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The excuse you gave for Buffet's long term success was that legions of others copy his investments and they become self fulfilling prophecies. But Renaissance T

by Tycho 14y ago

The excuse you gave for Buffet's long term success was that legions of others copy his investments and they become self fulfilling prophecies. But Renaissance Technologies are very secretive - they publish virtually nothing about what they do. What are the odds of them greatly outperforming the market (and always having positive returns) for all those consecutive years? What will you if they do it again this year? (and I dont think anyone claims they've been playing by a single strategy all this time)

lutusp 14y ago
> But Renaissance Technologies are very secretive - they publish virtually nothing about what they do. What are the odds of them greatly outperforming the market (and always having positive returns) for all those consecutive years? It is always possible to pick and choose your data to prove any point you care to make. But the fund you describe is one data point in a large distribution of investors and funds defined by the market averages. Please try to evaluate this scientifically, dispassionately. > ... What are the odds ... The odds are excellent that, in a field of tens of thousands of funds, a few of them will do spectacularly well because of chance factors. And this is the explanation favored by Occam's razor -- the idea that the simplest explanation is likely to be the correct one. In a computer analysis described here -- http://www.arachnoid.com/randomness/#Investment_Genius http://www.arachnoid.com/randomness/#Investment_Genius -- a model is set up with 100,000 investors, each of whom randomly buys and sells stocks, in a market that creeps up in value over time (like the real market) along with random fluctuations (like the real market). "What are the odds" for success because of chance? Very good -- essentially certain. Of the 100,000 investors with managed portfolios, each with an initial $10,000 stake, 224 became millionaires by chance alone. The top-earning portfolio returns $4,638,235.88 by chance alone. But at the same time, the average investor with a managed portfolio (who wasn't a buy & hold investor) came out behind -- more than 2/3 of the managed portfolios come out behind the market average. And this model didn't even assess trading fees -- a more realistic model that charges transaction fees makes active portfolios look much worse. Imagine you're a stockbroker and you know these facts, facts that put an active portfolio in such a bad light. What do you tell your clients? That having an actively traded portfolio is a losing proposition? Or that a handful of investors came out ahead, some far ahead? The bottom line is that a successful fund, especially one that won't reveal its methods, is the result of chance -- absent scientific evidence that something other than chance is involved. Imagine that someone throws a fair coin and eventually produces a series of 16 heads in a row. Doesn't that prove that the thrower has psychokinetic powers? No, it means he threw the coin 2^16 (65,536) times, a sequence during which the described outcome has a 50% chance to arise by chance alone. Also read this: http://www.arachnoid.com/randomness/#Miracle_Man http://www.arachnoid.com/randomness/#Miracle_Man In the above strategy, a con man mails you a series of predictions so remarkable that you're certain he's a genius, but the strategy is so absolutely predictable (and easily explained) that it can be carried out with a computer and as printer with no human intervention. So in answer to your question "what are the odds?", I have to say that all these outcomes are easily explained as chance occurrences, and that is by far the most likely explanation.
- Tycho 14y ago
  Chance doesn't explain it. Firstly, in the 90s I doubt there were 65,536 hedge funds around, so simple chance would not dictate one to return above average every year. Secondly, we're not talking about just a 50/50 outperform/underperform situation - the Medallion Fund spectacularly outperformed the market in many of those years and never reported losses. In years when the market crashed they were eg. 90% up. So it's not just the unlikelihood of consistently outperforming year after year, it's also the unlikelihood of outperforming at such a magnitude in any given year, that you need to consider.
  - lutusp 14y ago
    > Chance doesn't explain it. About a program I wrote, that generates random numbers, and that therefore can only model chance? Yes, chance does explain it -- it is the only possible explanation for a spectacular performance in a program that simply rolls random dice. > Firstly, in the 90s I doubt there were 65,536 hedge funds around ... I'm waiting to hear your argument. The number of funds doesn't change the outcome, and the number you chose has no bearing on the problem. > so simple chance would not dictate one to return above average every year. Are you aware that we're discussing a computer program that proves that spectacular returns can be gotten using random numbers? Which part of this aren't you understanding? > the Medallion Fund spectacularly outperformed the market in many of those years and never reported losses. False. http://www.hedgefundletters.com/category/renaissance-technologies/ http://www.hedgefundletters.com/category/renaissance-technol... Quote: "Between January 1993 and April 2005, RenTech’s flagship Medallion fund had only 17 losses out of 148 months." Check your facts, Mr. Scientist. Also irrelevant. If your position had merit, science would be a matter of choosing the most extreme, unrepresentative outlier and calling that the average. But that's not science, that's superstition. Guess how many funds are above average on a given day? 10%? 20%? Would you believe 50%? The third answer is the right one -- as you would know if you understood statistics. In science, Occam's razor prefers the simple explanation. The simple explanation is chance. The same chance outcome that means ... wait for it ... fully 50% of funds are above average.
    - Tycho 14y ago

