4 ms·

I agree with the flaws in this argument. Imagine Deep Blue beats Kasparov 40 games in a row. "Oh, this computer is getting lucky, it doesn't really have a stra

I agree with the flaws in this argument. Imagine Deep Blue beats Kasparov 40 games in a row. "Oh, this computer is getting lucky, it doesn't really have a strategy. This is the unicorn computer that is beating our best player." If the manager picked a single stock 40 years ago and that outperformed the market, that would be a unicorn. If the manager actively managed the fund for 40 years, buying and selling several times a year based on market conditions, and beat the market (the "best we have"), I'd say the strategy was sound. You can always cop out and claim talent is luck (Steve Jobs was "lucky" at picking products, etc.).

jordanthoms 12y ago
The problem with this argument, though, is that it's highly likely that if you have 10000 monkeys randomly picking stocks for 40 years, one or more of them will do really well. But it doesn't mean they'll do better than the average for the next 40 years. So, yes it's possible that this guy is doing something clever or has some advantage that means he will continue to beat the market. It's also possible it's just that he got lucky, and the other 9,999 people who pursued strategies and didn't get lucky are forgotten about.
- throwawaymsft 12y ago
  Think of it like a drug trial: the control is the stock market, the drug is your strategy. If (somehow) beating the market was a 50-50 chance (which is like saying a randomly written chess algorithm has a 50-50 chance of beating Kasparov), the chance of 40 years of gains is 1/2^40, which is less than 1 in a trillion. I'd say that's sufficient evidence to reject the null hypothesis, that the drug is no better than placebo. Just because we don't understand the mechanism doesn't make it chance.
  - gonvaled 12y ago
    I do no get this. How is the chance of gains less than 1 in a trillion? This is not an all-or-nothing bet: outperforming the market by a very tiny margin also qualifies him for the title. So you do not really need 1 trillion managers to get this 1 lucky manager. Much less will suffice - maybe even a couple thousands, which are easily active on the market all the time. So, he very well could be the lucky monkey.
    - throwawaymsft 12y ago
      The typical claim is stock market returns are entirely random, not based on skill, so any returns that beat the perfectly efficient market are purely due to chance. Beating the market (no matter the margin) is purported to be a 50-50 chance, and doing so 40 times in a row would happen by chance less than 1 in a trillion times. (That is, if you accept the premise that stock market investing has no skill component.)

jordanthoms 12y ago

The problem with this argument, though, is that it's highly likely that if you have 10000 monkeys randomly picking stocks for 40 years, one or more of them will do really well. But it doesn't mean they'll do better than the average for the next 40 years. So, yes it's possible that this guy is doing something clever or has some advantage that means he will continue to beat the market. It's also possible it's just that he got lucky, and the other 9,999 people who pursued strategies and didn't get lucky are forgotten about.

throwawaymsft 12y ago
Think of it like a drug trial: the control is the stock market, the drug is your strategy. If (somehow) beating the market was a 50-50 chance (which is like saying a randomly written chess algorithm has a 50-50 chance of beating Kasparov), the chance of 40 years of gains is 1/2^40, which is less than 1 in a trillion. I'd say that's sufficient evidence to reject the null hypothesis, that the drug is no better than placebo. Just because we don't understand the mechanism doesn't make it chance.
- gonvaled 12y ago
  I do no get this. How is the chance of gains less than 1 in a trillion? This is not an all-or-nothing bet: outperforming the market by a very tiny margin also qualifies him for the title. So you do not really need 1 trillion managers to get this 1 lucky manager. Much less will suffice - maybe even a couple thousands, which are easily active on the market all the time. So, he very well could be the lucky monkey.
  - throwawaymsft 12y ago
    The typical claim is stock market returns are entirely random, not based on skill, so any returns that beat the perfectly efficient market are purely due to chance. Beating the market (no matter the margin) is purported to be a 50-50 chance, and doing so 40 times in a row would happen by chance less than 1 in a trillion times. (That is, if you accept the premise that stock market investing has no skill component.)