Does Market Timing Work?
schwab.com
schwab.com
If you look at Japanese or European stock markets they tell a very different story. Similarly the next 40 years in the USA could be a miserable time for investors. I can't believe how much people take for granted that stock markets "usually go up 7% a year" or whatever.
No one really knows but it wont be as good as the last few decades.
Such confidence! The first part is of course true, but you’ll make money teaching the market that you are smarter if the latter is true.
Perfectly possible that AI kicks the economy into overdrive in the next few years and growth increases. I wouldn’t bet my house on it, but also wouldn’t bet my house against it either.
I think they are talking about AI driving growth in the broader economy, not making investment decisions.
Even still, it's not clear that AI will drive that kind of growth.
Productivity is about producing the same things faster. If AI can do part of our work for us it means we can accomplish more with the time saved.
I do think that a service-oriented economy has many, many more nooks and crannies to hide non-productive jobs, though, and that could perpetuate the “bullshit job economy” hypothesis.
Consider the steam-locomotive. It was a great invention but we didn't stop there now we have bullet-trains and hyperloops.
There is also plenty of room at the bottom as famously noted by Feynman I think. We can make products smaller to make them easier to carry around. New cheaper price points create new demand and new markets.
Also as economies improve, people will have fewer children, because they don't need them to take care of themselves at old age. So it's not like we will have too many people having nothing to do.
On the contrary I think AI can be the great equalizer: Rather than having fewer people who know how to do things, we will have more people who are able to do things with the help of AI.
The technology by itself will not produce a great society however. We need democracy to accomplish that. As people will have more free time they will have time to study and more and more people will demand democracy because they will understand it's the only way to avoid wars.
If someone finds a way to actually predict the market, then in taking advantage of that they will add unpredictability into it again. This is part of the entire basis of how markets work!
Regardless, I'd happily take a bet at even money up to a reasonable sum that we'll wake up in 20 years to find that a system using LLMs has just destroyed the market doing fundamental analysis, for 15 years.
He's saying if every atom of the economy is n% more productive, that will grow the economy by n%.
If there's a sure-fire early way to make money from AI, it's going to involve betting against people who blow it off.
2 - Their retirement should be financed by 401ks and the like.
3 - Stock Markets can go down as well as up.
You can't have all three, so the government will always ensure that the stock market goes up long term.
Why? Retirement is a very recent phenomena. The idea of someone earning enough during their working life to then fund several decades of non-working life is a very modern thing, maybe only the last sixty years or so. Only a very rarified few were ever wealthy enough to actively stop working prior to becoming physically unable to work. And then, for most all of human history, those too old to work lived out their remaining few years being taken care of by their children. I'm would not casually assume any "right" to the modern concept of retirement.
I think we all deserve to make progress on things like retirement instead of making arguments like this. Sure, retirement hasn’t always been a guarantee, but can we agree that this isn’t a good thing?
We never question the desire to innovate in how to make money, but we’re often very quick to dismiss the idea that we can also dream to innovate society in a way that’s decoupled from profit, which is sad.
I'm perfectly happy pursuing my own interests, at my own pace, without having some overlord making sure I'm maximizing value for some corporation. Sure, I don't want to just sit around doing nothing, but there's a wide gulf of possibilities between that and full-time employment.
But for many retirees, they have never developed the mechanisms to continue being a productive member of society without structured work. The net result is a general drop in well being and health in their “golden” years.
Also, i made a comment where I think our relationship to work needs to change. I think that speaks to your point. I don’t think a false dichotomy between “working for the capitalist overlord” and “doing whatever I want” is what I was after.
I agree with this, but the problem is that there is no guarantee of work being available to everyone. With the rise of AI and hyper-specialization of work, that problem is only going to get worse.
The key here is to make sure that automation and cost efficiencies make it through to the production of necessities, and we don't prop up artificial scarcity.
There are an effectively unlimited number of jobs that employers would pay someone $0.01/hour to do. Not as many that employers would pay $100/hour to do. So if you need to make $100/hour to afford housing and medicine, that's a problem. But if we reduce the artificial scarcity and regulatory overhead in these industries, so you only have to make $5/hour to afford them, we're in a much better place. And all the better if lower costs allow someone to make a living at $2/hour.
AI and automation can help to reduce those costs. As long as they're in the right places (i.e. production of necessities) and we don't have regulatory capture preventing it from happening there.
This doesn't get you out of zoning restrictions but could allow you to recover from their historical effects more quickly after zoning reform is achieved.
That said, some assemblies have become pretty common, I think preassembled roofing trusses are frequently used in favor of framing on site.
This gives me a different idea and I wonder if it's worthwhile.
There are industrial robots that e.g. mass produce cars. Suppose you make one to mass produce housing, but instead of putting it in the factory you put it on the truck. Put it on the construction site. It takes a pile of lumber, cuts it to length and turns it into walls, puts the pipes and wires through the walls etc. This is the kind of thing that existing industrial robots can actually do if you program them appropriately.
Then you send it across the street to put together another building. Assembly line, but the products are big so instead of moving the products to the next station you move the robots.
Houses are made out of wood and tolerances are measured in centimeters if not inches.
I'm not saying its impossible, but I think the marginal costs are too high to replace what we already have. In addition, society has been moving towards individualization since the 1980s. We aren't in the Henry Ford days where people are ok with "any color of car as long as its black." People want individualization when it comes to their homes as well, and that lack of standardization makes automation more difficult than building a modern Levittown with robots.
