> Update: Added a Monte Carlo mode which lets you play with data that is randomly generated from the daily returns of the S&P500. The probability of a daily return being picked is the same probability/frequency that it occurred in the last 68 years.
This mode is rigged.
Any proposal for market timing requires correlated returns. "Technical" traders infer short-term trends form patterns like the shave-and-a-haircut and lovely-lady-humps that are ultimately based on a theory of market psychology, and "fundamental" traders usually make structural observations like price-to-earnings ratios being mean-reverting.
Both of these hypotheses are excluded by construction when market results are constructed by a random draw of daily returns.
Yes, it simulates the hypothesis that future markets are unknowable. Which would indeed be begging the question. Unless of course you find that whenever you apply technical trading to a Monte Carlo market, you get the same results as applied to real market history. Then you show that the signals technical trading uses are not actually predictive.
At any rate, if the market trends upward and trading is close to random (regardless of what the trader believes) then being out of the market occasionally will always be bad statistically. If there are vast numbers of traders all actually acting randomly then some will out preform others and some tiny number might out preform the market. In fact, if you have the data, you can plot the performance of every trader against the market average and actually measure how far from random the average trader is.
Maybe price to earnings ratio "should" relate to stock price. But in actuality stock price is determined by what people are willing to pay for it obviously. To the degree that people are buying and selling _not_ based on P/E, say for example they are doing so somewhat randomly, then the P/E won't reflect accurately the stock price: it won't be predictive.
These hulking paragraphs is what the demo is basically saying.
Yes exactly. The market may resemble a random walk in the short term, over days, but it is driven by economic forecasts and company results in the long term (the long term is also more than the 3 year timing given).
Absent any of that information, obviously you can’t guess how the stocks will move (i.e. time the market), except that they will in aggregate move gradually upwards in price as all currencies aim for inflation.
With that information, sometimes the way the market will move over a time period of years is clear. Clearly the consensus moves in a panicky way with the latest news, and constantly undershoots or overshoots real returns, but it is based on real returns in the long run.
They could easily create a better simulation with a moving block bootstrap method. That is by sampling consecutive returns (for example for a whole week) and create a new time series with them.
I don't see that text on the page. Was it a 6-year period? If so, the accuracy is basically perfect. (21.05% annual growth will return 214.6% after 5.9996 years.) Otherwise, weird.
> edit : yes this was for a period of 10 years on the market which should be around 8% annual returns instead.
How did you get a period of 10 years? It runs in 3-year increments.
I'd expect percentage losses as deep as those seen in 2007/2008. This isn't just paper money drying up, it's the inability to physically work. It's not just a matter of injecting a ton of capital into the economy, literally that capital cannot do anything if people can't work.
We'll also see hyperspecialization towards COVID-19 in the health sector, which could leave those industries vulnerable when COVID-19 finally runs its course(likely many months from now).
Some industries are already failing, and will need propped up. If not, then those industries will take awhile to recover after COVID-19 runs its course.
Also I'd be incredibly wary of huge single day gains. Consistent slower gains is a better sign of a healthier economy than the spiky behavior we've seen as of late indicating people are heavily speculating on the volatility.
Seems legit. We already had one of the largest single day jumps in the stock market the day after one of the largest drops and the day before another one of the largest drops.
This is such a nonsense being pandered by people who make money on it.
You, you can absolutely "time the market". You just can't do it exclusively based on the chart. The real world is still there, and it's important, you know? And Stock Market and savings accounts are not the only investment instruments available to people. And you don't have to be all in or all out.
Maybe if you don't have time and skills to think about it, etc. then this makes you feel better about your "investments" because "there was nothing you could have done better". But it's still load of rubbish.
> This is such a nonsense being pandered by people who make money on it.
Are you suggesting there’s more money in the market of selling index funds than there is in the market of selling you the idea that you can beat the index? Because I’ve got news for you...
> You, you can absolutely "time the market". You just can't do it exclusively based on the chart. The real world is still there, and it's important, you know? And Stock Market and savings accounts are not the only investment instruments available to people. And you don't have to be all in or all out.
Maybe if you don't have time and skills to think about it, etc. then this makes you feel better about your "investments" because "there was nothing you could have done better". But it's still load of rubbish.
There have been countless studies done about this, and countless fools who tricked themselves, like scratch off players and gambling addicts, who think they’re winning. It’s exceedingly uncommon for investors to beat the market over 10+ year periods.
