There has been debate to whether the Efficient Market Hypothesis is or ever was valid.
The evidence brought forward of its death is usually stories of people in the LessWrong community correctly predicting market changes, using only widely available information and rational reasoning.
It might be correct that the market is highly efficient, but that LessWrong members and the community as a whole, in many cases, is even more efficient.
It is not unreasonable, that rationalists with a certain area of expertise and great knowledge of biases and reasoning, might occasionally find investment opportunities they can reasonably expect to beat the market (adjusted for risk of course). Even if for any given member this happens only once or twice in a lifetime, those opportunities could be highly valuable for the community. And if a great number of LessWrong members shared when believing to have found such opportunities, it might be possible to consistently beat the market. At least until a big investment fund picks up on it and starts analysing LessWrong for stock predictions.
To test the “Efficient LessWrong Hypothesis”, I’m arranging two competitions:
Stock Picking Competition - Rules
All LessWrong members are invited to comment on this post, what securities they believe will outperform the market over the next twelve months, along with their reasoning for why they think the stock will outperform VTSAX adjusted for risk.
Any security, such as stocks, bonds or cryptocurrencies, traded on any major trading platform, such as eToro and RobinHood can be picked. Also, a very small group of stocks could be picked together to decrease risk, for example “I suggest AMD and Nvidia stocks, because GPU market will do well, and buying both decreases risk.”
No investment strategy except for the “buy and hold” can be considered in this competition.
Please upvote other comments, based on how convincing those investment opportunities seem to you.
The top four most upvoted comments containing investment recommendations, with at least five karma, will be considered winners. Each author will be rewarded 50 USD that can either be transferred through PayPal or Revolut, or donated to a charity of the authors choice.
Also, there is a reward for 30 USD each, for the top two upvoted comments that do not contain stock recommendations, assuming they all have at least ten karma. For example these comments can be critique or feedback on other investment suggestions, questions about the competitions or suggestions to improve the competition.
Sunday the 17th of April, at 23:59 CET (Central European Time), the stock picking competition ends and winners will be contacted.
Shorting is allowed, and profits from it will be calculated at the spread of the shorted stock, and VTSAX + the return of VTSAX. Meaning if stock A goes down 10% and VTSAX increases 5%, the investment made 10% + 5% + 5% = 20%.
Minimum numbers required for a winner in the top four changed from ten to five karma.
The competition has now been finalized.
No comment with a security suggestion reached five karma, but to encourage participation in future contests, I'm lowering the limit to three karma. That means that jimv, Zach Stein-Perlman and cat from /dev/null are winners!
Also, lechmazur also wins 30 usd for his comment with 11 upvotes.
Winners will be contacted shortly.
Soon part two of the competition will start. Participants will be able to probability distributions on the securities from this contests. Rewards will be given to participants in relation to how much their prediction outperforms the market.
I don't expect LW to outperform the market short-term. I would expect LWers to be better at anticipating plausible Black Swans such as the crypto boom and AI takeoff.
Personal anecdote: Before I discovered LW/SSC, when I was 14, I convinced my parents to invest a substantial sum into Bitcoin back when it was trading at $5.2k. Despite my exhortations, they haven't sold any of it yet.
I think crypto is an interesting example, since LWers are very overrepresented among the people who made money of Bitcoin. But this could very likely be more due to the fact that tech interested people in general invested in Bitcoin, regardless of reasoning, and it just happened to turn out well.
Predicting black swans and booms would technically mean that LW would outperform the market, although it might take a long time and many events to prove it.
While I believe the probability for LW to outperform the stock market long term is significantly less than 50%, I believe testing the hypothesis is worth testing, since the potential gain is significant (even if I personally might not benefit from it). Also, I find the topic interesting, and will enjoy it regardless of outcome.
This is the best thing I can think of that might change your parent's minds:
How did it in this case?
No comment with a security suggestion reached five karma, but to encourage participation in future contests, I'm lowering the limit to three karma. That means that jimv and cat from /dev/null are winners!
Securities: Alphabet (GOOG) and Nvidia (NVDA)
Reasoning: AI hype will increase (more than generally expected), and these companies will benefit
Both are down ~33% since my comment 9 months ago, oops. (The Nasdaq is down ~22%.)
