During discussion about things where you had strong opinions and then changed your mind, someone mentioned EMH. Do you believe in EMH and if so is it strong or weak version?
I used to believe EMH but not strongly. The pandemic changed my view because I managed to invest some money when the stock market dived and was clearly influenced by overly pessimistic view of the impact of covid. Some might argue that the market reacted to the irrational government measures, so it is not that the case that the market was mistaken. I still think that investors were equally irrationally pessimistic. I reject the view that this is a hindsight and I was merely lucky. I am not big expert and I did not possess any proprietary information. I had the same information as everybody else, I just didn't let my emotions take over me. This is further confirmed that even today when all the events have passed exactly as predicted, majority of people still maintain their mistaken views that covid was very dangerous to young and non-risk population.
It is the only time when I saw the rest of the society to be so wrong in their views and clearly this was my once-a-lifetime chance. I haven't see any other opportunities for easy money so far but I think that people who are experts in their fields and investors might have been able to find more opportunities.
One of them was found by Michael Burry who definitely saw that the 2008 financial crisis was coming. He wasn't just lucky because he had read and analysed all the documents and had to create special investment instruments to profit for it. In this way, it wasn't easily accessible by laypersons like me who have no time or understanding about investment. Again, most professionals were blinded by collective frenzy.
What is your opinion about EMH?
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Notes -
Renn tech existing is probably the best argument against EPH. Renn Tech being closed to non employees suggests that the opportunity is pretty small.
Don’t forget that there’s a whole industry of firms like Rentech that trade with their own money and get consistently good results, albeit usually not as good as medallion. Sometimes people even start new ones :)
My impression from having worked at one of these firms long ago is that the famous, highly liquid markets (e.g. US equities) are indeed very competitive and efficient. If the price moves out of line you will need some serious advantages in modeling or microstructure to be the one to profit off of it. Probably the right thing to say is that the EMH is “almost true.”
What I mean by this:
Markets aren’t magically efficient; they’re the sum of lots of people thinking really hard about the world and making bets. These people aren’t omniscient, but they don’t have to be to make money (the traders I worked with got stuff analogous to OP's COVID examples wrong sometimes but their trading was still profitable on the whole).
If you are some combination of smart and well resourced, you can be one of these people (in a +EV way).
(2) is pretty hard but not impossibly so, as demonstrated by the fact that lots of people manage to do it
There are some markets where this is easier than others for various reasons like less competition
Should you yolo your life savings in the next time there’s an event like COVID where you think the market is wrong? Probably not, unless you’re extremely confident and also think you’re very well calibrated on that confidence. But on the other hand, I think it is not always right for all people to say “oh well, EMH” and use that as an excuse to never bet on anything. Maybe (not investment advice) think about how confident you are and then bet some fraction of Kelly.
Then again, if your goal is to get rich probably a better thing to do than trying to beat very competitive markets is to take advantage of (4) and build a business that takes advantage of some market that is not so efficient (generalizing this to include stuff that doesn’t look like a stock market at all).
It is impossible to tell. The next time when we get a pandemic, it will not be the same as COVID. We don't know if it will be the case when people get overreact or the case when the risk ir real and measures like lockdowns and travel restrictions are effective and need to be implemented. We don't even know whether markets will be so wrong then.
But the idea is that everybody knows something that other people don't. Sometimes it gives you opportunity to make better bets on the stock market. Should you use this opportunity? EMH says that we shouldn't because the current price already includes the publicly available information that you have but other people don't.
Yeah I’m saying that you shouldn’t do this because it’s terrible risk management and probably bad in expectation. Are there worlds where the bet pays off handsomely? Sure, but you probably won’t end up in one of those worlds.
No, the overreaction to the pandemic was a terrible risk management, instead of understanding it and acting contrary to the government's recommendations during this time. The same probably applies to the activities in the market during times when you clearly see the world being collectively afflicted by wrong decisions.
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I don't need the EMH to avoid doing things that are clearly reckless and most likely leading to ruin. But apparently many people need something that is softer on their ego. Instead of saying to them – don't overestimate your ideas, you probably know less whether the potential investment opportunities are good deals or not – we have to tell them soft lies about the EMH. It is like saying that you are a genius instead of an idiot but other investors are geniuses too and they have already cornered the market so you have very little chance to be the first. :)
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