4 ms·

Someone will always beat the market, because that's what we're looking for. I think it was on "Thinking Fast and Slow" that I read it's pointless to analyze th

by inerte 7y ago

Someone will always beat the market, because that's what we're looking for. I think it was on "Thinking Fast and Slow" that I read it's pointless to analyze the stock market winners, since it's a random process. Imagine there are 30 million entities that own stocks in the US - individual, companies, funds, etc... If on a given year half of them did better than average (with some rounding liberty): 1st year: 15M better than average 2nd year: 7.5M better than average 3: 3.25M 4: 1.6M 5: 800k 6: 400k 7: 200k 8: 100k 9: 50k 10: 25k And so on... after 20 years, probably 25 traders will have beaten the market for 20 years straight. Next year, same thing, 25 traders will have beaten the market, and so on. In the US, there's always someone who has beaten the market over the last few decades - there's nothing special about them. Randomly picking stocks would give you the same end result. But since we're storytellers, we build an explanation and go with it.

melling 7y ago
Who said it’s a random process? Stock prices don’t go up randomly over the long term. Joel Greenblatt had 50% yearly returns for a decade. Renaissance Technologies uses algorithms. Also, I don’t think you would expect someone to beat the market every year, but over a ten year period, for example.
- neaden 7y ago
  An important difference. You would expect someone to beat the market every year for ten years just by chance alone, you wouldn't expect it to be any specific person. I expect someone is going to win the lottery, I just don't expect that someone to be me.
- ryandrake 7y ago
  I’ve got a roulette “system” too. Trust me, it even has algorithms and machine learning. I’ll sell you the book. The discussion reminds me of a fun exercise we did in one of my B-school classes: everyone stands up and flips a coin. If you flip heads you sit down and stop the game. Everyone who flipped heads flips again, with the new tails flippers sitting down. At the end when there’s one person left, the prof interviews him, asking “how did you become so skilled at flipping heads?” and “what advice can others take to get as good as you!” This is what we are doing when we admire stock pickers and try to figure out what their secret is.
  - mruts 7y ago
    Well Claude Shannon and Ed Thorpe did figure out how to beat roullette. And BlackJack. And then Thorpe figured out Black Scholes and made a killing in the markets trading warrents. See my above comment about how statistics does not bear out your fooled by randomness theory.
    - gbronner 7y ago
      See also the Eudaemonic Pie
    - kasey_junk 7y ago
      I don’t have a dog in this fight but Ed Thorpe has one of his funds liquidated via RICO. He’s usually used as an example in the positive case for “only bad behavior gets outsized market returns” argument. Scholes & Merton got famously wrecked in the markets.
      - bob_theslob646 7y ago
        This is the perfect example of broken telephone. (If you don't know the full story and fail to post any source) The reason why they got the RICO. "From 1969 to the end of 1987 the amount invested rose from $1.4 million to $273 million. Its limited partners saw their wealth grow at 18.2 percent annualized after fees. PNP had no losing years — and not even a losing quarter." The regulators thought that it was a Ponzi scheme based off that information or did they... "But most knowledgeable observers believed that the charges — filed under the Racketeer Influenced and Corrupt Organizations (RICO) Act — were also intended to get the Princeton Newport principals to testify against Michael Milken, the controversial “junk bond” trader who had upended Wall Street conventions and who had dealings with PNP." The regulators thought that it was a Ponzi scheme, when in reality, they mastered the tax code and created losses via hedging, which was legal at the time. "The resulting charges were related to trades that PNP had made to create losses that would offset corresponding gains that arose during the firm’s hedging maneuvers." "The Princeton Newport attorney, Theodore Wells, a Harvard Law and Harvard Business School alumnus known for high-profile white collar criminal defense, argued that the trades were allowed under IRS regulations. They even had a former IRS commissioner, Donald Alexander, prepared to testify in their defense. The judge would not permit it." >I don’t have a dog in this fight but Ed Thorpe has one of his funds liquidated via RICO. First off, his name is Edward O. Thorp https://g.co/kgs/jfpjL1 https://g.co/kgs/jfpjL1 not "Thorpe" >Ed Thorpe has one of his funds liquidated via RICO. Please post a source because almost all of the charges were overturned. "Ed Thorp, who was not greatly affected by the criminal charges, was able to restart his hedge fund activity. In 2012 Thorp’s net worth was estimated at $800 million." All of this information came from this source. https://communitynews.org/2017/02/28/from-fat-cat-to-racketeer-jay-regan-says-no-way/ https://communitynews.org/2017/02/28/from-fat-cat-to-rackete...
- rebuilder 7y ago
  Yes, given enough traders, you very much would expect some of them to beat the market consistently, over a decade or more.
kolbe 7y ago
If you think everything is just random, you should educate yourself the impact of superior information sources or technology on producing returns. Are you telling me someone who runs the fastest market data feed between Chicago and New Jersey, doing arbitrages between S&P futures and S&P ETFs is just getting lucky over and over again, and it will eventually be revealed that they just won 30,000 coin tosses in a row?
