Hey there!

Hope you’re having a great weekend. And Happy Republic Day, to folks from India!

I’ve been writing a lot about AI and ChatGPT, haven’t I? Change of pace this week. Let’s move to the world of Finance, and take on a fundamental axiom of the market.

Let’s talk about the Efficient Market Hypothesis.

1. So you think you can beat the market?

I'm sure you've heard this parable.

Economist 1: Look, there’s $20 on the ground!
Economist 2: No there isn’t. If there were, someone would have picked it up already.

We've all laughed at silly Economist 2. The $20 bill is there, why would he not pick it up!

But have you heard this version of it? (HT Larry Swedroe):

Economist 1: Look, there is a $20 bill on the ground.
Economist 2: Boy, this must be our lucky day! Better pick that up quick because the market is so efficient it won’t be there for long. Finding a $20 bill lying around happens so infrequently that it would be foolish to spend our time searching for more of them. Certainly, after assigning a value to the time spent in the effort, an ‘investment’ in trying to find money lying on the street just waiting to be picked up would be a poor one.
When he had finished, they both looked down and the $20 bill was gone!

This one seems to convey a more general truth.

Markets tend to be efficient. There are no metaphorical $20 bills on the sidewalk. Or if there are, they won't be for long.

Right?

I thought about this when reading about the history of the NBA 3-pointer.

"Live by the 3-pointer or die".

Basketball player about to throw a 3-pointer, digital art (via Midjourney v4)

This week, I came across a 2015 article about the rise of the 3-pointer in basketball. (Ask Google / ChatGPT if you're not sure what it means).

How the NBA Learned to Stop Worrying and Love the Bomb starts with this:

LeBron James is one of the greatest athletes the world has ever seen.
The body of an NFL linebacker. The speed of a track star. The vision and precision of a marksman. The basketball mind of a computer. All rolled into one package barreling right at you on his way to the rim.
How do you defeat such a modern-day Goliath?
With a slingshot, of course.
In the NBA, they call it a 3-pointer.
In dismantling the two-time champion Miami Heat in last year's NBA Finals, the San Antonio Spurs fired up more 3-pointers (23.6 per game) than any championship team in league history and averaged more 3s than even the most 3-happy Phoenix Suns squad in the "Seven Seconds Or Less" era.
…
This season, the league shot over 55,000 3-pointers. The average team today shoots 22.5 3-pointers a game, a rate that would have led the league in 2000-01. Stephen Curry won MVP while breaking the 3-point record.
…
As John Hollinger wrote in 2009, there's a new motto in today's NBA: Live by the 3 or die. "Few stats correlate better with winning than 3-point attempts," he wrote.

Read that last line again. "Few stats correlate better with winning than 3-point attempts."

Sounds like an amazing scoring innovation. I can see the leading teams scrambling to learn how to score the 3-pointer, as soon as it was introduced.

Except: That was totally not what happened.

The 3-pointer was introduced in the NBA in 1979! But it was only in the late '90s (and really only in the '00s) that it became the predominant winning strategy that it is today.

Why did it take so long?

Why did they leave the 20 dollar bill on the sidewalk *for a quarter century*?

I'll come back to this. But here's a general principle:

Most markets are not efficient.

The Efficient Market Hypothesis (EMH) is true when it is applied to financial markets. The most liquid parts of the stock market are indeed efficient.

How could they not be? There are thousands (millions?) of very smart people looking at each stock to identify mispricing. And crucially, any attempts to exploit a mispricing correct the mispricing.

As Eliezer Yudkowsky says in Inadequate Equilibria:

Any other possibility would be the equivalent of a $20 bill staying on the floor of Grand Central Station for ten years while a horde of physics PhDs searched for it using naked eyes, microscopes, and machine learning.

Stock markets are self-correcting systems. If you see an undervalued stock and buy it, that action itself corrects the valuation. That's what makes them efficient.

But most other markets are not efficient. In three different ways.

#1: Markets may be efficient at the collective level, but inefficient at the individual level.

Let's go back to the story of the NBA 3-pointer. Why did it take so long to come to the fore?

At first, teams saw it as a cheesy gimmick, because it originated in a rival league.

Back to the article:

George Karl, a veteran player and coach of both leagues, says the shot's coming from the ABA is precisely what doomed it in the eyes of NBA traditionalists. "The NBA was rebellious against the 3-pointer at first because it was born out of the ABA," Karl said. "For years, the NBA guys kind of said, 'That's not a good shot! That's playground basketball!'"
Pat Riley's Los Angeles Lakers were the dominant team of the shot's first decade. In 1981-82, Riley's first season as head coach, the Lakers made a total of 13 3s. All season. And still won the championship.
"It just wasn't something that we used back then," Riley says. "I think it was seen as more of a gimmick in the beginning."

