Since we're discussing EMH and VTSAX, seems as good a place to add a recent anecdote:
Chatting with someone, investments came up and they asked me where I put mine. I said 100% VTSAX. Why? Because I think the EMH is as true as it needs to be, I don't understand why markets rise and fall when they do even when I think I'm predicting future events accurately (such as, say, coronavirus), and I don't think I can beat the stock markets, at least not without investing far more effort than I care to. They said they thought it wasn't that hard, and had (unlike me) sold all their stocks back in Feb 2020 or so when most everyone was still severely underestimating coronavirus, and beat the market drops. Very impressive, I said, but when had they bought back in? Oh, they hadn't yet. But... didn't that mean they missed out on the +20% net returns or so of 2020, and had to pay taxes? (VTSAX returned 21% for 2020, and 9.5% thus far for 2021.) Yes, they had missed out. Oops.
Trading is hard.
The GPU company increase is notable because the reason Nvidia and AMD have done well has little to do with AI. It's almost entirely about crypto, with some portion about video gaming. So while you would have done well if you had invested in GPU companies in 2015 because of AI, your results wouldn't have actually been causally connected with your reasoning. If you take out Nvidia and AMD then your results are not nearly as much better compared to SPY. And I'm not really convinced that most of the rest of the tech increase has much to do with AI either, perhaps other than Tesla, although their increase seems more akin to Gamestop than to a company more based on fundamentals.
Of course, you could also have done better than the economy than by just investing in tech stocks, but that's not nearly as much of an exciting conclusion (though still a bit of an exciting one).
However, that's missing that the EMH is fundamentally based on risk - it's easy to get better returns than the market, even over a five year time period, by investing leveraged. But then if the market goes down, it's easy to lose everything. I haven't calculated the numbers, but I suspect that someone who invested leveraged from 2015 to 2020 would have been looking great in January 2020 and then be bankrupt in April 2020. Tech has a different risk model than investing leveraged, but it definitely is higher risk than the overall US economy..
You can beat the market by investing in a high risk market, but that's literally what the EMH tells you, so it's a boring conclusion.
This is right. For people who do not know, you cannot actually use AMD GPUs for deep learning (at least not productively, AMD is trying to get there though), so AMD's rise has little to do with AI.
I tried to bet on this on Polymarket a few months ago. Their native client for directing money into your account didn't work (I think it was because I was in the US and it wasn't legal under US law). I tried to send money from another crypto account, and it said Polymarket didn't have enough money to pay the Ethereum gas fees to receive my money. It originally asked me to try reloading the page close to an odd numbered GMT hour, when they were sending infusions of money to pay gas fees, but I tried a few times and never got quite close enough. I just checked again and they're asking me to send them more money for gas fees, which I should probably do but which is a tough sell when they just ate the last chunk of money I sent them.
I assume the person you're talking about who made $100K is Vitalik. Vitalik knows much more about making Ethereum contracts work than the average person, and details the very complicated series of steps he had to take to get everything worked out in his blog post. There probably aren't very many people who can do all that successfully, and the people who can are probably busy becoming rich some other way.
Not Vitalik. A friend of mine from OBNYC.
I don't know why you had so many troubles putting money into polymarket a few months back. Right now polymarket is in 'trouble' since ETH fees are so high so its expensive to withdraw.
I mostly election bet elsewhere but I got five figures into polymarket without too much trouble.
I wish you had posted on lesswrong. I would have happily helped you.
I think some markets are basically efficient and very difficult to beat. The public stock market is one. I'm not convinced by the AI example basically due to priors -- we've seen many many people claim to be able to beat the public markets without special information, with evidence that seems much more convincing than this, and they are on average wrong. So I don't think at least this argument overcomes my priors.
However less liquid markets are for sure beatable. The prediction markets around the election are one. Crypto is another -- I personally have done well not just investing in crypto but by co-founding a hedge fund that has actively traded crypto for 3 years, many trades per day, making a trading profit (earning alpha) on 1081/1093 days. (And the losing days were all very small, each well below a day's average profits.)
I also sit on an investment committee for an endowment and see what returns can look like in private markets where it's possible to have a high informational advantage and turn that into outsized returns.
So to me, the EMH is mostly true for highly liquid highly accessible markets. But for illiquid, less accessible, lower information markets, there is money to ...
