Correlation does imply some sort of causal link.
For guessing its direction, simple models help you think.
Controlled experiments, if they are well beyond the brink
Of .05 significance will make your unknowns shrink.
Replications prove there’s something new under the sun.
Did one cause the other? Did the other cause the one?
Are they both controlled by something already begun?
Or was it their coincidence that caused it to be done?
Julia Galef is a top-notch communicator. I hope to learn how she gets these ideas across to an audience less, um, obsessed with them than I am. I also hope that rather that I can lend the book to a few people and get these ideas across in somebody else’s words rather than my own.
def printTheNews(science, ideology):
if science.getTheme() not in ideology.keys():
return
print(science.getTheme(), “says”, ideology[science.getTheme()])
I agree, these are all important and missing.
The concept of this model isn’t to give license to any trade meeting these criteria. Instead, it’s to show you a category of trades that might be ignored by hedge funds and HFTs not, a priori, because they are bad investments. So the idea would be that within this space, you’d then look for trades with an attractive risk/reward/tax/fee profile.
I do agree that opportunity costs might be the clincher. It might be that no matter how much you earn an hour (risk adjusted), the simple fact that you can make that much through this form of work is strong evidence you could have made more in another line of work.
It points to a model of the world that goes something like this:
Humanity has a giant pot of slack, known as “funding,” which it doles out liberally to people who’ve got a reasonable chance of providing value to shareholders. This tends to generate even more wealth for those value-generating businesspeople, who then have nothing to do with that money but put it back into the pot.
Investing, then, is only for two kinds of people:
Those who have more money than energy + brains (which doesn’t imply they’re lazy/dumb, just that they have a WHOLE lot of money, or that they’re ready to retire)
People who want to help the investors make better investment decisions. This is a form of work, rather than investing. But they have to prove their product works, by using it to make good investments. Example: people selling satellite data to hedge funds.
So maybe we need a change of quote. Instead of “if you’re so smart, why aren’t you rich,” it’s “why are you investing, if you’re not rich, retired or dumb?”
Yes, this is a good example. I think a real gung-ho capitalist would say that these people are doing a public service, and are just engaging in the same sorts of price discrimination that conventional businesses do all the time.
In a way, a bookstore is doing the same thing. An author’s book is sold as a preorder for lower than the later retail rate. The bookstore purchases a stockpile of copies at a low price. Then, when the release date rolls around, they charge a higher rate than what they paid. If their customers had only known about the preorder in advance, they too could have snagged it at a lower price. Now, they’re forced to deal with the book seller.
I also know somebody who runs a business where she buys cheap clothes on Ebay, models them, and then resells them on Instagram for a steep markup. That’s retail scalping—with a small value-added service, to be sure—but it doesn’t feel repugnant to anybody who hears about it. It’s just a step above dumpster-diving. You’re looking through a bunch of things people are giving away for a low (or zero) price, picking out the few that are actually nice enough to warrant a higher price, and then charging a premium for your service.
It would, of course, be nice to find such opportunities with the additional requirement that they’re not repugnant. But in principle, yes, as long as the deal isn’t fraudulent, anything goes. The question is whether there’s money to be made, not whether there’s nice-looking money to be made.
But for someone who’s interested in the latter question, they just have a harder problem to solve. The same thoughts above might help them to find solutions.
You seem to posit reasons why strategies might exist, but really this is a concrete problem. “Name some strategies”.
So I think our disagreement might be this:
I think that exploring why strategies might exist is an interesting and important question on its own, separate from articulating a concrete, step-by-step procedure for doing so.
You seem to accept (?) that tractable strategies in general might plausibly exist, but think that this is uninteresting on its own. The more interesting question for you is in naming and proving a specific one.
The reason that I think articulating why strategies might exist is that I’m a dogmatic EMH fundamentalist. When a person gives investment advice, I have historically ignored it, the same why I ignore it when somebody makes an argument for why I should consider using heroin, or committing suicide. Those behaviors are on my “no” list. I don’t intellectually engage with arguments in favor of them, and short-circuit the updating of my priors.
Likewise, the EMH has put investment advice (aside from “invest in index funds”) on my “no” list. I follow an iron law of not engaging with investment advice.
In concrete terms, this “iron law” plays out a bit like this:
Bob claims to have some investment advice.
