Since we're discussing EMH and VTSAX, seems as good a place to add a recent anecdote:

Chatting with someone, investments came up and they asked me where I put mine. I said 100% VTSAX. Why? Because I think the EMH is as true as it needs to be, I don't understand why markets rise and fall when they do even when I think I'm predicting future events accurately (such as, say, coronavirus), and I don't think I can beat the stock markets, at least not without investing far more effort than I care to. They said they thought it wasn't that hard, and had (unlike me) sold all their stocks back in Feb 2020 or so when most everyone was still severely underestimating coronavirus, and beat the market drops. Very impressive, I said, but when had they bought back in? Oh, they hadn't yet. But... didn't that mean they missed out on the +20% net returns or so of 2020, and had to pay taxes? (VTSAX returned 21% for 2020, and 9.5% thus far for 2021.) Yes, they had missed out. Oops.

Trading is hard.

The GPU company increase is notable because the reason Nvidia and AMD have done well has little to do with AI. It's almost entirely about crypto, with some portion about video gaming. So while you would have done well if you had invested in GPU companies in 2015 because of AI, your results wouldn't have actually been causally connected with your reasoning. If you take out Nvidia and AMD then your results are not nearly as much better compared to SPY. And I'm not really convinced that most of the rest of the tech increase has much to do with AI either, perhaps other than Tesla, although their increase seems more akin to Gamestop than to a company more based on fundamentals.

Of course, you could also have done better than the economy than by just investing in tech stocks, but that's not nearly as much of an exciting conclusion (though still a bit of an exciting one).

However, that's missing that the EMH is fundamentally based on risk - it's easy to get better returns than the market, even over a five year time period, by investing leveraged. But then if the market goes down, it's easy to lose everything. I haven't calculated the numbers, but I suspect that someone who invested leveraged from 2015 to 2020 would have been looking great in January 2020 and then be bankrupt in April 2020. Tech has a different risk model than investing leveraged, but it definitely is higher risk than the overall US economy..

You can beat the market by investing in a high risk market, but that's literally what the EMH tells you, so it's a boring conclusion.

I tried to bet on this on Polymarket a few months ago. Their native client for directing money into your account didn't work (I think it was because I was in the US and it wasn't legal under US law). I tried to send money from another crypto account, and it said Polymarket didn't have enough money to pay the Ethereum gas fees to receive my money. It originally asked me to try reloading the page close to an odd numbered GMT hour, when they were sending infusions of money to pay gas fees, but I tried a few times and never got quite close enough. I just checked again and they're asking me to send them more money for gas fees, which I should probably do but which is a tough sell when they just ate the last chunk of money I sent them.

I assume the person you're talking about who made $100K is Vitalik. Vitalik knows much more about making Ethereum contracts work than the average person, and details the very complicated series of steps he had to take to get everything worked out in his blog post. There probably aren't very many people who can do all that successfully, and the people who can are probably busy becoming rich some other way.

I think some markets are basically efficient and very difficult to beat. The public stock market is one. I'm not convinced by the AI example basically due to priors -- we've seen many many people claim to be able to beat the public markets without special information, with evidence that seems much more convincing than this, and they are on average wrong. So I don't think at least this argument overcomes my priors.

However less liquid markets are for sure beatable. The prediction markets around the election are one. Crypto is another -- I personally have done well not just investing in crypto but by co-founding a hedge fund that has actively traded crypto for 3 years, many trades per day, making a trading profit (earning alpha) on 1081/1093 days. (And the losing days were all very small, each well below a day's average profits.)

I also sit on an investment committee for an endowment and see what returns can look like in private markets where it's possible to have a high informational advantage and turn that into outsized returns.

So to me, the EMH is mostly true for highly liquid highly accessible markets. But for illiquid, less accessible, lower information markets, there is money to be made for people willing to put in the effort. 

Whether it's worth the opportunity cost is also another question, it's not like it's hard to make money lots of ways if you are motivated and smart. Crypto is a fun hobby for me, like poker used to be, and I like to make money from my hobbies. Not everyone wants to spend their free time looking for EV in weird places.

By the EMH I mean this practical form: People cannot systematically outperform simple strategies like holding VTSAX. Certainly, you cannot expect to have a higher expected value than max(VTSAX, SPY). Opportunities to make money by active investing are either very rare, low volume, or require large amounts of work. Therefore people who are not investing professionally should just buy broad-based index funds. 

This isn't the right way to formulate an EMH. You can trivially get higher expected return than any investment by simply leveraging that investment. 1.1x leveraged SPY has higher expected return than SPY, and 1.2x SPY has even higher expected return and so on. As long as the borrowing rate is lower than the expected return on SPY, leveraging will always improve your return.

