How to profit from irrational behavior?

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embwbam
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How to profit from irrational behavior?

Post by embwbam »

I think there's solid evidence that people are being crazy right now, speculating on stocks, crypto, etc. But as we know "The market can remain irrational longer than you can stay solvent".

I keep finding myself missing the boat on speculative explosions. For example, I avoided buying real estate after the 2008 crash because I don't believe in it, and the people around me buying houses seem irrational to me. Yet, they all have done very well. I'm a technologist, and have followed bitcoin from the beginning. I avoided it because it seemed like it was only flooded by speculators. And yet, the speculators are hugely rich, and investing a small amount would have cost me little.

There must be a rational way to take advantage of irrational behavior. Otherwise, what is the point in being rational, besides reducing risk?

Are there logical ways to modify a 3-fund portfolio to take advantage of speculation without market timing? For example, if I notice that people are speculating on BTC or TSLA, perhaps I can stake out a 1% position and keep rebalancing. They will inevitably crash, but can a small position allow a conservative investor to ride the wave a little, without market timing? Maybe it's too late now for BTC and TSLA, but I could act on the next insane trend I notice.

Any other ideas or thoughts?
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Re: How to profit from irrational behavior?

Post by anon_investor »

embwbam wrote: Fri Jan 22, 2021 10:15 pm I think there's solid evidence that people are being crazy right now, speculating on stocks, crypto, etc. But as we know "The market can remain irrational longer than you can stay solvent".

I keep finding myself missing the boat on speculative explosions. For example, I avoided buying real estate after the 2008 crash because I don't believe in it, and the people around me buying houses seem irrational to me. Yet, they all have done very well. I'm a technologist, and have followed bitcoin from the beginning. I avoided it because it seemed like it was only flooded by speculators.

There must be a rational way to take advantage of irrational behavior. Otherwise, what is the point in being rational, besides reducing risk?

Are there logical ways to modify a 3-fund portfolio to take advantage of speculation without market timing? For example, if I notice that people are speculating on BTC or TSLA, perhaps I can stake out a 1% position and keep rebalancing. They will inevitably crash, but can a small position allow a conservative investor to ride the wave a little, without market timing? Maybe it's too late now for BTC and TSLA, but I could act on the next insane trend I notice.

Any other ideas or thoughts?
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Re: How to profit from irrational behavior?

Post by arcticpineapplecorp. »

you have to make sure you're not the greatest fool.

once you figure that out, let us know how you did that consistently.
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Re: How to profit from irrational behavior?

Post by sksbog »

You are already buying TSLA, BTC and others as part of your 3 fund portfolio.
You are speculating, that other speculators are speculating on stocks. The fact is, “no one knows” and no one has that crystal ball. Market could crash next week or five -10 years later.
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Re: How to profit from irrational behavior?

Post by Pandemic Bangs »

embwbam wrote: Fri Jan 22, 2021 10:15 pm
There must be a rational way to take advantage of irrational behavior.
Why would a rational person make this statement?

Why can't I reliably monetize the weather?

I don't think one capitalizes on irrational behavior so much as one insulates ones self from it -- via index funds, etc. I guess you can always short whatever you feel is overvalued. You'll be wrong more than you're right there, too, I bet.

I hope to avoid participating in every irrational run-up.
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Re: How to profit from irrational behavior?

Post by KlangFool »

OP,

Why do you think that you need to do anything special?

"Buy, Hold, and Rebalancing" is a good "market timing" tool.

See below.

viewtopic.php?t=335902


I made money from my REIT INDEX FUND in 2008/2009 too. My 5/25 rebalancing rule forced me to sell my REIT INDEX FUND when it went up 30+%. I harvested my gain right before the crash.


Did you rebalance in March 2020? I guess not. Or else, you would not be posting this topic.


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Re: How to profit from irrational behavior?

Post by embwbam »

arcticpineapplecorp. wrote: Fri Jan 22, 2021 10:18 pm you have to make sure you're not the greatest fool.

once you figure that out, let us know how you did that consistently.
With rebalancing, couldn't you make a large profit off of speculation even if you ARE the greatest fool? IE: let your speculative position go to zero?
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Re: How to profit from irrational behavior?