And yet, here we are with people still working many hours on average and many jobs going unfulfilled. I personally think it’s a problem with our relationship to work, rather than limited opportunity for work. Humans seem to have an insatiable apple for more, which requires continued amounts of work to be done. I think the bigger problem is getting people to have the skills to do the jobs that will still need to be done.
People, if you disagree, that's fine, but make some kind of a (polite, rational) counterargument rather than abusing "downvote" to express your visceral disgust at becoming aware of an opinion that differs from your own.
I forgot which, but one of the more popular economists of the last century believed that, with productivity gains, people would be working much, much shorter work-weeks by now.
He was only sorta wrong: the productivity gains did actually happen, but we decided to use the extra time to do more work, not do the same amount of work and take the rest in leisure.
There's nothing that says that we as a civilization couldn't decide to slow down and relax more. I know that this won't happen; capitalists run the world, and they'll never accept this sort of arrangement. But it's not like this is some sort of inherent natural must-do state of existence.
Government isn't a static thing - especially one that is elected by the people (for the people). Sooner or later members within said government will also consider retirement. So even if you can elect a government that disagrees with #1, you won't be able to hold it for too long.
If that assumption is correct, this is a relatively new idea, at least in the sense that government has any active responsibility for it.
I can absolutely guarantee you that there are currently elected members of the US Republican Party, and similar political parties in other countries, who do not agree with the concept that government has any role to play in this. Don't work hard enough during your life? Your problem. Don't save/invest appropriately ? Your problem.
100 or 150 years ago, the idea that there would ever be a US government that would take notable steps to try to ensure a moderately comfortable life during retirement would have seemed like a pipe dream. It remains something upon that some political ideologies do not agree with.
You missed one: "inherit"
> borderline unaffordable
It's funded by your own income; it's a compulsory savings plan.
The current system is mathematically unsustainable as a result of politics.
If you're going to untie benefits from payments then the first sensible thing to do is to make the same payments to everyone instead of giving more to people who made more money, but this would result in large numbers of affluent retirees voting against you.
If you're going to untie benefits from payments then the second sensible thing to do is to eliminate social security tax whatsoever and fund the program from general revenues, which would remove the need for the farce of a "social security trust fund" (the government owes itself money: it's a debit and a credit in equal amounts and nets to zero). But then people would condemn you for "bankrupting social security" or "stealing the trust fund" or similar nonsense, funded by the people the tax burden would be shifted onto.
Removing the cap while leaving the program as it is not only is worse than either of these things, it doesn't even solve the problem, because the program as-designed would then be making higher payments to all of those people when they retire which would consume more than all of the money they paid in because people who made more money tend to live longer.
Can you elaborate? It seems like the govt has a liability and the pensioners have an asset.
That fund is an asset full of assets. Those assets are government debt. Owning your debt basically nets to 0.
The point is that the "trust fund" is a NOP. It's like writing a check to yourself. When you go to deposit it into your account, your account balance doesn't change.
Every penny the Social Security Administration withdraws from the "trust fund" is either coming out of that year's general revenues or is causing the US government to sell more treasuries into the bond market. It's the same thing that would happen if the "trust fund" was empty and the money the Social Security Administration pays out in excess of what it collected that year came out of general revenues or deficit spending.
Worrying about what happens if it "runs out" is ridiculous. It's like worrying about what happens if you run out of checks you wrote to yourself. What you need to worry about is where you're actually going to get the money.
Which you can go ahead and do already because both "social security tax" and "deficit spending" aren't particularly ideal, but that's what's happening today. Social Security tax is one of the most regressive taxes we have.
This is the kind of economic theory that loses people. It’s like what economists say deficit spending doesn’t matter because a govt isn’t like a person. It certainly matters if confidence in the system matters.
The fact that you acknowledge the money comes from side other source implies there’s a tradeoff. There’s no free lunch here, regardless how creative the accounting gets.
The Social Security Administration charges tax to Bob and then uses the money to make payments to Alice. For some years it was taking in more than it was paying out, so it used the rest to buy US government bonds, which is really just giving the money to Congress to spend on something else. Then Congress spent it on something else. It's all gone. All you're left with is a piece of paper that says the government owes itself money -- and not even as much of it as Bob was promised.
Now Bob is retired and expects his money back. But most of the money went to Alice and the rest went to Congress in 1994. There's no money. If you want money to pay Bob then you need to collect more taxes or sell more government bonds into the market.
So which of those things do you want to do? And if you want to use tax revenue, do you want it to be the regressive inefficiently duplicative social security tax or general taxes that don't charge higher effective tax rates to people who make less money?
Now I will agree that this is a contrived problem because SSI is a contrived system. We could just change the rules and make it continue to work, but that will come with tradeoffs.
You might not think that's fair. I do. Even under this hypothetical regime, I know who I'd choose to be: rich and paying a ton in taxes, in a heartbeat.
I think my larger point is we have to zoom out for a systems level analysis. We shouldn't assume that the production is de-coupled from the consumption, and production can come with a host of negative externalities. I'm not convinced that wonton consumption (especially for the sake of itself) is a net positive, given human nature's tendency to be insatiable with regard to consumption.
