pool, is typically liquidity is much lower, so costs are higher.
EDIT: To be clear viz-a-vis your title “Are there opportunities for small investors unavailable to big ones?” I think the answer is “Yes, but there are lots more small investors”
Thanks for your thorough response. I hope you’ll indulge me a bit more as I reflect on your argument.
Whilst each fund is structured differently, typically individual portfolio managers have a lot of autonomy within their mandate. If they change their mind about a position they can move very quickly. (Ignoring the size issue from the next paragraph). Bureaucracy can be a factor in some funds, but that’s typically not what limits people.
“Inertia” is probably a poor choice of words. I really mean “investment in a type of investment,” but that’s clumsy-sounding. To be specific, I mean that I expect that hedge funds wind up with human and material forms of knowledge that’s specially invested in a particular company or type of market.
In concrete terms, they employ people who are, say, experts in the Walmart corporation, and the tools (well beyond what’s accessible to the average individual investor, such as those spy satellites looking at the parking lot) to evaluate it. That “Walmart specialist” isn’t necessarily going to turn around tomorrow and start focusing on, say, Bitcoin. They’re going to focus on continuing to find alpha in the area they understand best, and perhaps find logical adjacent types of investments if they’re going to expand beyond it.
Extrapolate across the employees in the whole fund, and that amounts to something a bit like “inertia.” Another way of putting it is that smaller investors face lower opportunity costs by exploring novel investment types.
Whilst not all trades scale, lots do, so finding a $10 opportunity is not necessarily easier or harder for a large fund than a $1mm opportunity.
This doesn’t quite make sense to me, taken alone. Any $1mm opportunity is also a $10 opportunity, but not all $10 opportunities are $1mm opportunities. There must be more, say, $1,000 opportunities. Hard to give a firm reason to explain what the ratio would be.
Some other advantages of scale which you’re glossing over:
This also doesn’t quite fit the argument I’m making, though I accept all these points are true. The more hedge funds are pursuing investments that are unavailable to small investors, the more this works in favor of small investors. It means they aren’t competing with hedge funds, because the hedge funds are pursuing other opportunities.
By the same token, I’ve been teaching piano lessons for the last 10 years, and I don’t have to compete with Lang Lang for my business. He’s pursuing other opportunities. If he showed up in my neighborhood and offered to teach lessons to the neighborhood kids, he’d have no trouble finding as much business as he desired. But because he has bigger fish to fry, I get to fry the little fish (so to speak).
In a way, the idea that hedge fund efficiency consumes all opportunities is like the lump of labor fallacy. Providing liquidity is a job, like any other. In general, getting more efficient at your job doesn’t allow you to do all the work, leaving none for others. Instead, it leads you to specialize, leaving other opportunities available to others.
Consider the HFT—they are trying to place trades to earn pennies and they are much more than 20x as efficient as you at identifying those opportunities.
Agreed. I think that to be a successful small investor, you’d also need to find a niche that HFTs can’t fill. I don’t really know how they work, but I imagine they do things like technical analysis, sentiment analysis, and reacting to news reports automatically.
Humans might differentiate themselves from such algorithms by focusing on an approach to investing that considers it more along the lines of “superforecasting”-style questions. Figuring out how to ask and answer questions with good judgment, and determine how the answers bear on the market, is something that an algorithm is not cut out for.
I don’t think this is quite the right interpretation. Can you describe to me a concrete trade which looks like: 20% return on $1000.
No (I’m assuming you’re talking about 20% gains on a low-volume stock). But I have modest confidence that these opportunities might exist, and that I’d discover historical examples if I took the time to look. Right now, I’m trying to focus more on “how the EMH could be wrong (enough) under not-too-unreasonable assumptions to justify doing more research to verify or falsify the model,” rather than making an argument that the model is valid or that the EMH is right or wrong. As I said, this is highly speculative, and I am inexperienced but trying to learn.
EDIT: To be clear viz-a-vis your title “Are there opportunities for small investors unavailable to big ones?” I think the answer is “Yes, but there are lots more small investors”
And this is my key point. Within this class of opportunity, you’re not competing with hedge funds. You’re competing with other small investors. One thing I really don’t understand is what fraction of small investor wealth is tied up in things like index funds and managed retirement funds. Of small investor wealth, what fraction is people actively trying to play the small-cap low-volume weird-investment stock market? What level of sophistication does their thinking rise to?