I don't have much experience in the market, but "invest in index funds" seems like a way to inflate the values of all the companies in the index fund, deserved or not, and I find it worrying that it's touted as an easy/simple way to make money. If there's a lot more index fund money than hedge fund / active money it would probably mess with prices, right? Is there any good analysis of when it would stop making sense to invest in an index fund? Or ways to weight certain companies higher or lower in a 'personal' index fund?
> If there's a lot more index fund money than hedge fund / active money it would probably mess with prices, right?
No, assets under management is irrelevant to price discovery. Trading is what sets prices not holding stocks. According to a 2018 Vanguard paper index funds only made up around 5% of trading volume despite holding about 50% of assets. So active managers are still responsible for 95% of price discovery even if they hold only 50% of assets.
One key to the success of index funds is that the indexes will remove underperforming companies and replace them with growing companies. The argument for this enforced survivorship bias is that it's meant to provide a dynamic view of the economy changing. In practice, this also helps keep the returns of the indexes up and is a case of survivorship bias working out in the individual passive investor's favor.
Interesting. Would be even better if it let you download data on returns at any point. For example, you might pause after Day 200, download data on the S&P 500 for Days 1-200, analyze the data, and then proceed accordingly.
The "Buy and hold ETF" strategy of today is good advice until it isn't. Eventually, ETF holders will probably be exposed to a black swan like the NIKKEI 225 lost decade event (although it should probably be called the lost decades) [0].
My opinion is that buying and holding the index is better than picking stocks and timing the market unless you are a professional (you need to be doing it full time to gain a consistent edge, and even then it isn't guaranteed). However, even then, it is only good advice if equities is a small part of your overall portfolio. Blindly buying and holding the index is not smart if your net worth is 80% tied in equities -- you should diversify in bonds, real estate, precious metals, and other commodities.
You can already do this with ETFs, e.g. with Aggregate Bond Index ETFs, and the All Cap I invest in includes basic materials, oil & gas. The REIT ones can be more expensive.
Only going for equities is risky I agree, but I don't see this as an ETF problem.
Generally, in markets that were part bearish (like the 80s), I made very good returns, between 10 % and 30 % above the index. As a very simple rule, after 2 days of a falling index, sell for exactly 1 day. This works mainly because there are enough consecutive 3 days of a falling index. However, if the market trend is overwhelmingly bullish, that does not work anymore, because there are not enough triplets of falling numbers. If it was possible to differentiate the two, I guess it would be possible to reliably beat the index. But of course that is the tricky part ... You cannot be better then the index in rising markets, but you could be better in falling markets.
> You cannot be better then the index in rising markets, but you could be better in falling markets.
That's because the only actions you can take in the game are "buy the index" and "sell the index".
As soon as there's more than one price in the market (even, say, one index tracking DJIA and another one tracking S&P 500), it's possible to beat the market average while prices are rising.
You can beat falling markets by not buying anything.
I don't get why is beating the market a goal, isn't making money the goal? I am much happier making 20% while market is up 30%, than losing 5% when the market loses 20%.
I successfully played a market timing game with Apple stock for years. It stopped working after Steve got sick. But I’ve probably wiped out half of those gains with buying or selling some other stock right before things went sour.
This just shows that so-called ‘technical’ analysis with no context is about as useful as trading based on horoscopes.
Add in some information like ‘a new pandemic threatens to shut the world economy for months and kill tens of millions of people’ and suddenly this changes.
Technical analysis has validity - it is just patterns and data. It isn't perfect, because outcomes are still variable, and also consist of independent human decisions.
A pandemic is an edge case... However, markets react much more quickly than in the past (algorithms, global data, instant analysis of that data) - that technical analysis short term timelines have compressed.
Sure. It's a really bad idea to try to time the market on a day to day basis. There's two sides to every trade, so you're generally playing poker against professionals with armies of quants.
But this game really just proves that you can't time the market while knowing nothing about the outside world.
Headlines sometimes matter.
Not all the time. Talking heads generally overstate how much one random speech matters, "politician X says Y, therefore stocks are reacting" is generally just over-analyzing noise. It's annoying to see post hoc rationalizations the norm in financial... in all news. People claim causation for anything they happened to read.
But occasionally, once a decade, say? Headlines do send a strong signal. "Crisis on Wall Street as Lehman Totters" was a headline that came just before the biggest cliff in 2008.
In February 2020 we didn't know as much as we do now, but people already started talking about difficulties in containment. China--which likes itself some economic growth (if only to keep the Party going)--decided a near total economic shutdown was necessary. The virus was already in a few dozen countries and Singapore was surrounded by container ships that couldn't dock.
So let's split out two separate claims:
1) The weak efficient markets hypothesis: you can't time the market blind.
