4 ms·

What's beating the market mean to you? The meme that the s&p's performance +/- is as good as you should expect to do is so bizarre to me. I know where it comes

by MrLeap 9y ago

What's beating the market mean to you? The meme that the s&p's performance +/- is as good as you should expect to do is so bizarre to me. I know where it comes from -- I've read the same stuff about warren buffet's bet and everything else. After having traded a while myself it's just so hard to believe. I don't think it's axiomatic for people who don't have enough capital to overcome liquidity. I wonder if someone has ever paid a PR firm to perpetuate that idea. If the PR firm were successful, it would drive more people away from active investing towards index funds, lowering volatility. That would help explain why shorting the VIX has c-c-c-c-clobbered the S&P's performance for a few years. If I start to see news stories about rags to riches stories I'll probably start going long volatility. Haha. My most successful trades this year have been betting against the consensus. The consensus is hilarious and terrible about a lot of things. I bought shares of a good property/casualty insurance company the friday ahead of irma. It was down like 35% in a month as the news convinced traders florida was going to sink. My theory was that if the storm was as bad as advertised, the stock would move about sideways. If it was anything less than there was money to be made. I was up 20% on the trade by Monday. In August when North Korea news hype was peaked and missiles were being tested, I shorted the vix hard. I didn't think the panic was sustainable. Because of how much I put on it that was probably my riskiest trade. Made the S&P's YTD twice over in 2 weeks. In June I saw silver flash crash to 14$ an ounce and that just felt stupidly cheap for such a useful precious metal. Sold it for the S&Ps YTD about a week after. There was no research in this, I was just into hobby jewelry making and thought "hmph that isn't right." I watch the news pretty regularly and I'm mostly happy to stay uninvested unless I see an opportunity to bet against hype. Then I put about 10-20% of my savings on the hypothesis and I beat the market pretty handily doing that, with less of my cash on the line and everything. I guess one of these days I'll have so much money my block trades will get me sniped or I'll lose 5x in a row and start investing in the S&P again or something. Haha.

tempestn 9y ago
I would define "the market" as the maximally diversified portfolio fitting a given risk profile. If you're limited to large cap US stocks, then yeah, the S&P 500 would be the market. Better to think of a globally diversified portfolio though. By 'beat the market', I mean have a consistent expectation of outperforming the market by a sufficient amount to justify the effort and risk. Obviously there is a ton of uncertainty, so simply achieving higher returns than a given benchmark is not, for these purposes, beating the market. Unfortunately, that also means it's impossible to ever be 100% sure you have indeed determined a way to beat the market, although obviously the more logical the reasoning behind your approach, and the more evidence of it being successful, the more confident you would be. So, is this impossible? No. As he even says in the article, the expected equilibrium would be that it's possible to the extent that the professionals engaged in doing it earn just more than they would at their next best alternative. But is it possible to consistently do even better than that, or at significantly less effort? Unlikely. If it were, you would have found the metaphorical 20 dollar bill in the middle of Grand Central Station.
icebraining 9y ago
Usually the claim is weaker than "you can't beat the market". It's something like "after fees, the returns of active funds don't beat the market". And AFAIR the claim A Random Walk was even weaker, closer to "even if some funds can beat the market after fees, you have no way of distinguishing them from lucky ones".
Infernal 9y ago
For those of us who don't trade, but feel we have something to learn from the type of thinking that leads to these counter-consensus insights - do you have any examples of how this line of thinking has led you wrong, either in trading or other fields?
- MrLeap 9y ago
  For me, I associate counter-consensus insights tightly with a lot of cynicism. Having a deeply cynical attitude is isolating. It's hard to trust people to a severity that I'm constantly hyper alert to subtle signals that people are trying to take advantage or mislead me. This has had some false positives and made it hard to form deep, lasting relationships. I deeply treasure the ones I have though. The same attitude makes it hard to accept and be accepted by teams. As for bad trades. I lost a little betting on a biotech rally last week. I've never had a really catastrophic trade though. I tend to aggressively scale my position with my confidence and that's been an effective shield so far.
tome 9y ago
From where comes your confidence that you are not "picking up pennies in front of a steamroller"?
- MrLeap 9y ago
  I have very little confidence. That's why I stay mostly in cash and largely avoid single company equities. I capture my gains when it feels "early" and I leave a lot of money on the table doing this. All these behaviors come from trying to limit my exposure to the steamroller. The trades I get excited about though are ones that feel like the steamroller has already gone through and may have arrived prematurely. The S&P gives me even less confidence. The sector rotation often feels so artificial and controlled. Couple weeks ago when Apple had their keynote and the market reacted badly to it, I noticed bank stocks rising the next day about exactly as much as Apple lost market cap. Just feels like there's a smoothing function running on the S&P right now. If that function has operators then there's an enormous and still growing short opportunity for them to someday turn it off.

by MrLeap 9y ago

tempestn 9y ago

I would define "the market" as the maximally diversified portfolio fitting a given risk profile. If you're limited to large cap US stocks, then yeah, the S&P 500 would be the market. Better to think of a globally diversified portfolio though. By 'beat the market', I mean have a consistent expectation of outperforming the market by a sufficient amount to justify the effort and risk. Obviously there is a ton of uncertainty, so simply achieving higher returns than a given benchmark is not, for these purposes, beating the market. Unfortunately, that also means it's impossible to ever be 100% sure you have indeed determined a way to beat the market, although obviously the more logical the reasoning behind your approach, and the more evidence of it being successful, the more confident you would be. So, is this impossible? No. As he even says in the article, the expected equilibrium would be that it's possible to the extent that the professionals engaged in doing it earn just more than they would at their next best alternative. But is it possible to consistently do even better than that, or at significantly less effort? Unlikely. If it were, you would have found the metaphorical 20 dollar bill in the middle of Grand Central Station.

icebraining 9y ago

Usually the claim is weaker than "you can't beat the market". It's something like "after fees, the returns of active funds don't beat the market". And AFAIR the claim A Random Walk was even weaker, closer to "even if some funds can beat the market after fees, you have no way of distinguishing them from lucky ones".

Infernal 9y ago

For those of us who don't trade, but feel we have something to learn from the type of thinking that leads to these counter-consensus insights - do you have any examples of how this line of thinking has led you wrong, either in trading or other fields?

MrLeap 9y ago
For me, I associate counter-consensus insights tightly with a lot of cynicism. Having a deeply cynical attitude is isolating. It's hard to trust people to a severity that I'm constantly hyper alert to subtle signals that people are trying to take advantage or mislead me. This has had some false positives and made it hard to form deep, lasting relationships. I deeply treasure the ones I have though. The same attitude makes it hard to accept and be accepted by teams. As for bad trades. I lost a little betting on a biotech rally last week. I've never had a really catastrophic trade though. I tend to aggressively scale my position with my confidence and that's been an effective shield so far.

tome 9y ago

From where comes your confidence that you are not "picking up pennies in front of a steamroller"?

MrLeap 9y ago
I have very little confidence. That's why I stay mostly in cash and largely avoid single company equities. I capture my gains when it feels "early" and I leave a lot of money on the table doing this. All these behaviors come from trying to limit my exposure to the steamroller. The trades I get excited about though are ones that feel like the steamroller has already gone through and may have arrived prematurely. The S&P gives me even less confidence. The sector rotation often feels so artificial and controlled. Couple weeks ago when Apple had their keynote and the market reacted badly to it, I noticed bank stocks rising the next day about exactly as much as Apple lost market cap. Just feels like there's a smoothing function running on the S&P right now. If that function has operators then there's an enormous and still growing short opportunity for them to someday turn it off.