I say “Lots of people have investment advice. Why should I listen to yours?”
Bob says, “Just think about the reasoning! It makes total sense!”
I say “I am epistemically helpless in this matter and need to see empirical proof that it works.”
Bob says, “I’ve used it already to make a bunch of money!”
I say “How do I know you weren’t just lucky?”
Bob says, “I can show you statistical data that proves that’s extremely unlikely to be true.”
I say “How do I know the market hasn’t absorbed this information, so that your strategy will fail in the future?”
Bob says, “I’ve kept it a secret until now, and I’m sharing it with you out of the goodness of my heart.”
I say “How do I know you’re not lying or confused?” And that’s the end of the conversation.
The epistemic helplessness/fundamental trust problem here then precludes me from even starting to listen to Bob in the first place.
Hence, in order to ever get around to conceiving of, or even considering, a specific investment strategy, it’s first necessary to argue against this pattern of thinking. That’s what I’m trying to do here.
Hopefully, this illuminates why I don’t consider it useful to try and articulate specific investment strategies, without addressing this more fundamental question first. My prior on any public investment strategy beating the market is so low that it has precluded me from even going there.
To change that, I need to understand why my priors should be high enough to consider specific investment strategies in the first place.
If it wasn’t clear, the question I’m trying to address is not:
Is the EMH true in general? (I think yes)
Is the EMH true for me, AllAmericanBreakfast? (I don’t know)
Can a person a priori predict if the EMH is true for them, before they establish a track record? (No)
Are there a large number of investments and strategies where big-money, highly resourced hedge funds are strictly better than small investors? (Definitely yes)
It is this question (for which I think maybe):
Are there investment strategies, besides index fund investing, that make the amount of money you have, your level of political access, and your accumulated knowledge infrastructure, relatively unhelpful, or even actively harmful, for evaluating certain specific types of investments—even if those resources are also extremely helpful for accessing and evaluating other trades?
In other words, are there investment strategies where individual, ‘one-off episodes’ of rational thought—as opposed to accumulated rational reflection over long periods of time—is more important than any other factor for accurately predicting price change for a subset of possible trades?
In other other words, are there investment strategies that are unattractive to hedge funds, but work well for small, smart, creative, and hard-working analyst-investors?
And in addition (I try to give a tentative guess to establish plausibility):
If these investment strategies exist, can we identify them?
How easy is it to end up with a compelling, yet wrong answer?
You’re proposing a third, important question (this I don’t know the answer to):
If we can identify such a strategy, how many such opportunities can we expect to find, and how much competition will we face from other investors in our reference class?
it seems like the rate-limiting step (i.e. the step which accounts for the age-related increase in cancer) is the breakdown of the defences, not the time required for selection itself. Once cancer is underway, the selection process operates on a faster timescale.
Maybe there are multiple aging clocks.
Some run independently.
In other cases, clock A ‘triggers’ clock B.
Cancer selection might be triggered by the ‘primary aging clock’ you’ve proposed. Once that happens, you now have two clocks running simultaneously. However, the ‘cancer clock’ could still be potentially triggered even in the absence of the ‘primary aging clock.’
Then the empirical question becomes when in the life cycle the ‘cancer clock’ starts ticking. Is it always running in the background, but DNA damage from other sources makes it speed up over time? Or, in the absence of the ‘primary aging clock,’ would the ‘cancer clock’ stay off for most people, most of the time, barring exposure to some potent carcinogen?
There’s also a possibility of hard-to-specify combinations of physical and mental damage that are self-perpetuating, and operate independently of DNA damage. Each year, perhaps people face a risk of trauma that triggers a cycle of progressively self-destructive behavior, a ‘behavioral dysfunction clock.’ That’s speculation, just meant to illustrate the idea.
It still seems conceptually important to focus attention on the ‘primary aging clock’ as a hypothetical target. I agree with you that it’s plausible the ‘primary aging clock’ is the bottleneck. So this is more a move from “there’s one aging clock” to “there might be more than one aging clock, but one of them is a lot more responsible for diseases of aging than the others.”
Thanks for your thorough response. I hope you’ll indulge me a bit more as I reflect on your argument.
