4 ms·

That may have been true in the past, but there's a lot of money invested in data mining past returns to find patterns like that. If stock prices are predictive,

That may have been true in the past, but there's a lot of money invested in data mining past returns to find patterns like that. If stock prices are predictive, who's going to make the better prediction--you, or a team of MIT CS and Physics PhDs with an unlimited budget and years of experience?

RyanMcGreal 17y ago
The problem with the data mining approach is that it works spectacularly until it doesn't, and when it fails, it also fails spectacularly.
- byrneseyeview 17y ago
  That's true of any strategy in any situation in which your strategy affects the behavior of whatever system you're interacting with. i.e. value investing works, but if everyone does it then people will undervalue intangibles. If everyone chooses to be honest, the first fibber will rule the world. If everyone is violent, the first non-violent group will waste fewer resources. Etc.
  - Retric 17y ago
    There is actually a lot of research into this area (game theory). And for a surprising number of situations the best and most stable strategy is somewhat random. EX: Throwing a fastball vs curve ball where the odds of hitting each depend on which was expected. While it's clearly not a stable strategy if everyone did the same thing it's actually fairly hard to consistently beat a basket of randomly chosen stocks. Which is why I think rating stocks based on their relative value for your goals and then randomly picking a basket of them is probably the best and most stable strategy. (Excluding inside information.)
    - byrneseyeview 17y ago
      As long as you're smart enough to abstract out of your valuation system, you can survive. Buffett made his early money buying at a discount to assets: the company had a $5 million in the bank and their total market value was $3 million. Those opportunities mostly disappeared in the 1960's--conglomerates bought them out. But Buffett's meta-strategy of buying things at a discount still worked; it just worked better applied to businesses with a sustainable competitive advantage. But if you're not exceptionally good at what you do, yes, some randomness would help. Though wouldn't the closest analogy to the fastball / curveball thing be to randomly alternate among asset-management paradigms, instead? Have some of your portfolio passively indexed, some invested for catastrophe, some in pie-in-the-sky growth, some in inflation-resistant consumer goods, etc.
jakarta 17y ago
tell that to the Goldman Sachs Alpha Fund
eru 17y ago
You may be able to profit from smaller opportunities than they can profitably exploit.

RyanMcGreal 17y ago

The problem with the data mining approach is that it works spectacularly until it doesn't, and when it fails, it also fails spectacularly.

byrneseyeview 17y ago
That's true of any strategy in any situation in which your strategy affects the behavior of whatever system you're interacting with. i.e. value investing works, but if everyone does it then people will undervalue intangibles. If everyone chooses to be honest, the first fibber will rule the world. If everyone is violent, the first non-violent group will waste fewer resources. Etc.
- Retric 17y ago
  There is actually a lot of research into this area (game theory). And for a surprising number of situations the best and most stable strategy is somewhat random. EX: Throwing a fastball vs curve ball where the odds of hitting each depend on which was expected. While it's clearly not a stable strategy if everyone did the same thing it's actually fairly hard to consistently beat a basket of randomly chosen stocks. Which is why I think rating stocks based on their relative value for your goals and then randomly picking a basket of them is probably the best and most stable strategy. (Excluding inside information.)
  - byrneseyeview 17y ago
    As long as you're smart enough to abstract out of your valuation system, you can survive. Buffett made his early money buying at a discount to assets: the company had a $5 million in the bank and their total market value was $3 million. Those opportunities mostly disappeared in the 1960's--conglomerates bought them out. But Buffett's meta-strategy of buying things at a discount still worked; it just worked better applied to businesses with a sustainable competitive advantage. But if you're not exceptionally good at what you do, yes, some randomness would help. Though wouldn't the closest analogy to the fastball / curveball thing be to randomly alternate among asset-management paradigms, instead? Have some of your portfolio passively indexed, some invested for catastrophe, some in pie-in-the-sky growth, some in inflation-resistant consumer goods, etc.

jakarta 17y ago

tell that to the Goldman Sachs Alpha Fund

eru 17y ago

You may be able to profit from smaller opportunities than they can profitably exploit.