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> What makes trading any harder than programming or engineering or abstract mathematics or physics? That's easy to answer -- if you're very smart, you will do

by lutusp 13y ago

> What makes trading any harder than programming or engineering or abstract mathematics or physics? That's easy to answer -- if you're very smart, you will do better in math and physics, and the positive correlation between intelligence and success actually has meaning. But in equities trading, being very smart does no good at all, and might even represent a handicap. The reason? Equity pricing is mostly random noise, very high entropy. Many very smart people have tried to model and then beat the market, and (apart from chance outcomes) no one has succeeded in the sense that they located a reliable, describable "method" for it. Also, if in principle someone discovered an actual winning system, by publishing the system he would destroy its effectiveness (because once a "system" is put into practice, once everyone uses it, it loses its effectiveness). Obviously for a random collection of investment schemes, half will do better, and half worse, than the average market, but the half that do better will naturally enough claim the outcome resulted from their investment genius -- even if they're smart enough that they should know better. I can use a computer to model a random market and random investors, using random price changes and random trades, and not surprisingly, half the investors will do better than the average outcome. What is surprising is that, when the above-average investors are humans, they invariably try to claim this chance outcome resulted from a winning system that they will sell to you for some princely sum. More here: http://arachnoid.com/equities_myths http://arachnoid.com/equities_myths > Pointing that out X is hard and most people fail is a tautology, it's true of all difficult professions. Yes, but there's a qualitative difference between "hard" and "impossible".

throwawaymsft 13y ago
You're basically saying investing is random chance. Ok. What is the p-value that Warren Buffett's random investment plan outperforms the market 39/47 years? http://finance.fortune.cnn.com/2012/02/25/buffett-berkshire-hathaway-results/ http://finance.fortune.cnn.com/2012/02/25/buffett-berkshire-... If a drug beat a placebo in 39/47 experiments, would it be approved by the FDA? :-) There are investors who get lucky, and there are investors with sound strategies. The notion that every winning strategy gets immediately and flawlessly applied by every actor in the market is a fantasy world populated by homo economicus.
- zeckalpha 13y ago
  That's a fundamental misunderstanding of random. Investing being random chance doesn't mean everyone will do about average. It means that some people will make quite a bit of money and some people will lose quite a bit of money. It just happens that Warren Buffet is an outlier.
  - throwawaymsft 13y ago
    I'm not sure I understand. Buffett has a strategy X, which has defeated strategy Y (buy a market index fund) 39/47 times. We can say any return in strategy X is 1) Due to random chance (i.e., it defeated the market 39 times "randomly") 2) Not due to random chance, and there is an inherent advantage I'm saying the probability of 1) is sufficiently low so as to believe 2).
    - Thrymr 13y ago
      The question is, how many potential Warren Buffets were there in the pool to start with? You can't ask the question "what are the chances that this particular outcome would happen?" with a sample of one, you have to use the population it is drawn from. Otherwise it would be like saying "That's amazing! The lottery numbers today were 56 23 45 12 27 91! What are the chances!" Exactly the same as any other combination (very, very low). The trick is picking them in advance.
    - lutusp 13y ago
      You're missing the point. What is the probability that someone flipping a fair coin will flip 20 heads in an unbroken sequence? The answer is 2^-20 = about 9.5 * 10^-7. Next question. How many people need to be flipping coins for one of them to have a better than even chance to flip 20 heads in a row? Answer: about 3/4 million. Next question. How many investors are there in the world? Answer: many more than 3/4 million. Next question. If someone among millions of investors makes 20 successful market picks in an unbroken sequence, what's the probability that he will attribute that outcome to blind chance, and what is the probability he will start selling a book titled "Secrets of the Winners" on late night TV? My point? When confronted by an unexplained occurrence, it's wise to consider the possibility that it's a random outcome. This is called the "null hypothesis" and it's the first possibility a scientist considers.
gnaritas 13y ago
Excellent reply.
gnaritas 13y ago
> Many very smart people have tried to model and then beat the market, and (apart from chance outcomes) no one has succeeded in the sense that they located a reliable, describable "method" for it. That's an easy claim to make when you simply dismiss anyone who succeeds as random chance. > by publishing the system he would destroy its effectiveness Obviously and not disputed. > I can use a computer to model a random market and random investors, using random price changes and random trades, and not surprisingly, half the investors will do better than the average outcome. What is surprising is that, when the above-average investors are humans, they invariably try to claim this chance outcome resulted from a winning system that they will sell to you for some princely sum. That's not damning evidence, merely circumstantial. > Yes, but there's a qualitative difference between "hard" and "impossible". Yes there is, however I don't believe it's been adequately proven to be impossible.
- lutusp 13y ago
  > That's an easy claim to make when you simply dismiss anyone who succeeds as random chance. I never said this anywhere. You're confusing the practice of science with a blanket statement I never made. Pretend to be a scientist -- prove me wrong. Locate where I said what you claim I said. > Yes there is, however I don't believe it's been adequately proven to be impossible. Oh, great -- "proven to be impossible". Before you go on, learn about the impossibility of proving a negative: http://en.wikipedia.org/wiki/Russell's_teapot http://en.wikipedia.org/wiki/Russell's_teapot Quote: "Russell's teapot, sometimes called the celestial teapot or cosmic teapot, is an analogy first coined by the philosopher Bertrand Russell (1872–1970) to illustrate that the philosophic burden of proof lies upon a person making scientifically unfalsifiable claims rather than shifting the burden of proof to others ..." Remember -- all I have ever said is that the possibility of a chance outcome cannot, must not, be dismissed, and to a scientist, it is the first possibility to be considered, not the last. > That's not damning evidence, merely circumstantial. What? According to the scientific rules of evidence, the burden of evidence is not mine to prove that a winning stock picking strategy does not exist (i.e. prove a negative), the burden is on others to prove that it does.
  - gnaritas 13y ago

