Hussman shows a risk of 50-66% [US stock]market losses

[zbigi]

meanwhile the proficient player seems to know what kind of cards everybody is still holding and what you'll be forced to play next. How do they know that?

My point is, it's possible to some extent in games only, which are absolutely trivial compared to the real world. In the real world, the "game" has 8 billion players, and most of the information is either not public or just impossible to know (like - who could approximate in March 2019 the extent of damage to the economy that covid will inflict?). It's like playing poker without seeing who's in the hand or how much chips they have left.

Of course, on a more philosophical note, it's not possible NOT to invest. Anyone with any non-negligible assets is taking a position and effectively employing an investment strategy, even if they're just holding money in their checking account. We have to do it, even if we mostly have no clue on what we're doing and we're only taking some intelligent (hopefully) guesses based on haphazard pseudo-theories. It's the same as with life itself, where we're usually completely overwhelmed by the complexity at hand and with insufficient information, and yet have to decide how to proceed with our lives anyway.

[steveo73]

My point is, it's possible to some extent in games only, which are absolutely trivial compared to the real world. In the real world, the "game" has 8 billion players, and most of the information is either not public or just impossible to know (like - who could approximate in March 2019 the extent of damage to the economy that covid will inflict?). It's like playing poker without seeing who's in the hand or how much chips they have left

I'm just going to state that the guy I know who was Treasurer for 2 big banks (managing multiple traders) and a hedge fund for a billionaire didn't do it anything at all like the poker trading analogy.

I'm 100% positive the poker trading analogy is something sold to amateurs. I should add that there are probably a couple of traders who do roll like that but it wouldn't be common.

Like you say it's funny how people even view trading in the real world like playing poker. There are so many differences.

I can hear the difference between the inexperienced amateur investor and the professional because I too went through that amateur stage. I remember coming up with my own mechanical trading system. It looked good on paper. It didn't work. Then I worked with a professional and it was fascinating seeing the difference between the amateurs view of trading (I can beat the markets via math because I'm smart and I have the right emotional traits compared to everyone else) and how the professionals do it.

We would discuss the political/economic picture prior to making a trade. Our money management was what position we felt confident taking and it was big positions relative to out accounts. We didn't discuss the charts in completely mechanical trading rules. It's basically the complete opposite to the idea that it's like playing poker.

[theanimal]

Oh come on man. If you are going to criticize someone on their own board at least have the decency to know the major points of their background. Jacob worked on Wall St (yes, professionally!) for multiple years within the past decade. And besides, if nobody can beat the market like you say, what's it matter what this guy you know thinks?

If I didn't know any better, I would think this is trolling.

[steveo73]

Oh come on man. If you are going to criticize someone on their own board at least have the decency to know the major points of their background. Jacob worked on Wall St (yes, professionally!) for multiple years within the past decade. And besides, if nobody can beat the market like you say, what's it matter what this guy you know thinks?

If I didn't know any better, I would think this is trolling.

I think you are widely exaggerating Jacob's professional trading experience. It's not as simple as no one beats the market. It's that no one beats the market over the long term consistently.

[jacob]

Jacob worked on Wall St (yes, professionally!) for multiple years within the past decade.

... part of the job description being talking shop with various trading group managers as well as their traders and eventually teaching a course on trading. So yeah, I pretty much know what I'm talking about. Not really interested in debating this stuff on the internet anymore beyond pointing people in the right direction if they show an interest.

[jennypenny]

Some of you are misunderstanding the poker player analogy. I recommend reading Annie Duke's stuff or listening to interviews with her (she a regular on the podcast circuit).

[WFJ]

Read his books for gamblers and stock trading.

http://www.edwardothorp.com/books/

http://www.edwardothorp.com/

People can beat the market, but you are as likely to find one in one's daily life as showing up at your local YMCA and having LeBron James on your pickup team. In general, people who brag about their trades are not the ones beating the market. A past role of mine was to build zero Beta portfolios, inferring zero risk, but they were loaded with risk. Traders could follow parameters and as long as the recent past explained the near future, the system worked, and traders could claim of delivery positive risk adjusted returns. But the results were a statistical illusion.

The only traders who deliver true risk adjust positive returns roughly follow "Beat the Dealer" by only investing a few times a decade, only when there is a significant opportunity. The smart ones realize they were lucky, close their funds, pack their bags and enjoy life until another good opportunity arises. Those who attempt to grind small gains everyday end up losing.

[shemp]

The only traders who deliver true risk adjust positive returns roughly follow "Beat the Dealer" by only investing a few times a decade, only when there is a significant opportunity.

I've said this many times. In order to get above average returns, you have to answer the following questions: 1) who is the dumb money to your smart money? 2) how do you know someone smarter than you isn't targeting you as dumb money?