Extrapolate across the employees in the whole fund, and that amounts to something a bit like “inertia.” Another way of putting it is that smaller investors face lower opportunity costs by exploring novel investment types.
Right, but then my point is individual funds don’t matter. What matters is the ecosystem. Are there funds in your area? Another way of of putting your argument is: “Individual investors have an advantage because they can scan across all investments” but my counter to this is:
You already accept LARGE FIRMS can’t cover the space of all investments—how can an individual investor manage?
You aren’t competing with one firm, you’re competing with ALL FIRMS
This doesn’t quite make sense to me, taken alone. Any $1mm opportunity is also a $10 opportunity, but not all $10 opportunities are $1mm opportunities. There must be more, say, $1,000 opportunities. Hard to give a firm reason to explain what the ratio would be.
Lots of investments are $1mm investments and aren’t $10 investments. (Try and see if you can get a $10 allocation in an IPO / VC / PE type investment).
Humans might differentiate themselves from such algorithms by focusing on an approach to investing that considers it more along the lines of “superforecasting”-style questions. Figuring out how to ask and answer questions with good judgment, and determine how the answers bear on the market, is something that an algorithm is not cut out for.
And you think hedge funds aren’t doing this? I’m not sure exactly what edge you’re ascribing to small investors here.
No (I’m assuming you’re talking about 20% gains on a low-volume stock). But I have modest confidence that these opportunities might exist, and that I’d discover historical examples if I took the time to look. Right now, I’m trying to focus more on “how the EMH could be wrong (enough) under not-too-unreasonable assumptions to justify doing more research to verify or falsify the model,” rather than making an argument that the model is valid or that the EMH is right or wrong. As I said, this is highly speculative, and I am inexperienced but trying to learn.
I like the way of framing EMH as “Is EMH true for you?” and there may or may not be reasons to believe it’s true for you. Personally I have rather dim views of people who claim that EMH is not true in some generality. If you want to convince me EMH isn’t true for you, develop a track record.
(Also to be clear a 20% gain on even the lowest volume stock wouldn’t count for me—very low volume stocks would still allow investors to invest many times more than $1000...)
And this is my key point. Within this class of opportunity, you’re not competing with hedge funds. You’re competing with other small investors. One thing I really don’t understand is what fraction of small investor wealth is tied up in things like index funds and managed retirement funds. Of small investor wealth, what fraction is people actively trying to play the small-cap low-volume weird-investment stock market? What level of sophistication does their thinking rise to?
I would recommend you spend some time on [insert any online investing forum]. There are loads of people doing it. I’m not sure the “fraction” is particularly meaningful. One thing which I think is mechanically true is more of the investments in small caps are active (since fewer indices invest in small caps).
If it wasn’t clear, the question I’m trying to address is not:
Is the EMH true in general? (I think yes)
Is the EMH true for me, AllAmericanBreakfast? (I don’t know)
Can a person a priori predict if the EMH is true for them, before they establish a track record? (No)
Are there a large number of investments and strategies where big-money, highly resourced hedge funds are strictly better than small investors? (Definitely yes)
It is this question (for which I think maybe):
Are there investment strategies, besides index fund investing, that make the amount of money you have, your level of political access, and your accumulated knowledge infrastructure, relatively unhelpful, or even actively harmful, for evaluating certain specific types of investments—even if those resources are also extremely helpful for accessing and evaluating other trades?
In other words, are there investment strategies where individual, ‘one-off episodes’ of rational thought—as opposed to accumulated rational reflection over long periods of time—is more important than any other factor for accurately predicting price change for a subset of possible trades?
In other other words, are there investment strategies that are unattractive to hedge funds, but work well for small, smart, creative, and hard-working analyst-investors?
And in addition (I try to give a tentative guess to establish plausibility):
If these investment strategies exist, can we identify them?
How easy is it to end up with a compelling, yet wrong answer?
You’re proposing a third, important question (this I don’t know the answer to):
If we can identify such a strategy, how many such opportunities can we expect to find, and how much competition will we face from other investors in our reference class?
Are there investment strategies, besides index fund investing, that make the amount of money you have, your level of political access, and your accumulated knowledge infrastructure, relatively unhelpful, or even actively harmful, for evaluating certain specific types of investments—even if those resources are also extremely helpful for accessing and evaluating other trades?