by Tycho 14y ago

lutusp 14y ago

> But Renaissance Technologies are very secretive - they publish virtually nothing about what they do. What are the odds of them greatly outperforming the market (and always having positive returns) for all those consecutive years? It is always possible to pick and choose your data to prove any point you care to make. But the fund you describe is one data point in a large distribution of investors and funds defined by the market averages. Please try to evaluate this scientifically, dispassionately. > ... What are the odds ... The odds are excellent that, in a field of tens of thousands of funds, a few of them will do spectacularly well because of chance factors. And this is the explanation favored by Occam's razor -- the idea that the simplest explanation is likely to be the correct one. In a computer analysis described here -- http://www.arachnoid.com/randomness/#Investment_Genius http://www.arachnoid.com/randomness/#Investment_Genius -- a model is set up with 100,000 investors, each of whom randomly buys and sells stocks, in a market that creeps up in value over time (like the real market) along with random fluctuations (like the real market). "What are the odds" for success because of chance? Very good -- essentially certain. Of the 100,000 investors with managed portfolios, each with an initial $10,000 stake, 224 became millionaires by chance alone. The top-earning portfolio returns $4,638,235.88 by chance alone. But at the same time, the average investor with a managed portfolio (who wasn't a buy & hold investor) came out behind -- more than 2/3 of the managed portfolios come out behind the market average. And this model didn't even assess trading fees -- a more realistic model that charges transaction fees makes active portfolios look much worse. Imagine you're a stockbroker and you know these facts, facts that put an active portfolio in such a bad light. What do you tell your clients? That having an actively traded portfolio is a losing proposition? Or that a handful of investors came out ahead, some far ahead? The bottom line is that a successful fund, especially one that won't reveal its methods, is the result of chance -- absent scientific evidence that something other than chance is involved. Imagine that someone throws a fair coin and eventually produces a series of 16 heads in a row. Doesn't that prove that the thrower has psychokinetic powers? No, it means he threw the coin 2^16 (65,536) times, a sequence during which the described outcome has a 50% chance to arise by chance alone. Also read this: http://www.arachnoid.com/randomness/#Miracle_Man http://www.arachnoid.com/randomness/#Miracle_Man In the above strategy, a con man mails you a series of predictions so remarkable that you're certain he's a genius, but the strategy is so absolutely predictable (and easily explained) that it can be carried out with a computer and as printer with no human intervention. So in answer to your question "what are the odds?", I have to say that all these outcomes are easily explained as chance occurrences, and that is by far the most likely explanation.

Tycho 14y ago
Chance doesn't explain it. Firstly, in the 90s I doubt there were 65,536 hedge funds around, so simple chance would not dictate one to return above average every year. Secondly, we're not talking about just a 50/50 outperform/underperform situation - the Medallion Fund spectacularly outperformed the market in many of those years and never reported losses. In years when the market crashed they were eg. 90% up. So it's not just the unlikelihood of consistently outperforming year after year, it's also the unlikelihood of outperforming at such a magnitude in any given year, that you need to consider.
- lutusp 14y ago
  > Chance doesn't explain it. About a program I wrote, that generates random numbers, and that therefore can only model chance? Yes, chance does explain it -- it is the only possible explanation for a spectacular performance in a program that simply rolls random dice. > Firstly, in the 90s I doubt there were 65,536 hedge funds around ... I'm waiting to hear your argument. The number of funds doesn't change the outcome, and the number you chose has no bearing on the problem. > so simple chance would not dictate one to return above average every year. Are you aware that we're discussing a computer program that proves that spectacular returns can be gotten using random numbers? Which part of this aren't you understanding? > the Medallion Fund spectacularly outperformed the market in many of those years and never reported losses. False. http://www.hedgefundletters.com/category/renaissance-technologies/ http://www.hedgefundletters.com/category/renaissance-technol... Quote: "Between January 1993 and April 2005, RenTech’s flagship Medallion fund had only 17 losses out of 148 months." Check your facts, Mr. Scientist. Also irrelevant. If your position had merit, science would be a matter of choosing the most extreme, unrepresentative outlier and calling that the average. But that's not science, that's superstition. Guess how many funds are above average on a given day? 10%? 20%? Would you believe 50%? The third answer is the right one -- as you would know if you understood statistics. In science, Occam's razor prefers the simple explanation. The simple explanation is chance. The same chance outcome that means ... wait for it ... fully 50% of funds are above average.
  - Tycho 14y ago