What caught my eye this week.
How filthy rich would you be if you could see tomorrow’s newspapers today – and then trade on the back of your unfair insight?
Actually, many people could end up poorer.
At least that’s the takeaway of new research by Victor Haghani and James White of Elm Partners Management.
They decided to investigate conjecture by Black Swan author Nassim Nicholas Taleb that knowing the news in advance wouldn’t help most people make money.
The Financial Times explains:
Haghani and White devised a clever experiment to test out Taleb’s hunch: 118 ‘young adults trained in finance’ were given $50 and a copy of the front page of something called the Wall Street Journal, minus stock and bond prices, one day in advance.
The lab monkeys’ task was simple — to use their knowledge of the future to make as much money as possible by trading in the S&P 500 and a 30-year Treasury bond futures contract.
Participants were free to use as much leverage as they liked and asked to place bets on 15 different high-volatility days over the past 15 years, five of which coincided with big employment reports, five of which coincided with Fed announcements, and the other five of which were picked purely at random.
Now, if you’re a naughty active investor like me you’re probably licking your lips in anticipation.
Seeing the future? Talk about edge!
And yet the FT tells us:
- The average payout was just $51.62 per player, representing a weighted average return of 3.2%
- Just under half of players lost money
- 16% of players went bust
- Players guessed the direction of stocks and bonds correctly on 51.5% of the roughly 2,000 trades they made
Bloomberg adds (via Yahoo Finance):
“It’s very humbling,” said Victor Haghani, who was a founding partner of Long-Term Capital Management.
“Even if you have the news in advance, it’s still really hard to do asset allocation or whatever with a high chance of being right, let alone not knowing what’s going to happen.”
Haghani was a Monevator reader back in the day. I’d love to think my co-blogger’s passive investing articles added our two pence to the intellectual capital behind this research. 😉
Anyway if you’re the sort who doesn’t believe something until you’ve tried it for yourself then you can (a) join our Moguls membership gang (and be sure to track your returns!) and (b) play the same game over on the Elm Funds website.
Lie about let us know how you do in the comments below!
Have a great weekend.
From Monevator
What to do if you left it late to start investing – Monevator
From the archive-ator: Bridging to FIRE with an ISA – Monevator
News
Note: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.
Banks must refund fraud in five days, but losses capped at £85,000 – BBC
OECD lifts UK GDP outlook, but our inflation is still stickiest in G7 – Reuters
Landlords ‘forced to sell up’ over UK’s energy upgrade plans – This Is Money
London closes gap on New York as top global financial centre – Yahoo Finance
The ‘affordable’ shared ownership homes costing residents half their wages – Guardian
Labour reportedly considers watering down non-dom reforms – BBC
Cult card game Cards Against Humanity is suing SpaceX – The Verge
How fast will active ETFs grow? – Morningstar
Products and services
How to handle buying a leasehold property – Guardian
Three lesser-known cash back sites to help you save when shopping – Which
Get £100-£2,000 cashback when you open a SIPP with Interactive Investor (T&Cs apply. Capital at risk) – Interactive Investor
John Lewis price match: how it works – Be Clever With Your Cash
How does Nationwide’s new £175 switching bonus compare? – Which
Vanguard plans fresh push into active fixed-income market [Search result] – FT
How to downsize your home successfully – This Is Money
Open an account with low-cost platform InvestEngine via our link and get up to £50 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine
Is your energy bill right? – Be Clever With Your Cash
Art deco homes for sale, in pictures – Guardian
Comment and opinion
Lose all your money – Fortunes & Frictions
Inflation-proofing pensions is no mean feat – FT
Was Jack Bogle right about Smart Beta all along? – Morningstar
Short-term investing is a long shot – Behavioural Investment
Retail investors won on fees but they are losing on risk – Bloomberg via W.M.
What it takes to work for longer – Morningstar
Til stress do us part: money advice for couples – The Joint Account
Factchecking the myth of Central Bank omnipotence – Musings on Markets
U.S. markets mini-special
The U.S. now comprises >60% of global trackers but accounts for only 26% of GDP… – Verdad
…and the ‘relentless’ rise continues – Sherwood
Naughty corner: Active antics
Why quality stocks perform so well – CAIA
Microstrategy is bad at timing the Bitcoin market – Sherwood
New Softbank books mini-special
Thoughts on Gambling Man: The Wild Ride of Masayoshi Son [Search result] – FT
In Money Trap, an ex-Softbank exec revisits the madness – Semafor
Kindle book bargains
What They Don’t Teach You About Money by Claer Barrett – £0.99 on Kindle
Quit: The Power of Knowing When to Walk Away by Annie Duke – £0.99 on Kindle
The Good Enough Job by Simon Stolzoff – £0.99 on Kindle
Grit: The Power of Passion and Perseverance by Angela Duckworth – £0.99 on Kindle
Environmental factors
Southern Water may ship water from Norway due to drought fears – Sky
UK recycling rate falls to just 44%… – Guardian
…but could a new £1bn recycling plant in Flintshire turn things around? – BBC
The fight to save Sri Lanka’s natural flood buffers – BBC
Electric car production falls despite 2035 combustion engine deadline – Sky
An Australian oyster reef is revived – Hakai
Robot overlord roundup
Israel clears chatbot to give buy/sell advice – Bloomberg via Advisor Hub
DuoLingo’s CEO explains how the company harnesses AI – Sherwood
Microsoft relaunches ‘privacy nightmare’ AI screenshot tool – BBC
Enterprise philosophy and the first wave of AI – Stratechery
OpenAI to remove non-profit control, give equity to Sam Altman – Reuters
World’s first AI arts museum will open in Los Angeles in 2025 – SCMP
Off our beat
LinkedIn has become an obsession for corporate top brass – Sherwood
Where do music genres come from? – The Honest Broker
Misinformed about misinformation – Tim Harford
The extraordinary artist recluse rediscovered in Swindon – BBC
How Zelda became a first-time protagonist in her own series – Polygon
Never quite enough – Humble Dollar
Do it your way – Morgan Housel
And finally…
“It’s not hard. Stop thinking about what your money can buy. Start thinking about what your money can earn. And then think about what the money it earns can earn.”
