Years of academic research all points to the same conclusion. The average investor can’t beat the market, so why even try? Why not invest in ETFs, close your eyes until retirement, and ignore the stress of timing the market?
Yet simultaneously, there seems to be a “formula” for beating the market that investors ranging from Buffet to Howard Marks, from Dalio to Soros, Simons to Jeremy Grantham have discovered. Could this all be due to survivorship bias?
Namely, be greedy when others are fearful, and be fearful when others are greedy. Reverse psychology, so to speak. The problem of course is that if everyone is fearful, that in and of itself can be self-fulfilling and justified. And no one wants to catch a falling knife.
So, is contrarian investing the key to beating the market? Is passive investing a Ponzi Scheme? Is passive investing built on a house of cards?
It’s not just that ETFs tracking market indices, such as SPY, are traded as if they are penny stocks. It’s that the parameters of what determines aggregate asset levels is fundamentally based on the Fed.
In other words, if the S&P 500 goes up or down in a given time period, in the short term, the direction of asset price movements can be predicted to a certain degree based on the level of hawkishness or dovishness relayed by the central bank.
When asset bubbles are clearly inflated and deflated by central bank easing or tightening, respectively, all investors have to ask themselves, is it even possible to be passive? Or is that in and of itself an active decision?
If passive investing is based on a house of cards and interest rates are a hammer when everything’s a nail, maybe what we’re witnessing is the real time and inevitable collapse of something built of paper.
If you are a quant strategy developer
or anyone experimenting with markets, data, and strategies
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