I don’t understand this sentence?
In other words, are there investment strategies where individual, ‘one-off episodes’ of rational thought—as opposed to accumulated rational reflection over long periods of time—is more important than any other factor for accurately predicting price change for a subset of possible trades?
… still lost
In other other words, are there investment strategies that are unattractive to hedge funds, but work well for small, smart, creative, and hard-working analyst-investors?
Fine, interesting question, I don’t really see how it links to what you wrote in your post? You seem to posit reasons why strategies might exist, but really this is a concrete problem. “Name some strategies”.
And in addition (I try to give a tentative guess to establish plausibility):
If these investment strategies exist, can we identify them?
How easy is it to end up with a compelling, yet wrong answer?
You’re proposing a third, important question (this I don’t know the answer to):
If we can identify such a strategy, how many such opportunities can we expect to find, and how much competition will we face from other investors in our reference class?
I don’t really see where you ask how to identify strategies? Nor whether or not you could delude yourself?
I don’t really think LW is short of people suggesting strategies for small investors:
You seem to posit reasons why strategies might exist, but really this is a concrete problem. “Name some strategies”.
So I think our disagreement might be this:
I think that exploring why strategies might exist is an interesting and important question on its own, separate from articulating a concrete, step-by-step procedure for doing so.
You seem to accept (?) that tractable strategies in general might plausibly exist, but think that this is uninteresting on its own. The more interesting question for you is in naming and proving a specific one.
The reason that I think articulating why strategies might exist is that I’m a dogmatic EMH fundamentalist. When a person gives investment advice, I have historically ignored it, the same why I ignore it when somebody makes an argument for why I should consider using heroin, or committing suicide. Those behaviors are on my “no” list. I don’t intellectually engage with arguments in favor of them, and short-circuit the updating of my priors.
Likewise, the EMH has put investment advice (aside from “invest in index funds”) on my “no” list. I follow an iron law of not engaging with investment advice.
In concrete terms, this “iron law” plays out a bit like this:
Bob claims to have some investment advice.
I say “Lots of people have investment advice. Why should I listen to yours?”
Bob says, “Just think about the reasoning! It makes total sense!”
I say “I am epistemically helpless in this matter and need to see empirical proof that it works.”
Bob says, “I’ve used it already to make a bunch of money!”
I say “How do I know you weren’t just lucky?”
Bob says, “I can show you statistical data that proves that’s extremely unlikely to be true.”
I say “How do I know the market hasn’t absorbed this information, so that your strategy will fail in the future?”
Bob says, “I’ve kept it a secret until now, and I’m sharing it with you out of the goodness of my heart.”
I say “How do I know you’re not lying or confused?” And that’s the end of the conversation.
The epistemic helplessness/fundamental trust problem here then precludes me from even starting to listen to Bob in the first place.
Hence, in order to ever get around to conceiving of, or even considering, a specific investment strategy, it’s first necessary to argue against this pattern of thinking. That’s what I’m trying to do here.
Hopefully, this illuminates why I don’t consider it useful to try and articulate specific investment strategies, without addressing this more fundamental question first. My prior on any public investment strategy beating the market is so low that it has precluded me from even going there.
To change that, I need to understand why my priors should be high enough to consider specific investment strategies in the first place.
The reason that I think articulating why strategies might exist is that I’m a dogmatic EMH fundamentalist. When a person gives investment advice, I have historically ignored it, the same why I ignore it when somebody makes an argument for why I should consider using heroin, or committing suicide. Those behaviors are on my “no” list. I don’t intellectually engage with arguments in favor of them, and short-circuit the updating of my priors
Likewise, the EMH has put investment advice (aside from “invest in index funds”) on my “no” list. I follow an iron law of not engaging with investment advice.
I would highly recommend reading the full introduction to Section 20 of Cochrane’s “Asset Pricing”. (The whole course is excellent) Roughly he takes you through the progress academic finance has made since the 1970s, whilst not repudiating EMH, finding reasons why “invest in index funds” isn’t necessarily the whole story for investors.
Can you describe to me a concrete trade which looks like: 20% return on $1000. (All the ones I can think of tend to be just as amenable to professionals). The other issue of playing in the “micro-investment” pool, is typically liquidity is much lower, so costs are higher.
