Larry Swedroe: What Makes Factors Endure

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nedsaid
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Re: Larry Swedroe: What Makes Factors Endure

Post by nedsaid » Thu Jun 14, 2018 11:41 pm

Random Walker wrote:
Thu Jun 14, 2018 11:37 pm
nedsaid wrote:
Thu Jun 14, 2018 11:07 pm

Certainly AI will be a bigger factor in markets but I am skeptical that human emotion will be taken out.
As much as I believe in ruthlessly efficient markets always getting more so, I tend to agree. Just think human emotion can’t get sucked out of the markets no matter how advanced the gizmology gets.

Dave
My best guess is that gizmology will make the effect of human emotion worse. But what do I know?
A fool and his money are good for business.

Random Walker
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Re: Larry Swedroe: What Makes Factors Endure

Post by Random Walker » Thu Jun 14, 2018 11:59 pm

nedsaid wrote:
Thu Jun 14, 2018 11:41 pm
Random Walker wrote:
Thu Jun 14, 2018 11:37 pm
nedsaid wrote:
Thu Jun 14, 2018 11:07 pm

Certainly AI will be a bigger factor in markets but I am skeptical that human emotion will be taken out.
As much as I believe in ruthlessly efficient markets always getting more so, I tend to agree. Just think human emotion can’t get sucked out of the markets no matter how advanced the gizmology gets.

Dave
My best guess is that gizmology will make the effect of human emotion worse. But what do I know?
Yes, like the flash crash several years ago. Didn’t it take quite a while for people doing forensics on that to figure out how it happpened?

stlutz
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Re: Larry Swedroe: What Makes Factors Endure

Post by stlutz » Fri Jun 15, 2018 12:41 am

I don't know, computers and algorithms seem to amplify human emotion. I doubt that AI will be any different. Somehow, greed and fear are still in fashion.

I suppose someone will try baffling AI by doing seemingly really irrational trades. Do weird things in the markets to try to get AI machines to do weirder things in response. I can see someone with big shorts out there trying to freak out the machines to try to get markets to crash. Make the computers just go crazy by trying to create false signals in the markets.
I think you're right. But I think its the case that the computers will create different anomalies in the future than have existed in the past. The past ones are pretty easy for them to arbitrage away. The people who can figure out the new ones that they are creating will be the [rich] geniuses 10 years from now.

Note: I'm not one of those geniuses, so I'll have to settle for the market return.

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nedsaid
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Re: Larry Swedroe: What Makes Factors Endure

Post by nedsaid » Fri Jun 15, 2018 8:31 am

stlutz wrote:
Fri Jun 15, 2018 12:41 am
I don't know, computers and algorithms seem to amplify human emotion. I doubt that AI will be any different. Somehow, greed and fear are still in fashion.

I suppose someone will try baffling AI by doing seemingly really irrational trades. Do weird things in the markets to try to get AI machines to do weirder things in response. I can see someone with big shorts out there trying to freak out the machines to try to get markets to crash. Make the computers just go crazy by trying to create false signals in the markets.
I think you're right. But I think its the case that the computers will create different anomalies in the future than have existed in the past. The past ones are pretty easy for them to arbitrage away. The people who can figure out the new ones that they are creating will be the [rich] geniuses 10 years from now.

Note: I'm not one of those geniuses, so I'll have to settle for the market return.
I remember Jim Cramer admitting on national TV that as a hedge fund manager that he would spread rumors to attempt to drive down the prices of certain stocks. The clip is probably floating around on YouTube somewhere and it amazed some people that this didn't earn him a lifetime ban from the SEC. It is probably just the way the game is played.

I just can't imagine that someone wouldn't try in a similar fashion to send fake market signals to confuse Artificial Intelligence. I mean, how would the Securities Exchange Commission regulate this? If I ran big money, the temptation to sabotage the other guy's AI would be pretty large. Can Artificial Intelligence be manipulated? I know that manipulation works on humans, why not machines?
A fool and his money are good for business.

