
Top stockpics by author's forecasting accuracy - arbitragedude
http://www.arbitragedude.com
======
lutusp
I want to warn people that sites such as that linked here cannot possibly
predict the direction of the real equities market in a reliable statistical
sense -- apart from the outcomes one might get by flipping a fair coin.

This is common sense -- if the operator of the site actually had an inside
track on the market's workings, what possible reason would he have for
revealing his findings to the public, instead of privately investing his funds
based on his genius insight?

One answer is that the site's operator might have a position in the listed
stocks and hopes to trick people into investing in them, thus enriching
himself at the public's expense -- the so-called "penny stock" scam.

All speculation, of course. But for those unversed in equities trading, sites
like that linked here are utterly without value, a fact demonstrated by the
now-famous WSJ dartboard Contest:

[http://online.wsj.com/news/articles/SB1000142412788732450470...](http://online.wsj.com/news/articles/SB10001424127887324504704578410864000872642)

Further reading:
[http://arachnoid.com/equities_myths](http://arachnoid.com/equities_myths)

~~~
panarky
You're right, but it's even worse than that. This system is trivially
vulnerable to sybil attacks.

I can create 16 identities, each posting an opposing investment thesis on 8
securities.

For the 8 identities that were correct in the first round, each posts a new
thesis for 4 securities.

For the 4 identities that were correct in the second round, each posts a new
thesis for 2 securities.

Now I have two identities with a spectacular record of three perfect calls in
a row. Not due to skill, but purely due to chance.

What is the value of the next prediction by these remaining stock pickers?
Their 100% accuracy record has exactly zero predictive value.

~~~
lutusp
> This system is trivially vulnerable to sybil attacks. I can create 16
> identities, each posting an opposing investment thesis on 8 securities.

Good for you for knowing this! I have a writeup on this strategy here:

[http://arachnoid.com/equities_myths/index.html#Miracle_Man](http://arachnoid.com/equities_myths/index.html#Miracle_Man)

I didn't know it had a name like "Sybil attack", although the name makes
perfect sense once heard.

> Their 100% accuracy record has exactly zero predictive value.

Yes, as do most such predictions, a fact unknown to naive investors.

Thanks for your experiment -- enlightening.

------
arbitragedude
gals/guys what do you think about my attempt to outsmart Wall st?

~~~
lutusp
You need to learn how the stock market works. Before real scientific analysis,
your predictions have no value at all -- not a bit. And after scientific
analysis, they will turn out to be random guesses, as has been demonstrated
again and again by people who wanted more than anything to discover the
opposite.

Here's why:
[http://arachnoid.com/equities_myths](http://arachnoid.com/equities_myths)

And remember -- people who actually have money, and who are seasoned
investors, aren't misled by sites like yours.

~~~
arbitragedude
Actually, I have worked in the bond market in Wall St. for more than a decade
and a have a masters degree in computational finance from a top university. My
accuracy measure is based on information ratio. As in whether the poster
outperforms S&P 500 on a risk adjusted basis. Poster's information ratio is
compared simultaneously with a position invested in S&P 500. If the poster
outperforms, his accuracy goes up.

What do you think?

~~~
lutusp
I think you don't understand either equities or probability. Here's an
example:

> If the poster outperforms, his accuracy goes up.

No, it's not about accuracy, it's about chance. His position on a normal
distribution changes, but the mean of the distribution is equal to the market
long-term growth pattern, not any exploitable "secrets of the winners"
advantage. The WSJ dartboard contest proved this once and for all --
professional stock pickers can't pick stocks, but they can charge brokerage
fees.

Anyone can throw eight sequential heads with a fair coin, but only a fool
thinks this makes him psychic. (If you throw a fair coin 256 times, according
to the Binomial Theorem the probability is 63% that, somewhere in the series,
eight sequential heads will appear.)

I can mail my customers six months of reliable, accurate and exploitable
market forecasts and then try to get them to sign their portfolios over to me,
but I don't actually have to know anything to do this, or have an inside track
on the workings of the market. Do you doubt this? Here's how it's done:

[http://arachnoid.com/equities_myths/index.html#Miracle_Man](http://arachnoid.com/equities_myths/index.html#Miracle_Man)

The bottom line is that there are no secrets of the winners, and the only
people who actually beat the market (in a reliable statistical sense) are
those willing to deal in illegal insider information.

Guess what Warren Buffet chose as the financial instrument for his relatives,
during his estate planning? Index funds. Buffet knows better than to trust
market forecasters.

EDIT: In a long and reliable tradition, the above perfectly accurate post,
replete with technical detail and references, is downvoted for the simple and
sole reason that it's right. The downvoting is performed by people who can't
articulate their grievances, but who can click a mouse.

