Investing

Does technical trading work? It doesn’t. There are many chart-based and technical systems for trying to read markets. These systems are so widespread that they are already built into most prices. Going against them would have a better chance than following them. If you see candlesticks and shapes, run.

Does fundamental investing work? Not so much. Everyone has the same information, which means “the fundamentals” are already priced in, so you can’t get an edge by studying reports and analyses. Stock market investing is a game of wolves and sheep, where the wolves are those with a computing and algorithmic or data advantage, and the sheep are all the rest of us. Hedge funds are in an arms race to create profitable algorithms, and now most of those funds have reached the same plateau. Even Warren Buffett says he can’t beat the market (and hasn’t in over 20 years). Those who have an edge over the market usually make money until their edge disappears, often surprisingly quickly. The problem is skewness, which you can understand from reading this technical paper or by reading The Black Swan, by Nassim Taleb. My favorite book on investing is A Man for All Markets, by Ed Thorp.

So how should I invest? Mostly passively. Most of us mortals can’t generate alpha, so it’s better to capture beta. That means take advantage of the average gains of various asset classes. Have exposure to global markets, real estate, and inefficient asset classes. Try to find “smart beta” opportunities. Pick a few private funds that specialize in small niches. As Eliezer Yudkowsky says, “An efficient market is one where smart individuals should generally doubt that they can spot overpriced or underpriced assets.” Most markets are very efficient. If you can pick the winners ahead of time, by all means give it a try. You might get lucky.*

Should I buy or hold gold? Gold has traditionally been seen as a hedge against inflation. However, people don’t understand that the central banks cause 100 percent of long-term inflation. Central banks currently target 2 percent. In the past, they undershot that target. Since Covid, they have way overshot that target and caused a lot of unnecessary problems. Because central banks can control inflation, gold is useless as a hedge against runaway inflation. A second fear is the total meltdown of a government or its fiat system of money. While it has happened in places like Argentina and Venezuela, only conspiracy theorists are worried about a major currency going under. Even F. A. Hayek explained that gold is a poor form of money. Real estate is generally a better, but less liquid, store of value.

What causes financial bubbles? I don’t believe they exist. They are a story told in reverse after a shock. Most “bubbles” — from the Dutch Tulipmania* to the Great Depression to the housing bubble — are very poorly understood by experts and the general public. Cause and effect is a story told in reverse but rarely applies again. In reasonably liquid markets, prices accurately reflect the market’s assessment of upside and downside . If traders could easily short (bet against the rise of) any asset, and if insiders could trade (with immediate transparency), that would make markets even more efficient.