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nedsaid
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Re: Larry Swedroe: What Makes Factors Endure

Post by nedsaid » Fri Jun 15, 2018 8:39 am

Random Walker wrote:
Thu Jun 14, 2018 11:59 pm
nedsaid wrote:
Thu Jun 14, 2018 11:41 pm
Random Walker wrote:
Thu Jun 14, 2018 11:37 pm
nedsaid wrote:
Thu Jun 14, 2018 11:07 pm

Certainly AI will be a bigger factor in markets but I am skeptical that human emotion will be taken out.
As much as I believe in ruthlessly efficient markets always getting more so, I tend to agree. Just think human emotion can’t get sucked out of the markets no matter how advanced the gizmology gets.

Dave
My best guess is that gizmology will make the effect of human emotion worse. But what do I know?
Yes, like the flash crash several years ago. Didn’t it take quite a while for people doing forensics on that to figure out how it happpened?
This is why I believe factors will endure because you can't take human emotion out of the markets. The old greed and fear thing. In my opinion, factors have primarily a behavioral explanation. Of course they are a risk story too but human nature is involved with risk creation as well.
A fool and his money are good for business.

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Re: Larry Swedroe: What Makes Factors Endure

Post by triceratop » Fri Jun 15, 2018 9:16 am

nedsaid wrote:
Fri Jun 15, 2018 8:31 am
stlutz wrote:
Fri Jun 15, 2018 12:41 am
I don't know, computers and algorithms seem to amplify human emotion. I doubt that AI will be any different. Somehow, greed and fear are still in fashion.

I suppose someone will try baffling AI by doing seemingly really irrational trades. Do weird things in the markets to try to get AI machines to do weirder things in response. I can see someone with big shorts out there trying to freak out the machines to try to get markets to crash. Make the computers just go crazy by trying to create false signals in the markets.
I think you're right. But I think its the case that the computers will create different anomalies in the future than have existed in the past. The past ones are pretty easy for them to arbitrage away. The people who can figure out the new ones that they are creating will be the [rich] geniuses 10 years from now.

Note: I'm not one of those geniuses, so I'll have to settle for the market return.
I remember Jim Cramer admitting on national TV that as a hedge fund manager that he would spread rumors to attempt to drive down the prices of certain stocks. The clip is probably floating around on YouTube somewhere and it amazed some people that this didn't earn him a lifetime ban from the SEC. It is probably just the way the game is played.

I just can't imagine that someone wouldn't try in a similar fashion to send fake market signals to confuse Artificial Intelligence. I mean, how would the Securities Exchange Commission regulate this? If I ran big money, the temptation to sabotage the other guy's AI would be pretty large. Can Artificial Intelligence be manipulated? I know that manipulation works on humans, why not machines?
Here's the video: https://www.youtube.com/watch?v=JEzsfPmh894

It was very well used by Jon Stewart to discredit him as an honest, ethical, and reliable broker of information back in the Daily Show / CNBC wars.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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nedsaid
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Re: Larry Swedroe: What Makes Factors Endure

Post by nedsaid » Sun Jul 22, 2018 11:38 am

Random Walker wrote:
Tue Jun 12, 2018 9:11 am
St Lutz,
Yes I do think small stocks are riskier than big stocks. Who would you rather lend money to, a huge multinational company or a smaller local or regional company? Who would you charge the higher interest rate? The cost of capital for a company equals the expected return for the company’s stock. I wouldn’t expect grouping all the small companies together doesn’t change their average cost of capital.
Can’t give you much insight into the growth/value thing. I’ve simply read that value risk is specifically associated with doing badly in bad times. It intuitively makes sense to me as well. Companies that are highly leveraged and have volatile earnings would seem especially susceptible to me. I think growth stocks are subject to a different kind of risk, I think of it as bubble risk. In good times investors get overly optimistic about earnings growth, project it way out in the future, then stock takes itmon the chin when the perfect expectations for the future are not met.
YOU DO SEE LARGE CAP GROWTH RECOMMENDED ALL THE TIME on this forum. TSM and S&P 500 are dominated by large cap growth so much that they are effectively large cap growth funds. The factor folks believe they have plenty of large cap growth already in their core or TSM funds; they are trying to diversify away from that bias already in their portfolios.
I believe that despite the apparent popularity of value now, the actual growth-value spreads have not really changed. If value has been over grazed, we’d expect valuations to narrow.

