I was skeptical until I saw the phrase “nuclear mathematician”
This was in my email box this morning:
Dear Reader,
I admit, an 18.79% annual return for the rest of your life sounds too good to be true.
You have every right to be skeptical of such claims.
I certainly was skeptical when a colleague of mine told me he had developed and back-tested a system for making such profits.
But then he divulged the entire story . . . how he discovered a secret calendar that Wall Street uses to grab 250% gains, and how he teamed up with a nuclear mathematician to perfect the calendar to pick winning trades 96% of the time.
It truly is one of those marvels that “you have to see to believe . . .”
Which is why my colleague was kind enough to put a video together revealing this secret calendar, and how anyone could use it to profit.
Back-tested? Then count me in.
Even better, the company was strongly recommended by a famous conservative newsmagazine.
Tags:
18. January 2014 at 17:02
Greenblatt’s return is even better: 24% per year from 1988 to 2009.
I’m actually a huge fan of this method. I’ve been investing a ton of my own personal money this way!
http://basehitinvesting.com/some-thoughts-on-joel-greenblatts-magic-formula-and-its-ytd-results
http://basehitinvesting.com/magic-formula-and-other-quantitative-results-from-2013-should-the-computers-takeover
18. January 2014 at 17:29
Grifters gotta grift.
18. January 2014 at 18:27
Winning 96% of the time isn’t so hard, but the skew is a bitch.
18. January 2014 at 18:45
Greenblatt on CNBC:
http://www.youtube.com/watch?v=kDj_vAWy6tc
18. January 2014 at 19:11
Watch the Wolf of Wall Street for some hilarious examples of these types of scams. The fact that you can make a living fooling people like this shows how important the Efficient Markets Hypothesis is to know.
Warren Buffett likes to joke the best way for him to make money would be to pay for all business schools to teach the EMH because it would give him such a huge advantage over other investors. He compares the EMH to saying that thinking doesn’t matter when you play chess and all the moves you might make will be the same.
I think Buffett misses the bigger issue that learning the EMH teaches you not to fall for scams and to buy low cost index funds which have been proven over the years to be the best investment and outperform most other funds once you take into account the fees. Plus I think that Buffett is just wrong that markets mis-price assets enough to mean that beating the market is much more than dumb luck.
18. January 2014 at 19:50
Scott,
Bob Murphy has your back against the Konstant Krugman Kontradictions.
http://consultingbyrpm.com/blog/2014/01/two-new-posts.html
18. January 2014 at 20:13
That reminds me of an e-mail I once got promising me that, for a small fee, I could receive a masters or a Ph.D. from a “prestigious non-accredited university”.
18. January 2014 at 20:46
there are all kinds of selection bias in backtesting seasonality with static trading rules devised hindsight. but i know you put it on here because it makes for great blogging material.
18. January 2014 at 20:47
I’m still trying to wrap my head around the nuclear mathematician. But I will say that those returns beat the Madoff fund.
18. January 2014 at 21:13
@JohnB: “Plus I think that Buffett is just wrong that markets mis-price assets enough to mean that beating the market is much more than dumb luck.”
Mr. Buffett will be very happy to hear his strategy is working.
18. January 2014 at 21:43
Gene Callahan,
I smoked Buffett’s returns this year with my index fund.
18. January 2014 at 21:46
All hail John Bogle.
19. January 2014 at 00:03
I have an atomic physics whiz pal, and we have been making 23.7869 percent compounded daily for 6.12346 years. On average.
BTW, OT, but if you are old enough, there was a time when S&L’s would offer savings accounts, as in “5 percent, compounded quarterly.” Reg Q limited the interest offered on passbook accounts.
Then some S&L’s offered accounts “compounded monthly,” and then they went to “compounded daily.”
19. January 2014 at 06:24
JohnB, Buffett has not done well ever since I pointed out that he was just lucky (in my post “Being There”)
19. January 2014 at 06:56
A few thoughts.
1. I’m a huge Bogle fan.
2. I think you can beat the market, but it requires a long term outlook and a lot of hard work.
3. It’s a lot harder to pick a stock-picker than to pick stocks.
19. January 2014 at 07:22
Personally, I think Buffett is a genius.