There is a vast pool of dumb money in the form of mom and pop trend followers, who pour money in at the end of bull markets, then sell near the bottom of bear markets, then repeat over and over. That's your dumb money.

To avoid being someone else's dumb money, you must trade very infrequently, since most really smart people who actively trade are not yet rich and retired and hence need quick results. So they can only target other short term traders. They cannot wait 10-20 years for the slow boom/bust cycle described in the previous paragraph to play out. And especially they can't wait if they are managing someone else's money. In particular, hedge funds will lose investors after at most 2 years of underperformance from being in cash (unless the fund is managed by someone like Dr John Hussman, Ph.D who exercises some sort of cult appeal over his group of frightened old men investors, who will never abandon him, no matter how bad his performance). Institutional money (endowments, pension funds) typically have a mandate to always be X% invested, so no market timing allowed by them, no matter how smart the manager.

The only people who can sit around and wait 10 years for an opportunity to pull money out at market tops and put it in at market bottoms (opposite of what dumb money does) are smart individual investors, and most of this money is in the hands of older people who don't want to bother with market timing, because they have little to gain (they are already rich) and lots to lose if they screw up. In other words, there simply isn't enough slow moving smart money to offset the massive amount of slow moving dumb money. Which is precisely why slow moving booms/busts (obvious overpriced/underpriced markets) occur.

There is research that confirms that mom and pop investors in mutual funds are dumb money, meaning they pour money into mutual funds at market tops, pull out at the bottom. There is also research which shows that corporate insiders are smart money, and tend to sell when their company stock is near a top, and buy near bottoms (subject to SEC rules requiring planning sales in advance), but this is a small factor. There is no way to track other buying/selling (individual stocks/bonds, ETFs) at market tops/bottoms. So most smart money is hidden.

Probably the majority of smart money is patient soft-spoken people who follow Benjamin Graham's advice to optionally, if you have the right temperament, move to 75/25 stocks/bonds when Mr Market is in one of his periodic depressed moods (buy low), 25/75 stocks/bonds when he is manic (sell high), and otherwise go 50/50. Because central banks have decided to eliminate depression risk, I would update the foregoing percentages to 100/0, 60/40, 80/20, respectively, and replace bonds by cash. Warren Buffett's similar advice was to "be greedy when others are fearful, fearful when others are greedy". March 2020 was clearly a time when others were fearful, and now is clearly a time when others are greedy.

I'm currently still 96% stocks (down from 99% in March 2020, by simply not reinvesting dividends) but it appears I'm turning into one of those old people who is capable of effectively market timing but doesn't bother trying. However, of that 96% stocks, only 29% is USA and that is all value, plus further tilt to small value. So I'm not very exposed to the bubbliest part of the market. I expect a 20% drop for value stocks, versus a wipeout in growth. Given how low cash/bond rates are, I don't feel very uncomfortable with my current allocation.

[white belt]

The only people who can sit around and wait 10 years for an opportunity to pull money out at market tops and put it in at market bottoms (opposite of what dumb money does) are smart individual investors, and most of this money is in the hands of older people who don't want to bother with market timing, because they have little to gain (they are already rich) and lots to lose if they screw up. In other words, there simply isn't enough slow moving smart money to offset the massive amount of slow moving dumb money. Which is precisely why slow moving booms/busts (obvious overpriced/underpriced markets) occur.

This assumes that the only way to make money is selling at market tops and buying at market bottoms. With options and futures (among other things), you can profit in an infinite number of ways that don't require the market to be at a top or bottom.

Probably the majority of smart money is patient soft-spoken people who follow Benjamin Graham's advice to optionally, if you have the right temperament, move to 75/25 stocks/bonds when Mr Market is in one of his periodic depressed moods (buy low), 25/75 stocks/bonds when he is manic (sell high), and otherwise go 50/50. Because central banks have decided to eliminate depression risk, I would update the foregoing percentages to 100/0, 60/40, 80/20, respectively, and replace bonds by cash. Warren Buffett's similar advice was to "be greedy when others are fearful, fearful when others are greedy". March 2020 was clearly a time when others were fearful, and now is clearly a time when others are greedy.

This assumes mean reversion. If we look back at history at times that were not the bond bull market in the USA of the past 40 years, we can see that "buy the dip" is a strategy that would result in capital losses in many periods like between 1936-1946, 1946-1960s, and 1960s-1980s. I'm not trying to cherry pick data, but just to point out that recency bias is a strong force. A market correction with quick recovery like March 2020 is not a huge risk that long term FIRE or ERE investors should worry about. Rather, the risk is a market correction followed by years of flat or low inflation-adjusted returns. As anyone who studies sequence of returns risk knows, that will blow up just about any portfolio that relies primarily on stock indexing. The USA in the 1930s and Japan still are obvious historical examples. When analyzing portfolio strategies that would have survived the past ~100 years, Chris Cole said something along the lines of "I'm not concerned with a rainy day, I'm more concerned with a rainy decade."

