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Innovation Is Inherently Controversial (etftrends.com)
81 points by salakotolu 25 days ago | hide | past | favorite | 43 comments

Innovation may be inherently controversial, but that doesn't mean that you shouldn't pay attention to the controversy. People who are vocal enough to voice a concern about your product probably care on one level or another, and ignoring them is tantamount to ignoring a support query. If you want your innovation to mean something, you still need to listen and work with your community to build something better. All of the biggest innovators have done this: Discord pivoted to more inclusive branding after their original "gaming" market expanded, and Microsoft headed into the server provisioning/cloud market when developers suggested that they preferred Microsoft as an SAAS. Being flexible enough to meet your users demands is how you take innovation to the next level, so make sure that your controversy counts.

> biggest innovators

> Discord

We’re speaking of a chat application...

Love it or hate it, Discord changed the chatting landscape. They're approaching 100 million active users and have inspired countless other chat clients and software like Matrix's Element, or Slack. They may not have built Rome here, but I'd argue that the best innovation just repositions pieces that are already on the table.

Discord is a small improvement on already existing ideas. The number of users has nothing to do with “innovation”. Unless of course you think toilet paper is “innovative” because it has more users than Discord.

both slack and element significantly predate discord...

Why do you think it is that Discord has taken off more than Element in terms of ubiquity, given that Element theoretically had a head-start?

Or, what can advocates of Matrix (and open protocols more generally) do to try to replicate that success and catch-up?

Generally speaking, once a fund reaches the level outperformance of ARK, they underperform the market. Only time will tell if she was just lucky or actually had any kind of edge. It's usually the former.

> Generally speaking, once a fund reaches the level outperformance of ARK, they underperform the market.

Source for this? It would make sense to me if your claim was that future performance for this cohort is average. But, you seem to making a stronger claim -- that is, this cohort of outperforming funds performs worse than average going forward.

I think this makes more sense if you think of it in terms of mean reversion [1], particularly as distinct from regression to the mean, that mean being the market return.

Here are a couple articles that try to analyze the phenomenon [2][3].

[1] https://www.bogleheads.org/wiki/Mean_reversion

[2] https://peeranalytics.com/2018/05/21/hedge-fund-mean-reversi...

[3] https://www.valuewalk.com/2015/05/hedge-fund-mean-reversion-...

Thanks for the sources.

A quote from your second source: The average subsequent performance of the historically best- and worst-performing long U.S. equity hedge fund portfolios is practically identical and similar to the market return.

A quote from your third source: Due to hedge fund mean reversion, yesterday’s nominal winners tend to become tomorrow’s nominal losers.

So, it seems like there are differing conclusions based on how you slice the data. I'm familiar with mean reversion, but I don't understand why this would predict underperformance for outperforming funds. If you flip a coin 10 times in a row and get heads 10 times in a row, you don't expect to get heads less than 50% going forward (but do expect the average rate of heads to trend back towards 50% over time).

Furthermore, if OP's strong claim ever held true, surely there would be funds that outperform by simply indexing the broad market minus the holdings of top performing hedge funds. As more and more money gets invested in these new inverse fund, the pattern the strong claim is based on would slowly cease to exist. Unless you're saying the underperformance is due to fraud or exorbitant fees.

You can find lots of research on it but first, between 85-90% of actively managed investment funds underperform their benchmark:


That means it is very, very hard to outperform.

Then, if you do outperform, that tends to be an exceptional year followed by not so great results.


Key comment:

"Of the 123 stock funds that gained 100%-plus between 1990 and 2016, just 24 made money in the three years following their big gain, with the average fund losing around 17% per year."

Now, is it possible that ARK is an exception - of course. But the math would tell you that is highly unlikely.

Interesting read, but the data seems extremely skewed.

Quote from the same article: "Eighty-eight of the 123 funds were go-go tech/Internet darlings that soared in 1999 but crashed after, losing 24.1% per year from Jan. 1, 2000, to Dec. 31, 2002."

So, it seems like the data comprising the "after-years" is highly skewed towards years when the overall market crashed, which explains the negative returns.