By the EMH I mean this practical form: People cannot systematically outperform simple strategies like holding VTSAX. Certainly, you cannot expect to have a higher expected value than max(VTSAX, SPY). Opportunities to make money by active investing are either very rare, low volume, or require large amounts of work. Therefore people who are not investing professionally should just buy broad-based index funds.
This isn't the right way to formulate an EMH. You can trivially get higher expected return than any investment by simply leveraging that investment. 1.1x leveraged SPY has higher expected return than SPY, and 1.2x SPY has even higher expected return and so on. As long as the borrowing rate is lower than the expected return on SPY, leveraging will always improve your return.
A better formulation would be that no strategy has a better risk-adjusted return than the market portfolio, which is the capital weighted portfolio of all securities held by everyone. If you restrict your investment universe to US equity only, the market portfolio is VTSAX (or SPY, they're close enough). Then you could formulate the EMH as saying no portfolio of US equities will consistently outperf...
I see three things missing from your examples:
Counterparty risk and risk of extreme volitility in underlying are both very hard to estimate for crypto shenanigans. There's also the chance of wiping out your principal with mistakes.
It seems deluk is investing with Bitfinex (blocked in US), which has lots of ongoing issues; see Patrick McKenzie on why the whole thing is a fraud that is down several hundred million and is likely to seize accounts https://www.kalzumeus.com/2019/10/28/tether-and-bitfinex/ .
IIRC some individual investors in Binance (also supposed to be blocked for US investors) were being targeted for investigation by CFTC; there's an aspect of lending that lead to Know Your Customer violations (very hazy on specifics).
A legal way to put on this trade is to short MicroStrategy (Co that bought bitcoin) and buy bitcoin yourself. https://www.coindesk.com/microstrategy-bitcoin-michael-saylor-valuation
Two issues with this post. 1) You have grossly underestimated your risk profile here. By way of example, in 2006 many financial institutions thought there was virtually no counterparty risk when dealing with large, established investment banks like Bear Sterns and Lehman Brothers. They turned out to be wrong. You imply that your "plausible" counterparty risk here is on the order 1%. Do you believe then that FTX is less of a source of counterparty risk than a large investment bank? Your position implies something like that. 2) There are multiple versions of the EMH, even if we allow that what you have shown here is a source of risk adjusted excess return, you would only be giving evidence against some variants of the EMH.
The point I was trying to make here was that your space of material risks and their probabilities are much too optimistic, so your presentation here is not “Strong Evidence” that the EMH is false. (I also mentioned that, your practical form of the EMH aside, multiple variants of the EMH make this a more complicated issue than you’ve presented, but I believe I get what you’re trying to say so that’s really just a minor quibble.)
In your second paragraph you state that there are nearly risk-free trades that net at least a 5% monthly return, i.e., an Annualized Return of: (1+0.05)^12-1 = 79.6%. That’s more than 10x the last century-or-so’s return on the US stock market. That would be strong evidence indeed but I don’t think you’ve shown that. Your prediction market and crypto trades are full of risks and frictions you haven’t accounted for and your AI trade, even if we generously grant that the outsized returns weren’t at least partially attributable to other factors, is only obvious in hindsight.
Regarding your underweighted risks, other commenters have aptly pointed out some of these, e.g., cryptocurrency volatility and trade execution risk, so I’ll just focus on the counterparty risk...
For the Perpetual Futures arbitrage, the return on investment is sensitive to the price difference between the future and the underlying asset. A price difference of 0.3% is needed for 10% returns per month (since 1.1^(1/30) ≈ 1.00318), while a price difference of 0.1% only gets 3% per month. I went on Binance and checked the spot price vs. the futures price for a moment in time; it was about $50 difference for BTC, or 0.085%.
So I am convinced that it's profitable to arbitrage crypto futures; I predict the rate of return for the next 12 months at 10% - 40%...
You're claiming you've been correctly noticing good investment opportunities over a several month period. What has been your effective return over the last year (real return on all actual investments, not hypothetical)?
I feel like the strongest way to address the "If you are so smart why aren't you rich?" question is to show that you are in fact rich.
My Vanguard has gotten a 30.4% return over the last year. I have a very simple, everything in the basic large funds strategy (I can share the exact mix if its relevant). Your advice is substantially harder to execute than this, so it would be great to know the actual relative return.