2) Strong EMH: you can't time the market, not even once in a while, with your eyes wide open.
In defense of (2), the housing crisis really started in October 2007, and ended in February 2009. You can delve for headlines for those moments, but they are way more specious. Here's the real test: what will be the best signal of the rally after the pandemic?
1) China hitting zero active cases, reassuring the world it can be done.
2) Global new case "growth rate" below 1 for two straight weeks? [Growth rate being the ratio of today's new cases to yesterday's new cases, with lower than 1 a tipping point away from exponential growth, and probably the halfway point in the crisis.]
3) China keeping no new local cases even after reopening its economy?
4) Some decision about how to keep airlines solvent?
Any of these seem plausible. But who knows which will be right? However, if we are attacking strong EMH, we don't really have to time things maximally, we just have to do slightly better than the index. So maybe just wait until the S&P 500 has recovered a quarter of its losses and get in then?
Maybe the general problem with active investing is the financial sector's approach: hire people to study market signals full time and generate algorithms that can trade more and more actively. Full time people are expensive, and tuning algorithms is expensive. So that means you burn through fees (on top of probably not outperforming the market, because you're competing against noise).
If you hire people to do something full time, they will find ways to justify their time. If you hire someone to play rock paper scissors full time, and give them some of the highest bonuses in the world, they will come up with some very nice models. And usually not outperform a random thrower, but give you lots of reports on why and how they'll do better next time.
But if all the daily signals are noise except for one really blaring foghorn once a decade, maybe the better solution would be to hire a part time market hobbyist on a contingency fee. "Hey, if you see a signal that the entire market should be shorted, maybe short the market. You get two trades per decade max. Otherwise, just index and hold."
Probably also wouldn't work, but I really like the idea of some plumber in Poughkeepsie controlling billions of dollars in hedge fund money, you know, just as a side hustle.
The Efficient Market Hypothesis is obviously, patently false. The markets cannot agree on the value of an asset from week to week, day, hour, minute or second. Equities in stable businesses with millions of shares traded daily see their prices fluctuate 5%, 10%, 20% intra-day. The tangible value of a company simply does not change that fast. It doesn't.
It's impossible to time the market perfectly every time because that would imply perfect knowledge of the moves of all the participants. By the same token, it's impossible to mis-time the market every time, because then you could just take all the opposite moves and you're back to winning. It is possible to win more than you lose, not by being the smartest, but simply by being smarter than the average participant. Which, thanks to companies like Robinhood putting trading capability into the hands of any naive smartphone owner, has become easier than ever.
I believe the strongest, first order, signal for a rally that sticks will be when there's a somewhat effective treatment for the virus that can be deployed in a scalable way. This will mean that the healthcare systems will be under less pressure as they will be operating in a different mode and that will mean that restrictions that have a negative economic impact will be lifted.
Until then, there's always the prospect of resurgence of the virus once restrictions are lifted, and that will keep the lid on the markets.
If there's strong news of effective treatments in the short term, that may kick off a sustained rally soon.
Of course the other things you mention are very valid too and will have positive effects, and may be "the one".
[+] [-] Majromax|6 years ago|reply
This mode is rigged.
Any proposal for market timing requires correlated returns. "Technical" traders infer short-term trends form patterns like the shave-and-a-haircut and lovely-lady-humps that are ultimately based on a theory of market psychology, and "fundamental" traders usually make structural observations like price-to-earnings ratios being mean-reverting.
Both of these hypotheses are excluded by construction when market results are constructed by a random draw of daily returns.
[+] [-] TomMckenny|6 years ago|reply
At any rate, if the market trends upward and trading is close to random (regardless of what the trader believes) then being out of the market occasionally will always be bad statistically. If there are vast numbers of traders all actually acting randomly then some will out preform others and some tiny number might out preform the market. In fact, if you have the data, you can plot the performance of every trader against the market average and actually measure how far from random the average trader is.
Maybe price to earnings ratio "should" relate to stock price. But in actuality stock price is determined by what people are willing to pay for it obviously. To the degree that people are buying and selling _not_ based on P/E, say for example they are doing so somewhat randomly, then the P/E won't reflect accurately the stock price: it won't be predictive.
These hulking paragraphs is what the demo is basically saying.
[+] [-] grey-area|6 years ago|reply
Absent any of that information, obviously you can’t guess how the stocks will move (i.e. time the market), except that they will in aggregate move gradually upwards in price as all currencies aim for inflation.
With that information, sometimes the way the market will move over a time period of years is clear. Clearly the consensus moves in a panicky way with the latest news, and constantly undershoots or overshoots real returns, but it is based on real returns in the long run.
