People Beat the Market Because of IQ, Not Conspiracies

Liberals like Nicholas Nassim Taleb, Robert Shiller, and Michael Lewis insist the market is rigged, a scam and a bubble, and therefore anyone who achieves long-term, risk-adjusted superior returns is either lucky, ignoring hidden risks, running a Madoff-like fraud, cheating (HFT, dark pools), or in cahoots with ‘evil’ bankers. In the same way the left denies how some people are born smarter than others and that these differences in intelligence are manifested in socioeconomic outcomes, the left denies that some people, by virtue of high-IQ and innate talent, are born to be better traders. The operative word is ‘born’. That means these traders are so successful because of an innate, congenital ability – not because of some ‘unfair’ environmental advantage, fraud or cheating. This drives the left crazy because it throws cold water all over their collectivist delusion – that only the state can make people perfect; people cannot be born perfect. And second, because the left hates it when people make money through individual merit that the state cannot take credit for. (Obama’s ‘You didn’t build that!’ speech comes to mind)

So why are smart people so much better than everyone else at ‘reading’ the economy and stock market? Because the skills that IQ tests measure (making connections between pieces of information, pattern recognition) have direct applications in stock trading – namely smart people have a superior ability to separate signal from the noise, choosing the best strategies from a huge pool of crappy ones and leaving the rest for everyone else. Then these losers with poor trading strategies cry foul, whining about imagined conspiracies such as fed manipulation and the market being a fraud. Liberals create conspiracies to explain away being failures at life, attributing the real-life manifestations of their mental deficiencies to non-existent external factors. Believing in market/economic conspiracies is no more risible than believing that more education spending will narrow an achievement gap that is really an IQ gap. It’s as stupid as believing that ‘shadow governments’ are keeping down the poor – not low IQs.

I sometimes get into debates with conspiracy nuts, well-intentioned but misinformed people who believe the fed’s QE program is the only reason for stocks going up. This is countered by the fact that despite the fed tapering almost 2 years ago and finally ending QE a year ago, stocks have actually risen 30%, which shouldn’t have happened if QE were entirely the cause of this rally. The left wants it both ways – they want to call QE a failure, but also predict it will cause hyperinflation. QE was a success by boosting confidence and asset prices, and that is good enough for me. Libs who wanted more job creation: too bad. Stocks are surging because the fundamentals of the US economy as measured by exports, consumer spending, profits & earnings keep being better than ever. Large cap tech companies like Apple, Microsoft, Google and Facebook are flooded with cash. The banks are sitting on the QE money due to individuals and businesses not borrowing, so QE isn’t even inflating the economy anyway. Treasury yields are still rock bottom despite the unending doom and gloom predictions of high inflation, and the dollar is rallying to multi-year highs. Yes, to some extent QE contributed to the bull market, but it’s hardly the only cause.

Tomorrow’s post: The strategies smart people use to beat the market and everyone else