- inerte 7y ago
  Correct. There are numerous studies showing professional traders (individual or companies) are in fact no better than randomly picking stocks. Just the sheer number of players and variables will eventually produce winners, then we will justify why it happened in the first place.
  - kolbe 7y ago
    Do you understand that 'studies' are not necessarily reality? I know the "I fucking love science" crowd has replaced priests with professors, but professors, their data and their logic are also highly fallible. How about you go ahead and mock up a probability model about how a company like Jump Trading can make 100s of market neutral bets every day for ten years, and end up being lucky to make money on 95% of those days. The probability of that happening due to randomness around a 50% probability on each trade is probably lower than 1 in the number of atoms in the universe.
  - justinmeiners 7y ago
    Think about how the underlying market works though. Is success or failure actually a random process? Or are cause and effect relationships happening? Isn't it possible to identify traits of a good business that others aren't recognizing.
  - bowcoy 7y ago
    This is a contradiction. You first assume complete market efficiency (assets are priced in) to support that the market is random and unpredictable. Then you say that a hedge funds' payroll is no better than random guessing (something you could scale up without hiring anyone). This means that quants are grossly overpaid (assets don't reflect their true price) and that the trader's market is highly inefficient... That's having your cake and eating it too: a rational irrational market. And it is a hypothesis that can't be disproven or proven, since, in a round-about way, it concerns non-computable concepts like Kolmogorov Complexity/Randomness (The efficient market hypothesis basically states that the stock market is an optimally compressed computer program, there are no discernible patterns left to reduce the "file" size). There are numerous tried and tested ways to beat the market, including: - Have more information than other players - Have better models than other players - Make faster decisions than other players - Have enough energy to perturb the system and predict the outcome (this is the big one that is out of reach of most individuals and non-Physics PhD's). Survivor bias is of course a very real phenomenon, but like other incomplete information games that can be won, or even solved, algorithmically: Poker, international diplomacy, ..., we would not conflate pure luck with the real skills required to play those games consistently well.
deleted 7y ago
[deleted]
downandout 7y ago
The math, at least when it comes to the Medallion Fund, says that you are wrong. The odds of being able to achieve 40%+ returns (net of very steep fees) over 20+ years are astronomically low. In fact, the odds of simply being in the top 25% of hedge funds for 20 straight years, through “randomly picking stocks” as you put it, are 1/(4^20), which is roughly 1.09 in 1 trillion. There have been less than 25,000 hedge funds in US history. Yours is the kind of folksy explanation that appeals to the masses. It seems like the kind of thing Bernie Sanders would say in a speech. But in this case it leads to an astoundingly inaccurate conclusion.
- actually_trades 7y ago
  This is the correct response. For whatever reason, people seem to think "50/50 chance of beating the market" = 50% chance of generating 40% return on any given year. Try randomly picking stocks over the last 20 years, and run 1 billion simulations and see if you get anywhere near that (even letting you have survivorship bias for free)
  - simtel20 7y ago
    > people seem to think "50/50 chance of beating the market" = 50% chance of generating 40% return on any given year Yeah, quants like to coyly say they're figuring out where pennies might drop, and then they bring in leverage. Without the leverage, they'd be beating the market by less than a percent in so many cases.
mruts 7y ago
Okay, let’s do the math buddy. Let’s assume the null hypothesis (the market) has a mean return of 10% and vol of 10%. RenTec’s Medallion Fund has made 80% annualized return before fees in the last 20 years. Assuming the market is a random walk (it’s not), the chance of RenTec making >50% (I don’t think they’ve ever made less than that in 20 years) every year for 20 years is... 3.486 x 10^(-91) The actual probability is a lot smaller btw. Why do people keep posting this tired argument over and over? It’s not true. There’s no evidence that it is true. The math strongly suggests (see above) that you can beat the market.
- Macross8299 7y ago
  >Why do people keep posting this tired argument over and over? Sour grapes. Easier to pretend _nobody_ beats the market than honestly admit you're not willing to put in the effort to constantly discover new alpha. And it's fine to not be willing to do that -- it takes a lot of effort and skill to discover alpha and most people will be better off improving their skills in their day job and just tracking indexes. Doesn't mean it's impossible to beat the market, especially as a small investor where you have some advantages over larger players (your orders aren't large enough to move markets and reveal valuable information)
- deleted 7y ago
  [deleted]
Guph 7y ago
It's not really random, the value of stock has more to do with popularity of stock than the data people like to analyze. As long as people keep buying a stock, it's price will continue to go up. Same thing the other way. Now also keep in mind I can sell stock and you buy it, and we can both make money as I bought my stock lower than you.