A better formulation would be that no strategy has a better risk-adjusted return than the market portfolio, which is the capital weighted portfolio of all securities held by everyone. If you restrict your investment universe to US equity only, the market portfolio is VTSAX (or SPY, they're close enough). Then you could formulate the EMH as saying no portfolio of US equities will consistently outperform VTSAX in risk-adjusted terms, meaning, if we normalize the beta of the first portfolio to 1, then it won't outperform VTSAX (which has a beta of 1 by virtue of being the market portfolio). Now my argument with leverage does not contradict this formulation, because a 1.1x leveraged VTSAX will have beta = 1.1. So if your normalize it to beta = 1, you get back VTSAX, which does not outperform VTSAX.

I see three things missing from your examples:

1. Taxes. Especially relevant if you're trying to balance possible gains (taxable) against possible losses (which may not lead to corresponding tax reductions).
2. Counterparty risk. The more complicated the scheme, the more likely there's some risk involved that you don't understand.
3. Sudden regulatory changes. Eg, your government suddenly outlaws bitcoin.
4. The possibility that you're just wrong. You might think that AlphaGo signaled good times for GPU manufacturers, but did you also think some years ago that the hype about nanotechnology could lead you to profitable investments? EMH advocates have never claimed that  you can't make money by investing based on your predictions about future technologies - if you happen to be right.

Counterparty risk and risk of extreme volitility in underlying are both very hard to estimate for crypto shenanigans. There's also the chance of wiping out your principal with mistakes.

Two issues with this post. 1) You have grossly underestimated your risk profile here. By way of example, in 2006 many financial institutions thought there was virtually no counterparty risk when dealing with large, established investment banks like Bear Sterns and Lehman Brothers. They turned out to be wrong. You imply that your "plausible" counterparty risk here is on the order 1%. Do you believe then that FTX is less of a source of counterparty risk than a large investment bank? Your position implies something like that. 2) There are multiple versions of the EMH, even if we allow that what you have shown here is a source of risk adjusted excess return, you would only be giving evidence against some variants of the EMH. 

For the Perpetual Futures arbitrage, the return on investment is sensitive to the price difference between the future and the underlying asset. A price difference of 0.3% is needed for 10% returns per month (since 1.1^(1/30) ≈ 1.00318), while a price difference of 0.1% only gets 3% per month. I went on Binance and checked the spot price vs. the futures price for a moment in time; it was about $50 difference for BTC, or 0.085%.

So I am convinced that it's profitable to arbitrage crypto futures; I predict the rate of return for the next 12 months at 10% - 40% (50% C.I.) with a median of 20% per year. There's a chance of losing everything, but the expected value only decreases by 2% per 1% of losing everything, so as long as you estimate it to be small (<5%) and aren't betting everything, the risk is manageable.

It seems doubtful to me that the 50% - 100% returns per year that you've experienced in the last month will be sustained for a year, and I wonder how it compares to other investments in crypto, both in expected return and in risk profile. Staking Ethereum gets 8% - 12% with little uncertainty, with the caveat that your money is locked up, so one gives up an opportunity cost to chase better investments. Investing in a basket of crypto or specific cryptocurrencies gives ??? rate of return; I think it would have much higher risk and higher returns compared to crypto arbitrage, so higher than the 18 to 20% I estimated for the futures arbitrage in the last paragraph.

In the previous sentence I compared a risky asset to a mostly risk-free arbitrage, and it might seem that's there's no principled way to compare the two, with the only commonality being both are in the crypto space. The assumption I make is that traders are willing to pay more for the futures for higher leverage, and that the market is efficient in some way, such that there's a relation between the expectations of the rate of return of the traders and the price premium they're willing to pay. So I still find some assumptions of market efficiency useful, even if the concrete statement of the Efficient Market Hypothesis does not hold.

You're claiming you've been correctly noticing good investment opportunities over a several month period. What has been your effective return over the last year (real return on all actual investments, not hypothetical)?

I feel like the strongest way to address the "If you are so smart why aren't you rich?" question is to show that you are in fact rich.

My Vanguard has gotten a 30.4% return over the last year. I have a very simple, everything in the basic large funds strategy (I can share the exact mix if its relevant).  Your advice is substantially harder to execute than this, so it would be great to know the actual relative return.
 

I can't say much about other markets, but I do believe in the EMH is a reasonable approximation for the US stock market. The "obvious" rationalist investments into Tesla and AMD are an after-the-fact story to make it sound like that was the right thing to do back then. I'm sure one con construct an equally persuasive story for any other community of people. The pizza lover community will say you should have obviously invested in Dominos, and their stock has grown 25x in the past 10 years. Car enthusiasts will pick Tesla, etc. 

Additionally, one prediction for a few years of returns is statistically insignificant. If you can today make, say 20, independent predictions about stocks that will beat SPY 1 year from now (in risk adjusted terms -- after correcting for different risks), each of which has only a priori 50% chance of beating SPY, and then at the end of the year you're correct on say 15+ of them, that would be statistically significant, for example.

Hm it definitely does seem like there's money sitting on the table on Polymarket. For example, will there be a recall election triggered for Governor Newsom is 90/10 even though 2.1 million out of the 1.5 million required signatures were submitted yesterday. It's possible that some sort of shenanigans will prevent the recall election, but a 10% chance of that seems excessive. Someone wanting to make a big bet on this should probably lookup for the 179 historical recall attempts, what was the signature margin for successful recall attempts vs unsuccessful (in particular, what's the largest signature margin that recallers claimed to have and then failed to actually qualify?).

