22 ms·

Crunching 200 years of stock, bond, currency and commodity data

308 points by chollida1 8y ago

benj111 8y ago
I'm not surprised by this, these strategies are based on pretty timeless human foibles. People are always going to prefer to buy something everyone else is buying, (no one was ever fired for buying IBM). Some people will want to buy 'cheap', some investors will just want to receive a dividend cheque every year.
soared 8y ago
> the market is not as efficient as it is supposed to be I have a recent business degree, but not finance or econ. In school we were strictly taught the market is efficient and I fully believed that. But I've seen online and discussed in person a (seemingly) growing idea that markets are not in fact efficient at all. Are there any economists/finance people that can shed light on this? Are these new ideas gaining traction, or old ideas just sticking around?
- JohnJamesRambo 8y ago
  https://en.wikipedia.org/wiki/Efficient-market_hypothesis#Criticism https://en.wikipedia.org/wiki/Efficient-market_hypothesis#Cr...
- chollida1 8y ago
  I think there are a few good responses to the question of "are markets efficient?". 1) Markets are efficient enough in that you generally don't see any real big arbitrage opportunities. Small ones will always be present, and as is often pointed out its not worth the big players time to search them out and capitalize. A trader also sees this as evidenced by the fact that we are using more and more data and ever increasingly complicated math to eek out smaller and smaller chunks of alpha. 2) different people have different ideas as to what the correct price actually is. Consider a company that is continually losing money. - Fundamental analysts will value this as a poor company due to its future cash flows dwindling. They may consider this a short opportunity - Merger Arb folks may bid up this up as a potential merger target thus raising the price. - ETF's tracking an index just don't care, they'll buy the company in proportion to its index weight. - Stat arb folks will be agnostic to price and only compare it to a peer that they feel it will trade in relation ship with, these people will be both long and short this company at different times, often unrelated to what its price currently is. 3) Physics often uses the simplifying assumption of no friction to make things easier. The efficient market hypothesis works under the assumption that everyone knows about news immediately and has time to react. Some investors react in micro seconds, some in weeks. Both affect the price
  - walshemj 8y ago
    Well in the UK I have as a amateur investor taken advantage of arbitrage in the last few years. One on a big trust Witan that had gone out to a much bigger discount than normal due to a stock overhang caused by a forced sale. The other was Electra private equity which was on a huge discount.
    - subjectHarold 8y ago
      It's only an arb if your net exposure is zero. If you want an arb, look at Hansa. You can buy their trust and sell an underlying porfolio which, if you do it right, should come out to very close to zero exposure. But most CEFs aren't selling at a discount because of liquidity, they are just shit (if the manager is decent, they should buy back shares to close the discount).
- CabSauce 8y ago
  The market model is a gross simplification of reality. The basic model doesn't incorporate irrational decision-makers, data asymmetries, externalities, etc.
- afterburner 8y ago
  The market can stay irrational longer than you can stay solvent. Efficient market theory is mostly used to justify deregulation, to protect the profits of the big players who can throw the most weight around. Some economists support this (perhaps because their paychecks depend on it, or they were brainwashed at the University of Chicago where the movement was strongest). But I doubt most do, especially these days, so soon after the reminder of the Great Recesssion, 80 years after the Great Depression taught the initial lessons. But Keynes got boring for some I guess, and the allure of the "totally rational human" was clearly too great for some, and attractive to lobbyists. https://www.nytimes.com/2009/09/06/magazine/06Economic-t.html https://www.nytimes.com/2009/09/06/magazine/06Economic-t.htm...
  - TheOtherHobbes 8y ago
    I'm honestly baffled why anyone would take "markets are efficient" seriously. It seems such an obviously rhetorical (i.e. politically expedient, not fact-based) narrative intended to sell the idea that markets are the very best of all possible ways to organise everything - in spite of all the centuries of historical evidence that markets consistently run in an irrational bubble-driven boom-bust cycle with almost insanely destructive opportunity and recovery costs.
    - gbear605 8y ago
      What “markets are efficient” means is really that you can’t make more money on the stock market than average unless you put the same time and brain power to it that hedge fund people do, and even then you can only make about as much money as hedge fund traders do. (Assuming a few things, like that you’re only trading based on public knowledge) The logic is this: if this were not the case, then some of those very smart hedge fund people were take advantage of this strategy, making that strategy become the average that everyone wants to beat.
  - onlyrealcuzzo 8y ago
    Isn't the modern interpretation of Keynes a complete bastardization of what he was actually teaching? AFAIK, Keynes claimed that the market is more efficient than not. But he was decidedly not a believer of the efficient market hypothesis! Further, he was mostly concerned with money supply and risk-free government bonds. Sometime between the 60s and the 80s, Keynes got associated with Supply-Side Economics and Laissez Faires (which from my understanding Keynes was completely against). Also, when Keynes was writing -- FIRE (Finance, Insurance, and Real Estate) amounted to about 5% of the U.S. economy. Now it amounts to more than 30%. So, ideas that weren't concerned with those markets probably need to be concerned with them now.
- twblalock 8y ago
  All models are flawed. The question is not whether the market is efficient, but rather if it is useful to model the market as efficient for the purposes of economic research. Such a model does seem to work well in a lot of cases.
- prewett 8y ago
  Check out the book "How Markets Fail" for a discussion on how the efficient market hypothesis gained popularity (part 1) and a discussion of the many ways that real markets do not maintain the preconditions for markets to be efficient. In particular, the precondition that Adam Smith stated was that increasing production required linearly increased costs. However, this is frequently not the case (utilities, railroads, software, social media networks, etc.). Also, markets require a certain minimum number of producers (and consumers) in order to remain efficient. Consolidation can reduce the number of producers below the level that meets the precondition of efficiency, and then barriers to entry to prevent newcomers from joining the market. As far as efficient market theory applied to the stock market, I've always thought that efficient market theory was trivially disprovable: did all companies in the US lose 20% of their value all at the same time this past Nov - Dec, in the same season that they are selling all their inventory during the holiday season? And then regain 10% of it all at the same time the next month? Did Apple lose 50% of its value from between July and December, despite the fact that its revenues, costs, dividends, assets, people-capital, know-how, brand, consumer sentiment, etc. remained roughly the same? Compare to, say, PG&E during the same period.
  - mushufasa 8y ago
    John Cassidy's "How Markets Fail" is a must-read IMHO. I went through 4 years of an economics degree at a top tier university (top 5 globally in Econ), and Cassidy's book just happened to be the weekly assigned reading for a class my last semester. Everything then made sense. All the inconsistencies you hear about economics, with one camp saying one idea and another talking about something totally different, both passing it off as consensus, fit into place. TLDR: Cassidy's book is in 2 parts. The first part, he constructs the classical/rational model of economics through intellectual history. The second part, he deconstructs, drawing from all the critiques of inefficiency, both behavioral and mathematical. (Some of the most fascinating aspects are the beautiful mathematical models that can't be solved). It's all well written prose, no need to have a pen and calculator to follow along. The title is misleading IMHO, because it seems to be a populist polemical. It's not. It should be called something like "A Brief History of Economics", echoing Hawkin's Brief History of Time.
