The Stock Market Always Wins（原声文稿）

dollar bet on the dumbest investment strategy imaginable.

Buy all stocks according to their size and do absolutely nothing for 10 years.

In 2017, he won by a landslide and continues to win to this day.

result that has been better than Wall Street professionals. This leads to the key question of this video.

How can nothing beat the smartest traders on earth?

聰明交易员 If money is evil, then that building is held.

To understand this paradox, we need to go deeper into the world-buffet bet against. 90 for 3,000! 90 for 3,000! Fill or kill!

over every penny Their methods shrouded in secrecy treated like a dark art a black magic.

question. Are these traders parasites stealing from average people?

Or are they more like bees providing a hidden service?

wild night I'll never forget, during the crypto bubble of 2017.

backwards, and finally understood Buffett's bet.

for geeks and libertarians, holding a few coins for fun.

But by 2017, Bitcoin had broken a thousand, and then two thousand.

was about to flow into this market like never before.

new exchanges just to mess around.

That's when Bitcoin price at $1,850 on one exchange but it was placed what's called a market order, basically current price is.

But my order just hung there, nothing there were no recent trades for the last few hours. I looked into something called the order book. This is the heart of how every exchange works.

Think of the order book like jars at different price levels.

trade at that exact price with what's called a limit order.

jars, people wanting to sell bitcoin for dollars.

The fuller the jar, the more depth the market has at that price.

In a normal, active market, an order book usually looks like this.

to buy at cheaper prices or sell at much more expensive ones.

matched to the best available limit order on the sell side.

next jar and so on until my order is filled. That's the price I get.

empty. Nobody had Bitcoin for sale at any price on this exchange.

Bitcoin from my wallet onto this exchange and posted where it was trading everywhere. I put it at $2,500 and it sold instantly.

my account, instead of the $200 it should have been worth.

So I kept selling it at a higher and higher price.

many market buy orders lined up to execute and they would pay any price available.

And at that moment, my limit sell orders were the only orders on the sell side.

I WAS the market, and had it cornered by accident.

And almost as a joke, I posted one bitcoin for $10,000 and it sold immediately.

I emailed a friend at 2am to explain, my hand shaking.

more bitcoin on a major exchange and tried to repeat this gold mine.

transfer, it took my new bitcoin to arrive.

But by the time it arrived, everything had changed.

and filled the sell side jars with reasonable prices.

a new order appeared undercutting me by 1 cent. I tried again and it jumped in front of me.

automated market makers who constantly post limit orders near the current price. That's when it started to hit me.

My lost opportunity was the average person's gain.

price barely moves and you get what you would expect.

problem from the stock market in the 1980s.

When a pension fund wanted to buy say $50 million worth of IBM stock, that massive because there wasn't enough depth to absorb it smoothly.

posting orders near the price level, reducing slippage fraction of a percent, even for large trades.

market where competition really matters, the news.

differently across outlets, how do you know what's really happening?

story is being covered across the political spectrum.

groundnews.com slash AOTP, or click the link in the description.

That's just $5 a month, but the cost of a coffee.

potentially acquiring Perplexity AI for $14 billion.

risky overspending on an unproven technology.

videos, I need to understand all sides to make sure my arguments code or click the link in the description to get this offer.

algorithms work exactly?

I figured it out when I started popped up, the same coin was trading at wildly different place and sell it in the other to make a risk-free profit of $100.

friend. The crypto market is special, very special.

The prices in a panic can be 20% you could trade profitable loops through multiple buy Bitcoin, trade from Bitcoin to Ethereum, and then exchange rates didn't multiply to exactly one, you'd make bot to scan all possible trading paths across all the circular routes where when you multiplied all the exchange than one.

And these profitable paths existed because exchanges would cause the prices to drift slightly out of first day of trading, the bot found a path between two exchanges and trading $200 through this loop netted us an $8.50 profit in a second.

sense. And when we traded a path, the opportunity would disappear.

here. And like before, the easy money didn't last.

were discovered by others, they would beat us to it.

Leaving us with paths that only had a tiny profit margin.

Professional firms with deeper pockets and faster algorithms arrived.

Again, competition actually made the markets fairer for the average person.

news broke affecting Bitcoin's value in one place, it would instantly spread to every exchange on Earth.

cryptocurrencies happens today across the entire global financial system.