AI capabilities have increased more than I expected. AI hype has increased less than I expected. I'd guess both have increased more than the market expected. I'd weakly guess that AI hype is still just a minor factor in the valuations of Google and Nvidia.
Google has accounted for several of the biggest AI breakthroughs in the past 10 years, perhaps most notably, the creation of the transformer architecture. Further they invest a lot in AI, which among other things becomes apparent by them creating TPUs (their own hardware for AI).
Thus I believe Google to be the most likely candidate for achieving future breakthroughs in AI. It is not yet clear to me however if they will manage to capitalize on it well, since in they usually share all their breakthroughs openly.
Further, Google has a PE of 23.14, well below S&P 500’s PE of 24.91. Meaning that of Google has the equal or more growth potential than the S&P 500 in general, it should outperform.
Suggestion: Ethereum (ETH)
Reasoning: There are a number of upgrades planned in the next few years. The biggest problem for cryptocurrencies in general is the low through-put of transactions (leading to high fees due to high demand for a scarce resource). The Ethereum project has long-term plans to improve this with sharding and zero-knowledge proofs, but the sharding upgrade is not planned until 2023 and it's not clear how much of the value of zero-knowledge proofs will be captured by Ethereum as opposed to the Layer-2 chains that build on top of Ethereum.
The stronger case for ETH in the next 12 months is the proof-of-stake upgrade planned for later this year. This upgrade is a pre-requisite to the later sharding upgrade. It will both decrease the amount of new ETH that is created as part of running the network and change who it's awarded to. Instead of rewarding miners, who have a capital investment in compute and upkeep costs of electricity, it will reward stakers, who have a staked capital investment of ETH and minor upkeep costs of compute. The Triple Halving thesis by SquishChaos (original was previously summarized on LW) claims that this will cause a great reduction in supply (mainly because ETH won't be sold to pay for electricity), comparable to the halving of Bitcoin rewards iterated three times, and that this should push the price up to around $30k~$50k (i.e. around 10x the current value of around $3k). This could certainly be an overestimate, but even if you want to (someone please do a pessimistic calculation here) adjust the numbers down for overly optimistic calculations I think you would find that this still looks promising
Risks: If all of crypto loses a lot of value this would impact ETH and could lead to a net loss. An alternative version of this would be to go long ETH and short BTC in order to distinguish this from movements of crypto in general. However, I haven't thought through if all the assumptions of this thesis are still likely to hold in such scenarios.
Ethereum upgrades have been delayed in the past. Proof-of-stake has been on the Ethereum roadmap for years, and was previously planned to be merged late 2021. However, they've now merged the Kiln merge testnet which is the last merge testnet before upgrading existing public testnets.
Some assumption of the analysis, or an inference step, could be wrong. I don't claim to have verified anything here beyond the most superficial level.
I'll also point out that the vast majority of fees paid by crypto users are paid to Ethereum, which seems fairly close to allowing us to perform a fundamental value analysis:
Post-merge, these fees would go to holders of the currency.
Suggestion: Fiverr International Ltd.
Personal thoughts: While I do believe the EHM to be true. I expect cases like Bitcoin and potentially Fiverr, to be opportunities where we can predict massive growth, even if the odds are only a few percent, to be one of our best bets at beating the market. I might suggest diversifying the risk a bit by investing in some competitors too, like Upworks, but if I would only bet on one stock it would be Fiverr.
5. The current rating system isn't particularly good, most people (including myself) gives 5 stars all the time unless something was wrong, so almost all sellers have like 5 or 4.9 stars. However it is possible that Fiverr can improve the rating system, to make it a much better predictor of how well a seller will be at performing a certain task. It could be a huge value add, since oftentimes the price and quality for consultancy services can vary hugely. Just look at video on youtube where they pay people on Fiverr to do stuff like edit videos, play instruments etc. The correlation between price and quality is quite low.
