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I disagree somewhat with #1. Long Amazon, short JCPenney is an example of an obvious trade the past 5 years. Or even the past 2 years. Same with long Apple in

I disagree somewhat with #1. Long Amazon, short JCPenney is an example of an obvious trade the past 5 years. Or even the past 2 years. Same with long Apple in 2012 when iPhones were ubiquitous. And you would have obliterated the index with those trades. Sometimes you don’t need an edge. sometimes the most obvious idea is the most profitable. And my theory why is because if it’s obvious, it’s because everyone else is in love with the idea as well and putting money into it. And in the financial world, people don’t just put money into it once. They add on to it month after month after month. So you don’t necessarily need to be early to profit well. Let the big trend appear, then invest big into it once it becomes clear as day. Because huge trends last longer than you think.

dannyw 6y ago
Specifically, there is a style of investing called “trend following” or “momentum” where you literally just buy things that are going up, and sell things that are going down. This works wonders and has been a constant source of factor alpha.
- eru 6y ago
  They have been a reasonable source of alpha some of the time. But not a constant source all the time: trend following can badly go wrong. And, of course, because so many people do trend following these days, trend following itself will work less well in future.
- r_singh 6y ago
  Identifying these "things" (assuming you're talking about options/futures) and getting the timing right is the hard part.
swyx 6y ago
as someone who was in a hedge fund shorting JCPenney in 2015, let me assure you that it wasn't "obvious". jcp was one of the most shorted companies in the entire world, its valuation was already low, and if it saw any real turnaround (as was hoped when they hired their ceo from Apple) all the shorts would have been obliterated. careful when you armchair quarterback with literal 2020 hindsight.
- hogFeast 6y ago
  Yep, I was in a similar position and feel exactly the opposite. I was short a ton of these retail positions. I remember a guy who used to be CFO of a clothing retailer telling me earnestly that I was an utter idiot, and didn't understand another clothing retailer (we were short, he was long in massive size). And he was right...I didn't understand the business, I didn't understand as much as him about selling clothes. But I understood the things that mattered: they had bad locations, footfall was tracking down 3% YoY, and wasn't going to recover (they declared bankruptcy three years later, the CFO owned it all the way down and lost his shirt...he was an "expert" after all). Hindsight tells us what information is important. But people rarely try to work this out ahead of time. They gather whatever information is most available (usually from the company), but not what is most important. In addition, I think people who end up in investing rarely think through why other people make decisions. They come up with lots of clever reasons to own dogshit stocks but never consider that no-one is going to use that same reasoning (with retailers, the issue was rarely that people were expecting a recovery...they were buying the company of today expecting things to not get worse...but no-one buys into that situation without doing a lot of research to confuse themselves). So...imo, it was obvious although not easy or common. Most of the time, you can't get the important information. And most of the time, you can't get someone to take the other side. But it does happen. And most professionals vastly over-complicate investing. (Also, the OP is not bad...but it is just confused. Credit card data hasn't moved us to some new level of efficiency, his source for this isn't apples to apples as hedge funds today are nothing like hedge funds two decades ago. Markets aren't more efficient, they are just composed of actors who behave differently. In particular, the rise of factor models has opened huge inefficiencies because they are trying to trade fundamentally with no knowledge of fundamentals...this is something that is obviously bad and flawed).
empath75 6y ago
It's perhaps clear now, but pre-AWS, Amazon was a money losing company with no path to profitability. I went all in on amazon stock 5-6 years ago when the large tech company I worked for decided they were moving their large and very expensive cloud to amazon, and everyone else I knew at every tech company big and small was doing the same. At the time, amazon stock was $400 a share - it wasn't reliably returning profits. AWS wasn't a significant proportion of their business. A lot of people still thought of amazon as a money losing retail company and a vestige of the original dot-com era. I told everyone I knew to invest in amazon because of AWS and it was very difficult to explain to people why it was going to beat the market. The fact that I found it difficult to convince people outside of tech that it was a good buy made me invest _more_ because I realized that 'the market' didn't fully understand the value of the company.
- yangminded 6y ago
  That makes it sound like the retail operation of Amazon was subsidized by AWS, which it isn't. Both are profitable. Amazon was losing money because they put every single dollar they earned (and more) into new projects and markets that expanded their reach. Definitely agree with your second paragaph though! There are so many companies that for some time fly under the radar of the general public, where experts in the field can already see their success coming a mile away. Nvidia would be another example. Anyone in Computer Science around 2014 could have predicted their meteoric rise due to machine learning and CUDA. But people outside of the field would have no idea.
  - empath75 6y ago
    funny you should mention nvidia-- I bought them at $30, because of vr, cryptocurrency and machine learning -- again, it was difficult to explain to people why suddenly video cards were going to be an important thing.
  - sokoloff 6y ago
    Was it that obvious that NVidia would specifically and inevitably be the beneficiary (rather than AMD, Matrox, Evans&Sutherland, or a new entrant)? I mean, it did turn out that way, but I'm not sure that it was obvious in 2014. (Transparently, you can read that I didn't invest in nVidia back then. :) )
valuearb 6y ago
There are no obvious trades. And 2012 is around when smart people were yelling at me that Apple was doomed, they could never compete on price and had missed the large screen market.