Whilst each fund is structured differently, typically individual portfolio managers have a lot of autonomy within their mandate. If they change their mind about a position they can move very quickly. (Ignoring the size issue from the next paragraph). Bureaucracy can be a factor in some funds, but that’s typically not what limits people.
“Inertia” is probably a poor choice of words. I really mean “investment in a type of investment,” but that’s clumsy-sounding. To be specific, I mean that I expect that hedge funds wind up with human and material forms of knowledge that’s specially invested in a particular company or type of market.
In concrete terms, they employ people who are, say, experts in the Walmart corporation, and the tools (well beyond what’s accessible to the average individual investor, such as those spy satellites looking at the parking lot) to evaluate it. That “Walmart specialist” isn’t necessarily going to turn around tomorrow and start focusing on, say, Bitcoin. They’re going to focus on continuing to find alpha in the area they understand best, and perhaps find logical adjacent types of investments if they’re going to expand beyond it.
Extrapolate across the employees in the whole fund, and that amounts to something a bit like “inertia.” Another way of putting it is that smaller investors face lower opportunity costs by exploring novel investment types.
Whilst not all trades scale, lots do, so finding a $10 opportunity is not necessarily easier or harder for a large fund than a $1mm opportunity.
This doesn’t quite make sense to me, taken alone. Any $1mm opportunity is also a $10 opportunity, but not all $10 opportunities are $1mm opportunities. There must be more, say, $1,000 opportunities. Hard to give a firm reason to explain what the ratio would be.
Some other advantages of scale which you’re glossing over:
This also doesn’t quite fit the argument I’m making, though I accept all these points are true. The more hedge funds are pursuing investments that are unavailable to small investors, the more this works in favor of small investors. It means they aren’t competing with hedge funds, because the hedge funds are pursuing other opportunities.
By the same token, I’ve been teaching piano lessons for the last 10 years, and I don’t have to compete with Lang Lang for my business. He’s pursuing other opportunities. If he showed up in my neighborhood and offered to teach lessons to the neighborhood kids, he’d have no trouble finding as much business as he desired. But because he has bigger fish to fry, I get to fry the little fish (so to speak).
In a way, the idea that hedge fund efficiency consumes all opportunities is like the lump of labor fallacy. Providing liquidity is a job, like any other. In general, getting more efficient at your job doesn’t allow you to do all the work, leaving none for others. Instead, it leads you to specialize, leaving other opportunities available to others.
Consider the HFT—they are trying to place trades to earn pennies and they are much more than 20x as efficient as you at identifying those opportunities.
Agreed. I think that to be a successful small investor, you’d also need to find a niche that HFTs can’t fill. I don’t really know how they work, but I imagine they do things like technical analysis, sentiment analysis, and reacting to news reports automatically.
Humans might differentiate themselves from such algorithms by focusing on an approach to investing that considers it more along the lines of “superforecasting”-style questions. Figuring out how to ask and answer questions with good judgment, and determine how the answers bear on the market, is something that an algorithm is not cut out for.
I don’t think this is quite the right interpretation. Can you describe to me a concrete trade which looks like: 20% return on $1000.
No (I’m assuming you’re talking about 20% gains on a low-volume stock). But I have modest confidence that these opportunities might exist, and that I’d discover historical examples if I took the time to look. Right now, I’m trying to focus more on “how the EMH could be wrong (enough) under not-too-unreasonable assumptions to justify doing more research to verify or falsify the model,” rather than making an argument that the model is valid or that the EMH is right or wrong. As I said, this is highly speculative, and I am inexperienced but trying to learn.
EDIT: To be clear viz-a-vis your title “Are there opportunities for small investors unavailable to big ones?” I think the answer is “Yes, but there are lots more small investors”
And this is my key point. Within this class of opportunity, you’re not competing with hedge funds. You’re competing with other small investors. One thing I really don’t understand is what fraction of small investor wealth is tied up in things like index funds and managed retirement funds. Of small investor wealth, what fraction is people actively trying to play the small-cap low-volume weird-investment stock market? What level of sophistication does their thinking rise to?
I truly have no idea.
Thanks for contributing a data point that it’s a tenable longish-term strategy :) Any chance you’d be willing to do a chat/zoom/call to talk about your study strategies and so I can bounce my thoughts off you?
There’s one additional crucial phenomenon that I think needs to be better highlighted here, which is natural selection for cancer as an organism ages.