I would include the debasement of one's moral soul for social-climbing purposes in the set of aforementioned sacrifices. :)
In any case, I did mention the dangers of overconsumption. There is something in between that and subsistence that is a net-positive for society (in this epoch, at least).
I'm relatively lucky in that I do hit the SS income cap every year. And I think it's extremely stupid that my paycheck suddenly grows 6.2% well before the end of the year every year. I can absolutely afford to continue paying my 6.2% tax, just like everyone else, and not need special treatment when withdrawal time comes in retirement.
But it's "the third rail" because there is so much money on the table. It's a program that makes transfer payments, which is zero sum, so any change will be fought hard by whoever ends up worse off than they are under the status quo.
Social Security is compulsory savings, and you get out pretty much what you put in.
(Maybe I'm focusing too much on one word.)
> it's "the third rail" because there is so much money on the table.
Also, I think because people feel an existential threat - some people rely on that money to survive.
And because, after seeing that deduction every two weeks for their entire lives, they want their payout.
But it is like insurance in that the program is named Old-Age, Survivors, and Disability Insurance (OASDI) Program.
It's also like insurance in that the payout is related to the premium / taxes. If you pay your premiums and experience the covered risks, you (or your survivors) get paid.
It's not like savings, because if you don't experience disability, or old age, you don't get paid. Your survivors might still get something though, I don't know much about survivor benefits.
Disability insurance is available from private insurers, but with different terms. Old-age insurance is more or less an anuity, again available from private insurers, with different terms.
The biggest difference with social security is that smaller incomes (and thus, smaller payments into oasdi) get a larger payment per dollar income if they experience a covered event. Another major difference is that if one has multiple former spouses of marriages that lasted at least 10-years, they're all potentially eligible for spousal benefits and they don't have to share it: no private insurer would sign up for that. Also, the actuarial tables are rarely updated and rather out of date at this point.
It pays until you die instead of paying until you run out of savings. The risk it's insuring against is that you live longer than the average person and outlive your savings.
The private insurance companies that offer this type of insurance call it an annuity.
> Also, I think because people feel an existential threat - some people rely on that money to survive.
Nah, the more sensible of the reform proposals are the ones that convert it into a fixed payment for everyone. Those proposals are still every hard to pass because some people would get more than they do now and some would get less, and the people who would get less are the more affluent people with no existential risk, but they would still fight it.
> And because, after seeing that deduction every two weeks for their entire lives, they want their payout.
The program started by making payouts to people who never paid in. Their money is already gone, given to their own parents.
It’s possible that the general HN view is skewed because tech tends to pay well and this dynamic erodes at higher levels of income.
Your money is not ever saved for you. Your retirement is NOT funded by your own past taxes. Your retirement is funded by those younger people who are then working and paying taxes.
You can see the details at https://en.wikipedia.org/wiki/Social_Security_Trust_Fund
Payments to retirees are made out of _currently incoming funds_. That is, the money paid in taxes by people currently working is immediately distributed to retired people who are receiving Social Security payments.
It is, in other words, NOT a savings plan. Full stop.
This scheme sort of worked in the 1930s when life expectancies were much lower and only a few people survived to retirement age relative to the much larger number of working people paying taxes.
Since 2009, Social Security has operated at an annual loss: the amount paid out has begun to exceed the incoming taxes. The deficit is expected to increase a lot in the coming years. (See https://www.cbo.gov/sites/default/files/cbofiles/attachments...)
Whatever you may think about whether Social Security is a good idea or whether the goverment ought to provide for retirement, it's clear that the current structure is not going to do that for much longer. A large-scale reform of some kind is coming.
Population aging and growth uncertainty is a big guess on my part.
https://www.imf.org/en/News/Articles/2020/02/10/na021020-jap...
The US is highly dependant on massive amount of immigration to maintain demand. Couple that with a few other things, such as the petrodollar, and you have the US behaving in an odd manner that I don't believe will last forever.
Japanese companies are notorious for having poor return on equity for decades.
Government deficit spending of course helping the economy. But we eventually have to pay taxes to cover that.
Citizens debt fueled spending on homes and goods. Corporate debt similarly. Student loans of course. Individuals and companies can only tolerate so much debt.
Our oil dependence never accounted for the cost of global warming and pollution, but we’re about to pay for that soon. This applies to many materials we consume, oil being the most prominent.
Corporations have systematically slowed pay growth while increasing prices, eventually consumers will be unable to afford enough goods to keep the machine spinning at full (growing 7%) capacity.
Our shrinking population from historic highs means each working person will need to contribute a bigger share to reach that 7%, while having more people to support.
I think this is a case of "time in the market" being the least worst option. The market may reward it, or it may not, but hard times are hard times and I don't see any obvious way to avoid them without exposing yourself to a lot more risk in other ways.
You don't have to look far to see that all the major tech developments of our species are coming out of the US: Generative AI, Reusable Rockets, self-driving cars, mRNA, Genetic Engineering, NIF Fusion, VR, etc. The US could strike it out on any single item and spark another industrial revolution.
Plus we're still king of the hill in so many other categories (World's largest producer of energy, world's largest agriculture producer, world's largest military, etc.) If you're an investor, the idea that you'd bet against the US economy is a hilariously bad take.
For example, developed economies index, VEA, outperformed US, VTI, last year.