Also, over the past 24 months, Berkshire’s A-Shares have outperformed the S&P 500 by about 2% per year.
19. January 2014 at 10:16
dtoh, “hard work” or “good luck?”
19. January 2014 at 10:17
… it may have felt like hard work, since you were working hard when you had the good luck. 😀
19. January 2014 at 11:00
“JohnB, Buffett has not done well ever since I pointed out that he was just lucky (in my post “Being There”)”
Absence of EMH doesn’t mean the same individual has to keep making abnormal gains.
In Buffet’s case, he was for many years using his superior knowledge and skill in earning abnormal returns. But his knowledge and skill has since been eclipsed by other, more knowledgeable and more skillful investors.
The fact that Buffet hasn’t been performing well lately isn’t a feather in the cap of EMH.
As many have pointed out, EMH is a way of looking at the world, and is not empirical. And, more importantly, anti-EMH is a far more useful and reliable way of viewing the market.
19. January 2014 at 11:18
anti-EMH is a far more useful and reliable way of viewing the market
Because people are beating the market, like, all the time.
Moron.
19. January 2014 at 12:48
Daniel:
“anti-EMH is a far more useful and reliable way of viewing the market”
“Because people are beating the market, like, all the time.”
There are people beating “the market” all the time. The people beating “the market” are those who have had superior knowledge and skill, relative to their peers. Those who have had inferior knowledge and skill, they have done more poorly than “the market.” Those who have had average knowledge and skill, have performed as well as “the market.”
Anti-EMH is a very useful way of looking at why there are individuals who have beated the market, why there are those who have performed as well as the market, and why there are those who have performed more poorly than the market.
“Moron.”
You’re a very angry person.
19. January 2014 at 13:01
Geoff,
Unsurprisingly, you’re too stupid to understand what the EMH actually says.
http://noahpinionblog.blogspot.ro/2013/02/in-defense-of-emh.html
19. January 2014 at 13:03
Daniel:
“Unsurprisingly, you’re too stupid to understand what the EMH actually says.”
I know what EMH actually says. I was teaching you about how to interpret historical events using an anti-EMH framework.
Oh, and merely posting a link along with an insult does not constitute an argument. Try again.
19. January 2014 at 13:06
To make the argument a different way, having relatively superior knowledge and skill over a period of time, refers to having relatively superior knowledge and skill in being able to exploit “mispricing”.
Anti-EMH doesn’t hold that one and same individual has to have a secret formula that can enable him to make permanent gains regardless of the knowledge and skill CHANGES of other individuals.
19. January 2014 at 13:10
And your point is ?
All I see is incoherent rambling about how someone beats the market a couple of times – and somehow that’s a more useful way of looking at things than the EMH.
Are you capable of expressing a coherent thought ?
19. January 2014 at 13:17
Daniel:
“And your point is ?”
I have many, which I explained above. No response? Come on, try harder.
“All I see is incoherent rambling about how someone beats the market a couple of times – and somehow that’s a more useful way of looking at things than the EMH.”
It’s not my problem that you find it necessary to constrict your view of things down to a single thought that makes you feel safer and more comfortable. If you have no response to give, then it’s probably better to improve your ideas before responding. But if you need me to insult, so be it.
“Are you capable of expressing a coherent thought ?”
That you would understand? I think so. I hope so. But I do recognize it to be a challenge. Some of my closest intellectual allies today started out as people just like you, who had the same mentality, the same anger and frustration, and the same need to insult. I get it. All I can do is what I have always done. Value ideas and seek out better ideas to replace worse ideas. However it is not easy for me. So I keep chugging along.
19. January 2014 at 13:19
I’ll take that as a “no”.
19. January 2014 at 13:20
Daniel:
“I’ll take that as a “no”.”
If you wish. Your loss.
19. January 2014 at 16:17
dtoh, What is Bogle?
19. January 2014 at 16:48
Geoff,
As a free-market fan, I am surprised that you are not more in favor of the EMH. One of the most beautiful features of capitalism is the way that prices communicate information. It is something that Mises, Hayek, and Rothbard emphasize over and over again. The efficiency of stock prices is a perfect example of how a system based on private property uses the information communicated by market prices to allocate resources into their most productive uses.
