5 years ago, my then-boss and I realized we disagreed about something. He thought the oil and gas sector was clearly on the decline, and would be a bad place to put your money. I was a big fan of the efficient market hypothesis, and though, well, shouldn’t that already be priced in?
He was confident and willing to give me good odds, but wanted to be clear he was talking over the very long term. So we agreed: 5 years term, 70% odds. If the O&G sector trailed the S&P 500 by more than 25%, I’d pay him ¢30, if it did better than that, he’d pay me ¢70. (The money being trivial, but the staking of our clear and unambiguous predictions being the important part.)
Now the bet has come to fruition. Take a moment to guess the result if you don’t know.
.
.
.
.
.
.
It wasn’t even close. The S&P returned 111% over the last 5 years, or 14.25% per year. The Dow Jones US Oil & Gas Index[1] returned −26%, or −5.5% per year.
Would I take the bet today? One thing I appreciate now that I don’t think I understood when I was 24 is that I was betting over a relatively small inefficiency. 5% per year is not an insight that you can get rich on. So the market is not gonna be that efficient. With that insight in mind I probably would have been more humble in my discussion with my boss, and we probably would not have ended up betting.
I probably also would have bothered looking at the past 5 years of performance, which I don’t remember doing.
However, I miiight still take the bet again? It was pretty good odds, and it’s famously very hard to predict the stock market, even over the long term like this.
So there you go, not obvious how much I learned from it, but I liked the experience of looking back on the confident feeling of my past self and seeing how I’d changed.
Readers passably familiar with finance will know that the Dow Jones Industrial Average is famously awful, being weighted by the price of individual shares in the companies, which is an arbitrary number. The Dow O&G index is weighted by market cap instead, like the S&P 500.
Economic efficiency and a 5 year old bet
5 years ago, my then-boss and I realized we disagreed about something. He thought the oil and gas sector was clearly on the decline, and would be a bad place to put your money. I was a big fan of the efficient market hypothesis, and though, well, shouldn’t that already be priced in?
He was confident and willing to give me good odds, but wanted to be clear he was talking over the very long term. So we agreed: 5 years term, 70% odds. If the O&G sector trailed the S&P 500 by more than 25%, I’d pay him ¢30, if it did better than that, he’d pay me ¢70. (The money being trivial, but the staking of our clear and unambiguous predictions being the important part.)
Now the bet has come to fruition. Take a moment to guess the result if you don’t know.
.
.
.
.
.
.
It wasn’t even close. The S&P returned 111% over the last 5 years, or 14.25% per year. The Dow Jones US Oil & Gas Index[1] returned −26%, or −5.5% per year.
Would I take the bet today? One thing I appreciate now that I don’t think I understood when I was 24 is that I was betting over a relatively small inefficiency. 5% per year is not an insight that you can get rich on. So the market is not gonna be that efficient. With that insight in mind I probably would have been more humble in my discussion with my boss, and we probably would not have ended up betting. I probably also would have bothered looking at the past 5 years of performance, which I don’t remember doing.
However, I miiight still take the bet again? It was pretty good odds, and it’s famously very hard to predict the stock market, even over the long term like this.
So there you go, not obvious how much I learned from it, but I liked the experience of looking back on the confident feeling of my past self and seeing how I’d changed.
Readers passably familiar with finance will know that the Dow Jones Industrial Average is famously awful, being weighted by the price of individual shares in the companies, which is an arbitrary number. The Dow O&G index is weighted by market cap instead, like the S&P 500.