Stupidity, Humility, and Stock Picking

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XCKD’s latest comic is about stock picking and the efficient market hypothesis:

The hidden hover text goes on – On the news a few days later: “Buzz is building around the so-called ‘camping Roomba’ after a big investment. Preorders have spiked, and…”

XKCD is finding humor in the idea that stupidity can be made profitable. But highly efficient markets really do take away the effects of stupidity, because the prices are already adjusted accordingly. You can’t be convinced to buy Apple at $500 a share when it’s trading at $320. On the other hand, if you find success in picking stocks, it’s really hard to separate luck and skill. Humility is in order.

I would also extend the idea of humility to also include skepticism. The promise of easy money solutions anywhere should always ring alarms. It really hurts to read about people being told that buying another new car is the solution to not being able to afford their current car. We have doctors convincing other doctors within Facebook groups to lose millions in a cryptocurrency hedge fund where instead of brokerage statements, they accepted phone screenshots.

Edges are rare. Why does your edge exist? What is your evidence that it exists? Why has nobody else thought of it? How much will it cost to make the bet? If it does exist today, how long will it last? Why is it durable?

In addition, remember the Kelly Criterion and adjust your bet size with the size/confidence level of your edge. Even if you knew with 100% certainty that a coin was biased 60% heads and 40% tails, you could still go bankrupt if you bet improperly! I make some “Fun Money” bets, but they are very small portion of my net worth.

What I like about my retirement portfolio is that I could not touch it for 50 or 100 years, and I wouldn’t worry too much. I can be a little stupid; I don’t need to watch it like a hawk or be a hedge fund genius. My bets are relatively humble.

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Comments

  1. Well said. I published my fun bets portfolio called Moonshots. Since it did quite well I went back and looked at my losers to avoid thinking I’m a wizard. Published my list of biggest losses as well. Each of them taught me something valuable.

  2. Thomas Ross says:

    Could you please refrain from reproducing God’s name taken in vain? I have not noticed this before on the blog and I hope it won’t happen again, or I will have to unsubscribe, despite having found useful articles on it for years. I don’t think you would reproduce racial slurs, the F-word, etc.; why is it OK to reproduce something that is highly offensive to those who love the Author of the 10 Commandments? What if He doesn’t like it either?

    Thanks.

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