Rune

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Covid 4/1: Vaccine Passports

Have you already written about the recent concerns with the Oxford vaccine causing Cerebral Sinovenous Thrombosis (CSVT)? I don't mean just any old blood clots, but these specific blood clots that happen in the brain that are super rare and often lethal? 

Much of the earlier blood clot discussion was unfortunately confused with regular blood clots, like deep vein thrombosis (DVT), which is not as big a deal, and neither is there good evidence that the Oxford Vaccine increases its occurrence. But CVST seems both serious and potentially a bigger side effect of one particular vaccine over the other options. So I would still take the Oxford vaccine over getting COVID, but now it's unclear whether Oxford's vaccine is just as good as the others, or somewhat inferior due to this side effect.

The EMH is False - Specific Strong Evidence

Thanks. I'm just trying to understand what people's reasons are. My portfolio is also US-weighted more than market caps would dictate.

The EMH is False - Specific Strong Evidence

This discussion is mostly irrelevant in practice, since the two funds track each other extremely well. 

Even if it's true that the S&P500 has beaten the overall market in the past, I doubt it's statistically significant. Theoretically I can't imagine a good reason why the optimal investment answer would be "pick roughly the top 500 companies, but not exactly those, but something like that picked by a committee of people you don't know, in proportion to their market cap." VTSAX just seems simpler as it tries to approximate "pick every company in proportion to their market cap." This is also what the one mutual fund theorem in portfolio theory says one should do (if one limits oneself to US stocks only), so it has solid theoretical basis, unlike the S&P500. 

The EMH is False - Specific Strong Evidence

I'm not a fan of this argument because even if you have some global coverage, why not get more and reap the benefits of diversification? It's like saying hey I already own 2 car company stocks, there's no point in owning all US car company stocks. Sure the stocks might move in tandem most of the time, but diversification allows you to reduce risk.

The EMH is False - Specific Strong Evidence

That's an interesting argument I hadn't heard before. It makes sense, although I think this argument can at best be used to rule out stocks of developing nations. That still leaves developed nations. So one might then diversify their stock holdings by adding some, say, Vanguard FTSE Developed Markets ETF (VEA) in addition to their VTSAX/VTI.

The EMH is False - Specific Strong Evidence

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 prediction for a few years of returns is statistically insignificant. If you can today make, say 20, independent predictions about stocks that will beat SPY 1 year from now (in risk adjusted terms -- after correcting for different risks), each of which has only a priori 50% chance of beating SPY, and then at the end of the year you're correct on say 15+ of them, that would be statistically significant, for example.

The EMH is False - Specific Strong Evidence

Yes, you're right. I'll weaken the claim to 1.1x SPY will beat SPY in expected return historically and in almost all reasonable contexts. Certainly often enough to invalidate the incorrect EMH stated above.

My statement was motivated by the single time period investment model, as is considered in the standard mean-variance diagram of modern portfolio theory. On that diagram, as long as the risk free rate is below the market portfolio, you can draw a straight line between them and once you go beyond the market portfolio, you'll always have higher expected return all the way to infinity. But a single time period is not the best way to model long-term investing.

The EMH is False - Specific Strong Evidence

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 outperform VTSAX in risk-adjusted terms, meaning, if we normalize the beta of the first portfolio to 1, then it won't outperform VTSAX (which has a beta of 1 by virtue of being the market portfolio). Now my argument with leverage does not contradict this formulation, because a 1.1x leveraged VTSAX will have beta = 1.1. So if your normalize it to beta = 1, you get back VTSAX, which does not outperform VTSAX.

The EMH is False - Specific Strong Evidence

Is there a reason you only invest in the US stock market and not the whole world (VTWAX)? Or is VTSAX good enough and it's not worth the effort to decide whether you should globally diversify and in what proportion?

A No-Nonsense Guide to Early Retirement

That's quite interesting! What was the stock/bond allocation in your examples that gave you a SWR of 4.3%?

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