If your claim is true, shouldn't there be a fund that simply indexes the broad market minus top performing hedge fund holdings? If not, why not?

Most active manager performance is mean reverting. They have a good year, and then there is little evidence of persistence in their future returns. Here's a larger study from S&P:


"We observe little to no evidence of performance persistence among active managers, except in the large-cap value and real estate categories. For example, out of 1,034 large-cap funds that existed in the universe as of Sept. 30, 2013, only 19.73%, or 204 funds, outperformed the S&P 500. In the following year, 15.69% of those 204 funds outperformed the benchmark. By the end of the third year, none of those original 204 funds were able to outperform the S&P 500 on a consecutive basis."

What is implied from this data is that if a manager has a good year, they are unlikely to match it going forward. So only 20% beat an index, and then only 16% of those that did beat it the next year.

You just made this up. I’m tired of people who don’t understand investing writing these aphorisms about it

No I didn't - it's easy to research. See the articles I reference above.

I work in the industry. Generally the winners keep winning. The same funds are always the top fund

So you're saying the same funds always have the top performance? Or have the top AUM? And are you talking about hedge funds or mutual funds?

Yes the same funds usually are the top ones. There’s one offs like people who made money in 2008 etc. but it’s the same people always beating the market. The industry is really small, I don’t need a false and misleading academic study

they provided study's and links, can you? Seems like you're the one just saying things.

Not only does it make sense from a mean scenario, but it makes sense from a human scenario too. When i see a company like Tesla skyrocket to 700, every day that it posts a 10% gain i think it's at the end of it's rally. Eventually, the firm gets way too hot and pressure to buy cools down. Market cap is just how much people are willing to pay for something * outstanding shares. If suddenly everyone thinks the rally has gone on too long, buying pressure ceeds and thus market cap/ stock price.

I’ve got better things to do, and it’s widely known that finance academia is worthless. The inner workings of the investing world is opaque. That’s why you see people posting logically sounding nonsense

Morningstar and S&P are not academic institutions. If you have data to refute what they're saying, I'd welcome it.

That's great but you didn't answer one question I asked - mutual funds or hedge funds? AUM or performance?

The way Cathie Wood manages ARK strikes me as institutional size day trading, and having a “five year vision” is no excuse to catch falling knives or accumulate recklessly.

You're not alone. I've also spent some time trying to understand the game ARK is playing. I wrote about it last week: https://tolusnotes.com/understanding-what-ark-invest-is-up-t...

I don’t know enough about this fund to agree or disagree, but I will say that this “selling to take profits” idea mentioned in the article really rubs me the wrong way: in my experience that’s not something people interested in long term plays do.

Kelly betting straightforwardly has you reduce your position size as your edge goes down, which happens when the price moves in your favor more than the fundamentals have changed. It's exactly correct.

Sure, but in the article/convo a distinction is made between selling to take profits and selling when there is a shift in expectations. That implies that taking profits here is a purely speculative move.

If there is no shift in expectations, then you should reduce your position as the price goes up, per Kelly, i.e. "take profits". It's a great heuristic. If you wouldn't buy something at the current price, why hold it?

taking profits is always a purely speculative move, but a good one. Taking profits doesn't mean you liquidate entirely, it just reduces risk.

E.G. I believe in crypto, but when btc went from 20k - > 50k i took all my profit except my initial investment. It was purely speculative sure, but it drastically reduced my risk without reducing too much profit potential if i still believe in the long term.

Talk about initial investment is not meaningful. Money is fungible. The only relevant question is what the current optimal percentage of bankroll to allocate is given the price and the expectation of future prices.

It's speculation, marketing, and size (as you suggest). Ambiguous words like "innovation" help them build a lot of FOMO for their holdings.

From the article: "3D printing is really a subset of autonomous technology and robotics."

Interesting to pick up on how she maps investments across "innovation themes" like robotics, AI, etc admittedly without deep domain knowledge herself, depending on the input of analysts.

> "3D printing is really a subset of autonomous technology and robotics."

