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:
Hi Panarky!
First, Please let me explain how the accuracy rating works on the www.arbitragedude.com.
1)
It's not a simple buy and sell and see what your return is. if return is positive you outperform. that is not how it works on my site for accuracy rating.
It's based on "Information Ratio Comparison with a long S&P Information Ratio". Information ratio is return/returnVol of your trade. This return/risk is compared to simulatenous S&PReturn/vol (a long position in S&P here ALWAYS). So you would have to outperform S&P portfolio buy on a vol adjusted basis. Which is a huge endeavor, because S&P has a much lower vol than indivdiual stocks due to diversification. I am trying to determine if you have "skill" picking stocks and outperforming S&P on a risk adjusted basis. In simple terms, even if you put buy and sell opposing views doesn't mean you outperformed S&P on a vol adjusted basis, so your accuracy rating would still go down. Which is veyr likely if your sell stock doesn't go down in price at all but just underperforms S&P returns. As stocks on average have a positive drift (i.e. 6-8% return over long periods) I hope this is clear. You would have to have inside information that a particular stock was going to move more than the market times the stock's beta with respect to the market. Please ask if this is not clear. So the coin flipping strategy doesn't apply directly. Please throw at me your next sophistication when you're ready (Hint: figure out probablity that a stock outperforms S&P on a risk-adjusted basis in a given period). We are always comparing it with S&P because we want to see if investors should hold the market portfolio or rely on a stock picker.
2) This issue is not UNIQUE to my site. There are millions of boards (yahoofinance, cnbc, barrons, stocktwits, bogleheads, ft, you name it) which provide no accuracy ratings for any of their commenters, bloggers and ppl can do what you are suggesting their as well. And in fact, this problem exists across the internet. Jim Cramer the biggest media analyst has an awful trackrecord but any new entrant doesn't know that. .So your concern applies to all the financial media forums in general! for the record unlike WSJ, cnbc, ft and other litter out there, my website at least attempts to track risk adjusted accuracy for everyone as per above metric not coin flippa.
3) Also most sophisticated INVESTORS ARE NOT DENSE. They will check your outperformance versus your reasons for outperformance in your writeups. People on the street generally know who got lucky and who called "it" and know her/his stuff.
4) VALIDATION TECHNIQUE DUH!!! Also I am currently testing beta traction I plan to add social media authentication (or cellphone code check) and minium trades before accuracy/crowd validation of articles. Eventually connect with brokerage to verify purchase.. which is not a problem. Also i plan to turn this into a crowdsourced efforts where analysts/writers get paid for their efforts.
The last part is where it gets interesting. I am trying to put a check across rampant misinformation on Wall st which hurts retail investors the most. That being said, I am open to suggestions to change things on my site and build it better.
If you had a barn of 10 different animal species all fenced in. Cows, dogs... and Kangaroos. And if 10% of animals jumped the barn fence and they all happened to be Kangaroos. Your conclusion is that that's a random event. My conclusion is that Kangaroo is skilled at jumping. You lack common sense!!!
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.
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.
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:
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.
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.
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.
> 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:
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.
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
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:
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.
> 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.
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.
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...
Further reading: http://arachnoid.com/equities_myths