They are composed of people doing that, people rigidly protecting their incomes and/or status, people cheating others, and especially these days, people trying to squeeze every drop of blood out of every other stakeholder (investors, customers, employees).
could easily turn out to be another nft style "boom"
There are 2 problems: 1. Market timing works: a. With inside information e.g. US congress b. Take an outsised risk e.g. Nasem Taleb keep buying/selling deep out of the money options. Lose money every day to make an outsised gain 2. You are Warren Buffet. Which is basically buy stocks like you are buying a company. Have the option of buying preferential shares. And hey 1b monkeys on typewriters...
Still totally agree with the OP. The last 40 years have been ridiculous from a macro perspective: 1. Interest rates, the most important price in the economy, the price of money, has fallen from 18% in the Paul Volker days till after covid close to 0. 2. Money has been printed like never before after the 08 collapse and covid.
It is very difficult to look at 2023, with the US fed cash rate at approx 5%, global interest rates going up, price inflation at 7%+, US national debt at $33T and growing at $1T per month exponentially, and the US paying more on Interest expense (not principal, just Interest) than they spend on the military.
I like Nassem Taleb. Invest still in index funds but invest in global infrastructure that is recession proof e..g [3]. Be anti-fragile
[1] https://sdw.ecb.europa.eu/quickview.do?SERIES_KEY=143.FM.M.J... [2] https://www.theatlantic.com/business/archive/2011/12/why-doe... [3] https://www.vanguard.com.au/personal/invest-with-us/fund?por...
Decades of something being true will do that
Interest rates are the thing I think could change things, but who knows. If you can get a guaranteed 5% return that's pretty nice, but it's possible we just slide into being a more corrupt/untrustworthy country for investments or baby boomers suddenly taking a disproportionate amount of money out of the market as they retire, etc.,.
A little bit contradictory.
If you don’t think the stock market is going to appreciate then it’s not for you. Don’t invest in it at all. You can stick with savings accounts, gold, and crypto scams.
For unsophisticated investors, timing the market tends to keep money on the sidelines during growth periods, eroding long-term returns. This is part of why it's considered an investing sin - "time in the market beats timing the market." Sophisticated systematic investors can probably get good results with certain momentum-based market timing strategies, but most of us aren't sophisticated systematic investors.
There have been experiments like the turtle traders ^ 1 who applied "trend following", used today by many CTAs on exotic markets. For this, an investor taught some people his strategy/rules, gave them his money and they've shined for 40 years. The fundamental strategy still works today (updated). Fundamentally, it's a method to ride momentum in different ways (e.g. crossectional.) Hedge fund managers like Rzepczynski, Cem Karsan, Alan Beer... Richard Brennan is the most insightful of them who shares his methods freely. N.b. trend following doesn't work well in stock markets, but flourishes in Mexican rate swaps, orange juice futures, London sugar... combined in ensembles.
Traditional value investors, building on the Intelligent Investor, have always done well over samples above a few years. (N.b. Warren Buffet hasn't been a value investor for a long time, because he has too much to manage. He was strongly inspired by Fisher's Common Stocks and Uncommon Profits, which gave us the concept of "growth stocks".) (N.b. 2, value investing ETFs are mostly terrible, fundamentally not investing in value stocks due to their structures.)
Carisle's Acquierer's Multiple is the most recent development in systemic value investing (he also runs an ETF or two along these lines). "Magic formula investing" even holds up too!
In the mining space, you also get discretionary (not purely systematic) investors like Rick Rule openly discussing their methodologies, successful for decades and decades.
Here’s an interesting paper ^ 2 (exec summary pages 5-6). Note that 70% of underperformance is due to investors withdrawing funds during times of market crisis. Fund fees also drive the majority of underperformance. N.b. most wealth managers can't legally follow such strategies because of the prudent person rule. They are legally forced to underperform typical indices - and the majority of research has focused on them, distorting the data pool.
[1] https://www.investopedia.com/articles/trading/08/turtle-trad...
[2] https://wealthwatchadvisors.com/wp-content/uploads/2020/03/Q...
From the last published interview with Benjamin Graham, author of II ("A Conversation with Benjamin Graham", Financial Analysts Journal, September-October 1976)
> > In selecting the common stock portfolio, do you advise careful study of and selectivity among different issues?
> In general, no. I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when our textbook "Graham and Dodd" was first published; but the situation has changed a great deal since then. In the old days any well-trained security analyst could do a good professional job of selecting undervalued issues through detailed studies; but in the light of the enormous amount of research now being carried on, I doubt whether in most cases such extensive efforts will generate sufficiently superior selections to justify their cost. To that very limited extent I'm on the side of the "efficient market" school of thought now generally accepted by the professors.
* http://www.grahamanddoddsville.net/wordpress/Files/Gurus/Ben...
[1] This part you did do that way, haha.
[2] I haven't done a formal count, but I'm sure some regex search engine will give you many hits if you search for \[[0-9]\].
[3] That last sentence still confuses me.
No public strategies are going to beat the market by a huge amount, and having the discipline to execute them manually isn't easy, but it has been clearly shown to be possible.
There is also a lack of consistency about what it is to "beat the market", in the world of clickbait headlines and armchair twitter dd - the benchmark each year (with hindsight) is the highest performing asset.
If the markets were truly efficient, randomly picking stocks would beat SPX ~50% of the time. Since markets are not super efficient, basic exposure to performance factors (small cap, value, momentum...) puts you at a fairly high likelyhood of beating SPX.