by inerte 7y ago

melling 7y ago

Who said it’s a random process? Stock prices don’t go up randomly over the long term. Joel Greenblatt had 50% yearly returns for a decade. Renaissance Technologies uses algorithms. Also, I don’t think you would expect someone to beat the market every year, but over a ten year period, for example.

neaden 7y ago
An important difference. You would expect someone to beat the market every year for ten years just by chance alone, you wouldn't expect it to be any specific person. I expect someone is going to win the lottery, I just don't expect that someone to be me.
ryandrake 7y ago
I’ve got a roulette “system” too. Trust me, it even has algorithms and machine learning. I’ll sell you the book. The discussion reminds me of a fun exercise we did in one of my B-school classes: everyone stands up and flips a coin. If you flip heads you sit down and stop the game. Everyone who flipped heads flips again, with the new tails flippers sitting down. At the end when there’s one person left, the prof interviews him, asking “how did you become so skilled at flipping heads?” and “what advice can others take to get as good as you!” This is what we are doing when we admire stock pickers and try to figure out what their secret is.
- mruts 7y ago
  Well Claude Shannon and Ed Thorpe did figure out how to beat roullette. And BlackJack. And then Thorpe figured out Black Scholes and made a killing in the markets trading warrents. See my above comment about how statistics does not bear out your fooled by randomness theory.
  - gbronner 7y ago
    See also the Eudaemonic Pie
  - kasey_junk 7y ago
    I don’t have a dog in this fight but Ed Thorpe has one of his funds liquidated via RICO. He’s usually used as an example in the positive case for “only bad behavior gets outsized market returns” argument. Scholes & Merton got famously wrecked in the markets.
    - bob_theslob646 7y ago
      This is the perfect example of broken telephone. (If you don't know the full story and fail to post any source) The reason why they got the RICO. "From 1969 to the end of 1987 the amount invested rose from $1.4 million to $273 million. Its limited partners saw their wealth grow at 18.2 percent annualized after fees. PNP had no losing years — and not even a losing quarter." The regulators thought that it was a Ponzi scheme based off that information or did they... "But most knowledgeable observers believed that the charges — filed under the Racketeer Influenced and Corrupt Organizations (RICO) Act — were also intended to get the Princeton Newport principals to testify against Michael Milken, the controversial “junk bond” trader who had upended Wall Street conventions and who had dealings with PNP." The regulators thought that it was a Ponzi scheme, when in reality, they mastered the tax code and created losses via hedging, which was legal at the time. "The resulting charges were related to trades that PNP had made to create losses that would offset corresponding gains that arose during the firm’s hedging maneuvers." "The Princeton Newport attorney, Theodore Wells, a Harvard Law and Harvard Business School alumnus known for high-profile white collar criminal defense, argued that the trades were allowed under IRS regulations. They even had a former IRS commissioner, Donald Alexander, prepared to testify in their defense. The judge would not permit it." >I don’t have a dog in this fight but Ed Thorpe has one of his funds liquidated via RICO. First off, his name is Edward O. Thorp https://g.co/kgs/jfpjL1 https://g.co/kgs/jfpjL1 not "Thorpe" >Ed Thorpe has one of his funds liquidated via RICO. Please post a source because almost all of the charges were overturned. "Ed Thorp, who was not greatly affected by the criminal charges, was able to restart his hedge fund activity. In 2012 Thorp’s net worth was estimated at $800 million." All of this information came from this source. https://communitynews.org/2017/02/28/from-fat-cat-to-racketeer-jay-regan-says-no-way/ https://communitynews.org/2017/02/28/from-fat-cat-to-rackete...
rebuilder 7y ago
Yes, given enough traders, you very much would expect some of them to beat the market consistently, over a decade or more.

kolbe 7y ago

If you think everything is just random, you should educate yourself the impact of superior information sources or technology on producing returns. Are you telling me someone who runs the fastest market data feed between Chicago and New Jersey, doing arbitrages between S&P futures and S&P ETFs is just getting lucky over and over again, and it will eventually be revealed that they just won 30,000 coin tosses in a row?