"You're claiming you've been correctly noticing good investment opportunities over a several-month period." This not what I am arguing. I am arguing that you can check the EMH right now and notice it is false.
The actual answer to your question is unfairly favorable to me given market conditions. I put a relatively large percentage of money into crypto so my overall portfolio is up more than 200% over the last twelve months. This is not replicable going forward. Pretty much everything in crypto is up but Solana started spiking later than other coins because of how it unlocked. I actually did tell people to but it when it was ~2 USD in early January and it has since gone up around 7x. That is less than some altcoins but as I said it starting spiking later which is favorable.
I can't say much about other markets, but I do believe in the EMH is a reasonable approximation for the US stock market. The "obvious" rationalist investments into Tesla and AMD are an after-the-fact story to make it sound like that was the right thing to do back then. I'm sure one con construct an equally persuasive story for any other community of people. The pizza lover community will say you should have obviously invested in Dominos, and their stock has grown 25x in the past 10 years. Car enthusiasts will pick Tesla, etc.
Additionally, one predict...
Hm it definitely does seem like there's money sitting on the table on Polymarket. For example, will there be a recall election triggered for Governor Newsom is 90/10 even though 2.1 million out of the 1.5 million required signatures were submitted yesterday. It's possible that some sort of shenanigans will prevent the recall election, but a 10% chance of that seems excessive. Someone wanting to make a big bet on this should probably lookup for the 179 historical recall attempts, what was the signature margin for successful recall attempts vs unsuccessful (...
I studied and worked in finance and I don't think I ever met someone who truly believed that the EMH was the absolute truth.
Hello,
Thanks for the detailed write-up. My experience so far is that if I explain this trade in excruciating detail to individual community members, they require more work from me than is involved in establishing a Cayman Islands limited fund before deciding that they don't have time to read my emails because everything else they are doing has higher expected value, or they say things like "if such an opportunity really existed, mastrblastr would already have lent you seven figures, so why are you talking to me?"
As an aside, you probably do not want to do ...
There are currently high return trades (5% a month at least, possibly more) with extremely low risk (you can lose 1-2% max, probably less depending on execution).
Worth noting that a new Metaculus market estimates ~50% chance of Polymarket being a counterparty risk in some sense 2021-2022.
The counter-party risk (either from hacks or scams) of FTX seems extremely low right now. The team behind FTX/Alameda has built flawless reputation in the crypto industry over the past few years, and is considered among the strongest technically. They basically went from non-existent to top ~3 of crypto exchanges worldwide in volumes in a matter of ~1 year. The recent growth in the FTT coin reflects this.
I think FTX will continue to grow in the next 6 months, as (1) crypto grows as a whole; and (2) FTX innovates and grows more than the competition.
For US residents, www.ftx.us is available (but more restricted).
Does FTX let you do the Perpetual Future Arbitrage trade on margin? I was seeing 20x leverage offered without additional fees on their website, that would come out to like 50% monthly gain, which seems batshit insane to me.
Safe high return trades exist right now - Perpetual Future Arbitrage
...
-- The amount paid is 1/24th of the discrepancy (on Binance these payments trigger every 8hours and the payment is 1/3 the difference).
...
A 1% counterparty risk does not really change the analysis and there is no way a major exchange was 1% to lose your funds over a short period of time.
It turns out that Biance is a lot less safe then assumed:
Re BTC-PERP, looks like the funding has flipped negative for the last 24 hours or so: https://ftx.com/trade/BTC-PERP. There are plenty of altcoins with positive funding though, e.g. FTT
I think it's worth noting that there are often both fixed and percentage fees associated with crypto which it's important to be aware of/minimize in order for the trades you mentioned to be profitable. Specifically:
In general Perpetuals trade above the price of the underlying coins
I’m confused by this. Doesn’t this means that long positions almost always pays short positions, even if the index is increasing ? If so, why would anyone go long on the future ?
What’s the point of buying bitcoins in your scheme ?
In the interest of avoiding confusion and generally making clear what we are talking about, it would be better to frame this debate as being about passive investing, instead of the efficient-market hypothesis.