Central banks can't eliminate depression risk, in part because they are reactive and data driven by nature. Julian Brigden made the argument on the recent Macrovoices episode that similar to what happened in the 1960s, the Fed's actions to smooth markets might actually have the opposite effect because of time lag (e.g. the Fed tightens into a recession and eases into a bull market).

[shemp]

This assumes that the only way to make money is selling at market tops and buying at market bottoms. With options and futures (among other things), you can profit in an infinite number of ways that don't require the market to be at a top or bottom.

And when you do that, you are trading short-term, and thus will inevitably become dumb money to smarter money. Very smart money (Renaissance Technologies, for example) is mostly short term, for reasons I explained. There is long term smart money, but not enough to offset the huge amount of long term dumb money, which is why long term market timing is the only area where average money (people in this forum) has a change to trade safely against dumb money.

This assumes mean reversion.

No, it assumes human psychology will continue swinging between greed and fear, hope and despair, mania and depression, and we have the entirety of recorded history proving human psychology is constant.

This doesn't mean long term market timing is easy. Furthermore, most people get only one chance per lifetime to long term market time, a time when they have enough assets for such market timing to matter and when they are still young enough to care about making more money. Impossible to distinguish luck and skill when it's a one-time test.

Central banks can't eliminate depression risk,

They most certainly can (by printing infinite amounts of money to lend at 0% to anyone who wants it) and it is utter ignorance of economics and finance to suggest otherwise. The question is whether they want to eliminate depression risk, because doing so introduces moral hazard and inflation risks. At this point, we have strong evidence that central banks have lost all hesitation about doing what it takes to stop depression. It will probably take many decades of fighting inflation and perhaps even a hyperinflation to cause central banks to change their views and again allow depression risk. If and when that happens, go back to Graham's 50/50 stocks/bonds baseline rather than my suggested 80/20 stocks/cash baseline.

[Scott 2]

Assuming you can trade profitably, what is the value add to society?

Best I can tell, it's a largely extractive process. Creating noise in the markets produces a chance to redistribute wealth in your favor. I find it hard to get excited about spending time that way.

I've heard the "it produces liquidity" and "it makes market pricing efficient" arguments. But those tilt me further towards long term indexing. If the traders are going to do that work, I might as well take my free ride on 3-5% real returns. It's good enough, and I can do something else with my time.


I do think smart money is constrained by their large capital pools. It seems very believable to me that opportunities to net 1000's are left on the table, because large funds are focused on managing billions.

[steveo73]

... part of the job description being talking shop with various trading group managers as well as their traders and eventually teaching a course on trading.

Awesome stuff. Sounds just like the guy I know who managed a billionaires hedge fund, was Treasurer of a big bank (Citibank) in 2 countries and managed those portfolios which included a team of traders.

He mentored me on trading and he would regularly take 20 million positions on his own account. That is one position as well. He could have multiple positions of that size when things were going his way.

I assume you earned the big dollars like he did as well. It'd be great earning millions of dollars a year. Well done.

[steveo73]

The only traders who deliver true risk adjust positive returns roughly follow "Beat the Dealer" by only investing a few times a decade, only when there is a significant opportunity. The smart ones realize they were lucky, close their funds, pack their bags and enjoy life until another good opportunity arises. Those who attempt to grind small gains everyday end up losing.

This is all a scam. I'm not joking either. It's the amateurs view of the professional. It's all about math and money management.

Trading isn't like that. It's about taking big punts on feel and holding those punts and getting it right.

I think you are basically correct but forget the "Beat the Dealer" approach. I am sure there are some people who may do this but it'd be rare. The big boys aren't like that.

The guy I know punts and punts large and he gets it wrong as well. His hedge fund went bust. He started a fund and traded for friends. That lost money and he paid them back out of his own pocket. Someone paid him to build a mechanical trading system. So they paid a programmer to build the system according to his rules. Another non success.

I've also seen him take multiple 20 million positions on his own account and seen a lot of profit. Every one cent movement is about a 200k real profit or loss. Once the brokerage firm didn't execute his trade correctly. He didn't make a lot of money when he should have. He complained and they admitted they had got it wrong as they record the phone calls. They also said they couldn't afford to cover his profits. I had a similar thing happen to me and they happily covered my position.

[steveo73]

Assuming you can trade profitably, what is the value add to society?

The guy I know funds some charity work. They help poor people in the Philippines who can't afford various surgeries. So they pay doctors to help mostly people with cleft palette issues. They fix them and then help them out.

Some horrific stories. This one young girl was raped and her kid had a cleft palette. The charity put up the whole family in decent accommodation rather than the slums.