Anti-EMH views can be very dangerous for investors regardless of how you view the usefulness of EMH as an economic theory. People that don’t know about the EMH are more likely to fall for scams or put money into expensive mutual or hedge funds that have no proven record of providing value for the money you pay them.
You are talking about entrepreneurship and stock picking as if they were the same. Fund managers-you would expect a market system to select the best forecasters as fund managers-have demonstrated no consistent ability to beat the market or even outperform a series of randomly selected stocks. This is solid evidence that markets do a good job of pricing in all the relevant information.
The EMH is useful because it advises you to buy low-cost index funds that have been shown to provide superior returns to individual investors to the majority of managed funds when accounting for fees. However, the case for index funds does not rest on the EMH but rather on loads of data showing the inverse correlation between investment fees and returns.
Travis V,
Vanguard’s small cap ETF is up about 50% versus 40% for the S&P 500 over the last two years. Berkshire Hathaway A shares just about split the difference between the two. However, the ETFs tracking small caps and the S&P 500 pay a dividend that more than compensates for the their fees (10 and 4 basis points respectively).
Dtoh,
Even if you’re right, all the research you’d have to put into beating the market carries a large opportunity cost and probably involves assuming additional risk. It is irrelevant whether it is harder to pick a stock picker than to pick stocks. As Bogle repeatedly shows in his books, what really matters is how much you pay for money management. The amount you pay to have your money managed is inversely correlated to your returns. Of course you can always get lucky and that tends to make people think that they have some type of special skill.
20. January 2014 at 01:45
Scott and Daniel,
While I find the pro-EMH arguments on this blog interesting, it strikes me as absurd to believe in stronger versions of the theory. If strong versions are true, there would be little in the way of arbitrage opportunities in the markets, and hence little reason for intelligent people to invest. But, if more intelligent investors pull out of efficient markets, then there would be more arbitrage opportunities. So, it seems that there is a limit to how efficient markets can be.
The argument, as I understand it being made here, is similar to the one that says it’s stupid to start a small business, since over 90% of them fail within the first year. Yet, if no one started small businesses…
It isn’t compelling to note that most professional money managers fail to beat the broad indexes consistently. Most professionals running businesses fail with most of their businesses, or at least fail to be better than average. Business, in general, involves far more failures than successes.
If everyone took Bogle’s advice and invested in broad index funds, there would be arbitrage opportunities all over the place.
20. January 2014 at 05:52
I dunno, 18.79% sounds pretty scientific.
20. January 2014 at 06:03
Scott Freeland wrote:
In EMH isn’t arbitrage part of the mechanism by which prices reflect all publically available information?
BTW, I have often heard proponents of active management that there would be a calamity if everyone invested in broad index funds. I doubt we will ever face such a calamity*, but even if they are right, this seems a poor rationale for why anyone who wants to invest in mutual funds should be obligated to pay rents. (It also ignores the fact that many active managers appear to be “closet indexers”).
*I think that as the proportion of money invested in broad index funds rises, the incentive to invest actively will also rise. So we will never come close to the “Doomsday Scenario” where the entire market is owned by broad indexes.
20. January 2014 at 06:47
Michael,
Of course it would be disastrous if everyone invested in broad indexes, but of course it won’t happen because of the opportunities it would open up everywhere else.
20. January 2014 at 06:54
Michael,
Oh, and if arbitrage is “part of the mechanism by which prices reflect all available information” in EMH, how could this be when strong versions of the theory claim that such arbitrage opportunities largely don’t exist? It isn’t a coherent thought.
20. January 2014 at 07:22
Dear Commenters,
See Warren Buffett’s analysis of interest rates here:
https://twitter.com/Kevin_Holloway/status/425015692677873664
Does it actually make sense?
20. January 2014 at 07:39
Buffett will be dead before interest rates rise.
20. January 2014 at 08:18
John,
I’m really trying to understand the context of Buffett’s comments. He might have said them in the mid-1960’s (and they may have been valid then). Not sure if the comments are valid in today’s context, though…….