– J.C. Collins, The Simple Path to Wealth
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Most ancient investors like me have tried to play this active investing game in the early stages of their financial education
Then eventually realising that they have no”edge” have settled for the “natural“ stockmarket gain -usually via index funds/ETFs
Obviously some investors amongst the pack have done over and above this normal stockmarket gain but those remarkable types are few and far between- and are also very hard for an amateur investor to pick out and follow
The other ways of “winning “ often involve illegal actions like insider trading and plain cheating ie ponzi schemes
Far better for the amateur investor to concentrate on matters under his direct control ie save as much as you can,keep costs as low as you can and live frugally
Buy the total stockmarket-equities and bonds-(in the proportions you require ie 100% equities while young and then a reasonable % of bonds as you age and retire)-and leave the stockmarket well alone to do its compounding “thing”
It’s a very boring investment policy/plan but it works!-so far!
xxd09
Thanks for the links as always @TI.
Pro traders did better though because they could size bets more appropriately using the Kelly criterion.
Traders understand better that news is not reliably predictive, either directionally or quantifiably, when it comes to price action response.
IIRC Gary Stevenson had an amusing anecdote about buying Japan when the news of the 2011 earthquake and Fukushima broke, on the basis that it was likely an overreaction, with that profitable realisation coming when a colleague (whose judgment he less than respected), who was watching the live cable news footage from the plant, started repeatedly shouting over the trading floor, ‘the fuel rods are exposed!’
I also recall some similar stories from traders in grain futures going short when news of Chernobyl broke in 1986 and the news was full of (what soon turned out to be ludicrous) stories of the Soviet Ukraine’s harvest being lost.
Mixing up Soros and Stevenson here: You make money by being right when the consensus is wrong and/or by losing less when you’re wrong than what you gain when you’re right.
Perhaps an interesting question here, and maybe even one for Moguls in the future? 😉 , is if one did have a strong conviction in an outcome, for whatever reason, how much should or would you stake on it vis a vie the allocation to the pure passive path?
In this regard, and to recap with some different examples what I’ve posted elsewhere on MV on skewness and stock unpredictability:
– From 31 Dec 1997 until 31 Dec 2017, half of the stocks in the S&P index delivered results in the range of -100% to +50% (some went bust), while the average change in the S&P index was +228% over the same period.
– The median return of a stock (measured when all stocks are ranked by performance and the one in the middle is selected) was much lower than the average return of all stocks weighted by their market cap (the index).
– The single most common outcome for stocks has been a 100% loss (companies went bust). In comparison, just 43% of common stocks have a buy-and-hold return (inclusive of reinvested dividends) that exceeds the return to holding one-month Treasury Bills over the matched horizon.
– The median life of a stock is only seven and half years.
– A tiny group of stocks account for a disproportionate share of overall returns. All wealth generated by US stocks since 1926 (26,168 stocks) was generated by just 4% of those stocks (1,092). The remaining 96% of stocks generated returns that, as a group, collectively only matched T-bills performance.
– During the 1926-2019 period, 57.8% of US stocks (15,132 out of 26,168) generated returns below cash yield (measured by T-bills).
– Just five firms (Apple, Microsoft, Exxon Mobil, Amazon and Alphabet contributed 10.4% to the overall wealth creation in that period. Top 50 firms account for 41% of all wealth creation. Put differently, 41% of wealth has come from just 0.2% of companies (50 out of 26,168).
– Only 31% and 26% of individual stocks outperformed the value-weighted and equal-weighted indices, respectively. The median return of a stock over a lifetime was a negative -2.3%, even though an average (mean) return for a stock in the same group and period (1926-2016) was a positive 187%. The mean return of all stocks on an annual basis was 14.7%, while the median annual return was only 5.2%.
Markets don’t react to news, they react to how the news differs from what the market already thought was going to happen.
In other words, to play the game, it’s not enough to know what will happen, you also need to know what the market thought was going to happen.
