
Crunching 200 years of stock, bond, currency and commodity data - chollida1
https://www.bloomberg.com/opinion/articles/2019-02-07/eternal-market-patience-offers-eternal-rewards
======
mathattack
Coming from a CS/Econ/Finance background....

Efficiency as “the market fully processes all information” is decidedly
untrue.

Efficiency as “Its very hard to arb markets without risk better than a passive
strategy” is very true.

Most professional money managers don’t beat the market once you factor in
fees. Many private equity funds produce outsize returns, but it’s based on
higher risk and taking advantage of tax laws.

Over time, positive performance for mutual funds don’t persist. (If you’re in
the top decile performance one year, you’re no more likely to be there next
year)

Despite all of this, there are ways people make money. But it’s a small subset
of professionals. It’s high frequency traders who find ways to cut the line on
mounds of pennies. It inside information from hedge funds. Or earlier access
to non public information. But it’s generally not in areas that normal people
like you and me can access.

~~~
mruts
I'm a finance professional as well, and I generally agree with you. But every
consumer has access to one piece of _very_ vital non-public information,
Namely, his or her's _personal_ preference.

For example, say that I own a Tesla car, and think that it's pretty great.
That's a very valuable piece of non-public information: I think Tesla cars are
good. If one was to act upon this private information 3 or 4 years ago, they
would have done very well indeed. Same with Google, or Amazon, or a multitude
of other public companies.

I think people overestimate how difficult it is to make money in the public
markets as individuals. Hedge funds, and especially mutual funds, are quite
constrained in their ability to up size positions and put on profitable
trades. They have redemptions, they have to hold assets in cash to liquidate
shares (mostly this in a problem for mutual funds, not hedge funds), they
might have to hold a long only portfolio (again, a problem with mutual funds,
not hedge funds).

Individuals don't really have this problem, since they are managing their own
money. If they want to put 50% of their capital into one name, no one is going
to stop them. Moreover, they have full transparency into redemptions and
inflows.

I have personally have done quite well with my own investments, achieving a
better return than the firm that I work at. This has only been possible
because I have complete insight into my risk tolerance, and don't have
management and performance fees eating into my returns.

Another example. My wife's grandfather's wife in the early 2000s loved books
and loved reading. Consequentially, she loved Amazon and what the company
could provide for her. She convinced her husband to invest a sizeable chunk of
their net worth (while not huge, was substantial, maybe 2 million) in one
name, Amazon. They both dead recently, but the estate is very very valuable at
this point, all because of that single Amazon investment shortly after they
IPO'd.

Just because there are huge players in the market, doesn't mean an individual
can't compete. In fact, individuals are probably in the best position to reap
the highest returns from the public markets.

~~~
JohnJamesRambo
>I have personally have done quite well with my own investments, achieving a
better return than the firm that I work at. This has only been possible
because I have complete insight into my risk tolerance, and don't have
management and performance fees eating into my returns.

How do you know it isn't just random luck? Same goes for your suggestions to
invest in one "good" stock. Some will pick Amazon and profit greatly and some
will pick AOL or Yahoo and be destitute. This is the whole point of
diversification and the rise of index funds and I'm a little amazed to see a
finance professional recommending things like this when studies repeatedly
have shown that picking stocks does not work when you get a large enough
sample size.

~~~
throwawaymath
If you cite a few of the specific studies you're talking about, I'll be happy
to explain why they're either 1) not actually concluding what you think
they're concluding, or 2) simply incorrect. I can tell you very confidently
that there is no academic consensus claiming alpha does not exist. It's rather
the contrary, actually, and it's far more nuanced than your comment implies.

Outside of academic finance you can also find pretty obvious indications that
alpna exists. Berkshire Hathaway has averaged about a 20% return between 1964
and 2018. Over the same timespan the S&P 500 averaged about a 7% annual
return. Smaller funds have done even better than that.

When you actually do the math on some of these firms' performance, you see
that the likelihood of their returns emerging by chance is too small to be
explained by the number of hedge funds that has ever existed. There are funds
which haven't lost money for 20 - 30 years, and whose returns are multiples of
the market over the same time.

~~~
FabHK
The question is not only whether alpha exists, though, but whether you can a)
identify it, and b) access it.

Berkshire Hathaway’s stellar outperformance seems to have declined in recent
years, right, and you and I can’t invest in Renaissance’s Medallion fund.

I’d concur that the individual investor has much more freedom in terms of
basic asset allocation than most professional fund managers (except maybe
hedge funds), but otherwise the general advice to go for a broad based index
fund still stands.