This assumes that the expected return of a single, randomly-picked stock is symmetrically-distributed. It is not, single stock returns are highly skewed and "lottery like". Index returns come from the fact that a small number of stocks do exceptionally well, while most of them do poorly.
This becomes even worse if we talk about timing: stock returns come from relatively short periods of doing really well, if you miss that because you are out of the market for some reason, you lose out on the vast majority of the index return.
Sorry, I don't have specific sources to cite. This comes from stuff I've picked up listening to the Rational Reminder podcast (https://rationalreminder.ca/podcast-directory), which have very well researched episodes as well as guest interviews with leading academic finance researchers. I'll try to dig up the relevant episodes, which do cite sources.
Edit: here is some sources:
1. https://www.dimensional.com/us-en/insights/singled-out-histo...
2. https://assets.jpmprivatebank.com/content/dam/jpm-wm-aem/glo...
Quote from this last one: "[...] around 40% of the time a concentrated position in a single stock experienced negative absolute returns, in which case it would have underperformed a simple position in cash. And around 2/3 of the time, a concentrated position in a single stock would have underperformed a diversified position in the Russell 3000 Index. While the most successful companies generated massive wealth over the long run, only around 10% of all stocks since 1980 met the definition of “megawinners”."
There were 4 moments when I thought - I should buy this stock for some reason, e.g. after ChatGPT I thought about buying NVidia. But I decided to continue being a purely passive investor. Now I regret that decision because all of those stocks overperformed.
I also correctly guessed that 3 out of 4 stocks would underperform (TSLA was the wrong call). It seemed obvious that the market was dumb about GME, AMC and TLRY.
Sure, many active investors are extremely sophisticated but what if the average invested dollar is kind of stupid?
Also, one minor nitpick about Ben Felix's content is focus on historical statistics. I think this gives you a false sense of confidence and security.
The stocks you are looking at are all stocks that have been popular with retail investors, and retail, as a general force, isn't out there doing equity research, incorporating all available information, estimating risk, and allocating its portfolio along the efficient frontier. Retail investors move the market, and there is money to be made if you can quantify how much of that move is driven by short-term sentiment.
That said, the market can remain irrational longer than you can remain solvent, sometimes "irrational" positive sentiment is coincidentally well-placed, and irrational sentiment is contagious and difficult to see through sometimes. Because of these factors, IMO any kind of active investing strategy should come with some kind of risk management component, where if your active bets blow up, you don't lose your life savings. Personally, I keep active bets to <20% of my portfolio, I'm extremely careful with leverage (margin, options, futures), and I put stop-losses on any particularly volatile position and any that incorporates leverage. I want to have it so if I'm dead wrong and also I fall into a coma and can't unwind my trade, my position still can't screw me.
And who is arguing that they are perfectly efficient? Markets work on information, which is not (initially) evenly distributed and because of the physics can only spread at the speed of light once it is known.
The latter was used to detect insider trading:
* https://www.npr.org/sections/alltechconsidered/2013/09/24/22...
For the former, people are renting satellite time to get to information that no one else has to determine trades:
* https://newsroom.haas.berkeley.edu/how-hedge-funds-use-satel...
> Since markets are not super efficient, basic exposure to performance factors (small cap, value, momentum...) puts you at a fairly high likelyhood of beating SPX.
Two of the proponents efficient markets explain why (and shared a Nobel for the work):
* https://en.wikipedia.org/wiki/Fama–French_three-factor_model
The two are not mutually exclusive, and there is published literature on it.
Good interview with Fama (audio, video, transcript):
I agree.
Meta was literally priced below $90 not even a year ago (I entered at about $100 FWIW, which was my nice and round number). Now at $315. Anybody who believes the market is efficient is on some serious drugs.
The market correctly valued Meta a $380 or so before the crash (because "TINA" I'm supposed to believe), then correctly valued it a few months later at $100, then now is again correctly valuing it at $315?
Please. Just please.
I'll go much further: none of these valuation are correct. The market is highly inefficient.
Then Meta announced they were going all in on the Metaverse, had set fire to $100bn so far and were going to continue to throw ~$20bn a year into the Metaverse - the market correctly valued Meta a $100.
Meta announded they were going all in on the Ai - the market correctly valued Meta at $315.
You have picked a poor example; the moves in the stock, are primarily the fault of themselves. Those that saw the emergence of Ai and Zuckerberg as one of the leaders in the space got a nice 3x. If it didnt happen, Meta stock would probably be worth about as much as MySpace.
fwiw I said they were going to zero when they rebranded to Meta. Turns out I was wrong.
There's nothing wrong with 3x changes. A lot can happen in a year to diminish or improve a company's outlook -- even a large company. And yes, by 3x -- or even much more.
The onus of proof here is on you to explain why those don't reflect largely realistic estimations of NPV of future profits, and to explain why you think you have better information, experience and judgment than the market.
This is of course assuming that we are at a level playing field. I don't believe for one second that insider trading is not prevalent.
Unfortunately a very large part of the credit universe is very difficult to access if you're a non-professional investor though.