Post by embwbam »

KlangFool wrote: Fri Jan 22, 2021 10:21 pm OP,

Why do you think that you need to do anything special?

"Buy, Hold, and Rebalancing" is a good "market timing" tool.

See below.

viewtopic.php?t=335902


I made money from my REIT INDEX FUND in 2008/2009 too. My 5/25 rebalancing rule forced me to sell my REIT INDEX FUND when it went up 30+%. I harvested my gain right before the crash.


Did you rebalance in March 2020? I guess not. Or else, you would not be posting this topic.


KlangFool
Yes, I followed my IPS to the letter and rebalanced accordingly. That's what I'm saying, does adding a small speculative position to a 3-fund portfolio and rebalancing it religiously make sense, to take advantage of other people speculating?
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Re: How to profit from irrational behavior?

Post by KlangFool »

embwbam wrote: Fri Jan 22, 2021 10:24 pm
KlangFool wrote: Fri Jan 22, 2021 10:21 pm OP,

Why do you think that you need to do anything special?

"Buy, Hold, and Rebalancing" is a good "market timing" tool.

See below.

viewtopic.php?t=335902


I made money from my REIT INDEX FUND in 2008/2009 too. My 5/25 rebalancing rule forced me to sell my REIT INDEX FUND when it went up 30+%. I harvested my gain right before the crash.


Did you rebalance in March 2020? I guess not. Or else, you would not be posting this topic.


KlangFool
Yes, I followed my IPS to the letter and rebalanced accordingly. That's what I'm saying, does adding a small speculative position to a 3-fund portfolio and rebalancing it religiously make sense, to take advantage of other people speculating?
Not in this case.


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arcticpineapplecorp.
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Re: How to profit from irrational behavior?

Post by arcticpineapplecorp. »

embwbam wrote: Fri Jan 22, 2021 10:22 pm
arcticpineapplecorp. wrote: Fri Jan 22, 2021 10:18 pm you have to make sure you're not the greatest fool.

once you figure that out, let us know how you did that consistently.
With rebalancing, couldn't you make a large profit off of speculation even if you ARE the greatest fool? IE: let your speculative position go to zero?
you're assuming you've rebalanced before it's gone to zero.

Ask the employees of Enron how easy it was to sell their stock before it went to zero. Sure they might have been in a blackout period when they were prohibited by their employer from selling, but when there's a rush to the bottom do you really think it's easy to find a buyer when everyone else is selling at lower and lower prices, all trying to get out before it goes to zero? How about all the non Enron employees who owned Enron stock. Do you think it was easy for them to exit? Some still have their stock certificates that aren't worth the paper it's written on. People who owned GM prior to 2009 now have worthless GM stock when they went through the bankruptcy in 2009.
Last edited by arcticpineapplecorp. on Fri Jan 22, 2021 10:28 pm, edited 1 time in total.
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Re: How to profit from irrational behavior?

Post by livesoft »

Here is how I profit from the irrational behavior of other market participants:

1. I don't worry about making a killing on the upside. I simply stay fully invested in my asset allocation at all times.

2. I take advantage of others bailing out by using the RBD method to decide additional times to move additional money from bond funds to equity funds. There is no market timing involved because I can see when people bail out in a factual way and then act. I don't guess before they act, so no guesswork is involved at all and no predictions are needed either.
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embwbam
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Re: How to profit from irrational behavior?

Post by embwbam »

I guess my (probably flawed) hypothesis is: when I notice people speculating on something for the first time, they're likely to continue speculating for a while. Or a second time, after a crash. Lots of things people speculate on show waves of interest followed by crashes. It seems like if you bought a small position in speculative the minute you notice you could profit by rebalancing through multiple waves.

I don't know when these waves will happen, but I think I do know that they are likely to swing up and down. Is that knowledge actionable? I'm not going to short anything, because I have no idea how long things will take to crash. But if I get into something volatile I can rebalance in and out to my benefit?
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Re: How to profit from irrational behavior?

