[nickff]

Then it should be very easy to make money by buying S&P501+ and shorting the S&P500. If you believe the theory in the OP, you can bet on it (and against EMH) by doing this.

The question is: how much are you willing to bet on it?

P.S. In case you are wondering, I have bet a significant amount of money on the EMH being correct.

[bcg1]

I have no interest in the hubris of shorting into a raging bull market, especially when investor sentiment is fearful (http://money.cnn.com/data/fear-and-greed/).

Also I'm not saying that the phenomenon in my above comment is something would be an efficient use of money to trade. Personally I'd much rather look at out-of-favor sectors like commodities than try to pick up pennies in front of a steamroller by attempting to arbitrage the S&P 500 and S&P 501+ (as you put it)

In any case, thanks for your comment it does give some important food for thought

[chair94]

I have no interest in the hubris of shorting into a raging bull market,

Read what he wrote: he stated that if you believe what you wrote, you can collect the spread by shorting side you claim underperforms, and going long on the side you claim outperforms.

If what you said is true, it's extraordinarily low-risk arbitrage.

If what you said is false, you're best served to say a bunch of bullshit that 's unrelated and then not make the trade.

Oh... I see... so you know you're full of shit.

[bcg1]

Shorting exposes you to potentially unlimited losses and you might have to keep putting up money to stay in your position if the market turns against your short position (even if the other side of your trade is working). You'd have to be very sure about your timing or have unlimited funds/credit in order to use that strategy. And even if you made money doing that, it doesn't mean that there isn't a better opportunity elsewhere in the market, risk adjusted or otherwise.

But if it makes you feel good to swear at strangers on the internet, you can sign up for anonymous accounts and say I'm full of shit, and I'll be glad that I could help boost your self esteem.

[eru]

> Shorting exposes you to potentially unlimited losses [...]

You can buy far out of the money options to limit those.

[im3w1l]

Bcg1 is not an ideal investor. He does not have an unlimited line of credit at top tier interest rate. Shorting S&P500 would be very dangerous for him.

A better strategy would be to underweight S&P500, and overweight the companies that are the closest to being included.

[nickff]

What you are describing is a lower-risk strategy, but it has a lower payoff as well. If one is very sure that a stock is overvalued, shorting is the best (simple) strategy to profit from it; if one is less certain, your strategy is a good one.

[mikeash]

What if you are very sure that a stock is overvalued, but totally unsure where it will peak first? Shorting it could leave you in real trouble then, even if you can somehow be totally certain that you're right about where the price will eventually be.

[nickff]

I was talking about the S&P500, which is composed of a few hundred different companies, so the risk of one company hurting you is low. You are right about the risk of shorting, but it is the strongest bet you can make. I would probably take out a put option on an S&P500 ETF if I agreed with the post I initially responded to. By buying the S&P501-750, you would also be fairly well secured against market upside risk.

My first response was intended more as a rhetorical question asking whether the poster is actually willing to bet money on their idea. I never really meant to enter into a discussion on the pros and cons of various trading strategies.

[mikeash]

Even the S&P 500 could keep on going up a long way despite eventually being doomed to drop substantially. (I have no idea if it actually is, of course.)

My point is just that seeing if someone is putting money behind their opinions about the long term isn't really telling, because "markets can remain irrational longer than you can remain solvent" and you may not know just how long term it'll be.

[im3w1l]

In addition to the margin call concern, just because a stock is overvalued doesn't mean it will reach its fair value before an adverse event (let's say the company makes a gamble with positive expectation, but it doesn't work out) happens that lowers its fair value. If that were to happen, he could be a few hundreds of millions in debt.

[nickff]

>"In addition to the margin call concern, just because a stock is overvalued doesn't mean it will reach its fair value before an adverse event (let's say the company makes a gamble with positive expectation, but it doesn't work out) happens that lowers its fair value. "

I'll assume that you meant the opposite of this quote (, that the stocks being short-sold beat expectations, and their fair value went up,) as what you said would benefit the short seller.

You are right that the stock could take longer than expected to reach its eventual (lower) value, but this is why you would bet on a large number of stocks (i.e. S&P500), to reduce the risk of a single or few adverse events cancelling out the strategy. In addition, by purchasing the S&P501-750, with the money from short-selling, you would be fairly well protected against market upside risk (as it is unlikely that the S&P500 will be the only stocks to do well in a bull market). You could also purchase options to reduce the risk of the short, but a (simpler) alternative would be to take out a put option on the S&P500, which the better believes will go down; this is obviously somewhere between the portfolio bias approach, and the short approach in terms of risk (and reward if you believe in EMH).

[matwood]

If you're very sure, options is where you should be.

[sokoloff]

You also need to be very sure about the timing to make the play in the options market.

[dothis]

    I have bet a significant amount
    of money on the EMH being correct.

How do you do that?

[eru]

Look at how one would bet money on EMH being wrong, and do the opposite?

Or, rely on EMH and just buy the index.

[jpdus]

How can Renaissance Technologies (and others) exist, if EMH is correct (in the general case)?

How is your bet structured and can you explain your opinion?

[eru]

Some weaker version of the EMH allow for Renaissance Technologies. Note how Renaissance Technologies does not want your or my money?