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And yet Ed Thorpe, from 1969-88, had 227 months where he made money, and 3 where he lost. Over that time frame, he had a mean return of well north of 15%, with a standard deviation of 4%. What precisely did you prove? Edit - your arguments are incoherent - I, or most others who claim that some people can consistently beat the market, are not relying upon some mythical, eternal method. You're correct in that any such method will become public and therefore worthless. I imagine consistently winning takes constant work and innovation.

Furthermore, no is claiming that [i]anyone[/i] can "make huge sums of money systematically without risk," or that successful hedge funds that can turn 1 dollar into 1+r dollars can always turn 1e9 dollars into (1+r)e9 dollars, or even that there exists a single financial genius that can entirely eliminate risk.

What a collection of straw men you have succeeded in knocking down!

> And yet Ed Thorpe, from 1969-88, had 227 months where he made money, and 3 where he lost.

First, he didn't beat the market average 227 times in a row -- for most of those periods, he didn't lose money, but then a buy & hold investor also didn't lose money. A meaningful comparison would have to compare his outcomes with that for a buy & hold investor riding the ascending market value by holding a boring, geriatric index fund.

Second, I wish people would study probability theory and statistics before trying to have conversation like this one. A totally random computer-generated market, with random trades, produces a handful of very spectacular outcomes, by chance alone. The larger the investor pool, the greater the chance for a spectacular chance performance.

http://arachnoid.com/equities_myths/index.html#Market_Model

In the above market model, which is a computer market driven by random trades, no intelligence, essentially flipping coins, out of 100 investors, the best performance over 30 years is $233,000 from an initial stake of $10,000 (an average performance would be $51,800). And if you increase the investor pool to millions like in real life, you greatly increase the size of the most spectacular performances.

Now imagine that the best performer is a human being instead of a computer model. What are the chances that he will say, "Oh, I was just lucky." For one thing, he might not understand enough probability theory to even grasp that chance could explain the outcome. For another, he might want to set himself up as a financial expert and make more money exploiting other people's stupidity than he ever made in equities.

> I imagine consistently winning takes constant work and innovation.

Imagine anything you like. There are no secrets of the winners. Prove this false using scientific evidence. Prove that spectacular performances cannot result from the workings of chance, as my computer model proves.

> ... your arguments are incoherent ...

Only to someone who has his mind made up and who cannot evaluate evidence. Imagine a group of people flipping coins -- how many people need there be, flipping fair coins, for one of them to have a 50% chance to flip heads 20 times in a row? And what is the chance for the lucky winner to say, "Oh well, it was probably a chance outcome"?

answer: 2^20 = 1,048,576 people.

It is difficult to imagine what sort of evidence will convince you. All sorts of behavior is possible under all sorts of unrealistic models.

I'd also like to note the irony of your snarky comment about wishing that those who disagree with you ought to study some math, given the background of managers like Jim Simons.

Edit: > First, he didn't beat the market average 227 times in a row -- for most of those periods, he didn't lose money, but then a buy & hold investor also didn't lose money. A meaningful comparison would have to compare his outcomes with that for a buy & hold investor riding the ascending market value by holding a boring, geriatric index fund

The stock market rose by about 8 or 9% annually during that time. Dismissing his 227 positive months requires absurd contortions, like positing that his firm would invest in the stock market or t-bills for 11 months out of the year, and then make a series of large bets in the remaining month. Given that he made, I believe, 10k bets a year, the disparity in bet size must be massive to even come close to supporting your hypothesis.

> It is difficult to imagine what sort of evidence will convince you.

What are you talking about? There is no evidence for the assumption, and the only reliable evidence stands against it, like the WSJ Dartboard Contest.

If a particular institution does better than the averages, the most likely explanation is chance, and no other explanation has anything resembling scientific evidence. And the Dartboard Contest demonstrates that, when called on to put up or shut up, the professionals weren't able to put up.