I'll look into this more, but the fact that it costs $120 in Etherium fees to try this out is just annoying enough to make me continue putting it off. Is Etherium likely to become useable again in the near future?

I studied and worked in finance and I don't think I ever met someone who truly believed that the EMH was the absolute truth. 

Hello,

Thanks for the detailed write-up. My experience so far is that if I explain this trade in excruciating detail to individual community members, they require more work from me than is involved in establishing a Cayman Islands limited fund before deciding that they don't have time to read my emails because everything else they are doing has higher expected value, or they say things like "if such an opportunity really existed, mastrblastr would already have lent you seven figures, so why are you talking to me?"

As an aside, you probably do not want to do this trade with AMPL, because it is a rebasing token. The amount of spot you are long will change at the rebase. The amount of perpetual futures you are short will not change. This is bad.

There are currently high return trades (5% a month at least, possibly more) with extremely low risk (you can lose 1-2% max, probably less depending on execution).

Worth noting that a new Metaculus market estimates ~50% chance of Polymarket being a counterparty risk in some sense 2021-2022.

The counter-party risk (either from hacks or scams) of FTX seems extremely low right now. The team behind FTX/Alameda has built flawless reputation in the crypto industry over the past few years, and is considered among the strongest technically. They basically went from non-existent to top ~3 of crypto exchanges worldwide in volumes in a matter of ~1 year. The recent growth in the FTT coin reflects this.

I think FTX will continue to grow in the next 6 months, as (1) crypto grows as a whole; and (2) FTX innovates and grows more than the competition.

For US residents,  www.ftx.us is available (but more restricted).

Does FTX let you do the Perpetual Future Arbitrage trade on margin? I was seeing 20x leverage offered without additional fees on their website, that would come out to like 50% monthly gain, which seems batshit insane to me.

Safe high return trades exist right now - Perpetual Future Arbitrage

...

-- The amount paid is 1/24th of the discrepancy (on Binance these payments trigger every 8hours and the payment is 1/3 the difference).

...

A 1% counterparty risk does not really change the analysis and there is no way a major exchange was 1% to lose your funds over a short period of time. 

It turns out that Biance is a lot less safe then assumed: 

Re BTC-PERP, looks like the funding has flipped negative for the last 24 hours or so: https://ftx.com/trade/BTC-PERP.  There are plenty of altcoins with positive funding though, e.g. FTT

I think it's worth noting that there are often both fixed and percentage fees associated with crypto which it's important to be aware of/minimize in order for the trades you mentioned to be profitable. Specifically:

• Most exchanges charge a hefty %fee on trades. To get around this you want to buy on the pro exchanges (coinbase pro, kraken etc...)
• Polymarket charges a 2% fee

In general Perpetuals trade above the price of the underlying coins

I’m confused by this. Doesn’t this means that long positions almost always pays short positions, even if the index is increasing ? If so, why would anyone go long on the future ?

What’s the point of buying bitcoins in your scheme ?

In the interest of avoiding confusion and generally making clear what we are talking about, it would be better to frame this debate as being about passive investing, instead of the efficient-market hypothesis.

What the EMH means traditionally is that for some market, conditioned on some set of available information, the expected value of the future price is equal to the current price times one plus the expected discount rate; in other words: current prices reflect available information. This doesn’t need to be taken literally, but markets being efficient should mean that it is at least approximately true. What “the expected discount rate” means is unclear because, if nothing else, it depends on the preferences of the traders, but in any case we can probably agree that the discount rate on the typical large cap stock from 2010 to 2020 was not greater than 20%.

Market efficiency implies that no possible trading system can be expected to perform better than equilibrium returns.

Everyone on LessWrong knows that a sufficiently good superintelligence could have made much greater than 20% returns trading on a single large cap stock from 2010 to 2020. So for many markets for large cap stocks, the equality hasn’t been even very approximately true.

And it doesn’t matter whether the information set is just publicly available past stock prices, or all publicly available information. Also it doesn’t matter whether the AI has access only to information that is at least one year old; it can probably still make much greater than 20% returns.

So markets aren’t even close to weakly efficient in the traditional sense.

The traditional EMH (“prices reflect available information”) is still what most of the world thinks of as the efficient-market hypothesis, even if there are many people (not at all just rationalists) using the term to refer to the thesis of passive investing (something vaguely like: “it is hard to make risk-adjusted returns, after fees, that beat the market benchmark”).

It’s hard to exclude the traditional EMH on grounds that it’s meaningless, that it doesn’t have practical implications, or that nobody ever thought it was true, because all three of these things are false. If markets were superintelligent, that would have far greater practical implications than any thesis about how to invest our savings: financial markets would become the most important thing in the world, we would use them as an oracle to answer all our questions, solve all our scientific problems, etc. Knowing that they aren’t able to do that is important.