~~~
arbitragedude

       The entire $10trn financial industry exists on the premise that markets are not efficient.  Even Warren Buffet has said himself, 

"I think you will find that a disproportionate number of successful coin-
flippers in the investment world came from a very small intellectual village
that could be called Graham-and-Doddsvill" All the successful investors seem
to come from the same investment zoo!!

Number of consistently successful traders and hedgefund managers do exist. I
agree 90% can't beat the market but I am trying to find the 10% that do beat
the market consistently through ArbitrageDude. Do you find it bizzare the
buffet tends to make the right trade everytime?? Do you find it bizzare Jim
Simmons returns are 30% annualized consistently

Also, Please read Robert Shiller's (Nobel Prize) winner's response to
efficient markets. He tells it better than I do.

[http://blog.supplysideliberal.com/post/82659078132/robert-
sh...](http://blog.supplysideliberal.com/post/82659078132/robert-shiller-
against-the-efficient-markets-theory)

i understand what your'e saying about probability and independent trials.

Also my financial media lacks accountability. My website tracks everyone's
trading record so you can see for yourself if Jim Cramer's recommendations are
worth listening to.

FT, WSJ, barrons, none of these tabloids provide any accountiblity record of
their recommendations.

~~~
lutusp
> Number of consistently successful traders and hedgefund managers do exist.

Yes! Absolutely! Half of them are more successful than chance and half less!
In the same way, if I flip a fair coin, roughly half the flips will confirm my
prediction that I am a genius -- or that I don't know anything about
probability.

This requires a bit of science:

1\. There are "successful" investment houses and individuals.

2\. What's the reason? Is it stock picking genius? Or is it the blind workings
of probability?

3\. Easily answered -- if an investment house publishes its predictions, and
if the predictions consistently beat the market, then the SEC will step in and
arrest those responsible for insider trading.

4\. Guess how the SEC detects insider trading. Yep, you guessed it -- they do
better than market averages.

> ... so you can see for yourself if Jim Cramer's recommendations are worth
> listening to.

But I can tell you in advance that they aren't. When they succeed (beyond a
chance expectation of 50%), it will be because of the announcement effect:

[http://www.investopedia.com/terms/a/announcment-
effect.asp](http://www.investopedia.com/terms/a/announcment-effect.asp)

A given viewer is well advised to ignore Cramer's advice for what should be
perfectly obvious reasons, if people were only educated in skepticism and
common sense.

> I agree 90% can't beat the market but I am trying to find the 10% that do
> beat the market consistently through ArbitrageDude.

I was right. You really don't understand probability. If you succeeded in
finding the magic 10%, you would only have isolated a temporary probabilistic
anomaly, a "black swan".

Remember that, in science, an untested claim is _assumed to be false_ until
incontrovertible evidence proves otherwise (the "null hypothesis"). Your
clearly stated position is that an idea is true until proven false -- the
opposite of the scientific outlook.

> FT, WSJ, barrons, none of these tabloids provide any accountiblity record of
> their recommendations.

Yes, and seasoned investors don't care, because they know these
recommendations are worthless.

> Please read Robert Shiller's (Nobel Prize) winner's response to efficient
> markets.

Your frequent allusion to authority (yours and that of others) tells me that
you don't understand science, which rejects all authority, relying instead on
direct evidence.

