The Efficient LessWrong Hypothesis - Stock Investing Competition

I don't expect LW to outperform the market short-term. I would expect LWers to be better at anticipating plausible Black Swans such as the crypto boom and AI takeoff.

Personal anecdote: Before I discovered LW/SSC, when I was 14, I convinced my parents to invest a substantial sum into Bitcoin back when it was trading at $5.2k. Despite my exhortations, they haven't sold any of it yet.

Winner announcement!

The competition has now been finalized.

No comment with a security suggestion reached five karma, but to encourage participation in future contests, I'm lowering the limit to three karma. That means that jimv [LW · GW] and cat from /dev/null [LW · GW] are winners!

Also, lechmazur [LW · GW] also wins 30 usd for his comment with 11 upvotes. 

Winners will be contacted shortly.

Soon part two of the competition will start. Participants will be able to probability distributions on the securities from this contests. Rewards will be given to participants in relation to how much their prediction outperforms the market. 

Securities: Alphabet (GOOG) and Nvidia (NVDA)

Reasoning: AI hype will increase (more than generally expected), and these companies will benefit

Suggestion: Ethereum (ETH)

Reasoning: There are a number of upgrades planned in the next few years. The biggest problem for cryptocurrencies in general is the low through-put of transactions (leading to high fees due to high demand for a scarce resource). The Ethereum project has long-term plans to improve this with sharding and zero-knowledge proofs, but the sharding upgrade is not planned until 2023 and it's not clear how much of the value of zero-knowledge proofs will be captured by Ethereum as opposed to the Layer-2 chains that build on top of Ethereum.

The stronger case for ETH in the next 12 months is the proof-of-stake upgrade planned for later this year. This upgrade is a pre-requisite to the later sharding upgrade. It will both decrease the amount of new ETH that is created as part of running the network and change who it's awarded to. Instead of rewarding miners, who have a capital investment in compute and upkeep costs of electricity, it will reward stakers, who have a staked capital investment of ETH and minor upkeep costs of compute. The Triple Halving thesis by SquishChaos (original was previously summarized on LW [LW · GW]) claims that this will cause a great reduction in supply (mainly because ETH won't be sold to pay for electricity), comparable to the halving of Bitcoin rewards iterated three times, and that this should push the price up to around $30k~$50k (i.e. around 10x the current value of around $3k). This could certainly be an overestimate, but even if you want to (someone please do a pessimistic calculation here) adjust the numbers down for overly optimistic calculations I think you would find that this still looks promising

Risks: If all of crypto loses a lot of value this would impact ETH and could lead to a net loss. An alternative version of this would be to go long ETH and short BTC in order to distinguish this from movements of crypto in general. However, I haven't thought through if all the assumptions of this thesis are still likely to hold in such scenarios.

Ethereum upgrades have been delayed in the past. Proof-of-stake has been on the Ethereum roadmap for years, and was previously planned to be merged late 2021. However, they've now merged the Kiln merge testnet which is the last merge testnet before upgrading existing public testnets.

Some assumption of the analysis, or an inference step, could be wrong. I don't claim to have verified anything here beyond the most superficial level.

Suggestion: Fiverr International Ltd.

Reasons:

1. Jobs are becoming more and more specialized. This is a trend that has been lasting for thousands of years, and likely won't stop anytime soon. Fiverr is a platform for buying and selling gigs, allowing for extreme specialization. 
   
   I think the market values Fiverr primarily on current numbers on growth. If we predict that the market will eventually blow up, this would likely lead to a growth acceleration of fiverr that the market might not have anticipated.
2. Small market cap (2.3 Billion USD) - Smaller businesses are less analysed by professionals, and therefore should in theory be easier to make good investments in. 
   
   Also, a small market cap means massive growth potential. If buying gigs become a massive industry, and big companies start creating systems for buying gigs. It seems possible for Fiverr to 10x-100x.
   
   Many other platforms for buying and selling has market caps, ex: Airbnb ($103 billion), Uber (64$ billion)
    
3. Good numbers. Fiverr has a price-to-sales (PS) ratio of 8.1 (source). This is significantly better than Airbnb at 17.08 (source). For comparison, the S&P 500 has a PS ratio of 2.91, so if Fiverr were to just over double it's revenue, it would be on par with the S&P.
   
   Fiverr is a growth company, so I don't understand why the market things it should have such a low PS ratio, but I'm sure it has it's reasons. But the low PS ratio is still a good sign, since it proves that there seems to be fundamental value to invest in, and not just a good idea.
    
4. Profitable? It depends on how profit is measured (so no not really profitable), but at least it doesn't seem like Fiverr is pumping out money like crazy, which suggests that the risk of going bankrupt isn't super high.
    

Personal thoughts: While I do believe the EHM to be true. I expect cases like Bitcoin and potentially Fiverr, to be opportunities where we can predict massive growth, even if the odds are only a few percent, to be one of our best bets at beating the market. I might suggest diversifying the risk a bit by investing in some competitors too, like Upworks, but if I would only bet on one stock it would be Fiverr.

Alibaba (BABA) - the stock price has been pulled down by fear about regulation, delisting, and most recently instability in China as it's zero covid policy fails. However, as far as I can tell, the price is insanely low for the amount of revenue Alibaba generates and the market share that it holds in China.

I don't know how much you want to go into the minutia to make it as accurate as possible but for shorting you really need to consider borrow fees and share availability. For example, I wanted to short DWAC (a SPAC that is merging with Trump's social media company) for a long while but these issues made it impossible (I also couldn't make a play using options because they reflected the negative outlook).

Suggestion: Tesla, Inc. (TSLA)

Reason: We should expect the stock market to be extremely difficult to beat at algorithmic trades, where lots of data of previous events is available. Tesla has several projects that are highly innovative and thus are difficult to appreciate the value of. Especially the Tesla bot and the D1 chip. The current market cap of around 1 trillion USD seems to reflect the value of the car business, as well as potential further profits from autonomous driving features, as well as full self driving. The Tesla Bot has tremendous potential, and humanoid robots in general seem like something that should come sooner or later (probably later). The D1 chip shows promise that Tesla might have a minor chance of becoming a big player in the AI chip field, which many predict will be a major industry, assuming AI development and adaptation continues.

Personal thoughts: Do I believe Tesla is a better investment than VTSAX? No, not at current prices. Tesla is analyzed by so many experts in the field, and with the hype of the stock, it seems fairly unlikely that it should be undervalued.

Stock Picking Competition:

NYSE: TSM - Taiwan Semiconductor Manufacturing Company

TSMC is the leader in the semiconductor world. They manufacture most of the advanced parts for Apple, like the SoCs, and starting from this year will even produce iPhone's 5G modems. They are years ahead of the competition. TSMC plans to release its 3nm chips next year, whereas Intel committed to releasing theirs in 2025.

Watch out. When markets use real money, people use them to hedge against certain outcomes. It's a lot like arbitrage in some cases, e.g. for people who only gain or lose any money in specific outcomes like if evergrande defaults on its debts, but they lose very large amounts and your market is comparatively smaller.

Suggestion: Ether (ETH).

Reason: ETH seems to have no fundamental security flaws and far more applications than bitcoin, yet is currently valued <10% of bitcoin. I have absolutely no story for why the market doesn't price this in, but if you question the EMH, then ETH seems like the obvious bet.