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.
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)
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.
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.
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.
See my above comment about how statistics does not bear out your fooled by randomness theory.
Scholes & Merton got famously wrecked in the markets.
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 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-rackete...
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.
Pull up Goldman Sachs, go to page 95ish:
https://www.goldmansachs.com/investor-relations/financials/c... (p. 95)
https://www.goldmansachs.com/investor-relations/financials/c... (p. 94)
look at the distribution chart. That's days where rev was positive vs. days not.
In the video they covered 2014/2015/2016 which I why I went a looked at 2017/2018. They are right a LOT. And year over year.
I don't think it's magic. I think they are paying attention and using information to their advantage.
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.
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.
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.
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)
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):
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.