------
lordnacho
Former fund manager here.

Behavioural economics seems like a very fashionable explanation for market
behaviour. However, it doesn't seem falsifiable. Just because some factor
seems to work, it doesn't have to be because of herd effects. In fact it's
never explained exactly which of the many BE effects is at play, or how to
know which ones are not active at a given time. I've never seen anyone predict
that now, loss aversion is excessive, therefore the market is going to go up
or down or whatever. It seems to always be "we found this violation of EMH" ->
behavioural econ is true.

Regarding the things mentioned in the article, none of them are new. That
doesn't mean that anyone can make money doing them. I like to do restaurant
analogies when it comes to hedge funds, maybe because I grew up in one and
went on to manage a couple of funds, but also there's certain similarities.

Everyone thinks they can cook. It's just taking the same ingredients that are
publicly available and putting them through some process, right? Well
unsurprisingly it is indeed possible to make a meal that is better than what
you can buy at a restaurant. Can you do it cheaper and with less effort? Not
likely. On the investment side though, it really matters a lot whether you can
execute cheaply. And you can get lucky with the right combination on either
side of this analogy.

Another analogy is recipes. How many restaurants owe their success to having
better recipes than everyone else? I struggle to think of any. A restaurant is
not merely a collection of recipes. You can stick exactly the same
instructions in front of two different teams and the experience will turn out
differently. The same goes for these strategies. Plenty of funds do trend
following, yet somehow they do not end up with the same returns.

And finally, a recipe is merely a guide. Look in any cookbook, there are loads
of questions left over after you read a recipe. Do I peal the potatoes? How
long do I cook things? At what temperature? And so on. These strategies are
just like that. So, 12-1 momentum. How much of each future? Is there an
execution strategy? What you end up doing depends a lot on what exactly the
environment is, who your staff are, etc.

~~~
alainchabat
I'm genuinely curious, where do you invest your money for the next 10+ years?

~~~
lordnacho
You looking for my advice or what I do? Funnily enough they are different,
since I have access to vehicles that others don't.

Plus I'm a particular person with a particular situation, advisees are a
general sort of group with an average situation.

~~~
bob_theslob646
What he/she is stating here is that they are an accredited investor. They can
invest in things that the average joe cannot.

> (5) Any natural person whose individual net worth, or joint net worth with
> that person's spouse, exceeds $1,000,000.

[5]"Electronic Code of Federal Regulations" ([https://www.ecfr.gov/cgi-
bin/retrieveECFR?gp=&SID=8edfd12967...](https://www.ecfr.gov/cgi-
bin/retrieveECFR?gp=&SID=8edfd12967d69c024485029d968ee737&r=SECTION&n=17y3.0.1.1.12.0.46.176))

~~~
alainchabat
Thanks! I'll make my research on what kind of investments accredited investors
have access .

If you have any interesting leads on this, I'm interested!

------
soared
> the market is not as efficient as it is supposed to be

I have a recent business degree, but not finance or econ. In school we were
strictly taught the market is efficient and I fully believed that. But I've
seen online and discussed in person a (seemingly) growing idea that markets
are not in fact efficient at all.

Are there any economists/finance people that can shed light on this? Are these
new ideas gaining traction, or old ideas just sticking around?

~~~
prewett
Check out the book "How Markets Fail" for a discussion on how the efficient
market hypothesis gained popularity (part 1) and a discussion of the many ways
that real markets do not maintain the preconditions for markets to be
efficient.

In particular, the precondition that Adam Smith stated was that increasing
production required linearly increased costs. However, this is frequently not
the case (utilities, railroads, software, social media networks, etc.). Also,
markets require a certain minimum number of producers (and consumers) in order
to remain efficient. Consolidation can reduce the number of producers below
the level that meets the precondition of efficiency, and then barriers to
entry to prevent newcomers from joining the market.

As far as efficient market theory applied to the stock market, I've always
thought that efficient market theory was trivially disprovable: did all
companies in the US lose 20% of their value all at the same time this past Nov
- Dec, in the same season that they are selling all their inventory during the
holiday season? And then regain 10% of it all at the same time the next month?
Did Apple lose 50% of its value from between July and December, despite the
fact that its revenues, costs, dividends, assets, people-capital, know-how,
brand, consumer sentiment, etc. remained roughly the same? Compare to, say,
PG&E during the same period.

