If you want to buy stocks, you should probably invest in an index fund. An index fund is just a portfolio of shares that mirrors the wider market: if you buy Vanguard’s FTSE Global All Cap, you’re buying shares in 7,180 companies that are representative of global stocks as a whole. You won’t be buying shares in literally every company, but the index fund will perform the same as the wider market because the composition is the same as the wider market. American stocks weighted by market cap account for ~64% of stocks in the global stock market, and about 64% of stocks in the index fund you buy will be American, and so on.
I’m a big fan of aggregated experts, but for the major decisions in my life (both by volume and importance), such high quality sources aren’t available. Despite knowing about the above, I have only had opportunity to take personal action three times: Donating (thanks, Sam, you inspired me with one of your early posts), downgrading my monkeypox concern, and calibrating my nuclear concern.
But the decisions I really have to make are (at the extremes) “What should I make for lunch?” And “should I switch jobs?” Both are too context specific. I recently used Stack Overflow surveys for guidance in setting up a new development environment, but even then I was stretching the external validity of its findings.
I like Trevor's article about index funds (https://tmychow.substack.com/p/the-vanguard-of-the-revolution), and think one of its broader points applies to your examples: quasi-index funds destroy important incentives. Even if the typical pundit would make better predictions about British politics just deferring Smarkets, this norm would destroy a lot of what is best about our media culture by turning political journalism into a hermeneutic exercise, rather than an attempt to hold power to account. I think sometimes there's a fallacy of aggregation in the neighbourhood of 'market efficiency'–esque arguments: it might be better for each individual to defer to the consensus of the 'market', but in aggregate this decision could be harmful on net.
Does anyone think of the alternative as the Talebian quasi-barbell emotional investment strategy? Maybe instead of having the average opinion, someone should have 90% antiquarian stance and 10% radical stances (e.g. "conspiracy theorists", innovators).
For learning, it means mixing knowledge binging and daydreaming/blogging (antiquarian) with analytical drafting and deep research (radical) contra pop-sci and short attention reading (index). https://www.dwarkeshpatel.com/p/barbell-strategies
If you can't beat the market and it's all priced in, what long run return should you expect to receive on index trackers? Long term shares have outperformed bonds but I don't know if that is on a risk adjusted basis or not.
My point is, if everything is priced in (including long term asset class performance) then presumably the return to capital should just be long term trend economic growth? Or should the return on equity actually match the return on all other asset classes, with perhaps some variance to reflect the short term volatility of return?
I guess what I'm saying is that by extension, if the EMH means you shouldn't choose your own stocks, could it also mean that you shouldn't choose index funds? Index funds might be better than stockpicking, but why should equity investment at all outperform any other asset class if EMH holds?
Maybe YOU can’t beat the market but ONE can beat the market so buying an index is fine if you don’t want to work to outsmart the average but is not fine if you have better ideas on expected returns and correlations than the average. The efficient markets hypothesis as popularly understood is one of the more silly things to fall out of financial economics as it completely disregards the psychology or sociology of crowds. When was bitcoin efficient? Yesterday or 14 months ago?
I’m no economist, but there are clearly asymmetric mechanisms for pushing prices up versus down. Shorting volatile assets is risky even if you are long term correct.
It’s driven home by a documentary, Betting on Zero, about one of the most powerful men in finance shorting a mid sized public company. The company is clearly suspect, but he can’t move it. That should be slam dunk market correction, so I’m skeptical of the claim that any less liquid market is *consistently* self correcting. See also Theranos, WeWork and SoftBank more generally. There were extended periods where their issues were open secrets, and even longer ones where every domain expert knew, but nobody was incentivized to make a big fuss.
Building consensus, even just in uncontroversial shared knowledge, takes work. Going against the grain also takes courage and, very often, sacrifice which will never be compensated.
I’m a big fan of aggregated experts, but for the major decisions in my life (both by volume and importance), such high quality sources aren’t available. Despite knowing about the above, I have only had opportunity to take personal action three times: Donating (thanks, Sam, you inspired me with one of your early posts), downgrading my monkeypox concern, and calibrating my nuclear concern.
But the decisions I really have to make are (at the extremes) “What should I make for lunch?” And “should I switch jobs?” Both are too context specific. I recently used Stack Overflow surveys for guidance in setting up a new development environment, but even then I was stretching the external validity of its findings.
I like Trevor's article about index funds (https://tmychow.substack.com/p/the-vanguard-of-the-revolution), and think one of its broader points applies to your examples: quasi-index funds destroy important incentives. Even if the typical pundit would make better predictions about British politics just deferring Smarkets, this norm would destroy a lot of what is best about our media culture by turning political journalism into a hermeneutic exercise, rather than an attempt to hold power to account. I think sometimes there's a fallacy of aggregation in the neighbourhood of 'market efficiency'–esque arguments: it might be better for each individual to defer to the consensus of the 'market', but in aggregate this decision could be harmful on net.
Does anyone think of the alternative as the Talebian quasi-barbell emotional investment strategy? Maybe instead of having the average opinion, someone should have 90% antiquarian stance and 10% radical stances (e.g. "conspiracy theorists", innovators).
For gym, it means mixing drills and casual sports (antiquarian) with powerlifting (radical) contra standard strength training and cardio (index). https://complementarytraining.net/conceptualizing-philosophy-in-strength-conditioning-the-barbell-strategy-and-risk/ https://kadavy.net/blog/posts/barbell-strategy
For learning, it means mixing knowledge binging and daydreaming/blogging (antiquarian) with analytical drafting and deep research (radical) contra pop-sci and short attention reading (index). https://www.dwarkeshpatel.com/p/barbell-strategies
For the other forms, there are some notes from https://alima.substack.com/p/midwits-and-the-office https://www.10ktom.com/post/barbell-strategy
If you can't beat the market and it's all priced in, what long run return should you expect to receive on index trackers? Long term shares have outperformed bonds but I don't know if that is on a risk adjusted basis or not.
My point is, if everything is priced in (including long term asset class performance) then presumably the return to capital should just be long term trend economic growth? Or should the return on equity actually match the return on all other asset classes, with perhaps some variance to reflect the short term volatility of return?
I guess what I'm saying is that by extension, if the EMH means you shouldn't choose your own stocks, could it also mean that you shouldn't choose index funds? Index funds might be better than stockpicking, but why should equity investment at all outperform any other asset class if EMH holds?
if it’s all “priced in” then why does it go up and down every day?
Maybe YOU can’t beat the market but ONE can beat the market so buying an index is fine if you don’t want to work to outsmart the average but is not fine if you have better ideas on expected returns and correlations than the average. The efficient markets hypothesis as popularly understood is one of the more silly things to fall out of financial economics as it completely disregards the psychology or sociology of crowds. When was bitcoin efficient? Yesterday or 14 months ago?
I’m no economist, but there are clearly asymmetric mechanisms for pushing prices up versus down. Shorting volatile assets is risky even if you are long term correct.
It’s driven home by a documentary, Betting on Zero, about one of the most powerful men in finance shorting a mid sized public company. The company is clearly suspect, but he can’t move it. That should be slam dunk market correction, so I’m skeptical of the claim that any less liquid market is *consistently* self correcting. See also Theranos, WeWork and SoftBank more generally. There were extended periods where their issues were open secrets, and even longer ones where every domain expert knew, but nobody was incentivized to make a big fuss.
Building consensus, even just in uncontroversial shared knowledge, takes work. Going against the grain also takes courage and, very often, sacrifice which will never be compensated.
https://m.imdb.com/title/tt3762912/
"Markets can stay irrational longer than you can stay solvent."
- John Maynard Keynes