This is actually the charity they contribute too:- https://www.operationrestorehope.org/

I suppose to answer your question you can use your money to fund good social work that appeals to you. Buffet/Gates give a lot of money away.

There is no inherent good though in trading. I have some friends (and both parents) who worked in the health care system and to me their work is a lot more valuable to society than when I managed IT projects and now that I do nothing. Interestingly the trader I know earned a lot more money than the health care workers.

[white belt]

And when you do that, you are trading short-term, and thus will inevitably become dumb money to smarter money. Very smart money (Renaissance Technologies, for example) is mostly short term, for reasons I explained. There is long term smart money, but not enough to offset the huge amount of long term dumb money, which is why long term market timing is the only area where average money (people in this forum) has a change to trade safely against dumb money.

As @Scott2 said, sizing matters for institutional traders. No institutional trader cares about a trading strategy that cannot scale beyond yielding $1k a month in profits. On the other hand, an ERE individual can cover their entire expenses and then some with that money. So yes, if you're trying to outsmart RT algos, you're probably playing the wrong game. There are many things in the world that are not apparent in data due to infrequency (e.g. see Taleb) or that the data lags too much to do anything useful with the information. I completely agree computers are superior for pattern recognition with simple variables and that a retail investor is almost never going to have a data edge because good data costs $$$.

They most certainly can (by printing infinite amounts of money to lend at 0% to anyone who wants it) and it is utter ignorance of economics and finance to suggest otherwise. The question is whether they want to eliminate depression risk, because doing so introduces moral hazard and inflation risks. At this point, we have strong evidence that central banks have lost all hesitation about doing what it takes to stop depression. It will probably take many decades of fighting inflation and perhaps even a hyperinflation to cause central banks to change their views and again allow depression risk. If and when that happens, go back to Graham's 50/50 stocks/bonds baseline rather than my suggested 80/20 stocks/cash baseline.

Japan tried this, no? They still had negative GDP growth in 2008 and 2009 even with the BOJ pumping QE infinity.

Many central banks over the past 2 days have said they are raising rates in 2022. You may be right that it is all talk and they will cave at the first sign of market wobble. Either way, letting inflation run slightly hot (~5-10%, not hyperinflation) is probably the least bad politically viable solution for an overleveraged world.

[white belt]

My point is, it's possible to some extent in games only, which are absolutely trivial compared to the real world. In the real world, the "game" has 8 billion players, and most of the information is either not public or just impossible to know (like - who could approximate in March 2019 the extent of damage to the economy that covid will inflict?). It's like playing poker without seeing who's in the hand or how much chips they have left.

Let's talk about the real world.

You can look back to old posts on this forum that pointed out a global pandemic as a risk to humanity back in 2017: viewtopic.php?p=146663#p146663

You can also look at this thread (started in January 2020): viewtopic.php?p=204929

Did anyone perfectly predict the damage to the economy COVID would inflict? Perhaps not, but many predicted that a global pandemic could have devastating consequences. There was a 2 month lag between when we started talking about COVID on here (also when I heard about it on a podcast) and when global markets actually priced it in. What do you think is the typical lag for laymen to process and integrate new information?

[zbigi]

He complained and they admitted they had got it wrong as they record the phone calls. They also said they couldn't afford to cover his profits.

Woah, it sounds like an amazing feat of honesty. At most companies, the incriminating recording would be "accidentally lost due to technical glitch".

[zbigi]

Many central banks over the past 2 days have said they are raising rates in 2022.

I dunno about rest of the world, but Polish central bank has already raised rates twice in the past 6 weeks or so. However, our society is not (yet) a house of cards based on overvaluated housing and stocks, so it's definitely easier here.

[zbigi]

Let's talk about the real world.

You can look back to old posts on this forum that pointed out a global pandemic as a risk to humanity back in 2017: viewtopic.php?p=146663#p146663

You can also look at this thread (started in January 2020): viewtopic.php?p=204929

Did anyone perfectly predict the damage to the economy COVID would inflict? Perhaps not, but many predicted that a global pandemic could have devastating consequences. There was a 2 month lag between when we started talking about COVID on here (also when I heard about it on a podcast) and when global markets actually priced it in. What do you think is the typical lag for laymen to process and integrate new information?

It's kinda obvious to anyone with a brain that global pandemic will have devastating consequences. What are the unknowns is - when will the next global pandemic hit, how long will it take and how bad it will be. All of these affect valuations of securities greatly. For example, you can invest a lot of money in a gym or a restaurant (or chain of gyms/restaurants), then a relatively mild pandemic like COVID hits and a year later most of your investment is gone.

[Bankai]

@zbigi - the least affordable housing in the EU is not overvalued? If the central bank governor has to repeatedly say that housing is not in a bubble, that tells me all I need to know.