> The stock market rose by about 8 or 9% annually during that time. Dismissing his 227 positive months requires absurd contortions ...

No, it requires acknowledging that the market rose by 8 or 9% per annum, as you just pointed out. His performance needs to be compared to the market averages, not to a hypothetical flat market. I can see you're not getting this -- someone says, "I must be a stock genius, because I never saw zero or negative growth in my portfolio." Someone then deflatingly points out, "Neither did the average market, the holdings of retired, risk-averse investors in Ohio."

> ... to even come close to supporting your hypothesis.

It is not my hypothesis, it is the default assumption of people with scientific training -- if there is no evidence, there is no effect. And there is no evidence.

In a pool of ten million investors, a handful will show spectacular performance by chance alone -- this is a mathematical fact -- and those individuals would have to be saints to avoid assuming and claiming they're stock picking geniuses.

Occam's razor is a precept that says the simplest explanation tends to be the right one. The simplest explanation is that some investors come out ahead because of chance. This means the burden of evidence rests with those who would like to claim that stock market performances arise from "secrets of the winners".

That would be you.

>But don't take my word for it -- instead, think. If there really was a surefire way to beat market averages, it wouldn't remain a secret for long, then everyone would practice it.

Not if it's costly. By that I mean what if there is a market oracle that can pick tomorrows winners, but you have to pay X dollars to pull the crank and get the info.

In that case, it could be possible to "beat the market" in the sense that your stocks overperform, but you do not actually beat the market if you factor in the cost of the oracle.

Real world example: http://www.cnbc.com/id/100809395

>A closely watched consumer confidence number that routinely moves markets upon release is accessed by an elite group of traders, for a fee, a full two seconds before its official release, according to a document obtained by CNBC.

Another situation would be that you could overperform the market if you hired thousands of employees that analysed the markets, but not so much that you could pay their wages and still win.

It could also be the case that some people have a comparative advantage. Maybe they have certain skills that enable them to win were other people cannot.

I can't believe you aren't getting this. There are no secrets of the winners.

> Real world example: http://www.cnbc.com/id/100809395

That's an announcement effect, not a method for beating the market. It exploits people's stupidity, not their intelligence. For a classic announcement effect, there are an equal number of winners and losers, and the average return is zero. In this specific example, some people get to buy the stocks in advance of the public announcement, then the public investors stupidly and dutifully buy stocks whose price has already peaked and is about to fall. It transfers money from uneducated investors to educated ones. If the uneducated investors realized what was being done to them, they would not invest and the system would collapse.

http://www.investopedia.com/terms/a/announcment-effect.asp

A typical announcement effect scam are online penny stock touters, who:

1. Buy a worthless stock.

2. Tout the stock online: "I just heard from my cousin that this stock is about to move!"

3. Wait for some idiots to invest in the stock.

4. Sell.

> It could also be the case that some people have a comparative advantage. Maybe they have certain skills that enable them to win were other people cannot.

Maybe Occam's razor says that it's all chance.

You're on the money in both this post and the grandparent. However, I'd urge you to examine your style. There's no need to condescend. In particular: > I just proved it. If you didn't understand the above proof, read it again.

> I can't believe you aren't getting this.

Plenty of otherwise rationally minded people have a hard time reasoning about this stuff. If I had a dollar for every time someone suggested that you can beat the house by playing a Martingale... gosh! You'll have a much easier time persuading people if you don't insult them.

I agree with your point, but in the 21st century, I have a hard time accepting that many people ignore basic scientific principles -- in particular, the null hypothesis, which in essence says that a given proposition is assumed to be false until there's evidence for it.

> Plenty of otherwise rationally minded people have a hard time reasoning about this stuff.

Rationality is what rationality does. There's a devious investment scam that, once explained, seems obvious, but most people fall for it unless forewarned. I call it the "Miracle Man" scam. Here it is:

http://arachnoid.com/equities_myths/index.html#Miracle_Man

I would like to live in a world where a scam like "Miracle Man" couldn't work, because people would say "It seems too good to be true, therefore chances are it's not true."