  - FabHK 8y ago
- rebeccaskinner 8y ago
  Markets are probably only efficient if P = NP, and it probably doesn't: https://arxiv.org/abs/1002.2284 https://arxiv.org/abs/1002.2284
  - WilliamEdward 8y ago
    There is a lot of 'probably' going on here. He structures his entire P=NP argument on the basis that most computer scientists believe it to be false. That's fairly weak. He has shown that markets are only efficient if P=NP, but that doesn't say much about whether they are therefore inefficient.
    - WilliamEdward 8y ago
      "In short, if P≠NP, then the market cannot be efficient for very long because the ability of investorsto check all strategies will be quickly overwhelmed by the exponential number of possible strategies there are to check." He also states this, but even an overwhelming amount of strategies can be condensed into algorithms that makes 99% of them useless. See the game of chess for similar ideas. 99% of the possible moves are useless, so it seems as if there are an exponential amount of good moves when only a fraction are viable. Chess is NP, but still partially solvable under P conditions. I believe the market is like this too.
- DennisP 8y ago
  The EMH has been losing some steam because it doesn't match the data. In the last couple decades there has been a lot of data crunching like this, and academics have found these same factors. This study confirms those results with more and older data. People have come up with two classes of explanations, touched on in the article. One is human behavioral factors and cognitive biases, the other is structural biases in the economy, like investment managers being more incentivized to avoid relative losses than to make absolute gains.
- dallashoxton 8y ago
  If markets were efficient we wouldn't see such enormous and consistent outsized returns from value investors of the Graham-Buffett school, as mentioned in another HN thread today: https://www8.gsb.columbia.edu/articles/columbia-business/superinvestors https://www8.gsb.columbia.edu/articles/columbia-business/sup... The absoluteness of the efficient market hypothesis also leads to some interesting paradoxes that don't make much sense when you look at the real world: https://en.m.wikipedia.org/wiki/Grossman-Stiglitz_Paradox https://en.m.wikipedia.org/wiki/Grossman-Stiglitz_Paradox
- wjnc 8y ago
  I am tempted to ask which school and truly in the post crisis era? In my econ podcasts they keep lamenting how things like this are still thaught, but I was somewhat incredulous. I studied econ in the early aughts and there was more behavioral, industrial and institutional economics than macro in my program. That was long before the crisis and still looks like the proper mix. And then on the question. Perfect information is false and there are degrees in the definition of how efficient markets are, with the most common one approximating 'somewhat' on the not too short timescale. Mileage varies between commodities, stocks, your staple teaching example of the market for used cars (lemons) going towards the more micro models with network effects etc. Institutional economics will teach you that no market functions without surrounding institutional arrangements and that there is some relationship between the nature of the product and the optimal 'institutional burden' (my words). Mechanism design is the subject where they try to design optimally structured markets. Economics is awesome and anyone teaching only perfect information even to undergrads or business students should be fired. Ceterum censeo
  - deleted 8y ago
    [deleted]
  - scottlocklin 8y ago
    Economics is not a science. The end. It's mostly ideology with mathematical excuses. At best, it's non predictive modeling.
    - FabHK 8y ago
      > Economics is not a science. The end. That’s too facile. I’d say, insofar as it is a science, it’s not about the real world, and insofar as it’s about the real world, it's not a science. But even that doesn’t give it enough credit.
      - kurtisc 8y ago
        To me that's hiding another question of whether or not it's worthwhile. Like when we ask if something is or isn't art, or if writing software is or isn't engineering. There shouldn't be any link between saying economics is or isn't a science and giving it credit.
- nradov 8y ago
  Are you certain you remember all of your schooling? Any basic finance class will cover the efficient market hypothesis, but also cover exceptions and temporary violations. This is standard course content and hasn't changed significantly in decades.
- gammateam 8y ago
  > In school we were strictly taught the market is efficient and I fully believed that. But I've seen online and discussed in person a (seemingly) growing idea that markets are not in fact efficient at all. I can tell pretty much everything I need to know about a person based on which one of these ideas they would say or defend. Always lots of new ideas and theories that hope to reduce the participants in a market down to an explainable behavior. But there are lots of ways to extract value from a market, which is more important than the debate around "already 'efficient' or not".
- bgroat 8y ago
  A simple thought experiment: The Efficient Market Hypothesis states that every asset is fairly priced, because anything that CAN be known about it has been ALREADY factored into the calculation of price. That's like walking down the street, seeing $20 and thinking, "Nah, if there was money on the ground someone would have picked it up ALREADY". Markets trend towards Efficiency, they are not in themselves efficient
  - dnadler 8y ago
    The problem with your analogy is that, in the real world, you don't know if the $20 is real or not. It could even be a -$20 bill.
  - lend000 8y ago
    You could make a similar comparison with evolution -- if the jungle is so competitive, how does the monkey find any food? The answer is that there is fruit available, but the monkey has to invest energy and expertise (both now and via billions of years of evolution) to extract it. The bigger the fruit, the more difficult to get it.
  - throwawaymath 8y ago
    That's actually not what the efficient market hypothesis (EMH) postulates. The EMH does not state that it's impossible to find opportunities to make a better-than-market return. It states that it's impossible to predict those opportunities. In other words, the EMH does not preclude $20 bills from lying on the street. It does imply that, in an idealized market which is informationally efficient, you cannot predict where people are dropping $20 bills around the city. Your example is one of the most common mis-analogies of what the EMH states. But in point of fact, if the EMH precluded any better-than-market returns, it would not be possible to have a market since you'd have no risk or volatility.
- sgt101 8y ago
  Perfect markets are efficient. There are no perfect markets because the participants are not all perfectly rational or in possession of all relevant, complete and correct information. Imperfect markets (real ones) are not efficient.
- mruts 8y ago
  No industry practitioner actually believe in strong EMH. Otherwise they would be doing something else. If the market was efficient, then no one, and I mean no one, would be able to achieve a higher Sharpe ratio than anyone else. A higher return would always imply higher risk. This is clearly not true, and the Sharpe ratio of different funds and investments has a high variance. Maybe you can say that weak EMH is true, that is, that the market is mostly efficient (and I believe that, as a professional market practitioner), but there will always be opportunities to make superior risk adjusted returns giving enough skill and wit.
- User23 8y ago
  The LIBOR scam and similar schemes blow out the fiction that markets are efficient. One counter-example suffices to defeat a general claim.
- doublekill 8y ago