Here is one example. About a month ago I bought the stock ASK:DSK. The daily trade volume is $AUD100-200k. That made it easy for me to buy $10k worth. It is now up 48%. My slippage was minimal—I was able to buy it all at the offer or better with no market impact.
For someone with $10B FUM keeping the portfolio size to 100 stocks would mean that assuming they only bought 10% of the daily trades per day it would take them 3-4 years to buy in and a similar time to get out of the trade. So this stock, which is by no means unusually small, having a market cap larger than 2⁄3 of the stocks on the ASX, is out of reach for the big guys.
You’ve given an example which is already 10x what I asked for, and you could have plausibly done another 5x your size… I’m glad you made some money, but I don’t think this is what I’m talking about
Inertia vs. agility
I think this section makes two arguments:
The investment universe is very large; it’s hard for one fund to cover all of it
Large investment funds have inertia associated with any large company
I think both points are ~wrong / unimportant for EMH.
Whilst the investment universe is large, so are the number of eyeballs on it. There are many funds all specialising so whilst you might not be competing with Bridgewater in your microstock world, you may be competing with some other funds.
Whilst each fund is structured differently, typically individual portfolio managers have a lot of autonomy within their mandate. If they change their mind about a position they can move very quickly. (Ignoring the size issue from the next paragraph). Bureaucracy can be a factor in some funds, but that’s typically not what limits people.
Investment size floors
I think the argument (as you’ve written it) doesn’t really make a huge amount of sense. (Saying that each person needs to find $x/per hour etc). Whilst not all trades scale, lots do, so finding a $10 opportunity is not necessarily easier or harder for a large fund than a $1mm opportunity. Some other advantages of scale which you’re glossing over:
Access to investments not available to smaller investors (allocations in issuance, private deals, products unavailable to retail investors, co-location etc)
Execution edge—your trade is typically being managed by hand, theirs can be managed by algos written by professionals; they can watch the market 24⁄7 to find the small edge in some weird basis you know nothing about.
A seat at the table—don’t like the way the board is handling a company you own? Phone them up / get your own board seat. Want to understand something about a company you might invest in? Have a chat with the head of IR / CEO etc
Small edges being meaningful—squeezing out another basis point on a big investment makes a big difference in $ terms. (You sort of address this later)
Consider the HFT—they are trying to place trades to earn pennies and they are much more than 20x as efficient as you at identifying those opportunities. (I don’t think HFTs are particularly interesting to consider when thinking about “competition” in an EMH sense, but I think it’s a good illustration about how much more efficient funds can be than you).
I don’t think this is quite the right interpretation. Can you describe to me a concrete trade which looks like: 20% return on $1000. (All the ones I can think of tend to be just as amenable to professionals). The other issue of playing in the “micro-investment” pool, is typically liquidity is much lower, so costs are higher.
EDIT: To be clear viz-a-vis your title “Are there opportunities for small investors unavailable to big ones?” I think the answer is “Yes, but there are lots more small investors”
Thanks for your thorough response. I hope you’ll indulge me a bit more as I reflect on your argument.
“Inertia” is probably a poor choice of words. I really mean “investment in a type of investment,” but that’s clumsy-sounding. To be specific, I mean that I expect that hedge funds wind up with human and material forms of knowledge that’s specially invested in a particular company or type of market.
In concrete terms, they employ people who are, say, experts in the Walmart corporation, and the tools (well beyond what’s accessible to the average individual investor, such as those spy satellites looking at the parking lot) to evaluate it. That “Walmart specialist” isn’t necessarily going to turn around tomorrow and start focusing on, say, Bitcoin. They’re going to focus on continuing to find alpha in the area they understand best, and perhaps find logical adjacent types of investments if they’re going to expand beyond it.
Extrapolate across the employees in the whole fund, and that amounts to something a bit like “inertia.” Another way of putting it is that smaller investors face lower opportunity costs by exploring novel investment types.
This doesn’t quite make sense to me, taken alone. Any $1mm opportunity is also a $10 opportunity, but not all $10 opportunities are $1mm opportunities. There must be more, say, $1,000 opportunities. Hard to give a firm reason to explain what the ratio would be.
This also doesn’t quite fit the argument I’m making, though I accept all these points are true. The more hedge funds are pursuing investments that are unavailable to small investors, the more this works in favor of small investors. It means they aren’t competing with hedge funds, because the hedge funds are pursuing other opportunities.