by lutusp 13y ago

throwawaymsft 13y ago

You're basically saying investing is random chance. Ok. What is the p-value that Warren Buffett's random investment plan outperforms the market 39/47 years? http://finance.fortune.cnn.com/2012/02/25/buffett-berkshire-hathaway-results/ http://finance.fortune.cnn.com/2012/02/25/buffett-berkshire-... If a drug beat a placebo in 39/47 experiments, would it be approved by the FDA? :-) There are investors who get lucky, and there are investors with sound strategies. The notion that every winning strategy gets immediately and flawlessly applied by every actor in the market is a fantasy world populated by homo economicus.

zeckalpha 13y ago
That's a fundamental misunderstanding of random. Investing being random chance doesn't mean everyone will do about average. It means that some people will make quite a bit of money and some people will lose quite a bit of money. It just happens that Warren Buffet is an outlier.
- throwawaymsft 13y ago
  I'm not sure I understand. Buffett has a strategy X, which has defeated strategy Y (buy a market index fund) 39/47 times. We can say any return in strategy X is 1) Due to random chance (i.e., it defeated the market 39 times "randomly") 2) Not due to random chance, and there is an inherent advantage I'm saying the probability of 1) is sufficiently low so as to believe 2).
  - Thrymr 13y ago
    The question is, how many potential Warren Buffets were there in the pool to start with? You can't ask the question "what are the chances that this particular outcome would happen?" with a sample of one, you have to use the population it is drawn from. Otherwise it would be like saying "That's amazing! The lottery numbers today were 56 23 45 12 27 91! What are the chances!" Exactly the same as any other combination (very, very low). The trick is picking them in advance.
  - lutusp 13y ago
    You're missing the point. What is the probability that someone flipping a fair coin will flip 20 heads in an unbroken sequence? The answer is 2^-20 = about 9.5 * 10^-7. Next question. How many people need to be flipping coins for one of them to have a better than even chance to flip 20 heads in a row? Answer: about 3/4 million. Next question. How many investors are there in the world? Answer: many more than 3/4 million. Next question. If someone among millions of investors makes 20 successful market picks in an unbroken sequence, what's the probability that he will attribute that outcome to blind chance, and what is the probability he will start selling a book titled "Secrets of the Winners" on late night TV? My point? When confronted by an unexplained occurrence, it's wise to consider the possibility that it's a random outcome. This is called the "null hypothesis" and it's the first possibility a scientist considers.

gnaritas 13y ago

Excellent reply.

gnaritas 13y ago

> Many very smart people have tried to model and then beat the market, and (apart from chance outcomes) no one has succeeded in the sense that they located a reliable, describable "method" for it. That's an easy claim to make when you simply dismiss anyone who succeeds as random chance. > by publishing the system he would destroy its effectiveness Obviously and not disputed. > I can use a computer to model a random market and random investors, using random price changes and random trades, and not surprisingly, half the investors will do better than the average outcome. What is surprising is that, when the above-average investors are humans, they invariably try to claim this chance outcome resulted from a winning system that they will sell to you for some princely sum. That's not damning evidence, merely circumstantial. > Yes, but there's a qualitative difference between "hard" and "impossible". Yes there is, however I don't believe it's been adequately proven to be impossible.

lutusp 13y ago
> That's an easy claim to make when you simply dismiss anyone who succeeds as random chance. I never said this anywhere. You're confusing the practice of science with a blanket statement I never made. Pretend to be a scientist -- prove me wrong. Locate where I said what you claim I said. > Yes there is, however I don't believe it's been adequately proven to be impossible. Oh, great -- "proven to be impossible". Before you go on, learn about the impossibility of proving a negative: http://en.wikipedia.org/wiki/Russell's_teapot http://en.wikipedia.org/wiki/Russell's_teapot Quote: "Russell's teapot, sometimes called the celestial teapot or cosmic teapot, is an analogy first coined by the philosopher Bertrand Russell (1872–1970) to illustrate that the philosophic burden of proof lies upon a person making scientifically unfalsifiable claims rather than shifting the burden of proof to others ..." Remember -- all I have ever said is that the possibility of a chance outcome cannot, must not, be dismissed, and to a scientist, it is the first possibility to be considered, not the last. > That's not damning evidence, merely circumstantial. What? According to the scientific rules of evidence, the burden of evidence is not mine to prove that a winning stock picking strategy does not exist (i.e. prove a negative), the burden is on others to prove that it does.
- gnaritas 13y ago