Rapid, yes, but extremely noisy. If you make some decision and lose a ton of money, that doesn’t mean it was a bad decision; maybe you just got unlucky.
What’s noisy is the information you get rapidly, not necessarily the outcomes. If you (stupidly, of course) buy and short-sell the same amount of some asset, your outcome is noiseless but the information you get from watching what actually happens to the asset is still noisy.
Sure. If, for instance, you decide that the information you want to get from watching your investments is the value of pi, then provided you compute it in the right way (e.g., by ignoring your investments and summing a rapidly convergent series) it won’t be noisy at all.
I assume you mean something distinctly less trivial than that, but I’m not sure what. I’d have thought that in a typical case the feedback you’re seeking is something like “is this trading strategy I’m using a good one?” Meaning: “if I continue to use it, will I make money?”. I have never worked at an investment bank or hedge fund, but my impression is that usually it takes some time before the answer to that question becomes clear, if it ever does. (The fact that the market is changing beneath your feet as you observe it doesn’t make that any easier, of course.)
I’d have thought that in a typical case the feedback you’re seeking is something like “is this trading strategy I’m using a good one?”
Yes, that’s a fair example.
my impression is that usually it takes some time before the answer to that question becomes clear, if it ever does
Nope, people who can’t figure out the answer to this question fairly quickly go out of business on about the same time scale :-)
How quickly actually depends on the trading strategy. One of the big advantages of high-frequency trading, for example, is that the trader will know there is something wrong with the strategy in a matter of hours. He may fine-tune it for months, but whether it works or not is clear very quickly. On the other end of the spectrum are long-term illiquid investments like private equity. In those cases it can, indeed, take years before you know whether your choices were good ones.
I would say that typically a few weeks to a couple of months of losses (or a few months of neither making nor losing money) is enough to subject a trading strategy to scrutiny.
First, we’re talking about typically complex strategies that are designed to run for a long time. Usually they accept short-term variation, but think that they’ll come out ahead after the noise diversifies away. But trading ideas usually have much faster feedback cycles. For example, if you think that at the moment some asset XYZ is trading cheap because of a temporary imbalance in supply and demand and it will revert to its normal valuation in a few hours—you’ll find out if that idea was correct in a few hours.
Second, the strategies I mentioned have already passed a very high bar—they convinced a sufficient number of people that they are good enough to commit real money to. At the research stage, figuring out if a strategy looks decent takes a few minutes—you feed it to a trading simulator based on historical data and look at the results. The strategies in the grandparent post are the equivalent of clinical trials in pharma—there are already a lot of people convinced they would work.
Finance, though, is a sub-field that provides one with rapid and unambiguous feedback most of the time :-)
It’s also a field in which one can get “positive feedback” (ie: make a profit) by taking completely randomized actions and then just waiting for the world to reward you anyway. Most available studies show that most professional money-managers don’t beat the market most of the time. On the whole, making money off macroeconomic growth doesn’t yield scientific bona-fides.
Market-tracking index funds are decidedly non-random. Lumifer’s point is that you’re confusing the professional money-manager’s ability to make money off people who don’t want to manage their own money (i.e. marketing) with the professional money-manager’s ability to make money off picking individual stocks (i.e. finance), which on average does not exist. The money-management field does not represent ‘free money’ in that you need to actively market for clients, and there is not free money to be had in doing mediocre money management with your own money.
The point that you were trying to make, that there’s money to made simply by having capital and investing it in the entire economy as a whole, doesn’t seem like a knock-down objection to Lumifer’s point; by watching how my index fund holdings are doing, I am getting rapid and unambiguous feedback about how the overall economy is doing relative to various segments or other holdings.
Let me also point out three different things and note that they are different.
Thing one is financial services. They are services—they provide you with something in exchange for some sort of a fee. For example, providing an index-tracking mutual fund is a service. If you want to use this service, you pay for it and if the service is sufficiently popular, the provider makes a profit. This is not different in principle from buying the services of, say, a gardener or a car mechanic. Of course, some providers make inflated claims about their services, but that’s hardly limited to finance.
Thing two is investment/trading where you are trying to, basically, extract (more) money out of a market.
Thing three is putting capital to work which, strictly speaking, doesn’t even require markets. If you have some value and you put that value to productive use, you can expect (subject to a large number of caveats) to get some profit. This is not even finance, but basic economics.
Note that in none of these cases anyone is “taking completely randomized actions” or is guaranteed a profit.
Does it actually? Economists rarely make unhedged predictions and then rigorously test how did they turn out.
Finance, though, is a sub-field that provides one with rapid and unambiguous feedback most of the time :-)
Rapid, yes, but extremely noisy. If you make some decision and lose a ton of money, that doesn’t mean it was a bad decision; maybe you just got unlucky.