inerte 7y ago
Correct. There are numerous studies showing professional traders (individual or companies) are in fact no better than randomly picking stocks. Just the sheer number of players and variables will eventually produce winners, then we will justify why it happened in the first place.
- kolbe 7y ago
  Do you understand that 'studies' are not necessarily reality? I know the "I fucking love science" crowd has replaced priests with professors, but professors, their data and their logic are also highly fallible. How about you go ahead and mock up a probability model about how a company like Jump Trading can make 100s of market neutral bets every day for ten years, and end up being lucky to make money on 95% of those days. The probability of that happening due to randomness around a 50% probability on each trade is probably lower than 1 in the number of atoms in the universe.
- justinmeiners 7y ago
  Think about how the underlying market works though. Is success or failure actually a random process? Or are cause and effect relationships happening? Isn't it possible to identify traits of a good business that others aren't recognizing.
- bowcoy 7y ago
  This is a contradiction. You first assume complete market efficiency (assets are priced in) to support that the market is random and unpredictable. Then you say that a hedge funds' payroll is no better than random guessing (something you could scale up without hiring anyone). This means that quants are grossly overpaid (assets don't reflect their true price) and that the trader's market is highly inefficient... That's having your cake and eating it too: a rational irrational market. And it is a hypothesis that can't be disproven or proven, since, in a round-about way, it concerns non-computable concepts like Kolmogorov Complexity/Randomness (The efficient market hypothesis basically states that the stock market is an optimally compressed computer program, there are no discernible patterns left to reduce the "file" size). There are numerous tried and tested ways to beat the market, including: - Have more information than other players - Have better models than other players - Make faster decisions than other players - Have enough energy to perturb the system and predict the outcome (this is the big one that is out of reach of most individuals and non-Physics PhD's). Survivor bias is of course a very real phenomenon, but like other incomplete information games that can be won, or even solved, algorithmically: Poker, international diplomacy, ..., we would not conflate pure luck with the real skills required to play those games consistently well.

deleted 7y ago

[deleted]

downandout 7y ago

The math, at least when it comes to the Medallion Fund, says that you are wrong. The odds of being able to achieve 40%+ returns (net of very steep fees) over 20+ years are astronomically low. In fact, the odds of simply being in the top 25% of hedge funds for 20 straight years, through “randomly picking stocks” as you put it, are 1/(4^20), which is roughly 1.09 in 1 trillion. There have been less than 25,000 hedge funds in US history. Yours is the kind of folksy explanation that appeals to the masses. It seems like the kind of thing Bernie Sanders would say in a speech. But in this case it leads to an astoundingly inaccurate conclusion.

actually_trades 7y ago
This is the correct response. For whatever reason, people seem to think "50/50 chance of beating the market" = 50% chance of generating 40% return on any given year. Try randomly picking stocks over the last 20 years, and run 1 billion simulations and see if you get anywhere near that (even letting you have survivorship bias for free)
- simtel20 7y ago
  > people seem to think "50/50 chance of beating the market" = 50% chance of generating 40% return on any given year Yeah, quants like to coyly say they're figuring out where pennies might drop, and then they bring in leverage. Without the leverage, they'd be beating the market by less than a percent in so many cases.

mruts 7y ago

Okay, let’s do the math buddy. Let’s assume the null hypothesis (the market) has a mean return of 10% and vol of 10%. RenTec’s Medallion Fund has made 80% annualized return before fees in the last 20 years. Assuming the market is a random walk (it’s not), the chance of RenTec making >50% (I don’t think they’ve ever made less than that in 20 years) every year for 20 years is... 3.486 x 10^(-91) The actual probability is a lot smaller btw. Why do people keep posting this tired argument over and over? It’s not true. There’s no evidence that it is true. The math strongly suggests (see above) that you can beat the market.

Macross8299 7y ago
>Why do people keep posting this tired argument over and over? Sour grapes. Easier to pretend _nobody_ beats the market than honestly admit you're not willing to put in the effort to constantly discover new alpha. And it's fine to not be willing to do that -- it takes a lot of effort and skill to discover alpha and most people will be better off improving their skills in their day job and just tracking indexes. Doesn't mean it's impossible to beat the market, especially as a small investor where you have some advantages over larger players (your orders aren't large enough to move markets and reveal valuable information)
deleted 7y ago
[deleted]

Guph 7y ago

It's not really random, the value of stock has more to do with popularity of stock than the data people like to analyze. As long as people keep buying a stock, it's price will continue to go up. Same thing the other way. Now also keep in mind I can sell stock and you buy it, and we can both make money as I bought my stock lower than you.