20. January 2014 at 12:00
To ssumner
You asked dtoh “what is Bogle?” Given the parody tone of this essay (e.g., I was going to say “I like earning money the old fashion way, trading deposits for social security numbers with Nigerian Princes) I am not sure if you are kidding or not. It is “who is Bogle”. Not what. He is John Bogle, founder of Vanguard. He has also been a very persuasive proponent of “buy and hold”. Relative to cash needs, of course, and gradual investment over time. He has also shown empirically how investors actually invest. There is a strong tendency to “buy high and sell low”. Vanguard has the lowest fees and trading costs in their index style funds and outperform 90+ percent of funds over any given multi year period. The average investor (or investors on average) who invest in stocks earn about 2/3rds of the S&P 500. This is due to excess fees, excess trading and buying high and selling low.
Given that you are an EMH guy, as I am by and large, I cannot tell if you were kidding re: “what is Bogle”. If not, please look him up. He is 85 or so. He could have been a deca-billionaire, but chose to be a deca-millionaire by keeping Vanguard a mutual holding company, thus keeping fees even lower.
20. January 2014 at 12:20
You were kidding about the Nuclear Mathematician, right? I actually have been involved for quite some time in quantitative model building. Unless you are really interested in a serious discussion, I won’t bore you with further commentary. But, given my experience and Bayesian predilection, I can virtually guarantee you there is nothing to your friend’s model worth perusing. Again, if you are interested in understanding why I say this, I will gladly write you a long essay.
But, I will assume you were kidding. In fact, I admit to being a little scared you take this seriously—-given that you have basically persuaded me re:NGDP. 🙂
20. January 2014 at 12:38
Mike Rulle,
Bogle has also given the majority of his money to charity. A larger portion than Buffet or Gates anyway-guys who are very noisy about it. He is my investing hero instead of Buffett. The books I’ve read by Buffett eventually convinced me that he is actually a very arrogant and misanthropic man.
There is also no such thing as a nuclear mathematicians, correct? A nuclear mathematician would really be a quantum physicist or a mathematical physicist or just a plain old mathematician. There is no job title called “nuclear mathematician.”
20. January 2014 at 12:46
To Scott Freeland and Michael Byrnes
I do admit To having cognitive dissonance re EMH and the seeming contradictory need for there to be some basic research knowledge about investments. But to me that is analogous to Big Bang theory breaking down once one stares at the implied exact moment of the BB. Once one ignores that theoretical problem, BB works pretty well.
As does EMH. EMH does not need index funds to be correct. Index funds are arguably a derivative of all other equity valuations. And just as other derivatives needs an “underlying” instrument against which to value itself, so do index funds. Inside index funds, all values change daily and on an absolute and relative basis. Relative changes would be impossible if we only had index funds.
But in the big picture, one can argue the entire market as a whole is an index—-I believe that is implied in EMH. Capital weighted indexes of course make the most sense, again a staple of EMH. But you are correct, someone has to make the relative valuation decisions–or so it seems–that “someone” is a different person(s) every second. Hence if we all just bought indexes, relative values would be frozen in time—-but that does not happen.
But if you want to look at an index which would break down far sooner than cap weighted just check out equal weighted ones. Apple would have same market cap as the latest IPO. There is way more room for index investing, cap weighted, than you think.
20. January 2014 at 13:00
John Becker
Could not agree with you more about JB and WB. Maybe even more than you (kidding!). You are so right. If I say any more about WB, I will likely break some civility code. Bogle is very good man, a man who is most grateful for what he had a chance to achieve. Basically just a good guy.
20. January 2014 at 13:02
Also, agree with you on NM John B.!
20. January 2014 at 14:05
Scott, I can answer for dtoh there: John Bogle. He founded the Vanguard Group of mutual funds. They are famous for having a large selection of low cost index funds, and the fund owners own Vanguard. Vanguard pays straight salaries to their employees. That helps mitigate costs too. In recent years they’ve gotten in to ETFs based on their index mutual funds. John has written several books. He’s retired now, but he still makes appearances here and there. You can find a lot of good interviews with him on youtube. For example:
https://www.youtube.com/results?search_query=John%20Bogle&sm=3
My Dad gave me one of his books back in 1990 called “Bogle on Mutual Funds” when I first started drawing a 401k benefit. I followed the advice and was happy with it.
His voice is so calm and reassuring, he’d make the ultimate con-man. I’m glad he chose another path! 😀
20. January 2014 at 14:07
Oh shoot… I see that I’m not the first to have answered for dtoh above! Well sorry for the redundancy.