Post by Styg »

What you are describing are essentially momentum and market timing strategies, which are both forms of trend-following. They are very anti-Boglehead, but it has worked well historically if executed "properly", but that is not really saying much. There are lots of trend-following funds you could invest in e.g. VMOT, VAMO, TRND, FCTR which rotate between various stock or asset class exposure, but they tend to carry high expense ratios, and personally I think there is a significant chance that they fail spectacularly i.e. if investor behavior changes in the future. Since the return mechanism is entirely based on investor irrationality, if markets become more efficient then the returns dry up, whereas market portfolio and traditional factor investing are based on risk factors which persist over long periods of time regardless of how investors behave. Although certainly a portion of the non-market factor returns are probably caused by investor irrationality, there is enough market theory to suggest there are true underlying risks to the factors (size, value, quality) that would create premia regardless of behavior.
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Re: How to profit from irrational behavior?

Post by firebirdparts »

Well, everybody always says be greedy when others are fearful and vice versa. This is the simplest embodiment of when to be contrarian; be contrarian when the rest of the market is in agreement. That's the best advice I can give. It doesn't exactly require irrationality. It requires disagreement with other people who think they are rational.

I've said this before, but recognizing the dips in the market is really really easy. If you're 100% stocks, recognizing them doesn't do you any good. If you're not 100% stocks, then it seems likely the part of your portfolio that's not stocks is going to be a drag in the future. If you're a market timer, recognizing when to sell is pretty hard compared to recognizing a dip.

So ultimately, staying the course might be the most sure-fire way to profit from irrational behavior. That's a boring answer.
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Re: How to profit from irrational behavior?

Post by Brianmcg321 »

When the market crashed last March,I moved all of my bonds (40%) to equities. I will probably stay 100% equities a few more years.
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Re: How to profit from irrational behavior?

Post by JoeRetire »

embwbam wrote: Fri Jan 22, 2021 10:15 pm I keep finding myself missing the boat on speculative explosions. For example, I avoided buying real estate after the 2008 crash because I don't believe in it, and the people around me buying houses seem irrational to me. Yet, they all have done very well. I'm a technologist, and have followed bitcoin from the beginning. I avoided it because it seemed like it was only flooded by speculators. And yet, the speculators are hugely rich, and investing a small amount would have cost me little.
"they all have done well"?
"the speculators are hugely rich"?

Don't you think there's a bit of selection bias in those statements? And don't you think there are speculative explosions where people you know didn't do well at all?

Get Rich Quick stories are appealing and ubiquitous. Unfortunately Lose Money Fast stories are told far less often for some odd reason. :happy
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Re: How to profit from irrational behavior?

Post by dknightd »

embwbam wrote: Fri Jan 22, 2021 10:15 pm
There must be a rational way to take advantage of irrational behavior. Otherwise, what is the point in being rational, besides reducing risk?
Reducing risk is a good thing! At least I think it is.
livesoft wrote: Fri Jan 22, 2021 10:27 pm Here is how I profit from the irrational behavior of other market participants:

1. I don't worry about making a killing on the upside. I simply stay fully invested in my asset allocation at all times.

2. I take advantage of others bailing out by using the RBD method to decide additional times to move additional money from bond funds to equity funds. There is no market timing involved because I can see when people bail out in a factual way and then act. I don't guess before they act, so no guesswork is involved at all and no predictions are needed either.
That seems rational.

I have money sitting in accounts earning 1% or less. That might seem irrational. But for me I think it is rational. I'll need that money in the next 0-7 years. As long as inflation does not go above 3% my plan will be fine.

I also think it is rational to risk what you can afford to loose on an irrational speculation. You might get lucky.

Everybody has a different definition of what is rational, or irrational, pick your mix.
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Re: How to profit from irrational behavior?

Post by backofbeyond »

You may want to have a look at a Fear & Greed Index. CNN puts out a pretty good one IMHO.

I followed it during the early days of COVID and did rather handsomely. Bought on Fear days/weeks. Stopped buying (except my dollar cost averaging in my retirement account) on days when it reached Greed.

Again, IMHO, in the long run the Market trades on fundamentals, but in the short term, it's emotions that drives it. Many BH do not want to bother with watching these type of cycles, so they just go on automatic: dollar cost average into broad market indexes and call it a day.
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Re: How to profit from irrational behavior?

Post by cheese_breath »

Sell when others are buying, and buy when others are selling. And you're already doing this if you stick with your AA.
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Re: How to profit from irrational behavior?

Post by Watty »

embwbam wrote: Fri Jan 22, 2021 10:15 pm Are there logical ways to modify a 3-fund portfolio to take advantage of speculation without market timing?
No.

