I’ve been thinking about the EMH a lot, since it seemed to me that even after the initial COVID crash the market still was overvaluing everything. This turned out to be correct and now I have a lot more money than I did before (although far less because it takes 4 days to be approved for option trading).
My confusion was about half resolved by the following thought: since actors in the market have finite capital, it can be consistent that the value of an asset is X, everyone knows that it will be Y > X in the far-ish future, but no one buys X until it reaches value Y now because there are other things that you can do that will make you more money, i.e. exploit market volatility, short-term puts/calls, etc. In terms of COVID, everyone can know that a recession is coming, but think that you can make more money through exploiting short term volatility, e.g. panic buying/selling.
What I’m still a little confused about is the fact that recent market movement seems incredibly obvious to me (so obvious that I put literally all my assets into shorting positions), but hedge funds are going out of business and Bridgewater’s Pure Alpha lost money. Dalio even thought about COVID significantly before the crash.
I only thought about COVID for like 5 days become becoming extremely confident that the market was going to drop. I wasn’t an expert on pandemics. I don’t think I’m a nimble generalist. I didn’t even make a guesstimate model. I just looked at COVID, read LW comments and read the news. Hedge funds can read both the news and LW, so they should know all the things that I know. They also have more time to think and more incentive to think correctly, so they should be efficient relative to me. But they were not. I notice I am confused.
What do people at hedge funds even do all day? You would at least have a few people working full-time to think about COVID, right? And they can’t all get it wrong? Is it really that important to be nimble?
And it didn’t just drop once more to correct, it dropped like 3 more times? Something must have gone horribly wrong, but all of my explanations seem way too forced.
Reactions to the virus (e.g., “social distancing”) will probably cause a big short-term economic decline followed by a rebound, which probably will not leave a big sustained economic impact. The fact of the matter is that history has shown that even big death tolls have been much bigger emotional affairs than sustained economic and market affairs. My look into the Spanish flu case, which I’m treating as our worst-case scenario, conveys this view; so do the other cases.
Global equity markets may have underestimated the economic effects of a potential COVID-19 pandemic because the only historical parallel to it is the 1918 flu pandemic (which is likely worse than COVID-19 due to a higher fatality rate) and stock markets didn’t drop that much. But maybe traders haven’t taken into account (and I just realized this) that there was war-time censorship in effect which strongly downplayed the pandemic and kept workers going to factories, which is a big disanalogy between the two cases, so markets could drop a lot more this time around. The upshot is that maybe it’s not too late to short the markets.
I also find it curious that unlike past major market drops (such as the 2008 financial crisis) no money manager has become famous from predicting it ahead of time and making money from it. The only one that comes close is Michael Burry but he is apparently just managing his own money now and it sounds like he just had a general bearish bet that wasn’t specific to the coronavirus.
I think he thought about the reference class of pandemics, more than he thought about COVID. I think the key details in this becoming as bad as it is are mostly missing from that post.
although far less because it takes 4 days to be approved for option trading
Did you try calling them to expedite the request or figure out what caused the delay? I’ve applied for options trading at multiple brokerages and they all approved in 1 business day.
I misspoke. It wasn’t actually getting approved that cost time, it was money I transferred taking time to be approved for options trading. I was led to believe that 4 days was standard and relatively unavoidable.
I’ve been thinking about the EMH a lot, since it seemed to me that even after the initial COVID crash the market still was overvaluing everything. This turned out to be correct and now I have a lot more money than I did before (although far less because it takes 4 days to be approved for option trading).
My confusion was about half resolved by the following thought: since actors in the market have finite capital, it can be consistent that the value of an asset is X, everyone knows that it will be Y > X in the far-ish future, but no one buys X until it reaches value Y now because there are other things that you can do that will make you more money, i.e. exploit market volatility, short-term puts/calls, etc. In terms of COVID, everyone can know that a recession is coming, but think that you can make more money through exploiting short term volatility, e.g. panic buying/selling.
What I’m still a little confused about is the fact that recent market movement seems incredibly obvious to me (so obvious that I put literally all my assets into shorting positions), but hedge funds are going out of business and Bridgewater’s Pure Alpha lost money. Dalio even thought about COVID significantly before the crash.
I only thought about COVID for like 5 days become becoming extremely confident that the market was going to drop. I wasn’t an expert on pandemics. I don’t think I’m a nimble generalist. I didn’t even make a guesstimate model. I just looked at COVID, read LW comments and read the news. Hedge funds can read both the news and LW, so they should know all the things that I know. They also have more time to think and more incentive to think correctly, so they should be efficient relative to me. But they were not. I notice I am confused.
What do people at hedge funds even do all day? You would at least have a few people working full-time to think about COVID, right? And they can’t all get it wrong? Is it really that important to be nimble?
And it didn’t just drop once more to correct, it dropped like 3 more times? Something must have gone horribly wrong, but all of my explanations seem way too forced.
In a March 3rd post Dalio wrote:
This is consistent with my earlier guess:
I also find it curious that unlike past major market drops (such as the 2008 financial crisis) no money manager has become famous from predicting it ahead of time and making money from it. The only one that comes close is Michael Burry but he is apparently just managing his own money now and it sounds like he just had a general bearish bet that wasn’t specific to the coronavirus.
I think he thought about the reference class of pandemics, more than he thought about COVID. I think the key details in this becoming as bad as it is are mostly missing from that post.
Did you try calling them to expedite the request or figure out what caused the delay? I’ve applied for options trading at multiple brokerages and they all approved in 1 business day.
I misspoke. It wasn’t actually getting approved that cost time, it was money I transferred taking time to be approved for options trading. I was led to believe that 4 days was standard and relatively unavoidable.