There's very little skill involved, which isn't to say there is no skill involved whatsoever - but at the end of the day it really is just luck
The following excerpts are from Thinking, Fast and Slow:
"The illusion of skill is not only an individual aberration; it is deeply ingrained in the culture of the industry. Facts that challenge such basic assumptions—and thereby threaten people’s livelihood and self-esteem—are simply not absorbed. The mind does not digest them. This is particularly true of statistical studies of performance, which provide base-rate information that people generally ignore when it clashes with their personal impressions from experience."
"Finally, the illusions of validity and skill are supported by a powerful professional culture. We know that people can maintain an unshakable faith in any proposition, however absurd, when they are sustained by a community of like-minded believers. Given the professional culture of the financial community, it is not surprising that large numbers of individuals in that world believe themselves to be among the chosen few who can do what they believe others cannot."
Could you elaborate?
Essentially Kahneman ended up being super confident ("disbelief is not an option" he said) about the findings he cited, some of which have been shown to suffer from lack of rigor.
If you're wondering "well, just some of them right?" I will ask you to ponder for a minute over the fact that this is not supposed to be some impulse aisle magazine article but a book applied epistemology ("behavioural economics" is to me just what gave this and related books some sales wheels).
[1] https://replicationindex.com/2020/12/30/a-meta-scientific-pe...
[2] https://slate.com/technology/2016/12/kahneman-and-tversky-re....
https://rationalreminder.ca/podcast/220
This is an interview with two academic researchers into active fund managers who can indeed beat the market consistently sometimes. One factor why they exist is that they have access to better information than the average individual investor. However, (1) excess returns tend to mostly get absorbed by higher fees and (2) it's very difficult to scale it up, funds who beat the market tend to lose this edge when more funds go into them. Thus, market-beating funds, if they want to maintain their edge, have to severely limit who can invest in the fund and how much they can put into it.
The episode also goes into the effect of security selection (which stocks are picked) vs market timing, which is relevant to TFA.
Is this like "60% of the time it works every time"? The fact that there are a few individuals that have beaten the market on occasion is a strong indicator that the chances of any retail trader doing this are slim to none.
I suspect poker has more skill involved than stock trading.
[0] https://www.linkedin.com/pulse/warren-buffett-has-underperfo...
In the Black Swan he talks about his endeavor with the stock market and how lucky he got by chance, and not by using some pseudo scientific formulas and whatnot to "predict" how his stocks would do. He also gave some pretty good advice when it comes to the stock market
The whole book is just awesome, I'd recommend giving it a read
- He isn't a stock trader, he is a bond trader. The kind of bets you need to make to be succesful are different.
- "how lucky he got by chance" - He doesn't say this. He talks about how we can even better model uncertainties.
>He talks about how we can even better model uncertainties.
Where does he say this? What chapter? Thanks in advance.
edit: were you alluding to his barbel strategy?
This is just like the startup founder argument. Every one which succeeds ends up having a tremendously interesting background demonstrating unique interest and capability.
Meanwhile I just get on with my day with index funds and get better returns.
https://www.investopedia.com/articles/investing/030916/buffe...
I believe there’s some evidence that low-volatility trading has been shown to beat the market over long periods of time. Although, “picking stocks for volatility” may be different than “timing stock picks”
“Buffett's ultimately successful contention was that, including fees, costs and expenses…”
Most good research that I’m aware of includes fees in the comparison because they can significantly erode returns. (Maybe somewhat less of an issue now that most brokerage now offer no-fee ETF trading). Not including fees and expenses is just a marketing tactic.
>But it's true. I could name half a dozen people that I think can compound $1 million at 50% per year -- at least they'd have that return expectation -- if they needed it. They'd have to give that $1 million their full attention. But they couldn't compound $100 million or $1 billion at anything remotely like that rate.
A lot depends on the details of who's doing what.
Wholly owned companies list: https://berkshirehathaway.com/subs/sublinks.html
0: In terms of BRK's overall wealth, it's still in the many billions of dollars.
2. They would be much richer if they could.
> https://www.nytimes.com/interactive/2022/09/13/us/politics/c...
What works better for me is joining in on earnings calls and reviewing presentation materials. Getting a sense for product roadmap, markets, competition, etc. This is the space where you can actually develop meaningful hypotheses regarding what might happen. Those who are performing time series astrology likely do not have the patience to go about things this way.
If you don't have time to spend about a day per quarter reviewing your portfolio, then you probably shouldn't be playing in traffic with individual stock picks, much less options contracts. If you think this is an unreasonable amount of time to spend playing investor, then perhaps you should just buy a little bit of something like $QQQ every day and focus on those other parts of life that are clearly more important to you.
Or, just contribute max to your 401k and close that distracting Robinhood account. Most people would do better over the long haul if they followed that bit of advice. Monkey brain is much more dangerous than losing a few % APY to fund management fees and sub-par allocations.
Derivatives have another, much more valuable use: They enable you to hedge your investment, essentially insurance.
For example, if you invest heavily in agriculture in Iowa, you might buy derivatives tied to the weather and to the price of whatever you grow - derivatives that pay if those things go bad. You lose a little if things go well, but that's just the cost of insurance. Similarly, if you invest heavily in electric vehicles, you might by a derivative tied to the price of key inputs, such as metals for batteries.