To take advantage of a bubble you have to do the correct market timing twice to buy then sell at the right time.

That is hard. Even the well known "irrational exuberance" speech during the dot com bubble was five years too early.
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Re: How to profit from irrational behavior?

Post by livesoft »

Watty wrote: Sat Jan 23, 2021 9:58 am To take advantage of a bubble you have to do the correct market timing twice to buy then sell at the right time.
This statement is false even though it is tossed around a lot. One only needs to be correct some of the time and not grossly incorrect most of the time.
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Re: How to profit from irrational behavior?

Post by Forester »

embwbam wrote: Fri Jan 22, 2021 10:15 pm I think there's solid evidence that people are being crazy right now, speculating on stocks, crypto, etc. But as we know "The market can remain irrational longer than you can stay solvent".

I keep finding myself missing the boat on speculative explosions. For example, I avoided buying real estate after the 2008 crash because I don't believe in it, and the people around me buying houses seem irrational to me. Yet, they all have done very well. I'm a technologist, and have followed bitcoin from the beginning. I avoided it because it seemed like it was only flooded by speculators. And yet, the speculators are hugely rich, and investing a small amount would have cost me little.

There must be a rational way to take advantage of irrational behavior. Otherwise, what is the point in being rational, besides reducing risk?

Are there logical ways to modify a 3-fund portfolio to take advantage of speculation without market timing? For example, if I notice that people are speculating on BTC or TSLA, perhaps I can stake out a 1% position and keep rebalancing. They will inevitably crash, but can a small position allow a conservative investor to ride the wave a little, without market timing? Maybe it's too late now for BTC and TSLA, but I could act on the next insane trend I notice.

Any other ideas or thoughts?
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Re: How to profit from irrational behavior?

Post by firebirdparts »

In other news, they're out here saying that wallstreetbets may have bankrupted a hedge fund. Maybe not just one. I have been reading about GME for weeks (wouldn't touch it with a 10 foot pole), and it went so high yesterday it tripped a circuit breaker on the way *up*. I have never even heard of this before.

Andrew Left said he's calling the Po-lice. This might actually work; reddit could purge the whole group any time.

I just mention that to say one way to profit from irrational behavior is to join in, and this is where momentum really comes in. I was reading a nice article about Gerald Cotten, the bitcoin banker that either died or faked his own death, taking the passwords with him, and it mentioned something I hadn't thought of. Before he famously died, he had been involved in setting up ponzi schemes. They just mentioned that customers will willingly and knowingly get into a ponzi scheme if they think they are getting into it early (long before you fake your own death).
Last edited by firebirdparts on Sat Jan 23, 2021 11:00 am, edited 1 time in total.
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Re: How to profit from irrational behavior?

Post by lostdog »

backofbeyond wrote: Sat Jan 23, 2021 9:35 am You may want to have a look at a Fear & Greed Index. CNN puts out a pretty good one IMHO.

I followed it during the early days of COVID and did rather handsomely. Bought on Fear days/weeks. Stopped buying (except my dollar cost averaging in my retirement account) on days when it reached Greed.

Again, IMHO, in the long run the Market trades on fundamentals, but in the short term, it's emotions that drives it. Many BH do not want to bother with watching these type of cycles, so they just go on automatic: dollar cost average into broad market indexes and call it a day.
Very interesting. Does this meter change daily?
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Re: How to profit from irrational behavior?

Post by qwertyjazz »

I think there are two questions. One is easy to answer. The other is harder but more profitable.
How can I profit from irrational behavior?
Ignore it. The particular bubble will eventually bust and if your money has been calmly invested in a 3 fund portfolio you will do on average better than most. The irrational behavior will increase bad bets on average if truly irrational and safer bets will gain a slight advantage.

How can I hugely profit from irrational behavior?
Multiple ways from momentum trades to out of the money options possibly mispriced. To using that timing to raise money for a company with potential. None of those are safe or definite though.
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Re: How to profit from irrational behavior?

Post by z3r0c00l »

How to profit from irrational behavior? Work for the brokerage industry and get fees coming and going no matter the market, e.g. get a job at Robinhood. How not to profit from it? Through irrational behavior of your own.
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Re: How to profit from irrational behavior?