[+] [-] rmrfstar|6 years ago|reply
Any proposal for market timing requires an observable x[t] that is correlated to R[t+d] for d>0. The returns may themselves lack any auto-correlation.
If market returns are auto-correlated in some way, then x[t] could be a function of R[s] for s<=t.
In the context of this game, x[t] would be some information about the internal state of the RNG at time t.
[+] [-] jcfrei|6 years ago|reply
[+] [-] valuearb|6 years ago|reply
And technical patterns aren’t predictive.
[+] [-] dnpp123|6 years ago|reply
"The market returned 214.6% during this period or 21.05% annually."
This simple math statement is wrong and makes me wonder about this website accuracy.
edit : yes this was for a period of 9 years on the market which should be around 9% annual returns instead.
[+] [-] thaumasiotes|6 years ago|reply
> edit : yes this was for a period of 10 years on the market which should be around 8% annual returns instead.
How did you get a period of 10 years? It runs in 3-year increments.
[+] [-] andreareina|6 years ago|reply
[+] [-] vidanay|6 years ago|reply
Just a prognostication on my part, it's worth exactly what you paid for it.
[+] [-] Klinky|6 years ago|reply
We'll also see hyperspecialization towards COVID-19 in the health sector, which could leave those industries vulnerable when COVID-19 finally runs its course(likely many months from now).
Some industries are already failing, and will need propped up. If not, then those industries will take awhile to recover after COVID-19 runs its course.
Also I'd be incredibly wary of huge single day gains. Consistent slower gains is a better sign of a healthier economy than the spiky behavior we've seen as of late indicating people are heavily speculating on the volatility.
[+] [-] fennecfoxen|6 years ago|reply
[+] [-] empath75|6 years ago|reply
[+] [-] dpc_pw|6 years ago|reply
You, you can absolutely "time the market". You just can't do it exclusively based on the chart. The real world is still there, and it's important, you know? And Stock Market and savings accounts are not the only investment instruments available to people. And you don't have to be all in or all out.
Maybe if you don't have time and skills to think about it, etc. then this makes you feel better about your "investments" because "there was nothing you could have done better". But it's still load of rubbish.
[+] [-] the_gastropod|6 years ago|reply
Are you suggesting there’s more money in the market of selling index funds than there is in the market of selling you the idea that you can beat the index? Because I’ve got news for you...
> You, you can absolutely "time the market". You just can't do it exclusively based on the chart. The real world is still there, and it's important, you know? And Stock Market and savings accounts are not the only investment instruments available to people. And you don't have to be all in or all out. Maybe if you don't have time and skills to think about it, etc. then this makes you feel better about your "investments" because "there was nothing you could have done better". But it's still load of rubbish.
There have been countless studies done about this, and countless fools who tricked themselves, like scratch off players and gambling addicts, who think they’re winning. It’s exceedingly uncommon for investors to beat the market over 10+ year periods.
[+] [-] heartbeats|6 years ago|reply
[+] [-] raphaelrk|6 years ago|reply
[+] [-] thekyle|6 years ago|reply
No, assets under management is irrelevant to price discovery. Trading is what sets prices not holding stocks. According to a 2018 Vanguard paper index funds only made up around 5% of trading volume despite holding about 50% of assets. So active managers are still responsible for 95% of price discovery even if they hold only 50% of assets.
https://personal.vanguard.com/pdf/ISGBEL.pdf
[+] [-] unknown|6 years ago|reply
[deleted]
[+] [-] loganfrederick|6 years ago|reply
https://jpm.pm-research.com/content/29/1/51
[+] [-] jbullock35|6 years ago|reply
[+] [-] lend000|6 years ago|reply
My opinion is that buying and holding the index is better than picking stocks and timing the market unless you are a professional (you need to be doing it full time to gain a consistent edge, and even then it isn't guaranteed). However, even then, it is only good advice if equities is a small part of your overall portfolio. Blindly buying and holding the index is not smart if your net worth is 80% tied in equities -- you should diversify in bonds, real estate, precious metals, and other commodities.
[0] https://en.wikipedia.org/wiki/Japanese_asset_price_bubble
[+] [-] slothtrop|6 years ago|reply
Only going for equities is risky I agree, but I don't see this as an ETF problem.
[+] [-] c06n|6 years ago|reply
[+] [-] thaumasiotes|6 years ago|reply
That's because the only actions you can take in the game are "buy the index" and "sell the index".
As soon as there's more than one price in the market (even, say, one index tracking DJIA and another one tracking S&P 500), it's possible to beat the market average while prices are rising.