....and you don't even need a few percent to throw it in a target date fund that regularly rebalances for you
The retail investor software is designed to take advantage of retail investors left and right. Placing trades is error prone. The spreads can be ridiculous (0.5% at 9:30am). the market zigzags consistently so no stop loss is left un-triggered before a bounce. These conditions are currently leading to a world of take-profit trading. Timing works if you pay attention to it all the time, but most don’t have the time for that. Your retailer software won’t warn you when you are losing profits gained in the past year. That’s why long term investors become complacent after a long stretch of growth and stop paying attention. With bots trading increasingly more and interest rates remaining higher, the market will not look the same as it did since 2010 AT ALL and the data from before then is only a usable in detail to those who can pay. Once retail investors have seen the lines go down. the bounce back won’t be as linear as 2020 or this spring. Treasuries require a lot less sweat.
He's made massive amounts of money from this. He admits that it's basically a second job in terms of time and effort spent, but believes that it's replicable because no institutional investor is actually looking at these stocks, leading to hypothetical mispricings.
(Internet has made me skeptical)
However, the only incentive I can think of schwab is to encourage people to invest ASAP they have cash so schwab can get that money in their system so they can charge fees/still services.
But that’s just normal business
The article is educational and generally stands up to the research on the topic. It is designed to build trust with clients so they invest in Schwab.
Compared to IBKR which gives "benchmark - 0.5%" on your NAV in USD, what does Schwab give for your USD sitting idle?
But you can just as easily buy a short duration Treasury ETF yielding 5%+ or a CD.
What happens if you make this mistake in a "cash account" i.e. no margin allowed I do not know and hope not to find out by means of usual accidental carelessness.
An alternative to SWVXX is VUSB, which trades with standard ETF timing.
They may not do so for their investors- this is before fees. But it does seem significant that they are beating the index on their own, and over a consistent period of time. 30% is not nothing. Seems like a blow to strong-form EMH to me.
As an FYI, I never want to hear a real-life fund or investor compared to a benchmark again. Benchmarks are theoretical investments with a 0.0% expense ratio- once you add in some of the real costs of running a passive fund, you start to get more real numbers
The problem isn't that it's impossible to beat the S&P 500 (it's actually trivial), the problem is it's hard to predict which portfolio will outperform the S&P 500.
Idk if that's true but you're not saying what percentage one would expect to see instead
I also think monkeys are the wrong example here because aren't they at even odds with the index? 50% of them, assuming they take no bananas for their service and assuming they don't get to make more trades than the index does, should have beaten the index, if my currently-half-awake brain is working correctly
I'm not sure that's the argument being made, but if so, it's a terrible argument.
I'll let the statisticians figure out of randomly ~50% should beat index or not.
As a very contrived example (to hopefully illustrate the "risk-adjusted" component of EMH while keeping the math simple), suppose the market consists of many equally sized firms and admits a strategy where each year 0.1% of firms will be uniformly randomly selected to have all their assets wiped out and distributed amongst the rest, and due to social pressures and incentives everyone uses the same strategy. Each year, 99.9% of firms will beat the market [0]. Forward-looking, 97% of funds starting in 1993 will have beaten the market that entire period (backward-looking is less meaningful because it depends on, among other things, how many new entrants to the market there are, not just their performance).
Despite the 97% success rate on a 30-year basis, this is still very plausibly a scheme you wouldn't want to participate in (your relative valuations of different outcomes might still make it desirable, but that's a separate question), but it doesn't violate EMH because of the high risk relative to the small returns being achieved.
Bringing the contrived example back to the real world a bit, that particular failure mode is common whenever a machine-learning person tries to tackle the market on their own. Even after getting over the hump of price -> bid/ask -> order book -> ... in correctly modeling what's happening, they're still prone to doing things like predicting the chance a security will go up or down and assuming that both branches have equal magnitudes. When they throw it at the real world, they find that despite low false positive and false negative rates for predicting when the price will increase, the times they were wrong were all the high-magnitude events, so they lose money on average.
Another way that potentially ties back to the real world, what exactly are the incentives for an active fund manager? When they fail, can they start a new fund? Can they distribute excess losses to a couple of years when the market also did poorly to be able to say something like "every year the S&P 500 went up, we went up more" and still attract new clients? It's not obvious to me that you'd expect behavior which would result in a low chance of beating the S&P 500 over a period of time, even if strong-form EMH holds.
[0] This assumes the "market" is static, but the details aren't meaningfully different when you instead benchmark against something like the S&P 500.
Even God Couldn’t Beat Dollar-Cost Averaging
https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-co...
> For example, any competent basketball coach could tell you whether someone was skilled at shooting within the course of 10 minutes. Yes, it’s possible to get lucky and make a bunch of shots early on, but eventually they will trend toward their actual shooting percentage. The same is true in a technical field like computer programming. Within a short period of time, a good programmer would be able to tell if someone doesn’t know what they are talking about.
> But, what about stock picking? How long would it take to determine if someone is a good stock picker?
> An hour? A week? A year?
> Try multiple years, and even then you still may not know for sure. The issue is that causality is harder to determine with stock picking than with other domains. When you shoot a basketball or write a computer program, the result comes immediately after the action. The ball goes in the hoop or it doesn’t. The program runs correctly or it doesn’t. But, with stock picking, you make a decision now and have to wait for it to pay off. The feedback loop can take years.
> And the payoff you do eventually get has to be compared to the payoff of buying an index fund like the S&P 500. So, even if you make money on absolute terms, you can still lose money on relative terms.
* https://ofdollarsanddata.com/why-you-shouldnt-pick-individua...