  If you believe the market is 100% efficient, then it follows it always has been this way. Do you really think the market is equally efficient as it was a 100 years ago? If not, then it follows that market efficiency is a gradient, and gets more efficient over time. I do not believe the market will ever hit 100% perfect efficiency. There is room for improvement and room for longer term alpha. Another argument against EMH is to assume it is true. Market wages for quants and hedge fund employees would reflect their true value. But wages for quants are a lot higher than the cost of using a random number generator. If all trading success can be attributed to luck or chance, it would make no economic sense to hire expensive quants, hence EMH being true leads to a contradiction. I do believe in a no free lunch theorem for market pricing. Averaged over all traders and all stocks and all strategies, there is no perfect approach that beats the market consistently. But that is of little practical value (in inference and search the no free lunch holds, but we can still use prior information to limit search ranges, focus on the profitable markets, and use approaches that worked on similar problems).
- chrischattin 8y ago
  Hypothesis is the key word. It's not a law, or a tested theory. Also, it's predicated on all participants having perfect info, which doesn't happen in the real world. Is it useful? Mostly no, in my opinion, other than realizing that when my own idea of valuation differs from the market's, it's usually because I'm missing something.
mathattack 8y ago
Coming from a CS/Econ/Finance background.... Efficiency as “the market fully processes all information” is decidedly untrue. Efficiency as “Its very hard to arb markets without risk better than a passive strategy” is very true. Most professional money managers don’t beat the market once you factor in fees. Many private equity funds produce outsize returns, but it’s based on higher risk and taking advantage of tax laws. Over time, positive performance for mutual funds don’t persist. (If you’re in the top decile performance one year, you’re no more likely to be there next year) Despite all of this, there are ways people make money. But it’s a small subset of professionals. It’s high frequency traders who find ways to cut the line on mounds of pennies. It inside information from hedge funds. Or earlier access to non public information. But it’s generally not in areas that normal people like you and me can access.
- benj111 8y ago
  >Efficiency as “Its very hard to arb markets without risk better than a passive strategy” is very true Isn't that the best we can hope for though? The inefficiency is basically not knowing how to price something, which on some level is always true. At the moment a giant meteorite strike is priced at a level that is probably wrong? Tomorrow the meteorite will or won't strike and tell us which way we were wrong. Essentially outperformance is down to being quicker on the trigger. Edit: Or as you say, guessing whether the meteorite will or won't strike.
- bitxbit 8y ago
  People can still make money because it’s still a rolodex game.
  - mruts 8y ago
    Most hedge funds are making worse returns than average investors. They only funds that are consistently making money are highly sophisticated quantitative top-down systematic traders. And their returns having nothing to do with their rolodex. Names like RenTech, Bridgewater, AQR, 2 Sigma.
- subjectHarold 8y ago
2019ideas 8y ago
Mind if I ask a poll question- Do you believe 'markets grow at 7-13%/yr, over 10 years' I've been taught this like its a fact.
- 0xffff2 8y ago
  It is a fact in the sense that the average stock market return over the course of the 20th century was ~10%. Of course, as every prospectus tells you, past performance is not a guarantee of future results, but what else are you going to use as a baseline?
  - penagwin 8y ago
    Disclaimer: I have limited experience with anything finance, my profession is programming. My understanding is that 10 years ago was a stock market crash(2008), and since then we've been in a historic bull run. My understanding is that it WILL crash again (obviously), we just don't know when. But the stock market has always been like this, cycling between bull/bear runs. Wouldn't it make more sense to use a larger dataset that isn't just a bull run? Maybe the last 25 years or whatnot?
- rifung 8y ago
  No. Over 30 or 50 years maybe but 10 years is too short especially considering we just had an incredible bull run. I think many leaders in the space have said they expect lower returns in the coming years as well. Obviously this list is biased towards those who I personally believe in: https://www.cnbc.com/2017/03/22/jack-bogle-believes-the-stock-market-will-return-only-4-annually-over-the-next-decade.html https://www.cnbc.com/2017/03/22/jack-bogle-believes-the-stoc... https://www.cnbc.com/2018/09/14/nobel-prize-winner-shiller-sees-bad-times-in-the-stock-market-ahead.html https://www.cnbc.com/2018/09/14/nobel-prize-winner-shiller-s... https://www.cnbc.com/2018/07/06/vanguard-youll-make-less-money-in-the-market-over-the-next-10-years.html https://www.cnbc.com/2018/07/06/vanguard-youll-make-less-mon...
- BeetleB 8y ago
  10 years is too short. Take a look at https://blog.nawaz.org/posts/2015/Dec/pay-down-mortgage-or-invest/ https://blog.nawaz.org/posts/2015/Dec/pay-down-mortgage-or-i... You'll find charts for 5, 10, 20 and 30 year windows for the S&P 500. If you look at the 10 year one, you can see it has gone as high as almost 20%/yr for some 10 year period, and has given negative returns at least twice. That's without inflation. If you adjust for inflation, then it's more like a peak of 17%, and multiple 10 year intervals that were negative. Even a 30 year window (which I think is where the traditional 7% after inflation comes from), there were periods below 5%. The highest was a bit over 10% (inflation adjusted). This is assuming a lumped sum in the initial period. If you're looking at putting money in every month/year and calculating the effective returns for those, you'll find those plots as well.
rio517 8y ago
What is trend following?
- rfinney 8y ago
  From https://investresolve.com/blog/over-two-centuries-of-global-factor-premiums-paper-summary/ https://investresolve.com/blog/over-two-centuries-of-global-... (linked to in the bloomberg article) : Trend and momentum are defined as the 12-month-minus-1-month excess return. While this is consistent with traditional measures of cross-sectional momentum, “trend” as proposed by Moskowitz, Ooi and Pedersen; and Hurst, Ooi and Pedersen does not impose a skip month. The current authors make the case that a skip month is more conservative because it allows for a delay in data diffusion in very early periods.
- xkjkls 8y ago
  It's pretty similar to momentum investing, except using real returns rather than relative performance: https://www.aqr.com/Insights/Research/Journal-Article/Fact-Fiction-and-Momentum-Investing https://www.aqr.com/Insights/Research/Journal-Article/Fact-F...
- module0000 8y ago
  Trend following is exactly what it sounds like. Pick a trend(over a time frame you choose, using a set of indicators you choose), then join the market on the side of the trend. To be successful, you must join the trend early, and be vigilant and disciplined enough to cut your losses when your trend fails to gain momentum and/or reverses.
lordnacho 8y ago
Former fund manager here. Behavioural economics seems like a very fashionable explanation for market behaviour. However, it doesn't seem falsifiable. Just because some factor seems to work, it doesn't have to be because of herd effects. In fact it's never explained exactly which of the many BE effects is at play, or how to know which ones are not active at a given time. I've never seen anyone predict that now, loss aversion is excessive, therefore the market is going to go up or down or whatever. It seems to always be "we found this violation of EMH" -> behavioural econ is true. Regarding the things mentioned in the article, none of them are new. That doesn't mean that anyone can make money doing them. I like to do restaurant analogies when it comes to hedge funds, maybe because I grew up in one and went on to manage a couple of funds, but also there's certain similarities. Everyone thinks they can cook. It's just taking the same ingredients that are publicly available and putting them through some process, right? Well unsurprisingly it is indeed possible to make a meal that is better than what you can buy at a restaurant. Can you do it cheaper and with less effort? Not likely. On the investment side though, it really matters a lot whether you can execute cheaply. And you can get lucky with the right combination on either side of this analogy. Another analogy is recipes. How many restaurants owe their success to having better recipes than everyone else? I struggle to think of any. A restaurant is not merely a collection of recipes. You can stick exactly the same instructions in front of two different teams and the experience will turn out differently. The same goes for these strategies. Plenty of funds do trend following, yet somehow they do not end up with the same returns. And finally, a recipe is merely a guide. Look in any cookbook, there are loads of questions left over after you read a recipe. Do I peal the potatoes? How long do I cook things? At what temperature? And so on. These strategies are just like that. So, 12-1 momentum. How much of each future? Is there an execution strategy? What you end up doing depends a lot on what exactly the environment is, who your staff are, etc.