I'm confused, is this an objectionable statement? A lot of people seem to treat 3d printing as something truly special and unique, but actually 3d printing is a form of CNC; additive rather than subtractive like a CNC mill, but a form of CNC nonetheless. It's a technology firmly rooted in a broader tree of established technologies.

I guess some people think of these machines as printers foremost, and thus perceive a huge conceptual jump or paradigm shift from 2d desktop inkjets to 3d printers. If somebody comes from a computer background rather than a manufacturing background, it's easy to see why this framing might be chosen. But I don't think that's the right way to look at 3d printers. Rather, 3d printers are the synthesis of two already well established concepts in manufacturing: making things by adding material, and controlling machines using computers.


> Wouldn't 2D printers then also be a subset of autonomous technology and robotics?

The modern familiar forms of 2d printers are such a subset, yes (and I never implied otherwise.) These machines were preceded by other forms of 2d printing which are not autonomous but were nonetheless mechanical. They were also preceded by autonomous forms of 2d printing that didn't fit inside your living room, but were nonetheless familiar technology to the general public (because everybody knows books exist.) I believe this is the reason 2d printing is generally considered more mundane than 3d printing, which is treated like sci-fi technology that came out of left field. Again, understanding the historic context of these machines gives us insight into the reasons they are perceived the way they are.

I've recently been thinking about this in the context of web technology (revisiting some ideas from the 90s that didn't pan out then, but can be repurposed now).

Your point here about CNC and additive versus subtractive manufacturing is also near to my hobbyist interests.

Extending the idea a bit, I suspect the history of social changes that resulted from the advent of the printing press are an entryway into understanding the public's reaction to social media today.

Aside from living through the history, can you recommend a way to build more of this knowledge? If it's a matter of being widely read do you know of something like a survey introductory text?

I will google more, but thought I'd ask.

Wouldn't 2D printers then also be a subset of autonomous technology and robotics?

From one angle, by looking at the bill of materials comparing a inkjet and makerbot, they both look like robots

But from another angle, printing and publishing paper is a different industry than manufacturing objects, so the distinction is in their context

By that logic, all cars are really just a subset of human-operable motorized transport devices. It's much less impressive if you look at it that way, right?

> human-operable motorized transport devices

Also known as 'automobile' or 'motor vehicle.' Cars are really just a subset of automobiles. It's less weird when you phrase it like that, using established terminology, right?

And now we've come full circle. That was my original point: we can abstract technologies like this into their original components, but it doesn't do any good to do so.

What you call "abstract technology to their original components", I call understanding the historic context of technology.

I think there is a lot of value in understanding that context. Without looking at that historic context, people are more likely to let their imaginations run wild and inadvertently come to believe things that aren't true (a significant portion of the general public believe Henry Ford invented cars...) or come to view technologies with an unwarranted level of awe and tunnel vision (the way 3d printing seems to be viewed by some, as mystical Star Trek replicator technology that came out of nowhere.) More generally, if people don't understand the true historic context of technology they become more likely to believe things that aren't true about technology. There is inherent value in dispelling myths and providing historic context for technology does exactly that.

And why is it important to break a technology down into it's constituent fundamental traits or properties? Because almost always the historical context of a technology includes technologies that did not share the same name. If you're talking about the history of cars but limit the scope of your consideration to things called cars, you won't get back much further than the 1890s. But if you break the concept of a car down, it becomes clear that you need to consider the history of wheeled vehicles and the history of motorized vehicles. Self-propelled traction engine are one of the conceptual predecessors to the machines we now call cars. They share 'abstract concepts' with cars (a wheeled vehicle, not on rails, which can move around under its own power), but not a name. Traction engines aren't cars, but are important historic context for cars. If you aren't willing to consider the abstract attributes that constitute a car, you cannot consider the true historic context of cars.

Industrial society and its consequences have been a disaster for the human race

pretty terrible sentiment but i've been seeing it a bit lately. We have cars, microwaves, refrigerators, insulation and food stamps. If you brought someone from a pre-industrial society i'm pretty sure they'd call modern america a utopia.

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