6. I have used Fiverr a lot, and in my experience the results has generally been better than other platforms.
Alibaba (BABA) - the stock price has been pulled down by fear about regulation, delisting, and most recently instability in China as it's zero covid policy fails. However, as far as I can tell, the price is insanely low for the amount of revenue Alibaba generates and the market share that it holds in China.
Your observations about fear and the revenue and market share are information which have been visible to the entire world for months or years now. Why do you think you have inside information on that?
Other questions come to mind: How much will BABA be worth if the techlash continues and Xi decides to outlaw, say, not video games or tutoring this time but advertising? Or if Ma is unpersoned? How much would it be worth to you, as a foreigner, if Xi decides to 'pull a Putin' and invade Taiwan and similar sanctions trigger? etc.
I of course don’t have insider information. My stance is something close to Buffett’s advice “be fearful when others are greedy, and greedy when others are fearful”. I interpret that as basically that markets tend to be overly reactionary and if you go by fundamentals representing the value of a stock you can potentially outperform the market in the long run. To your questions, yes disaster may really occur, but my opinion is that these risks are not sufficient to pass up the value here. I’ll also note that Charlie munger has been acquiring a substantial stake in BABA, which makes me more confident in its value at its current price.
Alibaba does looks cheap, with a PE ratio of 15, and probably likely to grow faster than the S&P 500.
However, I am not sure why the market would be wrong about the risks of delisting, regulation and instability in China.
I think one not obious advantage with Alibaba is that it's one of the strongest AI companies in China, and China is investing a lot in AI, and might (not sure how likely) become the biggest player in AI globally.
I don't know how much you want to go into the minutia to make it as accurate as possible but for shorting you really need to consider borrow fees and share availability. For example, I wanted to short DWAC (a SPAC that is merging with Trump's social media company) for a long while but these issues made it impossible (I also couldn't make a play using options because they reflected the negative outlook).
I think for the second competition where development will be predicted fees should be included to more accurately reflect the reality.
In this competition I think disregarding fees might still be viable, since it’s mainly people’s reasoning that is interesting.
Suggestion: Tesla, Inc. (TSLA)
Reason: We should expect the stock market to be extremely difficult to beat at algorithmic trades, where lots of data of previous events is available. Tesla has several projects that are highly innovative and thus are difficult to appreciate the value of. Especially the Tesla bot and the D1 chip. The current market cap of around 1 trillion USD seems to reflect the value of the car business, as well as potential further profits from autonomous driving features, as well as full self driving. The Tesla Bot has tremendous potential, and humanoid robots in general seem like something that should come sooner or later (probably later). The D1 chip shows promise that Tesla might have a minor chance of becoming a big player in the AI chip field, which many predict will be a major industry, assuming AI development and adaptation continues.
Personal thoughts: Do I believe Tesla is a better investment than VTSAX? No, not at current prices. Tesla is analyzed by so many experts in the field, and with the hype of the stock, it seems fairly unlikely that it should be undervalued.
Suggestion: a short position on Tesla (TSLA)
Reason: Tesla sold about 900k cars in 2021. This is about 1-2% of the global car market. Even in electric vehicle sales, Tesla only represents about 1/7 of global sales.  And yet TSLA is valued at as much as the combined value of the next 5 car companies combined.  Musk has been claiming since 2015 that self-driving Teslas are a year or two away  so it's hard to believe that they are particularly close now. It seems that Tesla's current self-driving features are not particularly more advanced than those of competitors. 
Personal thoughts: I have low confidence that this would be a good trade over a 12 month timescale. Markets can stay irrational longer than you can stay solvent and all that. And TSLA trades high based on Musk's personal appeal, which might have years left to run (see Matt Levine's Money Stuff newsletters on the Elon Market Hypothesis). But longer-term, some trade structured to represent the relative values of TSLA vs. the next, say, 5-10 largest car makers, seems like it should pay off. Either TSLA is currently over-valued or the other car makers are currently under-valued. Unless Tesla can capture, say, 50%+ of car sales globally, either its value will have to fall substantially or other makers' value will have to rise substantially, if investors realise that they have the same benefits as Tesla represents.
I appreciate you writing down your prediction, and that you included sources.
"Musk has been claiming since 2015 that self-driving Teslas are a year or two away  so it's hard to believe that they are particularly close now."