What the EMH means traditionally is that for some market, conditioned on some set of available information, the expected value of the future price is equal to the current price times one plus the expected discount rate; in other words: current prices reflect available information. This doesn’t need to be taken literally, but markets being efficient sh...
I am going to defend the following response to "If you are so smart why aren't you rich?": Rationalists actually are smart but we were way too modest and did not bet on our beliefs. The rationalists who actually tried to use rationality to invest often traded extremely lucratively. We should stop being so modest moving forward. Ideas have consequences, including for asset prices.
I will first present the best evidence I have that the EMH is quite false: There are currently high return trades (5% a month at least, possibly more) with extremely low risk (you can lose 1-2% max, probably less depending on execution). These trades take a little execution but do not require professionals. In the recent past, there were VERY simple bets that returned ~10% a month with even less risk. I will describe both these trades then talk about more speculative evidence. Be aware several options are geo-locked (in particular FTX blocks US IP-addresses. No exchange offers futures to traders in the USA).
By the EMH I mean this practical form: People cannot systematically outperform simple strategies like holding VTSAX. Certainly, you cannot expect to have a higher expected value than max(VTSAX, SPY). Opportunities to make money by active investing are either very rare, low volume, or require large amounts of work. Therefore people who are not investing professionally should just buy broad-based index funds.
I would say that for many asset classes you should have a reasonably strong prior that the current price is correct. I would include stocks and normal sports bets. However this prior is weak enough that the standard to overcome it is basically 'convincing argument from a friend'. It is important to approach this with the same mindset you would use to make predictions and to be reasonably detail-oriented. I am not claiming this is trivially easy to beat the market just very doable.
Post Election Trump Betting
You could lucratively bet against Donald Trump long after the election on various platforms. The most lucrative way known to me was to short 'TRUMPFEB' on ftx.com. TRUMPFEB was a token that would pay out 1$ if Trump was president on Feb 1st and 0$ if he was not. The tokens were tradeable. Importantly you could short them to bet against trump. If TRUMPFEB was selling for 8cents and you short TRUMPFEB you would essentially be betting 1 dollar to make 8cents. Here is a graph of the price over time and some specific values.
Source images: https://www.coingecko.com/en/derivatives/ftx/TRUMPFEB
Roughly the markets thought Trump has a 15-17% chance until Nov 22nd, ~10-11% chance until Dec 10th and ~5-6% chance until January 5th. The odds were non-trivial until the electoral college met in person. You could short TRUMPFEB with 2x leverage which let you double your returns. You could have easily placed a million-dollar bet shorting TRUMPFEB long after the election. FTX was not available to Americans but you could have gotten somewhat less lucrative odds betting on Polymarket or catnip. Polymarket and Catnip were available to Americans. At least one rationalist I know made over 100k betting on Polymarket. The Polymarket election market had nine figures of volume. Predictit had low limits and high fees but many other platforms did not. In many countries, you could easily and legally bet with fiat.
Safe high return trades exist right now - Perpetual Future Arbitrage
This trade is harder to explain and trickier to execute but it does not require being a professional. A 'perpetual future' is a contract that mimics an underlying asset. You can buy them 'going long' or you can 'sell' them to other people by shorting. For simplicity, let's talk about BTC and BTC-PERP. BTC-PERP is a tradeable asset that works as follows on ftx.com:
-- Ever hour compute the average prices of BTC and BTC-PERP over the last hour
-- If BTC-PERP traded higher then longs pay shorts. If BTC is higher than shorts pay longs.
-- The amount paid is 1/24th of the discrepancy (on Binance these payments trigger every 8hours and the payment is 1/3 the difference).
Here is what this looks like. The second to last is the 'payment' (negative means I got paid) and the last column is the hourly rate. (These are some example holdings, this is a real account but not a proposed portfolio):
The above account is short all the coins.
In general Perpetuals trade above the price of the underlying coins. The underlying reason is that it is much easier to use leverage when buying perpetual futures. This effect is especially strong if the market is bullish (as it is right now).
The way to make this into an arbitrage is to buy the underlying coin and short an equal amount of the perpetual. For example, buying Bitcoin and shorting BTC-PERP. Prices almost never differ by more than 0.2%.