Dave
This is a good rationale for Small/Value tilting, this summarizes my arguments very well. Yes, the S&P 500 and the US Total Stock Market Index are Large Cap Growth funds. Just over 50% of the US Market Cap are the top 100 companies. The two indexes I mentioned are in effect not just Large Cap Growth but actually Mega Cap Growth.
A fool and his money are good for business.

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Re: Larry Swedroe: What Makes Factors Endure

Post by stlutz » Sun Jul 22, 2018 12:16 pm

It's kind of funny, when I clicked on the thread to see what Nedsaid wrote, it actually dumped me a few posts above where I had said,"But I think its the case that the computers will create different anomalies in the future than have existed in the past. The past ones are pretty easy for them to arbitrage away. The people who can figure out the new ones that they are creating will be the [rich] geniuses 10 years from now."

That reminded me of this article that I had read this week: https://www.bloomberg.com/news/articles ... inst-flows

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nedsaid
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Re: Larry Swedroe: What Makes Factors Endure

Post by nedsaid » Sun Jul 22, 2018 12:32 pm

stlutz wrote:
Sun Jul 22, 2018 12:16 pm
It's kind of funny, when I clicked on the thread to see what Nedsaid wrote, it actually dumped me a few posts above where I had said,"But I think its the case that the computers will create different anomalies in the future than have existed in the past. The past ones are pretty easy for them to arbitrage away. The people who can figure out the new ones that they are creating will be the [rich] geniuses 10 years from now."

That reminded me of this article that I had read this week: https://www.bloomberg.com/news/articles ... inst-flows
[/quote}
Lu Wang said:

According to quant strategists at Deutsche Bank, investors can beat equity benchmarks by building portfolios out of stocks that get whipped around the most when exchange-traded funds rebalance.

Bet against the ones they buy, and buy the ones they sell, is what they recommend. If all you did was go long stocks with the most negative ETF flows over the last 12 years, you would’ve topped the Russell 3000 Index by 2 percentage points annually. Buying and shorting returned 7.2 percent a year, the firms says. That’s more than double the best-performer among 10 factors tracked by Bloomberg over the period.
Wow, the Nedsaid effect works even with ETFs based on indexing. That is what you sell tends to outperform what you bought to replace it. The sells tend to outperform the buys at a 2:1 or even a 3:1 ratio. Goshdarn it anyway, I wish I could trademark the "Nedsaid effect." An entire new investment strategy built upon it.

Glad that someone opens a thread to see what I said about it.
A fool and his money are good for business.

stlutz
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Re: Larry Swedroe: What Makes Factors Endure

Post by stlutz » Sun Jul 22, 2018 2:20 pm

Wow, the Nedsaid effect works even with ETFs based on indexing. That is what you sell tends to outperform what you bought to replace it. The sells tend to outperform the buys at a 2:1 or even a 3:1 ratio. Goshdarn it anyway, I wish I could trademark the "Nedsaid effect." An entire new investment strategy built upon it.

Glad that someone opens a thread to see what I said about it.
You need to start an ETF. Ticker symbol NED. :D

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nedsaid
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Re: Larry Swedroe: What Makes Factors Endure

Post by nedsaid » Sun Jul 22, 2018 3:56 pm

stlutz wrote:
Sun Jul 22, 2018 2:20 pm
Wow, the Nedsaid effect works even with ETFs based on indexing. That is what you sell tends to outperform what you bought to replace it. The sells tend to outperform the buys at a 2:1 or even a 3:1 ratio. Goshdarn it anyway, I wish I could trademark the "Nedsaid effect." An entire new investment strategy built upon it.

Glad that someone opens a thread to see what I said about it.
You need to start an ETF. Ticker symbol NED. :D
Humor does a great job of driving home a point that many paragraphs of narrative cannot.

As far as the NED ETF, nuttier things have been tried. Perhaps Nisiprius Investments will underwrite this idea. Cliff Asness at AQR probably won't, not after I told him that he resembled Rob Reiner. There went my Wall Street career. Oh well.
A fool and his money are good for business.

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