Paul is checking Chicago prices at the same time he's trading in New York.

Every bit of information could give him a critical advantage. Five-three-hundred and nine are better right now.

This leads to a powerful idea.

We can view all of these trading opportunities called arbitrage, relationship, consider the price of Bitcoin on two exchanges A and B.

exchanges, we're on this diagonal line where prices are equal. No arbitrage opportunity exists.

Think of this line as a no profit surface.

But if exchange B shows a higher price, we move off this line. That's a profit opportunity. Buy low and then sell high.

market point back towards the no-profit surface.

in higher dimensions using planes and other shapes.

off these surfaces, there's profit to be made.

Traders get paid to push the market point back to where it mathematically must be.

things get really interesting.

The next type considers where prices future arbitrage.

This kind of trading is statistical certain, even if it's likely, where we move from these sharp predicting prices can happen over any time period, whether brings us back to the master, Warren Buffett.

He who in 1949 wrote The Intelligent Investor, Graham taught to do research to find a company's future profit potential.

If that future seems likely then you buy now and wait for it to unfold.

But after you buy, you need to ignore the daily stock movements.

Graham compared this to a crazy person he called Mr. Market.

single day with a new price for your shares.

Sometimes he's wildly excited about what he has to offer. Sometimes he's deeply depressed.

and And the value he proposes seems to you a little short of silly.

So a perfect example of this process was Coca-Cola in the 80s.

mature American soda company, Buffett saw wildfire about to ignite globally.

The spark was already visible, Americans consumed about 300 cokes per year.

But in China it was three, India less than one.

fun, but these numbers were starting to climb rapidly as those markets opened up.

selling sugar water, it was selling an American lifestyle.

plan to make Coke available everywhere on Earth, To make it the world's drink to the world.

And so his research made this an obvious bet by 1994 he put 35% of their fund Street thought it was crazy. Mr.

Market would not have agreed by 1998 Coke sales exploded globally and his investment had grown to ever. But here's the key point.

This kind of long-term the traders making trades based on much shorter information second by second.

These are exactly the traders that point misses is how crucial short-term traders are.

Which brings us to one of the greatest living traders, Mr. Market himself, Paul Tudor Jones.

This is the kind of trading where Thank you very much. rubber really meets the road.

injected into the market prices as traders react moment by moment to the world.

It's more chaotic because it's reflecting reality itself. That's what makes it so exciting.

Every day is something new and every day is providing new information.

come to an agreement where they're going to have a 7% production cut.

you try to get 13 people to agree to anything know, wild horses couldn't keep me from betting against them succeeding in that.

surprise, when geopolitical events happen... You've heard nothing else on OPAC. No. I got you.

within seconds, injecting that new information into prices. Ask him how much he sold, give him your number.

Tell him more behind it, do it, do it, do it, there's more behind it. You're under arrest. Do not ever leave this phone.

You get someone, get the other broker to come and run the orders in. Do not leave this phone. All right, Paul.

information waiting to be injected into prices.

an agreement between 13 people, but two of them said they want a grade, Thank you for watching and please subscribe to my channel if you like this video.

research, whether you're managing billions or trading from your bedroom. It's not your trade.

trading on prediction markets like Kalschi.

nature of this selection, he saw that betting favorites that made sense, but he felt the pricing was mostly nonsense.

just four ballots signaling they made a decision, the favorites on the betting market spiked to 85%, but Dohmer had spotted a key bias.

There was a widely held belief that Americans could not be elected pope.

And he found Robert Prevost at 201 odds, which didn't make any sense to him, so American walked out as poli.

The market paid him handsomely information-starved market. Anyone can be the bee.

Which leads future arbitrage, where machines operate in fractions for patterns in how groups of stocks move together.

The correlation is here, phenomenal. That's incredible.

Gary Bomberger at Morgan Stanley pioneered the idea in the 80s with what's now called companies that were nearly identical, take Coke and Pepsi.

served the same market with similar products.

created a fuzzy corridor where these pairs usually traded together.

relationship, like when Koch launched New Koch in 1985 price while Pepsi celebrated, Baumberger's strategy would kick in.