By the same token, I’ve been teaching piano lessons for the last 10 years, and I don’t have to compete with Lang Lang for my business. He’s pursuing other opportunities. If he showed up in my neighborhood and offered to teach lessons to the neighborhood kids, he’d have no trouble finding as much business as he desired. But because he has bigger fish to fry, I get to fry the little fish (so to speak).
In a way, the idea that hedge fund efficiency consumes all opportunities is like the lump of labor fallacy. Providing liquidity is a job, like any other. In general, getting more efficient at your job doesn’t allow you to do all the work, leaving none for others. Instead, it leads you to specialize, leaving other opportunities available to others.
Agreed. I think that to be a successful small investor, you’d also need to find a niche that HFTs can’t fill. I don’t really know how they work, but I imagine they do things like technical analysis, sentiment analysis, and reacting to news reports automatically.
Humans might differentiate themselves from such algorithms by focusing on an approach to investing that considers it more along the lines of “superforecasting”-style questions. Figuring out how to ask and answer questions with good judgment, and determine how the answers bear on the market, is something that an algorithm is not cut out for.
No (I’m assuming you’re talking about 20% gains on a low-volume stock). But I have modest confidence that these opportunities might exist, and that I’d discover historical examples if I took the time to look. Right now, I’m trying to focus more on “how the EMH could be wrong (enough) under not-too-unreasonable assumptions to justify doing more research to verify or falsify the model,” rather than making an argument that the model is valid or that the EMH is right or wrong. As I said, this is highly speculative, and I am inexperienced but trying to learn.
And this is my key point. Within this class of opportunity, you’re not competing with hedge funds. You’re competing with other small investors. One thing I really don’t understand is what fraction of small investor wealth is tied up in things like index funds and managed retirement funds. Of small investor wealth, what fraction is people actively trying to play the small-cap low-volume weird-investment stock market? What level of sophistication does their thinking rise to?
I truly have no idea.
Right, but then my point is individual funds don’t matter. What matters is the ecosystem. Are there funds in your area? Another way of of putting your argument is: “Individual investors have an advantage because they can scan across all investments” but my counter to this is:
You already accept LARGE FIRMS can’t cover the space of all investments—how can an individual investor manage?
You aren’t competing with one firm, you’re competing with ALL FIRMS
Lots of investments are $1mm investments and aren’t $10 investments. (Try and see if you can get a $10 allocation in an IPO / VC / PE type investment).
And you think hedge funds aren’t doing this? I’m not sure exactly what edge you’re ascribing to small investors here.
I like the way of framing EMH as “Is EMH true for you?” and there may or may not be reasons to believe it’s true for you. Personally I have rather dim views of people who claim that EMH is not true in some generality. If you want to convince me EMH isn’t true for you, develop a track record.
(Also to be clear a 20% gain on even the lowest volume stock wouldn’t count for me—very low volume stocks would still allow investors to invest many times more than $1000...)
I would recommend you spend some time on [insert any online investing forum]. There are loads of people doing it. I’m not sure the “fraction” is particularly meaningful. One thing which I think is mechanically true is more of the investments in small caps are active (since fewer indices invest in small caps).
If it wasn’t clear, the question I’m trying to address is not:
Is the EMH true in general? (I think yes)
Is the EMH true for me, AllAmericanBreakfast? (I don’t know)
Can a person a priori predict if the EMH is true for them, before they establish a track record? (No)
Are there a large number of investments and strategies where big-money, highly resourced hedge funds are strictly better than small investors? (Definitely yes)
It is this question (for which I think maybe):
Are there investment strategies, besides index fund investing, that make the amount of money you have, your level of political access, and your accumulated knowledge infrastructure, relatively unhelpful, or even actively harmful, for evaluating certain specific types of investments—even if those resources are also extremely helpful for accessing and evaluating other trades?
In other words, are there investment strategies where individual, ‘one-off episodes’ of rational thought—as opposed to accumulated rational reflection over long periods of time—is more important than any other factor for accurately predicting price change for a subset of possible trades?
In other other words, are there investment strategies that are unattractive to hedge funds, but work well for small, smart, creative, and hard-working analyst-investors?
And in addition (I try to give a tentative guess to establish plausibility):
If these investment strategies exist, can we identify them?