~~~
cleetus
I think maybe a better question is not if markets are fully efficient, but if
markets are more efficient than the alternatives. I read the Cassidy book
years ago, so I might be misremembering, but I don't think that was something
he spent much time discussing. I don’t think many would argue that markets
can't fail and aren't fully efficient - he spent the entire book demonstrating
that.

The idea that regulators have the ability to design, implement, and maintain
laws that correct or protect from market failures without producing unintended
consequences, perverse incentives, significant costs, or market distortions
more severe than the original market failure was not sufficiently addressed,
from what I remember. Despite their problems, markets tend to be dynamic,
adaptive, and innovative, while regulations tend to be rigid, slow, and
reactionary. I don't know what the answer to market failure is, but I found
the book unsatisfactory in that regard.

~~~
onlyrealcuzzo
Cassidy spends plenty of time stating that regulations are often bad for
markets, and he spells out clearly which types of markets need to be
regulated: specifically markets with negative spillovers, mono/oligopolies,
and the financial industry because of its unique ability to impact money
supply.

He goes to GREAT lengths to talk about all of the potential pitfalls and
problems with placing regulations on these industries. And he even gives many
examples of times in the past where things did and did not work.

Sure, you can get a positive outcome from the wrong approach. But examples are
probably the best thing we can look to...

------
rbavocadotree
I think many people may be surprised how much of quantitative investing is
similar to what was done here: finding strategies that are proven to work well
over time and in different market conditions. It's not all black boxes and
HFT.

Here is a great video of Cliff Assess of AQR, one of the largest quant hedge
funds basically saying the same thing [0]. They focus on Value, Momentum,
Carry, and Defensive.

[0]
[https://www.youtube.com/watch?v=FqaP3VTKccE](https://www.youtube.com/watch?v=FqaP3VTKccE)

------
module0000
Commodity futures trader here... this article reminds me why I got into
futures: because I don't _have_ patience to hold positions for days, weeks,
months, or years. If that's what you are doing, and it's working for you -
keep on doing it.

All the bloomberg articles in the world won't help you trade profitably nor
consistently. At the end of the day(for me), success is a very repetitive set
of tasks that rely on math and probabilities to succeed. Inside information is
great(no really, it is _great_ when you have it), but discipline was the most
important skill for me to master. Before I began, I was sure I had it - and
was entirely wrong.

~~~
bluGill
Holding a position for years is the best bet for me because I don't have the
patience to investigate the same reports (with small changes to the numbers)
constantly to figure out what is going to change in the near future. I just
buy a good index and let it grow. I'm up 3x my money over the last 10 years
and I think about that account once a year when I have to put it on my taxes -
except for one time when I wanted to make a big purchase: I had plenty of
money to spare in that account.

~~~
module0000
That's fantastic! I was never able to hold over long periods myself, but
that's an excellent success story you shared.

At times like now(bullish), do you continue to grow your position or wait for
dips? I think there is great long term profit to be had in people allowing
fortunes to grow in long term index funds, I just wish I was one of the people
who could take advantage of it. My niche revolves around VIX futures contracts
and their effects on equity index futures - so very short term(intraday).

~~~
bluGill
The account I was talking about was created on a one time windfall (see my
other responses), and had no other contribution.

Most of my investment is in my 401k, which I max out. As such I'm dollar cost
averaging and not otherwise thinking about it (except my last paycheck in
December is a mini bonus). My day job is writing computer programs. When I get
home every night I have dinner with the family, play a bit and put the kids to
bed. This makes it easy to ignore the stock market day to day: I have better
things to do than think about it. Once a year I check balances, decide I can't
retire yet (won't happen for years) and forget about it.

------
subjectHarold
The chances of this data being accurate is close to zero. I have seen data
looking at factors for major markets outside the US, and it is wildly
inaccurate even as recent as the 1970s. Mainly trading costs and liquidity but
delistings too.

In addition, I know someone who looked through the paid data offerings for a
similar purpose. He ended up employing ten to twenty people year round to
build out a proprietary dataset because it was just not accurate.

~~~
SomewhatLikely
Furthermore, the farther back you go the of an issue you have with
survivorship bias. Finding all the companies that went bankrupt or bought out
at a discount and correctly accounting for the losses you would have made
investing in them is difficult.

------
paulpauper
To people saying the market is hopelessly efficient, It's not as bad as it
sounds. Working on an S&P500 option strategy that can capture the total return
of the S&P500 since 1990 while risking only 4-5% of capital per year (only 2%
when one includes a nominal 2% interest rate). There are tons of strategies
like this. There are many ways to get excess risk adjusted returns. Index
funds though are still the best bet for most people though.

