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It's a lot more complicated than that. Even a consistent prediction will generally only give you a small edge, and turning a small edge into real money is incre
by tikhonj 10y ago
It's a lot more complicated than that. Even a consistent prediction will generally only give you a small edge, and turning a small edge into real money is incredibly difficult. Just like ideas aren't worth much in startups, execution is a bottleneck on most otherwise-reasonable trading ideas.
There are a lot of problems:
- transaction costs quickly eat into your margins
- regulatory compliance requires a lot of careful work, with non-trivial penalties for mistakes
- different exchanges and countries have different rules
- trading across different timezones is difficult
- synchronizing your actions across multiple venues is incredibly hard
- you might need more leverage than you can get as an individual
- sourcing and cleaning the up-to-date data you need to actually trade on a model (vs back-testing) requires intense work and is expensive
- since your edge is probabilistic in nature, you need a particular risk tolerance (backed by enough cash to survive runs of bad luck, of course)
A lot of successful trading firms live and die more on their infrastructure and execution prowess than they do on brilliant insights and predictions. Even if your prediction or model is good, you might simply not be able to use it because you don't have access to the capital and infrastructure you'd need.
This is probably Numerai's core value proposition: they have an open system for people to submit models (ie predictions) and then use their existing infrastructure to actually execute the best ones.
- bluetwo 10y agoNotice I used the word ANY, not EVERY. If you can do better than a coin flip in ANY prediction, you can make money over time. I would assume the rational person with such predictive power would choose the relationship with the least complications.
- cestith 10y agoI'd say it's better than 50% that you'll sleep tonight. It's also better than 50% that you'll sleep on a bed or couch. I guess all I need to do to make loads of money is invest in furniture companies?
- bluetwo 10y agoThere is no market in predicting where I sleep at night because no one is willing to take the other side of that bet.
- dllthomas 10y agoSo... there exist predictions where being able to do better than a coin flip does not mean you can make money over time. This is in direct contradiction to what you said above: > If you can do better than a coin flip in ANY prediction, you can make money over time. It's also not true even in the case of predictions where there is a relevant liquid market. If everyone can do better than a coin flip, then I can only make money doing better than the rest. And even if I can do better than everyone else, if it's not better enough that the earnings cover my costs I am still losing money over time.
- tomp 10y agoA good description of investing is, it's like a game of chess that you can win (using skill) and get $1, and after every game you bet $50 on a random (unbiased) coin flip. Clearly, you can make money over the long run. But it's incredibly easy to go bankrupt. In addition, there's only so many chess players (trading opportunities), so after a certain point, there's nothing to be gained by investing more money (e.g. Renaissance has been returning 20% for decades, but only have a capital of about $10B - they pay out the profits because it's impossible for the to invest more money using these strategies).