How easy is it to end up with a compelling, yet wrong answer?
You’re proposing a third, important question (this I don’t know the answer to):
If we can identify such a strategy, how many such opportunities can we expect to find, and how much competition will we face from other investors in our reference class?
I don’t understand this sentence?
… still lost
Fine, interesting question, I don’t really see how it links to what you wrote in your post? You seem to posit reasons why strategies might exist, but really this is a concrete problem. “Name some strategies”.
I don’t really see where you ask how to identify strategies? Nor whether or not you could delude yourself?
I don’t really think LW is short of people suggesting strategies for small investors:
https://www.lesswrong.com/posts/pYxpvoGKa5Sdnxpmc/anti-emh-evidence-and-a-plea-for-help
https://www.lesswrong.com/posts/ybQdaN3RGvC685DZX/the-emh-is-false-specific-strong-evidence
https://www.lesswrong.com/posts/MSpfFBCQYw3YA8kMC/violating-the-emh-prediction-markets
So I think our disagreement might be this:
I think that exploring why strategies might exist is an interesting and important question on its own, separate from articulating a concrete, step-by-step procedure for doing so.
You seem to accept (?) that tractable strategies in general might plausibly exist, but think that this is uninteresting on its own. The more interesting question for you is in naming and proving a specific one.
The reason that I think articulating why strategies might exist is that I’m a dogmatic EMH fundamentalist. When a person gives investment advice, I have historically ignored it, the same why I ignore it when somebody makes an argument for why I should consider using heroin, or committing suicide. Those behaviors are on my “no” list. I don’t intellectually engage with arguments in favor of them, and short-circuit the updating of my priors.
Likewise, the EMH has put investment advice (aside from “invest in index funds”) on my “no” list. I follow an iron law of not engaging with investment advice.
In concrete terms, this “iron law” plays out a bit like this:
Bob claims to have some investment advice.
I say “Lots of people have investment advice. Why should I listen to yours?”
Bob says, “Just think about the reasoning! It makes total sense!”
I say “I am epistemically helpless in this matter and need to see empirical proof that it works.”
Bob says, “I’ve used it already to make a bunch of money!”
I say “How do I know you weren’t just lucky?”
Bob says, “I can show you statistical data that proves that’s extremely unlikely to be true.”
I say “How do I know the market hasn’t absorbed this information, so that your strategy will fail in the future?”
Bob says, “I’ve kept it a secret until now, and I’m sharing it with you out of the goodness of my heart.”
I say “How do I know you’re not lying or confused?” And that’s the end of the conversation.
The epistemic helplessness/fundamental trust problem here then precludes me from even starting to listen to Bob in the first place.
Hence, in order to ever get around to conceiving of, or even considering, a specific investment strategy, it’s first necessary to argue against this pattern of thinking. That’s what I’m trying to do here.
Hopefully, this illuminates why I don’t consider it useful to try and articulate specific investment strategies, without addressing this more fundamental question first. My prior on any public investment strategy beating the market is so low that it has precluded me from even going there.
To change that, I need to understand why my priors should be high enough to consider specific investment strategies in the first place.
I would highly recommend reading the full introduction to Section 20 of Cochrane’s “Asset Pricing”. (The whole course is excellent) Roughly he takes you through the progress academic finance has made since the 1970s, whilst not repudiating EMH, finding reasons why “invest in index funds” isn’t necessarily the whole story for investors.
Thanks, this sounds very interesting. I appreciate all your thoughts in this comment thread and the recommendation as well.
Here is one example. About a month ago I bought the stock ASK:DSK. The daily trade volume is $AUD100-200k. That made it easy for me to buy $10k worth. It is now up 48%. My slippage was minimal—I was able to buy it all at the offer or better with no market impact.
For someone with $10B FUM keeping the portfolio size to 100 stocks would mean that assuming they only bought 10% of the daily trades per day it would take them 3-4 years to buy in and a similar time to get out of the trade. So this stock, which is by no means unusually small, having a market cap larger than 2⁄3 of the stocks on the ASX, is out of reach for the big guys.
https://au.finance.yahoo.com/chart/DSK.AX
You’ve given an example which is already 10x what I asked for, and you could have plausibly done another 5x your size… I’m glad you made some money, but I don’t think this is what I’m talking about