Post by nisiprius »

Watty wrote: Sat Jan 23, 2021 9:58 am
embwbam wrote: Fri Jan 22, 2021 10:15 pm Are there logical ways to modify a 3-fund portfolio to take advantage of speculation without market timing?
No.

To take advantage of a bubble you have to do the correct market timing twice to buy then sell at the right time.

That is hard. Even the well known "irrational exuberance" speech during the dot com bubble was five years too early.
Just a detail: it was a bit less than four years. It was made in December, 5th 1996. The exuberance lasted until about 9/1/2000. How do I know? Because I cut back on stocks in 1997 based on that speech. I said "especially coming from Alan Greenspan, that is the clearest thing to an actionable warning you could ever expect." I certainly didn't go to cash or anything like that, and I have a very good set of rationalizations I can use as to how it all turned out more or less OK, but it was still a mistake on my part and I learned some kind of lesson.

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Re: How to profit from irrational behavior?

Post by nisiprius »

To answer embwbam's question, in my opinion, since most investors try, and fail, to profit from each others' irrational behavior, the true contrarian strategy is to do something different from what everyone else is doing. And the different thing is not doing the opposite thing, it is staying the course and doing nothing.

That is, for a US stock investment, buying and holding a total US stock market index fund is the truly contrarian strategy.

The result of this is not to improve your returns, which will be the returns of the market less a few basis points. The result is to improve your risk-adjusted returns by reducing the extra "manager risk" of your active decisions. That risks adds to the intrinsic risk of the market. The indexer will get the return of the market together with the risk of the market. By simple arithmetic, everyone else will still ending up getting the return of the market, on average. But everyone else will experience a random crapshoot spread of results, and up and down volatility above and below the market, due to the varying impact of sometimes guessing right and sometimes guessing wrong, wins and losses.

To my mind, the irrational behavior is "trying to profit from irrational behavior."

In the words of the fictional computer in the movie WarGames, stock market investing is "A strange game: the only winning move is not to play."

To expand on that a bit, it is a statistical historic fact that over the fifteen-year period preceding mid-2020 (latest SPIVA report), 89% of actively managed US stock market mutual funds underperformed a broad market index. Do I believe the professional managers of those funds were stupider than me? Not at all. I believe they almost certainly added alpha--before costs. But they kept all of it for themselves. How much are we talking about? We can put a ballpark upper limit on it. The average expense ratio of US stock market mutual funds was 0.74%. So if they underperformed the market, they must have made less than 0.74%/year in added alpha. That's also the general ballpark of what some academic papers have found that pros are able to add through skill.

Very well, then, can an individual retail investor, in a few hours a week, reading news and searching for data available online, paying nothing or at most a few hundred dollars a year, get the same results and keep the 0.74%/year of extra return for ourselves? I seriously doubt it. We're competing with people who put in a full work week, have assistants, and Bloomberg terminals, and access to expensive databases... for example, private satellite imaging services they can use to estimate how many acres of soybeans have been planted and how full the oil tanks in a tank farm are.

But anybody can successfully match the return of the stock market to within a few basis points just by buying and holding an index fund from any of at least a dozen good, competitive providers.
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Re: How to profit from irrational behavior?

Post by Kenkat »

Take 1% of your portfolio and try it. I don’t think you will find that it works as well as you think it does, but that’s probably the easiest way to find out.

Take BTC for example. My kids started mining these when BTC was $10. At the time, in no way did I think that it would be where it is at now. When it hit $1000, I remember wishing that I would have bought $1000 worth @ $10 each*. Would I have sold then? Should I have sold then? Obviously not, in hindsight, but that’s so easy to say now.

It’s also easy to forget all the speculative sure things that didn’t work out.

But again, maybe you need to try and then decide for yourself. If kept to a small amount, it won’t put you in the poor house and who knows, maybe you will hit on the next Tesla or Bitcoin.


* this would have been much harder to do than it sounds as there weren’t centralized markets for BTC back then in any way.
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Re: How to profit from irrational behavior?

Post by jello_nailer »

+1^
Survivorship bias.

"You don't know about the bazzillions that did not work out". * Embellished KenKats comment above.
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Re: How to profit from irrational behavior?