- alainchabat 8y ago
  I'm genuinely curious, where do you invest your money for the next 10+ years?
  - lordnacho 8y ago
    You looking for my advice or what I do? Funnily enough they are different, since I have access to vehicles that others don't. Plus I'm a particular person with a particular situation, advisers are a general sort of group with an average situation.
paulpauper 8y ago
To people saying the market is hopelessly efficient, It's not as bad as it sounds. Working on an S&P500 option strategy that can capture the total return of the S&P500 since 1990 while risking only 4-5% of capital per year (only 2% when one includes a nominal 2% interest rate). There are tons of strategies like this. There are many ways to get excess risk adjusted returns. Index funds though are still the best bet for most people though.
- hippich 8y ago
  Really interested to read specifics. Any links?
- FabHK 8y ago
  You can’t get 20x leverage on the upside without 20x leverage on the downside (unless you pay for it). There are not tons of way to get excess risk adjusted returns.
subjectHarold 8y ago
The chances of this data being accurate is close to zero. I have seen data looking at factors for major markets outside the US, and it is wildly inaccurate even as recent as the 1970s. Mainly trading costs and liquidity but delistings too. In addition, I know someone who looked through the paid data offerings for a similar purpose. He ended up employing ten to twenty people year round to build out a proprietary dataset because it was just not accurate.
- SomewhatLikely 8y ago
  Furthermore, the farther back you go the of an issue you have with survivorship bias. Finding all the companies that went bankrupt or bought out at a discount and correctly accounting for the losses you would have made investing in them is difficult.
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zackmorris 8y ago
The core of the article, for me: Now that quants have discovered them and attempted to profit from them, there’s a risk that those effects will be arbitraged away. But the sheer durability of the factors does imply there is something to factor investing. Can someone who has made money in finance or knows how it works, explain how/why short term gain/loss doesn't translate into long term gain/loss? It seems like if there was any signal left above the noise, that trading bots would exploit it. But that's obviously not the case, because I could hop on Robinhood today and make a quick 2% riding the daily heartbeat of the stock. My last experience with this was 18 years ago with my dad where we day traded Apple and got up about 40% or $40,000 over 4 months between the dot bomb and 9/11 (which lead to subsequently wiped out all our gains in a week). If things have changed so much that this is no longer possible, then I apologize. But the article suggests that finding correlations still works. I fundamentally don't understand how people on Wall Street can make hundreds of thousands of dollars per year investing (with other people's money, I guess?), but meanwhile the average return of the stock market is only 10% per year. What I'm getting at is that either: 1) there is predictability in investing (meaning that we could all profit if we just had the money to trade, which is inherently discriminatory against the poor) or: 2) there is no predictability in investing (meaning that it is gambling and should perhaps be regulated or banned as such) I'm getting the feeling that all of this has fingers in issues like wealth inequality and generational wealth. Perhaps this is simply a "because that's the way it is" situation, but that was said about stuff like slavery and child marriage.
- Chickenality 8y ago
  > (which lead to subsequently wiped out all our gains in a week) This is the key point. Many strategies that yield above-market returns often do so only because they're taking on large amounts of risk, even if that risk isn't immediately apparent. Think about trading cryptocurrencies, buying penny stocks, selling naked options, etc. You _can_ make a lot of money doing any of these things, but you'll be exposed to quite a bit of downside along the way, and most people who try will end up in the red.
  - drharby 8y ago
    ...given sufficient hours/time in the game. Just to bring the thought home. Im a blackjack player, and i calculate my returns at 100hours of play because of this manifestation of the law of large numbers
rbavocadotree 8y ago
I think many people may be surprised how much of quantitative investing is similar to what was done here: finding strategies that are proven to work well over time and in different market conditions. It's not all black boxes and HFT. Here is a great video of Cliff Assess of AQR, one of the largest quant hedge funds basically saying the same thing [0]. They focus on Value, Momentum, Carry, and Defensive. [0] https://www.youtube.com/watch?v=FqaP3VTKccE https://www.youtube.com/watch?v=FqaP3VTKccE
module0000 8y ago
Commodity futures trader here... this article reminds me why I got into futures: because I don't have patience to hold positions for days, weeks, months, or years. If that's what you are doing, and it's working for you - keep on doing it. All the bloomberg articles in the world won't help you trade profitably nor consistently. At the end of the day(for me), success is a very repetitive set of tasks that rely on math and probabilities to succeed. Inside information is great(no really, it is great when you have it), but discipline was the most important skill for me to master. Before I began, I was sure I had it - and was entirely wrong.
- dflock 8y ago
  You know what's very good at a very repetitive set of tasks that rely on math and probabilities - and is 100% disciplined, right?
- bluGill 8y ago
  Holding a position for years is the best bet for me because I don't have the patience to investigate the same reports (with small changes to the numbers) constantly to figure out what is going to change in the near future. I just buy a good index and let it grow. I'm up 3x my money over the last 10 years and I think about that account once a year when I have to put it on my taxes - except for one time when I wanted to make a big purchase: I had plenty of money to spare in that account.
  - module0000 8y ago
    That's fantastic! I was never able to hold over long periods myself, but that's an excellent success story you shared. At times like now(bullish), do you continue to grow your position or wait for dips? I think there is great long term profit to be had in people allowing fortunes to grow in long term index funds, I just wish I was one of the people who could take advantage of it. My niche revolves around VIX futures contracts and their effects on equity index futures - so very short term(intraday).
    - bluGill 8y ago
RickJWagner 8y ago
Jack Bogle would warn against "fighting the last war". This means past results have no bearing on future results.
roenxi 8y ago
There is a risk to this sort of long-term analysis - they identify 'following the trend' as a good strategy; but it was a good strategy under different circumstances. The advent of computers is a huge deal that may have changed the game. Even as recently as 1970, how easy was it to execute a trend following strategy? Gathering and processing the data would have been a mammoth activity requiring several clerks and lots of record keeping. Demonstrating the it was a good strategy would also have been very difficult (more clerks, lots of by-hand calculation). Only a serious trading house could have pulled it off. The ability of actuaries to employ statistical models has also changed completely in the last 10-20 years. The amount of money following a trend-following strategy is also an extremely interesting but unknowable figure. If the advent of computers makes it trivial even for a roaming programmer to implement a trend following strategy, is it still going to be robust? Now that it can be demonstrated to be a strong strategy, will the market correct for it?
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308 points by chollida1 8y ago