Is that also considered market timing?
Petra Perfect also has perfect market timing, but can buy and sell repeatedly.
All the uses of that expression that I see refer to an investor whose principal aim is to buy-and-hold to capture beta, but simply wants to try and pick the right moment.
Pulling out such a strategy would make you insanely rich.
$1 in the 1900 stock market would be $52000 today. In the 1900 T-bill market, $58. If you knew how to perfectly rebalance every Jan 1, $22.3m.
But the real question is whether it makes sense to keep cash on the side in order to wait for one of these relatively rare crashes. The answer is probably no.
If you were this sure, did you take a short position when pandemic was announced? Hindsight is 20/20.
Also not sure what you meant by when pandemic was "announced" but I guess you are referring to March 2020 broadly
Timing the market to some requires complete prescience.
To others it may not.
I do believe that markets can be beat, but by definition, you need to be "smarter" than the average capital, where more than half of the capital in the market on a given day is controlled by somewhat sophisticated investors. I don't think it's worthwhile for a retail trader to try their hand unless they are putting considerable effort into developing their alpha and either have automation skills or exceptional discipline.
It's worse than that! The average estimation performs on the level of superforecasters, thanks to the wisdom of the crowd.
The priced-in evaluation beats even most sophisticated investors! ("How is that mathematically possible?" About half of the investors are on the lucky side, but not consistently.)
All of the experiment "participants" must have Lucky in their middle names. They managed to keep their jobs over those 20 years and kept their cool at the economy downturns.
They only Buy (the index shares), except for the one that keeps "cash" aka money market shares. I guess they plan on doing this beyond the 20y, why stop feeding cash into the account, why retire when it can contnue growing?
Lucky ones will also retire in upturn.
Yet the whole transaction needs the Sell part to realize the gains. Surprisingly, the Schwab experiment did not model this for the "participants".
Does one need to "time" the Sells?
The FIRE community did model this at great length though. And the example in TFA is just an example: saving $2K a year is basically drinking one or two beers less each day (so I wouldn't look too much into that amount). Most people in the west could save that. At the very least the people at which TFA is aimed could save $2K a year.
Try $20K a year: most working people here could save that.
Here's a nice "rich, broke or dead" FIRE calculator:
In retirement you need Money more than you need Stocks, so the Sell side of the trade could be someone who is not trying to be clever with trades, but simply needs to pay for their groceries.
First, as you often see in these studies, they use the S&P500 which has returned a 9 or 10% annualized rate for decades now. How realistic is it to see someone's entire wealth invested in just this benchmark? Diversification will almost always mean returns lower than than the S&P. Ultimately this erodes at the findings of the study.
Second, there's no mention of yield which is basically the guaranteed portion of the return. This portion alone accounts for a quarter of your annual return making it another compelling reason to be invested early.
The real issue for the average Jo seeking alpha is you often need to pay the house (your government!) for the privilege.
In Australia you trigger capital gains tax when you sell. And if you buy and sell alot they may audit you and consider it income from professional trading!
(Assuming you meant indexes = beta... ?)
Another weird thing: transfer your house to your spouse and pay stamp duty! Stamp duty itself is regressive and should be replaced by a smaller annual property tax or just another form of tax (but given that property ownership tends to create wealth inequality probably good to tax ownership rather than add more income tax)
She benefited from the January Effect: https://www.investopedia.com/terms/j/januaryeffect.asp
Then there's the opposite question, how many active/day traders are consistently profitable, i think the answer is less than 5% of everyboedy that tries, the ideal is that somebody realizes they're not going to make it while replay/sim / paper trading, or people get stopped out quickly on substantial positions.
Anecdata: During my banking days, any time I received an outsized bonus it did seem to occur at a local market maxima. I had noticed this, and I was like I should have worked in entertainment as their earnings and thus investment opportunities were largely uncorrelated to the price of the stock market. Of course, this did change a bit when the stock market fueled streamers started spending money like drunken sailors on "content".
- Buying real estate before or after the 2008 real estate crash
- YOLO'ing on a specific stock/company/crypto before or after a bull run
I presume their advice becomes more solid the more you trade and the more diversified the investment is.
There just needs to be some kind of yearly pattern for such a strategy to exist. I even recall reading about it on money-stuff. But I can't remember the months.
Historically, April, July, November are the best, while January, June and September are the worst. "Sell in may" and go away used to be a common phrase too.
But if you are purely DCAing, such points don't make much sense. Following the interest rate cycle or business cycle is straight forward, or cycles in your own industry. Oil, shipping and microprocessor companies for example forecast years out when their profitable and unprofitable periods will be, so you can move your capital in and out for much higher performance.
There is no good idea with a Ponzi if you didn't create it.
"The numbers always go up"
That's it.
Few people doing so well would share such a process, but in theory, if they did, and it worked, it would likely trigger a flood of followers, and the behavior of the markets would shift alongside it.
Presumably someone making this claim is a billionaire. Or they've being doing well in stocks for a short enough time that it's yet to be proven if they are as good at timing the markets as they think they are.
Those people (we people) know not to try.
And if it did come from predictive ability, then everyone would just copy their predictions and arbitrage it out.
If they are broadcasting it, the broadcast is part of the strategy.
The guy who could died last year.[1]
[1] https://dailyprofitcycle.com/market-commentary/the-legacy-of...