~~~
FabHK
You can’t get 20x leverage on the upside without 20x leverage on the downside
(unless you pay for it).

There are not tons of way to get excess risk adjusted returns.

------
roenxi
There is a risk to this sort of long-term analysis - they identify 'following
the trend' as a good strategy; but it was a good strategy under different
circumstances. The advent of computers is a huge deal that may have changed
the game.

Even as recently as 1970, how easy was it to execute a trend following
strategy? Gathering and processing the data would have been a mammoth activity
requiring several clerks and lots of record keeping. Demonstrating the it was
a good strategy would also have been very difficult (more clerks, lots of by-
hand calculation). Only a serious trading house could have pulled it off. The
ability of actuaries to employ statistical models has also changed completely
in the last 10-20 years. The amount of money following a trend-following
strategy is also an extremely interesting but unknowable figure.

If the advent of computers makes it trivial even for a roaming programmer to
implement a trend following strategy, is it still going to be robust? Now that
it can be demonstrated to be a strong strategy, will the market correct for
it?

------
zackmorris
The core of the article, for me:

 _Now that quants have discovered them and attempted to profit from them,
there’s a risk that those effects will be arbitraged away. But the sheer
durability of the factors does imply there is something to factor investing._

Can someone who has made money in finance or knows how it works, explain
how/why short term gain/loss doesn't translate into long term gain/loss?

It seems like if there was any signal left above the noise, that trading bots
would exploit it. But that's obviously not the case, because I could hop on
Robinhood today and make a quick 2% riding the daily heartbeat of the stock.
My last experience with this was 18 years ago with my dad where we day traded
Apple and got up about 40% or $40,000 over 4 months between the dot bomb and
9/11 (which lead to subsequently wiped out all our gains in a week). If things
have changed so much that this is no longer possible, then I apologize. But
the article suggests that finding correlations still works.

I fundamentally don't understand how people on Wall Street can make hundreds
of thousands of dollars per year investing (with other people's money, I
guess?), but meanwhile the average return of the stock market is only 10% per
year.

What I'm getting at is that either:

1) there is predictability in investing (meaning that we could all profit if
we just had the money to trade, which is inherently discriminatory against the
poor)

or:

2) there is no predictability in investing (meaning that it is gambling and
should perhaps be regulated or banned as such)

I'm getting the feeling that all of this has fingers in issues like wealth
inequality and generational wealth. Perhaps this is simply a "because that's
the way it is" situation, but that was said about stuff like slavery and child
marriage.

~~~
Chickenality
> (which lead to subsequently wiped out all our gains in a week)

This is the key point. Many strategies that yield above-market returns often
do so only because they're taking on large amounts of risk, even if that risk
isn't immediately apparent. Think about trading cryptocurrencies, buying penny
stocks, selling naked options, etc. You _can_ make a lot of money doing any of
these things, but you'll be exposed to quite a bit of downside along the way,
and most people who try will end up in the red.

~~~
FabHK
Aka “picking up pennies in front of a steamroller” or “selling insurance” or
“writing naked options” etc.

------
benj111
I'm not surprised by this, these strategies are based on pretty timeless human
foibles.

People are always going to prefer to buy something everyone else is buying,
(no one was ever fired for buying IBM). Some people will want to buy 'cheap',
some investors will just want to receive a dividend cheque every year.

------
RickJWagner
Jack Bogle would warn against "fighting the last war".

This means past results have no bearing on future results.

------
rio517
What is trend following?

~~~
module0000
Trend following is exactly what it sounds like. Pick a trend(over a time frame
you choose, using a set of indicators you choose), then join the market on the
side of the trend. To be successful, you must join the trend early, and be
vigilant and disciplined enough to cut your losses when your trend fails to
gain momentum and/or reverses.

------
2019ideas
Mind if I ask a poll question- Do you believe 'markets grow at 7-13%/yr, over
10 years'

I've been taught this like its a fact.

~~~
0xffff2
It is a fact in the sense that the average stock market return over the course
of the 20th century was ~10%. Of course, as every prospectus tells you, past
performance is not a guarantee of future results, but what else are you going
to use as a baseline?

~~~
penagwin
Disclaimer: I have limited experience with anything finance, my profession is
programming.

My understanding is that 10 years ago was a stock market crash(2008), and
since then we've been in a historic bull run. My understanding is that it WILL
crash again (obviously), we just don't know when. But the stock market has
always been like this, cycling between bull/bear runs.

Wouldn't it make more sense to use a larger dataset that isn't just a bull
run? Maybe the last 25 years or whatnot?