Cancer isn’t best understood as a manifestation of genetic damage that the body is unable to remove or repair. That’s what causes individual cancer cells to emerge and survive. But that alone does not guarantee that the damaging agent (the cancer cell) will replicate itself. Damage and failure of disposal alone only leads to local blockage.
Cancer goes beyond this to propagate itself throughout the organism. It evolves, developing drug resistance, the ability to colonize new “soils,” and better evade the immune system with time. This is a feature that, as far as I know, is unique to cancer. And it depends on the mechanism of natural selection.
By contrast, lipofuscin, transposon-caused DNA damage, and protein plaques seem mainly to accumulate, causing local dysfunction. It’s deadly, but it’s ultimately a passive force.
Hence, I think that “selection for cancer” deserves to be mentioned as a “further up the chain” core pathway of aging. This is an active, antagonistic force actively working to defeat our efforts to cure it.
Yes, but I’m just starting to use it. For context, I’m in the midst of figuring out a deep overhaul of how I approach scholarship. This includes how to self-teach, practice and retain information deeply and long-term, apply knowledge, build relationships around ideas, focus, strategize, and prioritize.
To get feedback and create a record of my ideas as I go along, I’m doing lots of quick blog posts about them. But I take it from your comment that I should probably make this more clear up front :)
More broadly, someone aggregated reported BTC theft from 2011-2020. The spreadsheet linked from the article includes a graph where you can see that about 1-5% of BTC was stolen each year from 2011-2014. Since 2015, BTC theft has been lower, around 0.02-0.7% annually. For comparison, 3% of the US money supply is about $150 billion.
I’d be curious to know how that compares to other forms of theft. Unfortunately, statistics seem to include crypto theft in larger theft statistics, so it’s hard to evaluate whether crypto or dollars is safer from theft. I have to imagine that dollars are generally safer (FDIC something something?).
One way you can approach this in a scientific context is by picking a broad unsolved or imperfectly solved problem (“cure cancer,” “outperform the market,” “improve personal productivity”) and dividing it into sub-problems at progressively granular levels of detail.
You’d look for descriptions of things like:
Theory that articulates the general nature of the problem. For cancer, it’s things like selection for drug resistance and immune system evasion. For outperforming the market, it’s the EMH and analyzing risk. For improving personal productivity, it’s the ratio of salesmanship to science in the field.
Understanding how people work on the problem. For cancer, it’s divided into areas like screening, treatments, classifying cancers, and identifying pathways of cancer growth and suppression. For outperforming the market, it’s analyzing specific markets or evaluating investment strategies. For personal productivity, it’s researching products, building habits, improving motivation.
It seems very important to me to work on problems you can actually solve with the tools you have on hand. For example, I am preparing for grad school in bioengineering. As it is, though, I don’t have access to a biology lab. I’m just living in my apartment. I have a nice computer, a light microscope, a few basic chemistry apparatus from the in-home o-chem labs I took during COVID, and that’s about it.
Hence, despite my interest in problems like biosecurity, cancer, aging, Alzheimer’s, and vaccine development, I don’t have much of an ability to work on any of these problems with the tools I have at hand. I don’t have access to data, equipment, expertise, funding, or mentorship.
But I can do a couple things.
I can work on projects related to the work I want to do, but that require only what I have on hand. For example, although I can’t work on the project “cure Alzheimer’s,” I can work on the problem “understand how scientists are trying to cure Alzheimer’s,” a purely scholarly project.
I can find projects that are tractable with the tools I have on hand. For example, I might be able to do some actual bioinformatics or mathematical modeling. I could re-analyze published datasets. I can build software tools.
I can expand my resources, trying to acquire new pieces of equipment, funding opportunities, and building my network.
I’m interested in two things here:
What do you think is the base rate of investment advice value on LW? If we’d invested the same amount of money in each piece of advice the day it was given, and sold the stock today, what would our net profit/loss be?
Why is our community’s inability to separate good advice from bad an indictment of its rationality, rather than an indicator that this is a really hard problem?
More precisely, the first sample gives the most information about the mean. Learning one person’s income tells you a lot about incomes in general, even though incomes are heavy-tailed.