Post by Fallible »

embwbam wrote: Fri Jan 22, 2021 10:15 pm ... Maybe it's too late now for BTC and TSLA, but I could act on the next insane trend I notice. ...
Here's what it boils down to, where the rational gives way to the irrational: predicting what the market will do, which no one can do, based on the assumed ability to accurately "notice" a trend.
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Re: How to profit from irrational behavior?

Post by QBoy »

There is a theory in economics called "rational bubbles." In it, prices deviate from fundamentals, but the bubble component of the price rises in expectation at the required rate of return, so there are no profits to be had from shorting the asset. Even if not exactly true, this theory might be close enough to being true that there is little to gained by trying to take advantage of speculative bubbles.
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Re: How to profit from irrational behavior?

Post by Top99% »

Fallible wrote: Sat Jan 23, 2021 1:49 pm
embwbam wrote: Fri Jan 22, 2021 10:15 pm ... Maybe it's too late now for BTC and TSLA, but I could act on the next insane trend I notice. ...
Here's what it boils down to, where the rational gives way to the irrational: predicting what the market will do, which no one can do, based on the assumed ability to accurately "notice" a trend.
I have toyed with the idea of buying some out of the money put options on TSLA but if I do it will only be with "entertainment" money. Just reading some of the posts on cleantechnica.com and in the Tesla forums makes be believe the this stock is ripe for a rapid transition from greed to fear. But, I sure wouldn't bet more than entertainment money on it.
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Re: How to profit from irrational behavior?

Post by Fallible »

nisiprius wrote: Sat Jan 23, 2021 11:28 am
Watty wrote: Sat Jan 23, 2021 9:58 am
embwbam wrote: Fri Jan 22, 2021 10:15 pm Are there logical ways to modify a 3-fund portfolio to take advantage of speculation without market timing?
No.

To take advantage of a bubble you have to do the correct market timing twice to buy then sell at the right time.

That is hard. Even the well known "irrational exuberance" speech during the dot com bubble was five years too early.
Just a detail: it was a bit less than four years. It was made in December, 5th 1996. The exuberance lasted until about 9/1/2000. How do I know? Because I cut back on stocks in 1997 based on that speech. I said "especially coming from Alan Greenspan, that is the clearest thing to an actionable warning you could ever expect." I certainly didn't go to cash or anything like that, and I have a very good set of rationalizations I can use as to how it all turned out more or less OK, but it was still a mistake on my part and I learned some kind of lesson.

Image
This turned out to be a smart move based on knowing Greenspan, and it reminds me of his June 2005 comment about "froth" in housing. If one were aware of Greenspan's tendency to understate, then "froth" was almost as good as saying the housing bubble was about to blow (except that he was referring only to home prices in local markets).
"Yes, investing is simple. But it is not easy, for it requires discipline, patience, steadfastness, and that most uncommon of all gifts, common sense." ~Jack Bogle
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Re: How to profit from irrational behavior?

Post by Triple digit golfer »

Here's the interesting thing about Greenspan's irrational exuberance speech in December 1996: the market continued to go up for a few years, and even after the dot-com crash, it never went below the December level! It did in 2009 after the financial crisis, however.

I say that a lot on this board, that even at a high and seemingly "due" for a crash, the market may never go lower than its current level.

People (heck, not just people, the chairman of the U.S. Federal Reserve) thought the market was over valued in 1996, yet even after a correction a few years later, the market was still higher than it was in 1996.
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Re: How to profit from irrational behavior?

Post by Impatience »

It’s a loser’s game. Plenty of seemingly irrational behavior will actually prove to have been rational in hindsight, perhaps many years from now. Other times the opposite will happen. You’re not as smart or observant as you think you are. Don’t get caught with your pants down like everybody else who is trying to time the top of the “bubble” whether it’s in real estate, equities, crypto, whatever.
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Re: How to profit from irrational behavior?

Post by CurlyDave »

embwbam wrote: Fri Jan 22, 2021 10:15 pm
...There must be a rational way to take advantage of irrational behavior. Otherwise, what is the point in being rational, besides reducing risk?...

Any other ideas or thoughts?
Take 5% or 10% of your portfolio and speculate to your heart's content. If you think you can make bank investing in pork belly futures -- go for it. Call it your fun money. Even Jack Bogle though this was harmless entertainment.