I'm not surprised by this, these strategies are based on pretty timeless human foibles. People are always going to prefer to buy something everyone else is buying, (no one was ever fired for buying IBM). Some people will want to buy 'cheap', some investors will just want to receive a dividend cheque every year.

soared 8y ago

> the market is not as efficient as it is supposed to be I have a recent business degree, but not finance or econ. In school we were strictly taught the market is efficient and I fully believed that. But I've seen online and discussed in person a (seemingly) growing idea that markets are not in fact efficient at all. Are there any economists/finance people that can shed light on this? Are these new ideas gaining traction, or old ideas just sticking around?

JohnJamesRambo 8y ago
https://en.wikipedia.org/wiki/Efficient-market_hypothesis#Criticism https://en.wikipedia.org/wiki/Efficient-market_hypothesis#Cr...
chollida1 8y ago
I think there are a few good responses to the question of "are markets efficient?". 1) Markets are efficient enough in that you generally don't see any real big arbitrage opportunities. Small ones will always be present, and as is often pointed out its not worth the big players time to search them out and capitalize. A trader also sees this as evidenced by the fact that we are using more and more data and ever increasingly complicated math to eek out smaller and smaller chunks of alpha. 2) different people have different ideas as to what the correct price actually is. Consider a company that is continually losing money. - Fundamental analysts will value this as a poor company due to its future cash flows dwindling. They may consider this a short opportunity - Merger Arb folks may bid up this up as a potential merger target thus raising the price. - ETF's tracking an index just don't care, they'll buy the company in proportion to its index weight. - Stat arb folks will be agnostic to price and only compare it to a peer that they feel it will trade in relation ship with, these people will be both long and short this company at different times, often unrelated to what its price currently is. 3) Physics often uses the simplifying assumption of no friction to make things easier. The efficient market hypothesis works under the assumption that everyone knows about news immediately and has time to react. Some investors react in micro seconds, some in weeks. Both affect the price
- walshemj 8y ago
  Well in the UK I have as a amateur investor taken advantage of arbitrage in the last few years. One on a big trust Witan that had gone out to a much bigger discount than normal due to a stock overhang caused by a forced sale. The other was Electra private equity which was on a huge discount.
  - subjectHarold 8y ago
    It's only an arb if your net exposure is zero. If you want an arb, look at Hansa. You can buy their trust and sell an underlying porfolio which, if you do it right, should come out to very close to zero exposure. But most CEFs aren't selling at a discount because of liquidity, they are just shit (if the manager is decent, they should buy back shares to close the discount).
CabSauce 8y ago
The market model is a gross simplification of reality. The basic model doesn't incorporate irrational decision-makers, data asymmetries, externalities, etc.
afterburner 8y ago
The market can stay irrational longer than you can stay solvent. Efficient market theory is mostly used to justify deregulation, to protect the profits of the big players who can throw the most weight around. Some economists support this (perhaps because their paychecks depend on it, or they were brainwashed at the University of Chicago where the movement was strongest). But I doubt most do, especially these days, so soon after the reminder of the Great Recesssion, 80 years after the Great Depression taught the initial lessons. But Keynes got boring for some I guess, and the allure of the "totally rational human" was clearly too great for some, and attractive to lobbyists. https://www.nytimes.com/2009/09/06/magazine/06Economic-t.html https://www.nytimes.com/2009/09/06/magazine/06Economic-t.htm...
- TheOtherHobbes 8y ago
  I'm honestly baffled why anyone would take "markets are efficient" seriously. It seems such an obviously rhetorical (i.e. politically expedient, not fact-based) narrative intended to sell the idea that markets are the very best of all possible ways to organise everything - in spite of all the centuries of historical evidence that markets consistently run in an irrational bubble-driven boom-bust cycle with almost insanely destructive opportunity and recovery costs.
  - gbear605 8y ago
    What “markets are efficient” means is really that you can’t make more money on the stock market than average unless you put the same time and brain power to it that hedge fund people do, and even then you can only make about as much money as hedge fund traders do. (Assuming a few things, like that you’re only trading based on public knowledge) The logic is this: if this were not the case, then some of those very smart hedge fund people were take advantage of this strategy, making that strategy become the average that everyone wants to beat.
- onlyrealcuzzo 8y ago
  Isn't the modern interpretation of Keynes a complete bastardization of what he was actually teaching? AFAIK, Keynes claimed that the market is more efficient than not. But he was decidedly not a believer of the efficient market hypothesis! Further, he was mostly concerned with money supply and risk-free government bonds. Sometime between the 60s and the 80s, Keynes got associated with Supply-Side Economics and Laissez Faires (which from my understanding Keynes was completely against). Also, when Keynes was writing -- FIRE (Finance, Insurance, and Real Estate) amounted to about 5% of the U.S. economy. Now it amounts to more than 30%. So, ideas that weren't concerned with those markets probably need to be concerned with them now.
twblalock 8y ago
All models are flawed. The question is not whether the market is efficient, but rather if it is useful to model the market as efficient for the purposes of economic research. Such a model does seem to work well in a lot of cases.
prewett 8y ago
Check out the book "How Markets Fail" for a discussion on how the efficient market hypothesis gained popularity (part 1) and a discussion of the many ways that real markets do not maintain the preconditions for markets to be efficient. In particular, the precondition that Adam Smith stated was that increasing production required linearly increased costs. However, this is frequently not the case (utilities, railroads, software, social media networks, etc.). Also, markets require a certain minimum number of producers (and consumers) in order to remain efficient. Consolidation can reduce the number of producers below the level that meets the precondition of efficiency, and then barriers to entry to prevent newcomers from joining the market. As far as efficient market theory applied to the stock market, I've always thought that efficient market theory was trivially disprovable: did all companies in the US lose 20% of their value all at the same time this past Nov - Dec, in the same season that they are selling all their inventory during the holiday season? And then regain 10% of it all at the same time the next month? Did Apple lose 50% of its value from between July and December, despite the fact that its revenues, costs, dividends, assets, people-capital, know-how, brand, consumer sentiment, etc. remained roughly the same? Compare to, say, PG&E during the same period.
- mushufasa 8y ago
  John Cassidy's "How Markets Fail" is a must-read IMHO. I went through 4 years of an economics degree at a top tier university (top 5 globally in Econ), and Cassidy's book just happened to be the weekly assigned reading for a class my last semester. Everything then made sense. All the inconsistencies you hear about economics, with one camp saying one idea and another talking about something totally different, both passing it off as consensus, fit into place. TLDR: Cassidy's book is in 2 parts. The first part, he constructs the classical/rational model of economics through intellectual history. The second part, he deconstructs, drawing from all the critiques of inefficiency, both behavioral and mathematical. (Some of the most fascinating aspects are the beautiful mathematical models that can't be solved). It's all well written prose, no need to have a pen and calculator to follow along. The title is misleading IMHO, because it seems to be a populist polemical. It's not. It should be called something like "A Brief History of Economics", echoing Hawkin's Brief History of Time.
- FabHK 8y ago
rebeccaskinner 8y ago
Markets are probably only efficient if P = NP, and it probably doesn't: https://arxiv.org/abs/1002.2284 https://arxiv.org/abs/1002.2284
- WilliamEdward 8y ago