~~~
arbitragedude
Well you dropped buffets name first. I only shared Shiller's article because I
was too lazy to type out the conditional probability. Off the 10% of the
people, who beat market handily? If they all happen to be deep value
investors.

Will you still conclude blackswan? Or would you start thinking Conditional
probability

~~~
lutusp
> Well you dropped buffets name first.

Yes, but not as an authority. Your references all had college degrees or
prizes listed, as though that added weight to their opinions. My Buffet
example was limited to saying how he dealt with popular equities mythology,
i.e. by rejecting it out of hand.

> Off the 10% of the people, who beat market handily?

Do you understand anything about probability? For a sufficiently large
population of investors, even in a market that doesn't gradually increase in
value over time, some of those investors will become fabulously wealthy by
chance alone. As shown here:

[http://arachnoid.com/equities_myths/index.html#Market_Model](http://arachnoid.com/equities_myths/index.html#Market_Model)

Quote: "In this random market, with no investment strategy, the most
successful of the 100 managed-portfolio investors increases his original
investment by 2,330%, _solely because of chance_."

Now imagine the results for an investor pool of a million investors instead of
100.

> Will you still conclude blackswan? Or would you start thinking Conditional
> probability

1\. If an investor makes a killing, why would he care if it's a black swan or
the outcome of conditional probability -- and has it occurred to you that both
terms mean the same thing?

2\. Learn about science and probability. Stop making assertions about a system
you clearly don't understand.

~~~
arbitragedude
So if 10% of the people outperform the market and they all happen to be value
investors", is that a random event?

~~~
lutusp
> So if 10% of the people outperform the market and they all happen to be
> value investors", is that a random event?

Yes, of course -- that's the default assumption until there's reliable
evidence pointing to another conclusion. But if you were a deep thinker, you
would realize the problem in your alternative hypothesis -- assuming certain
individuals are able to read the market and reliably choose winners, then:

1\. They would stop talking to ordinary investors and directly invest their
own rapidly increasing funds.

2\. Following obvious principles, they would drain the market of its capital.

3\. Not being stupid and seeing a game they cannot win, businesses would react
by refusing to raise capital using equities.

But that hasn't happened, ever, even once. The conclusion a scientist makes is
that this stands as evidence against the idea that there is a reliable,
consistent winning strategy for playing the market.

And to think, you could have come to this self-evident conclusion on your own.

~~~
arbitragedude
So your take "Yes of course, value investor is a chance event".

Alternative hypothesis does exist:-) They also have names like Berkshire,
Soros, DE Shaw, Renaissance, Virtu, Tiger cubs, Ed Thorpe, Bridgewater, AQR,
Tepper .. why do they exist?? markets are efficient. Are they not as "deep"
thinkers as you are? Is that why they have wasted their 30-40yrs amassing
wealth in the market? They must not be very smart wasting all that time
thinking markets are inefficient.

Indeed, very large hedge funds and super successful/secretive investors do
exist (they are the same y/y after). The successful one get larger every year.
If markets are efficient, why would hedge funds particularly the successful
ones? Some of them aren't reported in the media as they are private family
offices. So the alternative hypothesis Why would these guys be wasting their
time? And more recently high frequency trading hedgefunds show Sharpe Ratios
of more than 7, outperforming the market by more than 15x.

The reason why they can't become large as the market is because they can't get
enough leverage and/or find large enough balance sheet. But you can bet, they
are actively seeking more money to expand. Case in point, Bridgewater, which
exploits really a longshot bias, via their risk-parity fund is now a $160bn
fund (grew from less than $1mn in 1970s). This is in practice, you just can't
get the world's balance sheet as Capital is tied up in other economic
processes. Also large swings in the stock market also indicate that the
markets are not efficient. What justifies 50% drop in S&P in less than a year,
if everything was fairly priced. In my opinion, super successful investors
also reach their utility function for capital. Case in point is guys like Ed
Thorpe, who ran successful hedgefunds for 20yrs with same 20% return every
year. There's a finite capital utility for every man.

I agree that someone who is not skilled in the market day to day, should just
invest in S&P.