Koch and sell the celebrating Pepsi, betting the usual region.

This reveals something important markets.

When Coke posts strong sales and jumps 10%, making sure relevant information doesn't get trapped company that should be affected.

DE Shaw took this idea thousands of stocks, and they traded all of them at the same time.

And soon computers were detecting far more complex relationships.

For example, when Coca-Cola announces strong but then other beverage companies and then restaurants, sugar suppliers, algorithms learned to map these real-world connections as curved surfaces, which showed how entire groups of stocks naturally moved flowchart for capital.

Which leads us to the most successful trader in history, Jim Simons and his legendary secretive medallion fund, the envy of the world.

mathematical thesis was on measuring geometric distortions, detecting one point deviated from where they should be on complex surfaces.

I showed it to churn and he said, oh, you did it in three dimensions, but it should be doable in all dimensions. Okay.

Years later, he realized markets were just another geometric system.

Prices tended to follow shapes based on real-world constraints.

exact trades needed to profit from their inevitable drift back.

So renaissance took a radically different approach from D.E. Shaw and others.

Is it true that you never hired people from the investment industry? Never.

Thank you very much for watching, and I'll see you in the next video.

Well, I like to say that you can teach a physicist finance, but you can't teach a finance person physics.

time series. You know, it has a value every day.

series. You can analyze time series mathematically.

and especially if you have hundreds or thousands of these time series and in looking at the patterns of prices I could see that there was something we could better and better and finally the models replaced the fundamental stuff they use machine learning to ingest everything prices news weather economic don't know about, and their computers discovered hundreds towards.

So a trade in this world would take the form of all stocks, thousands of precise portfolio instructions, based on where prices were expected to move in the short term.

the markets would open slightly up or down.

Often, these relationships would only exist briefly before disappearing.

Relationships so subtle that even Simon's team couldn't explain why they worked.

these surfaces because they couldn't see them.

every corner of the world and spreading it through market prices.

bedroom, they all push prices towards what's fair at any moment.

You can see it as a living hive.

And today the information war has reached the speed of light.

trading algorithms react in real time to the world.

the AP news account and a single fake tweet about which which then snapped back when algorithms realized it was fake.

The arms race for information has gone upstream.

cars in Walmart parking lots before earnings.

Citadel pays Robinhood for order flow to see trades before they hit the market.

And so finally, let's step back and remember Warren Buffett's original bet.

He wagered that doing nothing would beat all this sophisticated trading. How is that possibly true?

theory when he had a revolutionary insight.

His one big idea was to look at old traders collectively as one entity.

putting their dollars into some combination of stocks, whether it's all in one stock or spread across hundreds.

you actually get a single collective portfolio, which Sharp called the market portfolio.

remarkable, the collective result of everyone's wisdom.

deciding what to own and how much to own, to the market portfolio holder, growing and shrinking as they exchange value with each other.

Market portfolio holders get this ongoing reallocation for free.

It's like a living match the state of the world at each moment.

And portfolio is the average of everyone's holdings, so since it pays no fees and everyone else does for better over time because costs eat away at traders' profits.

And John Bogle turned this insight into the index fund in 1976.

by holding all 500 stocks in the S&P 500 in proportion to their market value.

updated every time new information gets injected to the market.

Bogle's original index fund has beat roughly 90% of funds.

American investor than any man in the country.

Jack, would you stand up? It wouldn't have happened without him.

The truth is it was not in the interest of the investment industry of Wall Street.

have the development of an index fund of the index fund because it brought down Buffett could make that bet against his own life's work you have a chance of being wrong and active investors have to keep guessing gone bankrupt, lost everything I had and had to borrow from friends three times in there and just go I can't believe this, you know just keeps creeping forward in the race and since fees don't slow it down index you literally have every trader on earth working for your money win.

It's the most important idea in finance Imagine yourself back on March 11th of 1942 that at that time bought the S&P 500.

I want you to think how much money you might have now let's go to the next slide, and we'll get the answer.

You'd have 51 million dollars, and you wouldn't have had to do anything. You wouldn't have to understand accounting.

You basically just had to make one investment decision in your life.

most sophisticated game on earth is refusing to play.

one problem buddy, your friendly stockbroker would have starved to death. Thanks a lot.