Thanks for sharing your experience—the third section in particular is really interesting. Relative to the central discussion: how much time and effort did you have to put in to find those edges, and do you think it was worth it? Would you encourage others to try and do something similar? Or is it more like a hobby?
Your formulation is nifty, and intuitively makes sense to me. I am feeling too wiped right now to think about it carefully, but my off-the-cuff response is that it has something to do with the fact that 'informational edge' is a much broader category than information about the actual underlying assets.
For example, a complicated day-trading algorithm is on some level a reflection of the fact that the market is missing some information. But that information looks more like 'there is a complex relationship between assets under XYZ specific conditions' than 'the EBTDA figure in Walmart's quarterly report'. I guess this is what most anomalies represent: they are more like meta-information than information.
In which case, if you had a superintelligence with near-infinite compute, I think your intuition that it could indeed beat the market is right. I don't know much about quants, but I imagine this is pretty much what they are trying to do, with the difference being that they have bounded resources.
If we take the 6th of March—the last trading day before the March 9 fall—then the market is down 12.2%, which is already in 'correction' territory, and an extremely rapid descent by historical standards.
If we take the 16th of March—the closest trading day we have to 'mid-March'—the market is already down 29.5% per cent, which is not too far off the bottom, and well and truly into 'bear' territory.
To be clear, I think time has proven you correct about the EMH (and this is easy for you to say, now that the market has stabilized).
I thought the talk about EMH being dead was weird at the time, and left a comment saying as much. I also wrote a post on March 24, which later turned out to be the bottom, saying that timing the market was a really bad idea, and the buy-and-hold forever strategy was about the best anyone could hope for. I am as surprised about the speed of the rebound as anyone! I possess no predictive powers, but I have consistently been defending boring orthodoxy.
I admire and respect you very much as a person and a thinker—seriously man, you have no idea—so I feel extremely bad if I have made you feel bad. I didn't mean to accuse you specifically of being a revisionist historian—it was more of a general vibe that seemed to be happening a lot—and although I think the passage as stated is misleading, I don't think it's deliberately so, and I've edited the post so it comes off as less accusatory.
Huh, I got that from a recent Bloomberg article which says 15:1...not sure who's right or why the numbers are so different.
Active management in the equity market, both in the U.S. and abroad, is dominant. And not by a little: Active management in the U.S. trounces passive by a ratio of 8-to-1 in dollar investments. Expand that to include the entire world, and the ratio is closer to 15-to-1. If we include fixed income in our calculations, the ratio balloons to 60-to-1.
Second, and it relates to the first, one of the other things (different time) that was pointed out was "market" is a problematic terms. Each asset that is traded has a market and that is not the same as "the market". I think this tends to be something of a problem area for people when the issue of EMH is in question.
Yes! This is another really great point. I think Noah Smith described it by saying something like, 'there is no EMH—there are an infinite number of EMHs all happening at the same time'. Which is another reason the theory is vague and unfalsifiable.
I find it helpful to think about each market in the narrowest possible terms. For example, the market for AAPL stock is likely to be less efficient than the S&P 500 market as a whole, although presumably not by much. The market for a thinly-traded stock languishing on the secondary board of the Tanzanian stock exchange is likely to be much less efficient than that. The market for a private company with no disclosure obligations is much less efficient again. By the time you get down to 'the market for the time and labour of this one guy called Richard', there are truckloads of inefficiencies and EMH doesn't really apply.
Thanks, nice post. I like 'anti-inductive markets', not least because it doesn't come with all the confusing connotations of 'efficient'.
Sure—I was testing a dual momentum strategy over the market as a whole, with a 12-month lookback period. The 'dual' refers to both absolute momentum, and relative momentum between asset classes (bonds, US stocks, non-US stocks).
I haven't evaluated it properly yet, but the signals it generated told me to stay in stocks until the end of March, at which point I ought move into bonds, just in time to miss the recovery. Over the period I've tested it so far (16 months) it has returned -4%, while my benchmark is at +18%. I am still mildly interested to see how it pans out, but I ignored the signals and am now only tracking it on paper.
Yeah, active investors are providing a valuable service to everyone else, both by exploiting genuine asymmetries, and by collectively generating a signal in the Uncle George sense. People sometimes worry about the passive revolution for this reason, but the vast majority of funds under management are still active, and human nature being what it is, there will presumably always be plenty of people willing to have a crack.
Plus one! I tried several free tools of this nature, but managed to find loopholes and self-sabotage every single time. Shelled out 20 bucks or something for freedom, and solved the problem instantly.