No, not usually, at least for common to me values of “extremely” :-) Finance does not require you to select high-variance bets :-)
True, but if your actual outcomes are “extremely noisy” you need better risk management which happens to be part of finance.
What’s noisy is the information you get rapidly, not necessarily the outcomes. If you (stupidly, of course) buy and short-sell the same amount of some asset, your outcome is noiseless but the information you get from watching what actually happens to the asset is still noisy.
Doesn’t that entirely depend on what kind of information you are interested in?
Sure. If, for instance, you decide that the information you want to get from watching your investments is the value of pi, then provided you compute it in the right way (e.g., by ignoring your investments and summing a rapidly convergent series) it won’t be noisy at all.
I assume you mean something distinctly less trivial than that, but I’m not sure what. I’d have thought that in a typical case the feedback you’re seeking is something like “is this trading strategy I’m using a good one?” Meaning: “if I continue to use it, will I make money?”. I have never worked at an investment bank or hedge fund, but my impression is that usually it takes some time before the answer to that question becomes clear, if it ever does. (The fact that the market is changing beneath your feet as you observe it doesn’t make that any easier, of course.)
Yes, that’s a fair example.
Nope, people who can’t figure out the answer to this question fairly quickly go out of business on about the same time scale :-)
How quickly actually depends on the trading strategy. One of the big advantages of high-frequency trading, for example, is that the trader will know there is something wrong with the strategy in a matter of hours. He may fine-tune it for months, but whether it works or not is clear very quickly. On the other end of the spectrum are long-term illiquid investments like private equity. In those cases it can, indeed, take years before you know whether your choices were good ones.
I would say that typically a few weeks to a couple of months of losses (or a few months of neither making nor losing money) is enough to subject a trading strategy to scrutiny.
Aha. I think our actual misunderstanding was about what counts as “rapid” feedback; I had in mind a shorter timescale than you did.
Keep in mind two additional points.
First, we’re talking about typically complex strategies that are designed to run for a long time. Usually they accept short-term variation, but think that they’ll come out ahead after the noise diversifies away. But trading ideas usually have much faster feedback cycles. For example, if you think that at the moment some asset XYZ is trading cheap because of a temporary imbalance in supply and demand and it will revert to its normal valuation in a few hours—you’ll find out if that idea was correct in a few hours.
Second, the strategies I mentioned have already passed a very high bar—they convinced a sufficient number of people that they are good enough to commit real money to. At the research stage, figuring out if a strategy looks decent takes a few minutes—you feed it to a trading simulator based on historical data and look at the results. The strategies in the grandparent post are the equivalent of clinical trials in pharma—there are already a lot of people convinced they would work.
It’s also a field in which one can get “positive feedback” (ie: make a profit) by taking completely randomized actions and then just waiting for the world to reward you anyway. Most available studies show that most professional money-managers don’t beat the market most of the time. On the whole, making money off macroeconomic growth doesn’t yield scientific bona-fides.
Heh. Why don’t you go try it? Sounds like free money X-/
Besides, aren’t you confusing finance and marketing?
Do you not have savings at all, or did you actually just say you’ve put no portion of your savings in market-tracking index funds?
Market-tracking index funds are decidedly non-random. Lumifer’s point is that you’re confusing the professional money-manager’s ability to make money off people who don’t want to manage their own money (i.e. marketing) with the professional money-manager’s ability to make money off picking individual stocks (i.e. finance), which on average does not exist. The money-management field does not represent ‘free money’ in that you need to actively market for clients, and there is not free money to be had in doing mediocre money management with your own money.
The point that you were trying to make, that there’s money to made simply by having capital and investing it in the entire economy as a whole, doesn’t seem like a knock-down objection to Lumifer’s point; by watching how my index fund holdings are doing, I am getting rapid and unambiguous feedback about how the overall economy is doing relative to various segments or other holdings.
Did I actually say? Quote me.
Let me also point out three different things and note that they are different.
Thing one is financial services. They are services—they provide you with something in exchange for some sort of a fee. For example, providing an index-tracking mutual fund is a service. If you want to use this service, you pay for it and if the service is sufficiently popular, the provider makes a profit. This is not different in principle from buying the services of, say, a gardener or a car mechanic. Of course, some providers make inflated claims about their services, but that’s hardly limited to finance.
Thing two is investment/trading where you are trying to, basically, extract (more) money out of a market.
Thing three is putting capital to work which, strictly speaking, doesn’t even require markets. If you have some value and you put that value to productive use, you can expect (subject to a large number of caveats) to get some profit. This is not even finance, but basic economics.
Note that in none of these cases anyone is “taking completely randomized actions” or is guaranteed a profit.