While I do agree that what Musk says is not a good indicator, the tech has been constantly improving.
"It seems that Tesla's current self-driving features are not particularly more advanced than those of competitors. "
There are sources that claim that Tesla is far ahead, and other sources that says they are not. I didn't find any reasoning why they thought some other vehicle manufacturers had close or better driver assistance than Tesla.
What I find interesting, is that both of our statements could be true, and that the market overvalues the car/autonomous driving part, and undervalues the bot/chip part of Tesla.
My suggestion isn't really aligned with your initial hypothesis, about the potential for LW to be more efficient than the efficient market because of comparative advantages at spotting niche things. I don't know much about cars, about car manufacturers, or about investment. So I'm not using some expert niche knowledge that I would realistically expect to be more efficient than the market.
Really, my reasoning is just that it doesn't seem that feasible that Tesla is worth more than car companies that are selling many, many times more vehicles than it.
From first principles, it seems high probability that most vehicles in the future are going to be electric vehicles. I suspect that incumbent car manufacturers forecast this too, and therefore expect that they are investing heavily in developing electric vehicles. These are large companies with very well-established dealership networks, large cashflows from sales of internal combustion engine vehicles, etc., so should have substantial capacity to pursue that development. I don't know whether Tesla claims a technical advantage in electric vehicles, but if they do, I don't see it as being likely to persist.
For the autonomous-driving parts of the technology, I could envisage there being more secret sauce than the electric vehicle parts. But for similar reasons I would expect the other vehicle companies to be investing heavily in it. And — this is really anecdote time now — I've seen some videos online that are suggestive of Tesla's self-driving abilities seeming outright dangerous.
Those seem like reasonable arguments.
It might be worth to point out, that Tesla has had way smaller budgets for R&D than other manufacturers like Ford and GM. So if Tesla holds an advantage, it implies that simply investing more money won’t let other manufacturers catch up.
Stock Picking Competition:
NYSE: TSM - Taiwan Semiconductor Manufacturing Company
TSMC is the leader in the semiconductor world. They manufacture most of the advanced parts for Apple, like the SoCs, and starting from this year will even produce iPhone's 5G modems. They are years ahead of the competition. TSMC plans to release its 3nm chips next year, whereas Intel committed to releasing theirs in 2025.
I get the impression that a common belief on LW is that AI will continue to boom, and for that reason TSM might be undervalued. TSM has a PE ratio 0f 24.8 (source) and S&P 500 has one of 24.91 (source). With the AI boom, and general chip shortage, it doesn't seem unlikely that TSM will be able to grow faster than S&P 500.
There is the black swan event of China attacking Taiwan. But the odds are only 10% of a conflict at metaculus, and a conflict might not lead to an extreme devaluation of TSM.
Their main competitor is usually considered to be Samsung, not Intel, and the difference in technology is debateable (source).
One option therefore is to invest in both Samsung and TSM, so regardless of which dominates in the future.
5G modems for iPhones seems like the type of thing the market would have already reacted to, but not sure.
Is the main argument then that higher uncertainty, generally leads to undervaluations of assets?
In general more high risk investments should be accompanied by higher expected returns, which might be the argument here?
Watch out. When markets use real money, people use them to hedge against certain outcomes. It's a lot like arbitrage in some cases, e.g. for people who only gain or lose any money in specific outcomes like if evergrande defaults on its debts, but they lose very large amounts and your market is comparatively smaller.
Suggestion: Ether (ETH).
Reason: ETH seems to have no fundamental security flaws and far more applications than bitcoin, yet is currently valued <10% of bitcoin. I have absolutely no story for why the market doesn't price this in, but if you question the EMH, then ETH seems like the obvious bet.
Ethereum's market cap is 47% of Bitcoin's. While you can argue that the market cap of cryptocurrencies is arbitrary, the price of one coin is even more arbitrary.
I think you picked a good suggestion for a bad reason. Both because of the difference between market cap and price per coin, as the sibling comment has pointed out, and because you don't give any reason for this to change in the next year when it's been the case for the last N years. Here's what I think is a better reason.