20. January 2014 at 16:42
Scott, I’m not arguing everyone should invest in index funds. I agree that if that occurred the market would become inefficient. I’m arguing that most people should invest in index funds.
Some people might have superior information to the market, on occasion, but I’m in no position to know who that is, nor are most other people.
Mike, Thanks, I have money at Vanguard, but did not know the name of the founder.
I just thought the phrase ‘nuclear mathematician’ sounded funny. Not sure why. Also the precise number on the rate of return. To me investing is mostly monkeys throwing darts, so it all sounds silly to my ears.
20. January 2014 at 21:01
The EMH doesn’t say that the market is unbeatable: Just that you can’t beat its pricing by using public information. Manage to obtain privileged information, or have enough knowledge of company specific that you can be an information creator, and you could beat the market and not contradict EMH one bit.
This is why one would expect congressmen to beat the market over and over again with their private portfolios: They are in a unique situation of knowing things before the market does.
20. January 2014 at 21:22
John Becker:
“As a free-market fan, I am surprised that you are not more in favor of the EMH. One of the most beautiful features of capitalism is the way that prices communicate information. It is something that Mises, Hayek, and Rothbard emphasize over and over again. The efficiency of stock prices is a perfect example of how a system based on private property uses the information communicated by market prices to allocate resources into their most productive uses.”
I can agree that free market prices convey the best information. The most useful information. That they should not be hampered by coercive interference. But that doesn’t mean I have to believe in EMH.
To recognize that there are occasionally investors with periodically greater knowledge and skill than all other investors, such that it is not “luck” that enables them to earn abnormal returns, does not require me to accept the notion that the market is flawed and in need of violent intervention.
“Anti-EMH views can be very dangerous for investors regardless of how you view the usefulness of EMH as an economic theory.”
I am not afraid.
“People that don’t know about the EMH are more likely to fall for scams or put money into expensive mutual or hedge funds that have no proven record of providing value for the money you pay them.”
What does that have to do with me? Are you saying I have to believe in something I know is a lie, so that other people are less likely to be hoodwinked? That I should pull the woll over their eyes and make them believe in a lie that might stop them from making mistakes? I have a higher view of humanity than that. You’re thinking like a preacher. I want to spread truth, even if it contains short term growing pains. Lying to people will only hurt them in the long run.
“You are talking about entrepreneurship and stock picking as if they were the same.”
What do you mean “as if”? Am I or aren’t I saying they are the same?
“Fund managers-you would expect a market system to select the best forecasters as fund managers-have demonstrated no consistent ability to beat the market or even outperform a series of randomly selected stocks.”
Anti-EMH does not require the same particular fund investor or the same particular group of fund investors to consistently beat the market.
Anti-EMH just rejects the asbolutism inherent in EMH about prices and knowledge, that’s all. It just amends the “nevers” to “sometimes”, and the “alls” to “most”, and so on.
“This is solid evidence that markets do a good job of pricing in all the relevant information.”
So is the fact that most fund managers have gone to universities instead of pubs with dartboards to learn how to invest.
So is the fact that active investing continues to exist.
So is the fact that if everyone PRACTISED the theory of EMH, the capital markets would collapse.
“The EMH is useful because it advises you to buy low-cost index funds that have been shown to provide superior returns to individual investors to the majority of managed funds when accounting for fees.”
Anti-EMH is even more useful because it teaches you that you can beat the market if you have superior knowledge and skill than other investors, for however long a period of time that might elapse before they become more knowledgeable and skillful than you. Anti-EMH doesn’t lead to reckless investing. It doesn’t necessarily make people delude themselves. Anti-EMH just means that the market isn’t exactly described by EMH, and that it is not always a good idea to invest in an index fund. After all, if everyone invested in index funds, there would be no index funds to talk about, since in order for there to be index funds, there has to be individual stock picking investors to create the indexes.
“However, the case for index funds does not rest on the EMH but rather on loads of data showing the inverse correlation between investment fees and returns.”
Sure, if you aggregate for a long enough period of time, and for a large enough group of investors, then indexes do seem to be superior. But that is not the environment that all individual investors live. Many live in a context where they have an opportunity to make abnormal gains, due to their superior knowledge and skill during certain periods of time, that go beyond mere luck.