But that's not this world, not by any means.

>It transfers money from uneducated investors to educated ones

And this is exactly what you "proved" could not happen

I think the point of the article is that is difficult to distinguish between luck and skill. (Or even a combination) But skill is still involved. Not doubt some people are smart and knowledgeable and some are not.

Following your example I can imagine that there is a mechanism (I wouldn't call it surefire) that can improve your odds. But that mechanism is difficult to acquire, difficult to transfer and not very scaleable. Therefore it is difficult for everybody to practice it. In fact some do it so badly that they end up loosing more than the average.

> If you think hard enough, you will realize why there cannot be a deterministic, legal system to beat the market.

I don't think anyone is arguing that there is a deterministic legal system to beat the market. Only that some people may be skilled enough to beat the market. edit:punctuation

> I think the point of the article is that is difficult to distinguish between luck and skill.

Not difficult, impossible. It cannot be established scientifically. No control group, no meaningful controls.

> Following your example I can imagine that there is a mechanism (I wouldn't call it surefire) that can improve your odds.

And people who write worthless "secrets of the winners" books rely on this very assumption (and on the stupidity of the average investor). If such a thing existed, one of two things would happen:

1. It wouldn't remain secret for long, therefore everyone would practice it, therefore it would become the new average market performance. End result: no secret.

2. It would remain secret in perpetuity, the owner(s) of the secret would use it to either drain the market of its capital or foment public doubt about market fairness, as a result of which businesses would stop using the equities market to raise capital. End result: no market.

So the "secret" would either destroy the market, or the market would adjust to its existence in a way that everyone would have the same opportunity. Therefore there is no secret.

> I don't think anyone is arguing that there is a deterministic legal system to beat the market. Only that some people may be skilled enough to beat the market.

I hope you now see that this is impossible.

> It would remain secret in perpetuity, the owner(s) of the secret would use it to either drain the market of its capital or foment public doubt about market fairness...

If this 'secret' could only be applied in small amounts, then the owner couldn't drain the market. Why do you think Buffett believes large funds can't outperform?

You assume any such 'secret' is infinitely scaleable. That's an incorrect assumption.

Insider trading is an advantage that exists but doesn't fall into your #1. Has it 'drained the market' or stopped businesses from using the stock market?

> You assume any such 'secret' is infinitely scaleable.

First, I never said or assumed that. Second, Human greed is, in fact, infinitely scaleable. But this is a silly debate -- obviously the most likely explanation for a spectacular market performance is chance.

> Insider trading is an advantage that exists but doesn't fall into your #1. Has it 'drained the market' or stopped businesses from using the stock market?

In a word, yes -- in a number of cases, companies try to buy themselves out of the stock market, for that and other reasons (like the tyranny of quarterly earnings reports and shortsighted boards of directors).

We're off on a tangent now. We've left the original topic. And the original topic was resolved by noting the WSJ Dartboard Contest, where managers had every incentive to show what they could accomplish, but instead they failed, spectacularly, in public, for years.

If there really was a surefire way to beat market averages, it wouldn't remain a secret for long, then everyone would practice it, then that "system" would become the norm -- the market average performance

But this applies to any human endeavour! What's the secret to being successful in any field? Or rather, why aren't we all world-class concert pianists or martial artists or ballet dancers or whatever takes your fancy? Because knowing "the system" and practicing the system are very different things...

It doesn't have to be a 'system' that's replicable. It might just be on a case-by-case basis. Maybe a few people just have a knack at seeing something most others tend to miss and that this varies from stock to stock.

> It doesn't have to be a 'system' that's replicable. It might just be on a case-by-case basis.

Sure, no problem with that. Case by case -- half the time it works, the other half the time it doesn't. Sum the outcomes and you have average performance, and you might as well have invested in an index fund and caught up on your reading.