Imagine you had no prior knowledge of how wealthy people are on Earth, or even how to think about the concept of “wealth.” For you, the meaning of the term is as inscrutable as the term “flargibargh.” You might sample a very poor person, and think everybody’s living in poverty. You might sample a middle-class person, and miss the existence of the very rich and poor. You might (unlikely) sample a billionaire and think everybody’s incredibly wealthy.
However, those samples help you avoid the mistakes of thinking that wealth is commonly extremely negative, or of a gigantic magnitude (i.e. on the order of Avogadro’s number). It gets you vastly closer to the mean than you might land at if you had absolutely zero knowledge of what the concept of “wealth” refers to, and didn’t even know that it’s a word to measure something relevant to humans (in which domain manageable numbers are common).
However, the first sample gives you no information about the distribution of the sample. As the problem above illustrates, sampling one person tells you nothing about whether wealth is distributed on a bell curve, a heavy-tailed distribution, is exactly even, has a linear distribution, or some other form.
It’s very important to gain the skill of “get a sample or example” when dealing with new territory. At the same time, you need to understand what that sample does or does not tell you. Mistakenly thinking that a sample gives you information about X can lead you to make decisions based on that illusory “information,” when if you’d known your ignorance better you might not have acted.
And then, of course, it’s important to make sure that your sample is actually a sample of what you think it is...
Post forthcoming, but here’s the teaser. School combines game-able systems and authentic career building. Distinguishing the two is the killer skill. To build a career, you’re making yourself into an interface with your profession. A law student is making themselves into a useful and convenient interface with the legal system for their clients. An engineer is making themselves into a useful and convenient interface with computers, chemicals, and robotics for theirs.
To efficiently build your career, you’d ask, when encountering a set of facts/skills in school, “would memorizing/practicing these facts/skills be the best way to make me a better interface with my intended profession?”
My biochem class is on photosynthesis this week. My intended path is biomedical engineering. Will the facts in my photosynthesis chapter likely be of use in helping me understand research on tissue engineering or gene therapy? Unlikely, so I can do the minimum in this unit. By contrast, we did a unit on transcription and translation in molecular biology six months ago that I think I could benefit greatly from by memorizing it in detail.
Similarly, it’s probably generally more valuable to read just the abstracts and commit the 3 most important factoids to memory via flashcards, just so that you know the paper exists and what it’s about. If the ideas turn out to be relevant later, you have a handy memory reference to it. If not, you only wasted time on the abstract and maybe a total of 5-10 minutes on flashcards.
This idea helps explain the tension between classroom work and career preparation.
A student building a career as a scientist needs one day to become an interface to their field. A cancer researcher needs to be an interface for several players: their colleagues and lab workers, grant makers, institutional administrators, suppliers, doctors, and patients.
By contrast, a school is an interface to vet and route students according to aptitude + interest into further training programs or jobs. Students may perceive much of what they learn there as “training,” when in fact is is a vetting procedure. Hence, they gain misguided notions of where they’d put their time, if their objective was to make themselves into a useful interface for their intended field.
The principle of “becoming an interface” as a way to reclaim this lost purpose can help clarify a lot of scholarship tasks. For example, I strongly considered using flashcards to memorize entire textbooks, under the theory that if coursework is meant to build useful knowledge for scientific work, then the most efficient way to do that was with flashcards. A Fermi estimate indicated I could probably memorize about 1.5 textbooks worth of facts per year, with time left over for deliberate practice.
Yet is that the most useful way for me to build my skill as a “bioengineering interface?” Alternative forms of interface-improvement might include:
Networking with people in the field, making friends, learning more about particular schools/labs/PIs
Learning about how grants are made
Learning broad skills for organizing research, decision making
Reading articles on the economics, current projects, major medical issues, common techniques
Specifically investigating gears-level mechanisms for particular problems (aging, for example)
Read the abstracts of 10 articles per day, and turn each of them into 3 flashcards referring to the primary goal and finding of the paper, so that I can have a shallow but broad grasp of who’s doing what and decide where to allocate my own energy based on that.
Learn general-purpose skills: Linux, programming, productivity software, personal organization.
Ascetic and stoic practices have been around for a long time, and have been invented by many cultures. There are lots of reasons to practice them. Deliberately inconveniencing yourself by denying yourself Google feels more theatrical or symbolic than efficacious. We need tools to work together as human beings to confront real world challenges. Google’s a key tool for that work.