  There is a lot of 'probably' going on here. He structures his entire P=NP argument on the basis that most computer scientists believe it to be false. That's fairly weak. He has shown that markets are only efficient if P=NP, but that doesn't say much about whether they are therefore inefficient.
  - WilliamEdward 8y ago
    "In short, if P≠NP, then the market cannot be efficient for very long because the ability of investorsto check all strategies will be quickly overwhelmed by the exponential number of possible strategies there are to check." He also states this, but even an overwhelming amount of strategies can be condensed into algorithms that makes 99% of them useless. See the game of chess for similar ideas. 99% of the possible moves are useless, so it seems as if there are an exponential amount of good moves when only a fraction are viable. Chess is NP, but still partially solvable under P conditions. I believe the market is like this too.
DennisP 8y ago
The EMH has been losing some steam because it doesn't match the data. In the last couple decades there has been a lot of data crunching like this, and academics have found these same factors. This study confirms those results with more and older data. People have come up with two classes of explanations, touched on in the article. One is human behavioral factors and cognitive biases, the other is structural biases in the economy, like investment managers being more incentivized to avoid relative losses than to make absolute gains.
dallashoxton 8y ago
If markets were efficient we wouldn't see such enormous and consistent outsized returns from value investors of the Graham-Buffett school, as mentioned in another HN thread today: https://www8.gsb.columbia.edu/articles/columbia-business/superinvestors https://www8.gsb.columbia.edu/articles/columbia-business/sup... The absoluteness of the efficient market hypothesis also leads to some interesting paradoxes that don't make much sense when you look at the real world: https://en.m.wikipedia.org/wiki/Grossman-Stiglitz_Paradox https://en.m.wikipedia.org/wiki/Grossman-Stiglitz_Paradox
wjnc 8y ago
I am tempted to ask which school and truly in the post crisis era? In my econ podcasts they keep lamenting how things like this are still thaught, but I was somewhat incredulous. I studied econ in the early aughts and there was more behavioral, industrial and institutional economics than macro in my program. That was long before the crisis and still looks like the proper mix. And then on the question. Perfect information is false and there are degrees in the definition of how efficient markets are, with the most common one approximating 'somewhat' on the not too short timescale. Mileage varies between commodities, stocks, your staple teaching example of the market for used cars (lemons) going towards the more micro models with network effects etc. Institutional economics will teach you that no market functions without surrounding institutional arrangements and that there is some relationship between the nature of the product and the optimal 'institutional burden' (my words). Mechanism design is the subject where they try to design optimally structured markets. Economics is awesome and anyone teaching only perfect information even to undergrads or business students should be fired. Ceterum censeo
- deleted 8y ago
  [deleted]
- scottlocklin 8y ago
  Economics is not a science. The end. It's mostly ideology with mathematical excuses. At best, it's non predictive modeling.
  - FabHK 8y ago
    > Economics is not a science. The end. That’s too facile. I’d say, insofar as it is a science, it’s not about the real world, and insofar as it’s about the real world, it's not a science. But even that doesn’t give it enough credit.
    - kurtisc 8y ago
      To me that's hiding another question of whether or not it's worthwhile. Like when we ask if something is or isn't art, or if writing software is or isn't engineering. There shouldn't be any link between saying economics is or isn't a science and giving it credit.
nradov 8y ago
Are you certain you remember all of your schooling? Any basic finance class will cover the efficient market hypothesis, but also cover exceptions and temporary violations. This is standard course content and hasn't changed significantly in decades.
gammateam 8y ago
> In school we were strictly taught the market is efficient and I fully believed that. But I've seen online and discussed in person a (seemingly) growing idea that markets are not in fact efficient at all. I can tell pretty much everything I need to know about a person based on which one of these ideas they would say or defend. Always lots of new ideas and theories that hope to reduce the participants in a market down to an explainable behavior. But there are lots of ways to extract value from a market, which is more important than the debate around "already 'efficient' or not".
bgroat 8y ago
A simple thought experiment: The Efficient Market Hypothesis states that every asset is fairly priced, because anything that CAN be known about it has been ALREADY factored into the calculation of price. That's like walking down the street, seeing $20 and thinking, "Nah, if there was money on the ground someone would have picked it up ALREADY". Markets trend towards Efficiency, they are not in themselves efficient
- dnadler 8y ago
  The problem with your analogy is that, in the real world, you don't know if the $20 is real or not. It could even be a -$20 bill.
- lend000 8y ago
  You could make a similar comparison with evolution -- if the jungle is so competitive, how does the monkey find any food? The answer is that there is fruit available, but the monkey has to invest energy and expertise (both now and via billions of years of evolution) to extract it. The bigger the fruit, the more difficult to get it.
- throwawaymath 8y ago
  That's actually not what the efficient market hypothesis (EMH) postulates. The EMH does not state that it's impossible to find opportunities to make a better-than-market return. It states that it's impossible to predict those opportunities. In other words, the EMH does not preclude $20 bills from lying on the street. It does imply that, in an idealized market which is informationally efficient, you cannot predict where people are dropping $20 bills around the city. Your example is one of the most common mis-analogies of what the EMH states. But in point of fact, if the EMH precluded any better-than-market returns, it would not be possible to have a market since you'd have no risk or volatility.
sgt101 8y ago
Perfect markets are efficient. There are no perfect markets because the participants are not all perfectly rational or in possession of all relevant, complete and correct information. Imperfect markets (real ones) are not efficient.
mruts 8y ago
No industry practitioner actually believe in strong EMH. Otherwise they would be doing something else. If the market was efficient, then no one, and I mean no one, would be able to achieve a higher Sharpe ratio than anyone else. A higher return would always imply higher risk. This is clearly not true, and the Sharpe ratio of different funds and investments has a high variance. Maybe you can say that weak EMH is true, that is, that the market is mostly efficient (and I believe that, as a professional market practitioner), but there will always be opportunities to make superior risk adjusted returns giving enough skill and wit.
User23 8y ago
The LIBOR scam and similar schemes blow out the fiction that markets are efficient. One counter-example suffices to defeat a general claim.
doublekill 8y ago
If you believe the market is 100% efficient, then it follows it always has been this way. Do you really think the market is equally efficient as it was a 100 years ago? If not, then it follows that market efficiency is a gradient, and gets more efficient over time. I do not believe the market will ever hit 100% perfect efficiency. There is room for improvement and room for longer term alpha. Another argument against EMH is to assume it is true. Market wages for quants and hedge fund employees would reflect their true value. But wages for quants are a lot higher than the cost of using a random number generator. If all trading success can be attributed to luck or chance, it would make no economic sense to hire expensive quants, hence EMH being true leads to a contradiction. I do believe in a no free lunch theorem for market pricing. Averaged over all traders and all stocks and all strategies, there is no perfect approach that beats the market consistently. But that is of little practical value (in inference and search the no free lunch holds, but we can still use prior information to limit search ranges, focus on the profitable markets, and use approaches that worked on similar problems).
chrischattin 8y ago
Hypothesis is the key word. It's not a law, or a tested theory. Also, it's predicated on all participants having perfect info, which doesn't happen in the real world. Is it useful? Mostly no, in my opinion, other than realizing that when my own idea of valuation differs from the market's, it's usually because I'm missing something.