[+] [-] qihqi|6 years ago|reply
I don't get why is beating the market a goal, isn't making money the goal? I am much happier making 20% while market is up 30%, than losing 5% when the market loses 20%.
[+] [-] hinkley|6 years ago|reply
[+] [-] empath75|6 years ago|reply
Add in some information like ‘a new pandemic threatens to shut the world economy for months and kill tens of millions of people’ and suddenly this changes.
[+] [-] czbond|6 years ago|reply
A pandemic is an edge case... However, markets react much more quickly than in the past (algorithms, global data, instant analysis of that data) - that technical analysis short term timelines have compressed.
If you want statistical breakdowns of each pattern, their movements, and outcomes - this book is a great reference. https://www.amazon.com/Encyclopedia-Chart-Patterns-Thomas-Bu...
[+] [-] brownbat|6 years ago|reply
But this game really just proves that you can't time the market while knowing nothing about the outside world.
Headlines sometimes matter.
Not all the time. Talking heads generally overstate how much one random speech matters, "politician X says Y, therefore stocks are reacting" is generally just over-analyzing noise. It's annoying to see post hoc rationalizations the norm in financial... in all news. People claim causation for anything they happened to read.
But occasionally, once a decade, say? Headlines do send a strong signal. "Crisis on Wall Street as Lehman Totters" was a headline that came just before the biggest cliff in 2008.
In February 2020 we didn't know as much as we do now, but people already started talking about difficulties in containment. China--which likes itself some economic growth (if only to keep the Party going)--decided a near total economic shutdown was necessary. The virus was already in a few dozen countries and Singapore was surrounded by container ships that couldn't dock.
So let's split out two separate claims:
1) The weak efficient markets hypothesis: you can't time the market blind.
2) Strong EMH: you can't time the market, not even once in a while, with your eyes wide open.
In defense of (2), the housing crisis really started in October 2007, and ended in February 2009. You can delve for headlines for those moments, but they are way more specious. Here's the real test: what will be the best signal of the rally after the pandemic?
1) China hitting zero active cases, reassuring the world it can be done.
2) Global new case "growth rate" below 1 for two straight weeks? [Growth rate being the ratio of today's new cases to yesterday's new cases, with lower than 1 a tipping point away from exponential growth, and probably the halfway point in the crisis.]
3) China keeping no new local cases even after reopening its economy?
4) Some decision about how to keep airlines solvent?
5) Unemployment nearing historical normals after skyrocketing beyond anything we've ever seen?
Any of these seem plausible. But who knows which will be right? However, if we are attacking strong EMH, we don't really have to time things maximally, we just have to do slightly better than the index. So maybe just wait until the S&P 500 has recovered a quarter of its losses and get in then?
Maybe the general problem with active investing is the financial sector's approach: hire people to study market signals full time and generate algorithms that can trade more and more actively. Full time people are expensive, and tuning algorithms is expensive. So that means you burn through fees (on top of probably not outperforming the market, because you're competing against noise).
If you hire people to do something full time, they will find ways to justify their time. If you hire someone to play rock paper scissors full time, and give them some of the highest bonuses in the world, they will come up with some very nice models. And usually not outperform a random thrower, but give you lots of reports on why and how they'll do better next time.
But if all the daily signals are noise except for one really blaring foghorn once a decade, maybe the better solution would be to hire a part time market hobbyist on a contingency fee. "Hey, if you see a signal that the entire market should be shorted, maybe short the market. You get two trades per decade max. Otherwise, just index and hold."
Probably also wouldn't work, but I really like the idea of some plumber in Poughkeepsie controlling billions of dollars in hedge fund money, you know, just as a side hustle.
[+] [-] corey_moncure|6 years ago|reply
It's impossible to time the market perfectly every time because that would imply perfect knowledge of the moves of all the participants. By the same token, it's impossible to mis-time the market every time, because then you could just take all the opposite moves and you're back to winning. It is possible to win more than you lose, not by being the smartest, but simply by being smarter than the average participant. Which, thanks to companies like Robinhood putting trading capability into the hands of any naive smartphone owner, has become easier than ever.
[+] [-] GlennFarrant|6 years ago|reply
Until then, there's always the prospect of resurgence of the virus once restrictions are lifted, and that will keep the lid on the markets.
If there's strong news of effective treatments in the short term, that may kick off a sustained rally soon.
Of course the other things you mention are very valid too and will have positive effects, and may be "the one".
[+] [-] saalweachter|6 years ago|reply
When people start worrying that there is a new bubble. :-)
[+] [-] legulere|6 years ago|reply
[+] [-] RickJWagner|6 years ago|reply