The extra rules are that the only way to add money to this fund is from new contributions. If you lose it all, you can put 10% of your new money into the fund. OTOH, if you are successful, let it ride. Not necessarily in the same investment, but don't take money out.
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Re: How to profit from irrational behavior?

Post by SteadyOne »

Market can go irrational longer than you can stay solvent. Logical way to do what you suggest is to short Tesla stock. To make it worthwhile you will need to invest a lot, otherwise it does not make sense. But what if it keeps growing for couple of more years and you continue to pay for shorts every month?
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Re: How to profit from irrational behavior?

Post by jhsu802701 »

You can profit from irrational behavior by buying what's irrationally cheap. Right now, that means foreign stocks (especially Japan) and currencies (especially Asia).
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Re: How to profit from irrational behavior?

Post by Katietsu »

I am not going to address your question about taking advantage of irrational exuberance. However, there was a time when I was ahead of the curve. I received my first email address while in college in the 1980’s. In the 1990’s I had a remote WFH job and an Amazon account. Became aware of bitcoin when it was less than $1 and twitter when you could have one on one conversations with certain CEO’s. I have had moments where I feel like I really should have been able to monetize this early exposure. Then I remind myself that I would have also “picked” Netscape and IBM. Have you seen the TV series Halt and Catch Fire? Not helpful for making money but can help make you feel better about missing the next great thing.
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Re: How to profit from irrational behavior?

Post by Beensabu »

embwbam wrote: Fri Jan 22, 2021 10:15 pm ...I could act on the next insane trend I notice.

Any other ideas or thoughts?
How many other insane trends have you noticed that did not result in speculative bubbles but simply went poof after a short time? How many %s would those add up to at 1% of portfolio for each?

Btw, buying real estate in 2009-2011 wasn't an insane trend, even if it appeared irrational to you. It was simply opportunistic for those with the means. Real assets have real value.
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Re: How to profit from irrational behavior?

Post by GAAP »

The closest thing I can think of to what you want, and what this particular community will accept, is by Gobind Daryanani, entitled "Opportunistic Rebalancing: A New Paradigm for Wealth Managers" https://www.financialplanningassociatio ... nagers.pdf.

Keep in mind the short timeframe (Jan 1992 to December 2004) and the portfolio used for this study:
Classes. For the baseline study, we considered a client with a 60/40 (equity/fixed) portfolio consisting of five asset classes: 25 percent U.S. large (S&P 500 Total Return), 20 percent U.S. small (Russell 2000 Total Return), 10 percent real estate investment trusts (Dow Jones REIT Total Return), 5 percent commodities (Dow Jones AIG Total Return), and 40 percent bonds (Bloomberg 7-10 Total Return). This is a typical asset allocation for a conservative client close to retirement.
Beyond that, you might look at some the trend-following posts that are considered more controversial (or even heretical) in this community.
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spanky123
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Re: How to profit from irrational behavior?

Post by spanky123 »

embwbam wrote: Fri Jan 22, 2021 10:24 pm
KlangFool wrote: Fri Jan 22, 2021 10:21 pm OP,

Why do you think that you need to do anything special?

"Buy, Hold, and Rebalancing" is a good "market timing" tool.

See below.

viewtopic.php?t=335902


I made money from my REIT INDEX FUND in 2008/2009 too. My 5/25 rebalancing rule forced me to sell my REIT INDEX FUND when it went up 30+%. I harvested my gain right before the crash.


Did you rebalance in March 2020? I guess not. Or else, you would not be posting this topic.


KlangFool
Yes, I followed my IPS to the letter and rebalanced accordingly. That's what I'm saying, does adding a small speculative position to a 3-fund portfolio and rebalancing it religiously make sense, to take advantage of other people speculating?
Sure, if you have some play money that you could afford to lose. Good luck.
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MinnGuyInvesting
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Re: How to profit from irrational behavior?

Post by MinnGuyInvesting »

To profit from it, you need to specifically define what you see as irrational.

If a single stock is going up or down irrationally, does it really matter?

If you are worried about the stock market as a whole is priced irrationally (either high or low) taking calls or puts out to hedge your bets is probably your best option.