mathattack 8y ago

Coming from a CS/Econ/Finance background.... Efficiency as “the market fully processes all information” is decidedly untrue. Efficiency as “Its very hard to arb markets without risk better than a passive strategy” is very true. Most professional money managers don’t beat the market once you factor in fees. Many private equity funds produce outsize returns, but it’s based on higher risk and taking advantage of tax laws. Over time, positive performance for mutual funds don’t persist. (If you’re in the top decile performance one year, you’re no more likely to be there next year) Despite all of this, there are ways people make money. But it’s a small subset of professionals. It’s high frequency traders who find ways to cut the line on mounds of pennies. It inside information from hedge funds. Or earlier access to non public information. But it’s generally not in areas that normal people like you and me can access.

benj111 8y ago
>Efficiency as “Its very hard to arb markets without risk better than a passive strategy” is very true Isn't that the best we can hope for though? The inefficiency is basically not knowing how to price something, which on some level is always true. At the moment a giant meteorite strike is priced at a level that is probably wrong? Tomorrow the meteorite will or won't strike and tell us which way we were wrong. Essentially outperformance is down to being quicker on the trigger. Edit: Or as you say, guessing whether the meteorite will or won't strike.
bitxbit 8y ago
People can still make money because it’s still a rolodex game.
- mruts 8y ago
  Most hedge funds are making worse returns than average investors. They only funds that are consistently making money are highly sophisticated quantitative top-down systematic traders. And their returns having nothing to do with their rolodex. Names like RenTech, Bridgewater, AQR, 2 Sigma.
subjectHarold 8y ago

2019ideas 8y ago

Mind if I ask a poll question- Do you believe 'markets grow at 7-13%/yr, over 10 years' I've been taught this like its a fact.

0xffff2 8y ago
It is a fact in the sense that the average stock market return over the course of the 20th century was ~10%. Of course, as every prospectus tells you, past performance is not a guarantee of future results, but what else are you going to use as a baseline?
- penagwin 8y ago
  Disclaimer: I have limited experience with anything finance, my profession is programming. My understanding is that 10 years ago was a stock market crash(2008), and since then we've been in a historic bull run. My understanding is that it WILL crash again (obviously), we just don't know when. But the stock market has always been like this, cycling between bull/bear runs. Wouldn't it make more sense to use a larger dataset that isn't just a bull run? Maybe the last 25 years or whatnot?
rifung 8y ago
No. Over 30 or 50 years maybe but 10 years is too short especially considering we just had an incredible bull run. I think many leaders in the space have said they expect lower returns in the coming years as well. Obviously this list is biased towards those who I personally believe in: https://www.cnbc.com/2017/03/22/jack-bogle-believes-the-stock-market-will-return-only-4-annually-over-the-next-decade.html https://www.cnbc.com/2017/03/22/jack-bogle-believes-the-stoc... https://www.cnbc.com/2018/09/14/nobel-prize-winner-shiller-sees-bad-times-in-the-stock-market-ahead.html https://www.cnbc.com/2018/09/14/nobel-prize-winner-shiller-s... https://www.cnbc.com/2018/07/06/vanguard-youll-make-less-money-in-the-market-over-the-next-10-years.html https://www.cnbc.com/2018/07/06/vanguard-youll-make-less-mon...
BeetleB 8y ago
10 years is too short. Take a look at https://blog.nawaz.org/posts/2015/Dec/pay-down-mortgage-or-invest/ https://blog.nawaz.org/posts/2015/Dec/pay-down-mortgage-or-i... You'll find charts for 5, 10, 20 and 30 year windows for the S&P 500. If you look at the 10 year one, you can see it has gone as high as almost 20%/yr for some 10 year period, and has given negative returns at least twice. That's without inflation. If you adjust for inflation, then it's more like a peak of 17%, and multiple 10 year intervals that were negative. Even a 30 year window (which I think is where the traditional 7% after inflation comes from), there were periods below 5%. The highest was a bit over 10% (inflation adjusted). This is assuming a lumped sum in the initial period. If you're looking at putting money in every month/year and calculating the effective returns for those, you'll find those plots as well.

rio517 8y ago

What is trend following?

rfinney 8y ago
From https://investresolve.com/blog/over-two-centuries-of-global-factor-premiums-paper-summary/ https://investresolve.com/blog/over-two-centuries-of-global-... (linked to in the bloomberg article) : Trend and momentum are defined as the 12-month-minus-1-month excess return. While this is consistent with traditional measures of cross-sectional momentum, “trend” as proposed by Moskowitz, Ooi and Pedersen; and Hurst, Ooi and Pedersen does not impose a skip month. The current authors make the case that a skip month is more conservative because it allows for a delay in data diffusion in very early periods.
xkjkls 8y ago
It's pretty similar to momentum investing, except using real returns rather than relative performance: https://www.aqr.com/Insights/Research/Journal-Article/Fact-Fiction-and-Momentum-Investing https://www.aqr.com/Insights/Research/Journal-Article/Fact-F...
module0000 8y ago
Trend following is exactly what it sounds like. Pick a trend(over a time frame you choose, using a set of indicators you choose), then join the market on the side of the trend. To be successful, you must join the trend early, and be vigilant and disciplined enough to cut your losses when your trend fails to gain momentum and/or reverses.

lordnacho 8y ago

Former fund manager here. Behavioural economics seems like a very fashionable explanation for market behaviour. However, it doesn't seem falsifiable. Just because some factor seems to work, it doesn't have to be because of herd effects. In fact it's never explained exactly which of the many BE effects is at play, or how to know which ones are not active at a given time. I've never seen anyone predict that now, loss aversion is excessive, therefore the market is going to go up or down or whatever. It seems to always be "we found this violation of EMH" -> behavioural econ is true. Regarding the things mentioned in the article, none of them are new. That doesn't mean that anyone can make money doing them. I like to do restaurant analogies when it comes to hedge funds, maybe because I grew up in one and went on to manage a couple of funds, but also there's certain similarities. Everyone thinks they can cook. It's just taking the same ingredients that are publicly available and putting them through some process, right? Well unsurprisingly it is indeed possible to make a meal that is better than what you can buy at a restaurant. Can you do it cheaper and with less effort? Not likely. On the investment side though, it really matters a lot whether you can execute cheaply. And you can get lucky with the right combination on either side of this analogy. Another analogy is recipes. How many restaurants owe their success to having better recipes than everyone else? I struggle to think of any. A restaurant is not merely a collection of recipes. You can stick exactly the same instructions in front of two different teams and the experience will turn out differently. The same goes for these strategies. Plenty of funds do trend following, yet somehow they do not end up with the same returns. And finally, a recipe is merely a guide. Look in any cookbook, there are loads of questions left over after you read a recipe. Do I peal the potatoes? How long do I cook things? At what temperature? And so on. These strategies are just like that. So, 12-1 momentum. How much of each future? Is there an execution strategy? What you end up doing depends a lot on what exactly the environment is, who your staff are, etc.