“Travis V,
Vanguard’s small cap ETF is up about 50% versus 40% for the S&P 500 over the last two years. Berkshire Hathaway A shares just about split the difference between the two. However, the ETFs tracking small caps and the S&P 500 pay a dividend that more than compensates for the their fees (10 and 4 basis points respectively).
Dtoh:
“Even if you’re right, all the research you’d have to put into beating the market carries a large opportunity cost and probably involves assuming additional risk.”
Investors keep doing it. In fact, it is precisely trying to beat the market, that creates a capital market in the first place. EMH is a plausible theory only because anti-EMH is the actual driver. Without individual active investors, the capital markets would cease to exist. Anti-EMH behavior may LOOK as though EMH is true. But looks can be deceiving. You have to go beneath the surface.
“It is irrelevant whether it is harder to pick a stock picker than to pick stocks. As Bogle repeatedly shows in his books, what really matters is how much you pay for money management. The amount you pay to have your money managed is inversely correlated to your returns. Of course you can always get lucky and that tends to make people think that they have some type of special skill.”
This is the theory of EMH being used to interpret past history. But one can use anti-EMH to explain the exact same events. Money inversely proportional to returns might be true for a long enough period of time, aggregated over a large enough sample of investors. But investors make localized choices. An investor can have superior knowledge and skill for a short time, and use that opportunity to make abnormal gains for a short period of time. Since a given investor isn’t necessarily permanently the most knowledgeable and skillful, at any given moment another investor can surpass him and make abnormal gains while the first investor is now average. Sure, luck can occur, but this doesn’t explain 100% of investment returns.
You don’t have to subscribe to EMH to make good sense of the capital markets. In fact, I would argue that EMH clouds one’s judgment.
20. January 2014 at 21:23
Bob:
“The EMH doesn’t say that the market is unbeatable: Just that you can’t beat its pricing by using public information. Manage to obtain privileged information, or have enough knowledge of company specific that you can be an information creator, and you could beat the market and not contradict EMH one bit.”
Depends on which form of EMH you’re talking about. There is the weak, semi-strong, and strong forms.
21. January 2014 at 05:49
Bob, Agreed.
21. January 2014 at 12:39
I want to address one misconception about the EMH. It doesn’t require people to “make” the market efficient. Prices can adjust to new information by changes in bid-ask spreads alone. This is something that Fama emphasizes. The theory does not predict an advantage to being early.
Geoff,
I’m not saying that you have to pull the wool over your eyes so other people don’t get hoodwinked. I’m saying that you are probably getting hoodwinked right now. So you should respect the implications of the theory whether you think it’s true or not.
Anti-EMH will lead you down a path of high fees and underperformance. Don’t be one one of the millions of people that pisses away their money thinking that they know better than the market. Or go ahead and be one of them. It might teach you some humility.
Fund managers might as well have gone to dartboards instead of universities for all of the value they have provided. The only reason they keep getting paid is that there is a tremendous demand to try and do better than “average” or to try and get rich quick. It’s tough to believe that people trained to do something can’t do better than blind luck but this is one case where it is actually true!!
I’m glad you’re not afraid of investing scams, I have three companies that are guaranteed to beat the market over the next three years. The most brilliant investment managers in the world have estimated gains in excess of 1000% by owning these three companies. For only $1000, I will give you this information. It is the steal of a lifetime.
27. January 2014 at 18:21
John Becker:
“Anti-EMH will lead you down a path of high fees and underperformance.”
No it won’t. I manage my own money, and don’t pay fees other than the basic transactions costs of making trades on the public exchanges.
You’re assuming people are stupid. I can always think that in the market, there are individuals who have superior knowledge and skill, and can beat the market based on something other than luck, without having to think that Mr. Smith has superior knowledge and skill and would let me in his secret if I only pay him $X.
“Don’t be one one of the millions of people that pisses away their money thinking that they know better than the market. Or go ahead and be one of them. It might teach you some humility.”
I only make contrarian bets when I am extremely confident that the information is not widely known. If I am too unsure, which is usually, I typically go with index ETFs, spiders, that sort of thing.