Saturday, 26 May 2018

Plausible Hypotheses In The Hunt For Gold

After a couple of relaxing weeks away touring the Scottish Highlands and the Lake District, mostly in perfect weather, you'll be pleased to know I am back, although not quite to normal as it's a holiday weekend and my poor old 90 year old Dad, declining fast with Alzheimer's, had a fall a couple of days ago which has prompted some discussion among my siblings and I regarding parental living arrangements. I'm sure many readers have been through similar challenges - how to take away the freedom to drive, when does a house with stairs become a danger etc.

At 90, my Mum insists on continuing to drive despite needing help with taking the hand brake off last week, parking in front of driveways that are clearly in use, resulting in angry neighbours knocking on the door, and requiring enough clear space in front of her when pulling out of a parking space from which a 747 could comfortably take off. 

One mildly amusing incident was when I was doing the washing up last week and my old Mum was drying while talking about my Dad's decline. After a brief pause she said, in what I thought was a very calm voice "well, the end is nigh". Rather shocked at the seeming acceptance of the imminent demise of my Dad, I looked at my equally confused wife with a look of wtf, before my Mum's next comment made it clear that she was actually referring to the status of the task of washing the dishes. 

This is all a rather long winded way of saying that I have other priorities in life right now, so posts on betting may be fewer and farther between than is normal. 

One comment on my last post from Konstantinos Charalampous asked:

Are Pinnacle odds opening, closing or the ones you have taken personally?
The odds used are all from Joseph Buchdahl's excellent site. Closing odds are as the name suggests, the odds close to the event start time, while what I call 'interim odds' are the odds as extracted a day or two prior to the event.  As Joseph clarifies - "Betting odds for weekend games are collected Friday afternoons, and on Tuesday afternoons for midweek games."

Joseph's web site is very useful for backtesting ideas, but as this finance article makes very clear, "backtesting should not be used as a research tool". 

As this blog post explains
In other words, before we can determine whether or not we have an edge (in systematic or discretionary trading), we need to establish knowledge. A theory explains how and why something occurs. Testing of historical data can help us conduct limited, targeted tests to determine whether our theory holds up in practice. Before we test, we must formulate a plausible hypothesis.
Computers offer us all the ability to look at thousands of combinations and come up with something that "works", but if your "edge" is in the MLS Second Division backing the draw when both teams have two vowels in their name, even if backtesting shows a profit, you don't have a real edge. And yes, I do know there is no such league.

There are web sites that target unsophisticated bettors with "information" such as these real life recent examples:
The Royals are 0-11 OU (-2.55 ppg) since Jul 15, 2016 when Ian Kennedy starts after he threw over 100 pitches in a team loss in his last start. 
The Cardinals are 12-0 since Aug 03, 2016 past the first game of a series as a favorite when facing a lefty after facing three straight righties.
Fascinating, but completely useless noise. Run enough queries and you are guaranteed to find something.

Readers of this blog will know that I have for a long term encouraged a very simple approach to investing which is to invest regularly in index funds and forget about it. It's encouraging to read in The Growing Crisis In Modern Finance article that:
The challenge here can be seen in some recent studies of individual investor behavior. For example, the 2017 DALBAR report found that over the 30-year period ending in 2016, individual equity fund investors averaged only a 4% annual return, compared with 10.2% that could be had by simply investing in a low-cost S&P 500 index fund. As we have pointed out, most of the shortfall is due to panic selling in downturns, lack of diversification, not understanding the basics of long-term compounded returns, and, in the end, a failure to establish a rational financial plan and stick with it over the long term.
If most consumers do not understand, much less practice, the basics of rational investing, and if even fewer understand that reliance on charts, graphs and frequent trading is not the answer, then it is much less likely that individual consumers can understand difficulties with backtest overfitting and other potential pitfalls that unfortunately pervade the investment world.
Invest your £100 at 10.2% and after 10 years it's worth £264, after 20 years £697, after 30 years £1,842. The power of compounding, the eighth wonder of the world, as Albert Einstein is quoted as saying.

This paragraph also supports my policy of low-fee index fund investing, as well as highlights the futility of trying to beat the market:
On the bright side, one upside to the “arms race” of competing quant operations is that the resulting market prices are closer to the “true” market price, since if some price were not, a savvy computer program will quickly capitalize on the situation and arbitrage it away. Thus when an individual investor buys or sells a security, it is more likely that he or she is getting a “fair" price. In particular, this system benefits those wise investors who simply invest in a diversified portfolio, or even a handful of low-fee index-tracking funds, and hold these securities consistently over the long term.
Another paragraph from the article stood out, a metaphor for not only financial markets but also one perhaps more appropriate for the riches once relatively easily available to the savvy exchange bettor:
Centuries ago, gold could be found near the surface of the earth and could be mined by enterprising individuals with shovels and pick axes. As the visible gold supply dwindled, it became necessary to utilize complex techniques for detecting microscopic gold and gold hidden far beneath the earth's surface. The days of California gold rush, where individuals could strike out and find their fortune, are long gone.
Profits are still there to be made, but the riches near the surface have long been exhausted. The claim of easy riches by unscrupulous individuals who should be well known to readers of this blog, are unfortunately actually pyrite, also known as fools' gold.

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