@Owl — Yes, this was my first thought. Tomorrow’s newspaper out of context and with no pricing information isn’t as useful as it seems. Still, I’d think genuinely skilled traders could exploit it, especially by getting their sizing right (as the research does seem to hint)
@Delta Hedge — Indeed. However some pushback I’d give to the Bessembinder research that’s now quoted everywhere is someone with edge shouldn’t be sitting in a stock going to zero. So while these results are superb evidence for the benefits of going passive/indexing (i.e. buy the haystack) I don’t think they’re quite the deathknell for active investing by *skilled* traders that they might seem. (But of course most people don’t have skill and those stocks that went to zero were owned by someone, so same difference).
@xxd09 — Early lessons cost the least and often teach us the most, right? 🙂
@Investor
While a great fan of both your website and your insightful comments, I do have to (mildly!) disagree with the remark about comment length. Not mentioning any names, but certain posters thoughts are always very helpful and having them break down exactly why they feel that way is a huge, and greatly appreciated, bonus for me and I suspect many other Moneyvator readers.
I cannot see how by giving someone the front-page of the FT tomorrow, you can derive that traders cannot predict market movements. Surely, the most obvious conclusion is the front-age of the FT has no useful information for predicting market movements?
I’ve been in this business for over 25 years and I’ve never even considered reading the FT to help me trade . With the exception off odd days where a major surprise occured the day prior, the FT wouldn’t provide that sort of information on it’s front page.
I’ve met Victor Haghani when he recently gave lectures. I rate some of his insights. Nonetheless, this seems a paper just written to generate a few clicks and headlines.
In view of the automatic bank refund scheme now being enforced for transfers of up to 85k…
How long until banks start conducting IQ tests on new account applicants?!
And how open to abuse will this be by the scammers themselves? There won’t be enough time for bank investigations to take place in 5 days to find out what occurred, where the money has ended up etc
@Ben Ber — No problem, this is the sort of feedback I want! 🙂 And 100% agree about helpful replies.
Surely tomorrow’s newspapers report what happened today? So even if you are shown “US non-farms disappoints”, it is probably (depending on precise timing) too late to do anything about that.
A more sensible experiment would be to show the front page of the WSJ 2 days in advance, so you know tomorrow’s news.
@TI, Ben Bur
I prefer it when a commenter keeps their response reasonably brief and doesn’t respond several times per blogpost. Moreover, I don’t see the need to comment as if one is answering an exam question, evidencing every point: just use inline linking to direct curious readers to sources and earlier responses, if it really is that important.
I played the Elm game during the week – doubled my money. If only life were as easy as that.
Upgrading to EPC C isn’t that costly. It involves passive measures like loft insulation and applying thermal plaster board. However, a landlord cannot write off the improvement against rent. It has to paid for with after tax profits. That is crazy.
@TI I’ve noticed you never post links to David Smith’s blog anymore. I wonder if this is because his old rss feed is broken and you might need to re-subscribe at https://economicsuk.com/wordpress/index.php/feed/
Yeh, as ZX says, you’re just being given the wrong information. I don’t see how it’s very interesting or insightful? Taleb popping up a bit of late. It’s annoying to read his quote about not listening to what people say but to look at what’s in their portfolio when his books constantly bang on about his ‘genius’ barbell approach and then completely fail to give any concrete example of what a barbell portfolio looks like.
On the Duolingo front. Both my kids are addicted to it. Any app that can pull them away from the normal junk games, Minecraft, clash of clans, etc. must be doing something right/clever?
@TI:
Thanks for another nice set of links.
@Naeclue (#9):
Would you be good enough to explain how to pull off that trick IRL – or is it perhaps proprietary/privileged?
@TI #4 > Early lessons cost the least
Surely this is at variance with the principle of compound interest making early contributions more valuable 😉
I spaffed £7k in the dotcom boom/bust, apparently £13k nowadays according to the Bank of England inflation calulator
Money well spent, some things you gotta learn the hard way. A bit like Mark Twains’ anecdote about what you learn by carrying a cat by the tail – you can’t learn it any other way.
I put the notional value of that dead loss into your CI calculator, apparently I’d be sitting on 21k today on the default assumptions. That wouldn’t have shifted the needle on the dial that much to help me retire early.
As an course in some of my most egregious failure modes, it served me well enough.
Off topic comment – where have all the uk finance blogs gone?
Is there a recent list/link of decent ones somewhere?
Indeedably/GFF look like there are about to do a RIT – unfortunately
Citywire forums .Bogleheads and Lemon Fool still operational
xxd09
@Boltt — Alas, the process I described 18 months ago has only gotten worse:
https://monevator.com/become-a-monevator-member/
As someone who has scanned the publication waves for nearly two decades, the independent publishing scene (blogs, small websites/magazines) has never looked worse.
Substack is the bright spot, but to be honest that seems to be more a US thing. Probably due to the critical mass of readers needed to sustain a subscription-only operation.
Thanks for becoming a member and doing your bit to keep our humble blog going!