dannyw 6y ago

Specifically, there is a style of investing called “trend following” or “momentum” where you literally just buy things that are going up, and sell things that are going down. This works wonders and has been a constant source of factor alpha.

eru 6y ago
They have been a reasonable source of alpha some of the time. But not a constant source all the time: trend following can badly go wrong. And, of course, because so many people do trend following these days, trend following itself will work less well in future.
r_singh 6y ago
Identifying these "things" (assuming you're talking about options/futures) and getting the timing right is the hard part.

swyx 6y ago

as someone who was in a hedge fund shorting JCPenney in 2015, let me assure you that it wasn't "obvious". jcp was one of the most shorted companies in the entire world, its valuation was already low, and if it saw any real turnaround (as was hoped when they hired their ceo from Apple) all the shorts would have been obliterated. careful when you armchair quarterback with literal 2020 hindsight.

hogFeast 6y ago
Yep, I was in a similar position and feel exactly the opposite. I was short a ton of these retail positions. I remember a guy who used to be CFO of a clothing retailer telling me earnestly that I was an utter idiot, and didn't understand another clothing retailer (we were short, he was long in massive size). And he was right...I didn't understand the business, I didn't understand as much as him about selling clothes. But I understood the things that mattered: they had bad locations, footfall was tracking down 3% YoY, and wasn't going to recover (they declared bankruptcy three years later, the CFO owned it all the way down and lost his shirt...he was an "expert" after all). Hindsight tells us what information is important. But people rarely try to work this out ahead of time. They gather whatever information is most available (usually from the company), but not what is most important. In addition, I think people who end up in investing rarely think through why other people make decisions. They come up with lots of clever reasons to own dogshit stocks but never consider that no-one is going to use that same reasoning (with retailers, the issue was rarely that people were expecting a recovery...they were buying the company of today expecting things to not get worse...but no-one buys into that situation without doing a lot of research to confuse themselves). So...imo, it was obvious although not easy or common. Most of the time, you can't get the important information. And most of the time, you can't get someone to take the other side. But it does happen. And most professionals vastly over-complicate investing. (Also, the OP is not bad...but it is just confused. Credit card data hasn't moved us to some new level of efficiency, his source for this isn't apples to apples as hedge funds today are nothing like hedge funds two decades ago. Markets aren't more efficient, they are just composed of actors who behave differently. In particular, the rise of factor models has opened huge inefficiencies because they are trying to trade fundamentally with no knowledge of fundamentals...this is something that is obviously bad and flawed).

empath75 6y ago

It's perhaps clear now, but pre-AWS, Amazon was a money losing company with no path to profitability. I went all in on amazon stock 5-6 years ago when the large tech company I worked for decided they were moving their large and very expensive cloud to amazon, and everyone else I knew at every tech company big and small was doing the same. At the time, amazon stock was $400 a share - it wasn't reliably returning profits. AWS wasn't a significant proportion of their business. A lot of people still thought of amazon as a money losing retail company and a vestige of the original dot-com era. I told everyone I knew to invest in amazon because of AWS and it was very difficult to explain to people why it was going to beat the market. The fact that I found it difficult to convince people outside of tech that it was a good buy made me invest _more_ because I realized that 'the market' didn't fully understand the value of the company.

yangminded 6y ago
That makes it sound like the retail operation of Amazon was subsidized by AWS, which it isn't. Both are profitable. Amazon was losing money because they put every single dollar they earned (and more) into new projects and markets that expanded their reach. Definitely agree with your second paragaph though! There are so many companies that for some time fly under the radar of the general public, where experts in the field can already see their success coming a mile away. Nvidia would be another example. Anyone in Computer Science around 2014 could have predicted their meteoric rise due to machine learning and CUDA. But people outside of the field would have no idea.
- empath75 6y ago
  funny you should mention nvidia-- I bought them at $30, because of vr, cryptocurrency and machine learning -- again, it was difficult to explain to people why suddenly video cards were going to be an important thing.
- sokoloff 6y ago
  Was it that obvious that NVidia would specifically and inevitably be the beneficiary (rather than AMD, Matrox, Evans&Sutherland, or a new entrant)? I mean, it did turn out that way, but I'm not sure that it was obvious in 2014. (Transparently, you can read that I didn't invest in nVidia back then. :) )

valuearb 6y ago

There are no obvious trades. And 2012 is around when smart people were yelling at me that Apple was doomed, they could never compete on price and had missed the large screen market.