Also, what position are you going to take regarding irrational behavior? Are you trying to ride the irrational wave (for whatever specific behavior you see as irrational) or are you trying to be a contrarian, where you benefit when the irrational behavior ceases and benefit from that result?
Index ETF's 41% |ARK Funds 39% | AAPL 5% | TSLA 3% | GOOGL 1% | AMZN 1% |Other stocks 5% | BTC/ETH 5% | | | Tracking my porfolio: https://www.bogleheads.org/forum/viewtopic.php?p=5745280#p5745280
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Re: How to profit from irrational behavior?

Post by MotoTrojan »

Become a value-factor investor and enjoy outsized returns because people pile into TSLA and leave low-multiple companies unloved, increasing returns.
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MinnGuyInvesting
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Re: How to profit from irrational behavior?

Post by MinnGuyInvesting »

MotoTrojan wrote: Sun Jan 24, 2021 4:34 pm Become a value-factor investor and enjoy outsized returns because people pile into TSLA and leave low-multiple companies unloved, increasing returns.
I think everyone WANTS to be a value investor.
But by traditional value metrics, you aren't going to find much.

I went on a limb and sought out my own "value" stocks by traditional measures. So far one has been a dog, another is Coca-Cola. (KO).
Really hard to find a good company at value right now.
Index ETF's 41% |ARK Funds 39% | AAPL 5% | TSLA 3% | GOOGL 1% | AMZN 1% |Other stocks 5% | BTC/ETH 5% | | | Tracking my porfolio: https://www.bogleheads.org/forum/viewtopic.php?p=5745280#p5745280
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Re: How to profit from irrational behavior?

Post by Gattamelata »

embwbam wrote: Fri Jan 22, 2021 10:15 pm can a small position allow a conservative investor to ride the wave a little, without market timing?
This bit of the OP jumped out at me as a contradiction.

If you're not market timing, then are you going to buy and hold this small position? Or do you have some objective criteria that you omitted from your OP that will dictate when you sell?

If the plan is to buy and hold this small position, then you're just tilting your asset allocation toward trendy stocks. I don't know much about momentum strategies, but I guess you should look into those to find your answers.

If the plan instead is to buy a small position in an irrationally inflated stock and then sell it before it collapses... "without market timing," then I think one of us is confused. That is market timing.

The big difficulty I see in your proposal is all of the elements that require subjective assessments in order for your approach to function. How do you identify an "irrational" "speculative explosion"? Your example is real estate, which "seem[ed] irrational to me." Many things seem irrational until we understand them well, so that's a low bar.
if I notice that people are speculating on BTC or TSLA, perhaps I can stake out a 1% position and keep rebalancing. They will inevitably crash, but can a small position allow a conservative investor to ride the wave a little, without market timing?
My understanding of bubbles is that the consistent way to make money off them is to provide goods or services that the speculators require, because then your returns are completely disconnected from the outcome of the speculations. I think your best bet in these circumstances is to start a cryptocurrency newsletter or blog, make sure it's interesting to the speculators, monetize it, and reap the profits. No market timing required.
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Re: How to profit from irrational behavior?

Post by BNAIBOA »

What is rational vs irrational? I have made a small fortune from buying rental properties and one individual stock.

Is it rational to buy Apple stock after the iPhone was released in 2007? If you had put $20 k then, you would have $1m today.

You have to know yourself and how much risk you can tolerate. I still believe in the boglehead’s philosophy because I am OK with receiving average return for minimal work.
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Re: How to profit from irrational behavior?

Post by nisiprius »

CurlyDave wrote: Sat Jan 23, 2021 4:01 pm... If you think you can make bank investing in pork belly futures -- go for it...
Alas, the trading of pork belly futures on the Chicago Mercantile exchange ended in 2011.
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CurlyDave
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Re: How to profit from irrational behavior?

Post by CurlyDave »

nisiprius wrote: Sun Jan 24, 2021 5:15 pm
CurlyDave wrote: Sat Jan 23, 2021 4:01 pm... If you think you can make bank investing in pork belly futures -- go for it...
Alas, the trading of pork belly futures on the Chicago Mercantile exchange ended in 2011.
Of course you are right, but there is a ray of sunshine. Last November they started trading Pork Cutout futures. The Cutout has a bunch of other things in it, but includes the belly.

All over the world pigs are quaking in fear... :mrgreen:
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