The account above has a value of around 32k. If you add up the payments you will notice I received more than five dollars in one hour. That is 840 USD or 2.65% a week. This payment is a little better than I would expect going forward but if the market remains bullish you can get 10% monthly doing these trades. I would be surprised if you could not get at least 5% returns over the next 30 days. Returns were even better a few months ago. However, rates were sane until about three months and will presumably return to sanity one day.
For now, you can grab some safe returns if you do this trade skillfully. This is not as simple as 'bet against trump' and you probably need some python scripts to grab funding rate data since rates differ between coins and over time. You also need to be careful about how you enter and exit positions. There is some work involved here but it easily makes sense if you have decent amounts of capital to invest (or can somehow pool some capital). Several entities with large bankrolls are doing this trade right now.
However the 'work involved' does not explain why this has not been arbitraged away as predicted by the EMH. Many large players are actually doing these trades. But at least for now, the 'smart money' cannot close the gaps. Markets are often inefficient for a long time. Just to be clear this is dramatically more work than Biden betting (which was trivially easy relative to the returns).
Backtesting Rationalist Investing
Hopefully, the previous examples have garnered me some credibility because I am about to do something very dangerous. The perp arbitrage is current and I told people to bet on the elections well ahead of resolution (I told people to bet post-election on various discords). But I think one very obvious implication of 'rationalist thinking' was to bet on AI progress. It was especially clear you should do this after Alphago. Conveniently Alphago came out a little over five years ago so we can check the five-year returns of some plausible AI investments:
Goog 3x
Nvidia 15x
AMD 30x
Intel 2x
Tesla 14x
Microsoft 4.5x
Botz ETF (2.5x)
TSM 4x
Facebook 2.5x
QQQ (Tech sector ETF) 3x
ARKQ (ETF) 4x
SPY (Obvious control group) 2x
You can argue that returns are driven by 'tech stocks did well' but GPU stocks did much better than tech in general. And I do think its fair to assume a rational investor who was looking to bet on AI progress would have put some of their portfolio into GPU manufacturers once it became clear that the 'more compute' paradigm was going to be influential. Imo Alphago was a good time to be convinced of the 'more layers' thesis and at the time most big AI projects were trained on Nvidia GPUS.
Much has also been made of the fact that Bitcoin was mentioned very early on lesswrong.
I changed my mind, Now I'm feeling different
I think it us usually best to focus on the strongest arguments for your case so I won't go into various weaker ones in any depth. But I will note it is possible to lend quite safely at high rates (~20% long term, often much higher APY short term). The 'Equity Premium Puzzle' is also a well known anomaly. It is very hard to explain why treasury bill returns have been so low relative to stocks for over a hundred years. I mention these as examples but I ask people to stick to object level counterarguments against my main points. I have been telling people how to beat the market for months. I am telling you how right now. So it doesn't really make sense to make meta-arguments about how the things I am saying are impossible. The object level have been laid out.
I too once believed in the EMH but I changed my mind. The third virtue is lightness. In a few days, I hope to follow this post up with a sketch of what is still available, practical advice on amateur trading and various paths forward. It is worth clarifying that clear arbitrage is strong evidence against the EMH. But it is much weaker evidence that various high-risk trades are actually positive EV relative to SPY. However, once you think the EMH is false you should, imo, start looking at the other end of the risk-reward curve.
Notably returns for the safe trades I discuss more than compensate for any plausible counterparty risks on FTX. A 1% counterparty risk does not really change the analysis and there is no way a major exchange was 1% to lose your funds over a short period of time. Nor imo was there a 1% chance the whole crypto system explodes.
My own mistakes
I should have written about this much earlier. I did tell people to Bet on Biden pre-election but that post had many flaws such as emphasizing predictit instead of Polymarket. In addition, post-election betting was much more obviously lucrative than pre-election betting. The last few months have also been extremely lucrative because of the crypto boom. I talked about many opportunities on various discord but did not post anything systematic and did not post 'Bet on Biden v2' to lesswrong nor did I post about crypto. Regardless of the reception, this thread gets I should have posted the information sooner. It is notable many people thanked me for the 'Bet on Biden' piece and it really hurts me that I did not sound the alarm louder on later opportunities. I also believe I cost myself a large amount of money by locking myself out of good counsel. I can make various excuses but I will not do so. Maybe my living and family situations played a factor in my bad judgment. Regardless I strongly regret my behavior