alainchabat 8y ago
I'm genuinely curious, where do you invest your money for the next 10+ years?
- lordnacho 8y ago
  You looking for my advice or what I do? Funnily enough they are different, since I have access to vehicles that others don't. Plus I'm a particular person with a particular situation, advisers are a general sort of group with an average situation.

paulpauper 8y ago

To people saying the market is hopelessly efficient, It's not as bad as it sounds. Working on an S&P500 option strategy that can capture the total return of the S&P500 since 1990 while risking only 4-5% of capital per year (only 2% when one includes a nominal 2% interest rate). There are tons of strategies like this. There are many ways to get excess risk adjusted returns. Index funds though are still the best bet for most people though.

hippich 8y ago
Really interested to read specifics. Any links?
FabHK 8y ago
You can’t get 20x leverage on the upside without 20x leverage on the downside (unless you pay for it). There are not tons of way to get excess risk adjusted returns.

subjectHarold 8y ago

The chances of this data being accurate is close to zero. I have seen data looking at factors for major markets outside the US, and it is wildly inaccurate even as recent as the 1970s. Mainly trading costs and liquidity but delistings too. In addition, I know someone who looked through the paid data offerings for a similar purpose. He ended up employing ten to twenty people year round to build out a proprietary dataset because it was just not accurate.

SomewhatLikely 8y ago
Furthermore, the farther back you go the of an issue you have with survivorship bias. Finding all the companies that went bankrupt or bought out at a discount and correctly accounting for the losses you would have made investing in them is difficult.

deleted 8y ago

[deleted]

zackmorris 8y ago

The core of the article, for me: Now that quants have discovered them and attempted to profit from them, there’s a risk that those effects will be arbitraged away. But the sheer durability of the factors does imply there is something to factor investing. Can someone who has made money in finance or knows how it works, explain how/why short term gain/loss doesn't translate into long term gain/loss? It seems like if there was any signal left above the noise, that trading bots would exploit it. But that's obviously not the case, because I could hop on Robinhood today and make a quick 2% riding the daily heartbeat of the stock. My last experience with this was 18 years ago with my dad where we day traded Apple and got up about 40% or $40,000 over 4 months between the dot bomb and 9/11 (which lead to subsequently wiped out all our gains in a week). If things have changed so much that this is no longer possible, then I apologize. But the article suggests that finding correlations still works. I fundamentally don't understand how people on Wall Street can make hundreds of thousands of dollars per year investing (with other people's money, I guess?), but meanwhile the average return of the stock market is only 10% per year. What I'm getting at is that either: 1) there is predictability in investing (meaning that we could all profit if we just had the money to trade, which is inherently discriminatory against the poor) or: 2) there is no predictability in investing (meaning that it is gambling and should perhaps be regulated or banned as such) I'm getting the feeling that all of this has fingers in issues like wealth inequality and generational wealth. Perhaps this is simply a "because that's the way it is" situation, but that was said about stuff like slavery and child marriage.

Chickenality 8y ago
> (which lead to subsequently wiped out all our gains in a week) This is the key point. Many strategies that yield above-market returns often do so only because they're taking on large amounts of risk, even if that risk isn't immediately apparent. Think about trading cryptocurrencies, buying penny stocks, selling naked options, etc. You _can_ make a lot of money doing any of these things, but you'll be exposed to quite a bit of downside along the way, and most people who try will end up in the red.
- drharby 8y ago
  ...given sufficient hours/time in the game. Just to bring the thought home. Im a blackjack player, and i calculate my returns at 100hours of play because of this manifestation of the law of large numbers

rbavocadotree 8y ago

I think many people may be surprised how much of quantitative investing is similar to what was done here: finding strategies that are proven to work well over time and in different market conditions. It's not all black boxes and HFT. Here is a great video of Cliff Assess of AQR, one of the largest quant hedge funds basically saying the same thing [0]. They focus on Value, Momentum, Carry, and Defensive. [0] https://www.youtube.com/watch?v=FqaP3VTKccE https://www.youtube.com/watch?v=FqaP3VTKccE

module0000 8y ago

Commodity futures trader here... this article reminds me why I got into futures: because I don't have patience to hold positions for days, weeks, months, or years. If that's what you are doing, and it's working for you - keep on doing it. All the bloomberg articles in the world won't help you trade profitably nor consistently. At the end of the day(for me), success is a very repetitive set of tasks that rely on math and probabilities to succeed. Inside information is great(no really, it is great when you have it), but discipline was the most important skill for me to master. Before I began, I was sure I had it - and was entirely wrong.

dflock 8y ago
You know what's very good at a very repetitive set of tasks that rely on math and probabilities - and is 100% disciplined, right?
bluGill 8y ago
Holding a position for years is the best bet for me because I don't have the patience to investigate the same reports (with small changes to the numbers) constantly to figure out what is going to change in the near future. I just buy a good index and let it grow. I'm up 3x my money over the last 10 years and I think about that account once a year when I have to put it on my taxes - except for one time when I wanted to make a big purchase: I had plenty of money to spare in that account.
- module0000 8y ago
  That's fantastic! I was never able to hold over long periods myself, but that's an excellent success story you shared. At times like now(bullish), do you continue to grow your position or wait for dips? I think there is great long term profit to be had in people allowing fortunes to grow in long term index funds, I just wish I was one of the people who could take advantage of it. My niche revolves around VIX futures contracts and their effects on equity index futures - so very short term(intraday).
  - bluGill 8y ago

RickJWagner 8y ago

Jack Bogle would warn against "fighting the last war". This means past results have no bearing on future results.

roenxi 8y ago

There is a risk to this sort of long-term analysis - they identify 'following the trend' as a good strategy; but it was a good strategy under different circumstances. The advent of computers is a huge deal that may have changed the game. Even as recently as 1970, how easy was it to execute a trend following strategy? Gathering and processing the data would have been a mammoth activity requiring several clerks and lots of record keeping. Demonstrating the it was a good strategy would also have been very difficult (more clerks, lots of by-hand calculation). Only a serious trading house could have pulled it off. The ability of actuaries to employ statistical models has also changed completely in the last 10-20 years. The amount of money following a trend-following strategy is also an extremely interesting but unknowable figure. If the advent of computers makes it trivial even for a roaming programmer to implement a trend following strategy, is it still going to be robust? Now that it can be demonstrated to be a strong strategy, will the market correct for it?

deleted 8y ago

[deleted]