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 -
At this point I have a bookmark of 2013 piece by Noah Smith who I think nailed it when it comes to explanation of what EMH is and why it holds. There must be something scissor-like in EMH, be its bad naming, the fact that everybody has some intuitions about economy, that it is popular to shit on Economics as a pseudoscience or that it attracts obnoxious lefties who for sure see red when they read Efficient and Markets in the same sentence. Anyways, even a lot of smart people have dumb take on it, especially around coronavirus like Eliezer Yudkowsky or they just think it means that there is no profit to be made like recently in this interview with Connor Leahy.
EMH is not about free market economy delivering Pareto efficient outcomes. It does not mean that nobody can have any novel profitable idea. It does not mean that there are no crashes ever. Also please give the authors some credit, these counterarguments are so basic that they should immediately signal that your idea is flawed. Of course authors of EMH knew that market crashes happen and they also knew that there are businessmen out there who have new profitable idea, even one-man startups. Give them some credit.
To me EMH and its constant bashing rings similar to how every now and then somebody - smart or stupid - comes up with this incredible way of how to beat a casino. Now of course you know that this somebody now reinvented Martingale Strategy of doubling the bet when losing. Now have fun convincing them that they are not the first one to come up with the idea, and that they should maybe put more work in thinking about it - before betting their house on it.
I see in this way. Yudkowsky and markets were right that we shouldn't have trashed economy over covid. That the governments of many countries did it anyway just shows unpredictable human nature. The experts who had actual expertise in dealing with pandemics in different settings were clearly against such widespread restrictions. At some point they were sidestepped and the panicking “the-sky-is-falling” guys took over and the rest is history. The winners were those who kept cool. Even after the crash the markets recovered nicely.
My thought is not about how one can become rich by playing market but what is the added value from market players. I understand that it indirectly helps to allocate capital to more efficient industries. If market collectively goes into the wrong direction, we need contrarians who can see it clearly and help to make necessary corrections.
The EMH just says that there are enough such contrarians already, so you don't have to worry. Which to me sounds very strange. It is like saying that no one should bother inventing a new drug because there are already many pharma companies doing that and their success rate is very low.
For me the usefulness of EMH is to curtail your hubris. At the very basic level - if you know nothing about let's say deodorant market, you probably should not feel the superiority of your insight after you read a news article about how the whole market is going to crash in a month. Or to word it alternatively, from all possible decisions you can make in large variety of areas and over long period, if you follow the market then you will be "right" much more often than you are going to be wrong.
EMH is information processing claim. As an analogy, imagine that you have a gas in some chamber and you will select one molecule of gas and then measure it's energy. If you know the temperature of the gas (an equivalent of market price) then you can make an informed bet about it. You will be sometimes wrong but it will be hell of a lot better performance compared to random number, or number based on "gut" feeling. Now maybe you can expend a lot of resources to get more information about the gas, about the chamber and so on - but the the downside is that it will only work temporarily as your information (e.g. more precise gas temperature measurement etc.) will be incorporated into the future.
I like that analogy with the gas chamber quite a bit.
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