They felt it "wasn't quite basketball".

Never mind that the goal was to win within the rules, not to play the sport in some mythical "right way". (“Are you trying to win, or are you winning?”, as I asked in Stop trying to hit me, and hit me.)

It required rethinking of strategies. By both coaches and players.

If you've been a coach for 20-30 years, there's a lot of inertia.

Even realizing a trivial mathematical truth is hard. "40% probability of a 3-pointer is equal to 60% probability of a 2-pointer". Should be easy enough, but it isn’t.

Plus, they had to think of offensive formations to hit 3-pointers. And defensive formations to prevent them.

From the article:

"I can remember if a guy was out at the 3-point line, you wouldn't even go out there and challenge him," Bird says. "Shoot, we didn't guard anybody out there. We dared them to shoot that shot."
…
"A lot of people will laugh because everyone's accustomed to the 3-point shot now," Brown says. "But we as coaches had to be schooled within the 3-point game and the math behind it. For me, at the time in 1975, it was an adjustment for me to be thinking under pressure in the game going down to the end, 3 versus 2 and 2 versus 3. Today, it's taken for granted that you understand all that."

And players had to be trained in the new way too!

But what makes this even more fascinating is:

All throughout, there were huge incentives to exploit this "under-valuation" of the 3-pointer. And yet, they didn't.

From Tyler Cowen's Stephen Curry and the Duration of the Great Stagnation:

This “technology” has been legal since 1979, yet only recently has it started to come into its own. (Some teams still haven’t figured out how to use it properly.)
And what a simple technology it is: it involves only placing your feet on a different spot on the floor and then moving your arms and legs in a coordinated (one hopes) motion.
The incentives of money, fame, and sex to get this right have been high from the beginning, and there are plenty of different players and teams in the NBA, not to mention college or even high school ball, to figure it out. There is plenty of objective data in basketball, most of all when it comes to scoring.

All through those 25 years, it was there to be exploited. Any player could use the 3-pointer, even if their teams weren't fully able to support the strategy.

Let's take another example. From healthcare this time. Eliezer Yudkowsky mentions one of his experiences in Inadequate Equilibria. Scott Alexander summarizes it well in his book review:

Eliezer’s wife Brienne had Seasonal Affective Disorder. The consensus treatment for SAD is “light boxes”, very bright lamps that mimic sunshine and make winter feel more like summer. Brienne tried some of these and they didn’t work; her seasonal depression got so bad that she had to move to the Southern Hemisphere three months of every year just to stay functional. No doctor had any good ideas about what to do at this point.
Eliezer did some digging, found that existing light boxes were still way less bright than the sun, and jury-rigged a much brighter version. This brighter light box cured Brienne’s depression when the conventional treatment had failed...
Eliezer, a random layperson, was able to come up with a better SAD cure after a few minutes of thinking than the establishment was recommending to him.

Just because the market has landed at a particular level doesn't mean that applies to you as an individual. You can still choose to do something different.

#2: Markets may be efficient to you, but they may not be efficient to me.

One of the key pillars of the Efficient Market Hypothesis is this:

All market participants have access to the same information.

In most cases outside the stock market, that's not true at all!

Real estate agents know more about available houses in a locality than you do.
You may have read the prospectus end to end. But what if I wrote it? (Case in point: How Nokia became the market leader in GSM mobile technology. By writing the GSM standards itself).
You're new to this sector. But I've been working in it through 3 decades and twice as many market cycles.

A market that looks efficient to you might be ripe for pickings by me.

My favorite example of this used to be Ryan Petersen's LA boat ride. As I wrote in The 6 secrets to building a future-proof business:

When you see a $100 bill on the sidewalk...
Something very interesting happened on Twitter this week.
The founder of Flexport, Ryan Petersen, toured the Long Beach port in LA. The same port whose congestion has caused a supply chain crisis across the world.
Lots of intelligent people have thought hard about this problem.
JP Morgan even wrote a detailed research report on the topic (entertainingly titled Dude, Where’s My Stuff?).
Anyway, so Ryan toured the port, and wrote a Twitter thread making one specific suggestion to resolve the blockage.
And within 8 hours, an executive order was passed by the government to make it happen!
Read his entire thread here.
The meta-lesson here is this:
Most markets are not efficient.
There are often $100 bills lying on the sidewalk.
What may be obvious to you may not be obvious to everyone. What may be obvious to everyone may not get spelled out.
So here you are: You've seen that $100 dollar bill. Now, you can theorize for hours as to whether it's fake.
Or you could, ya know, pick it up!

Now I have a new favorite example, Nikita Bier.

He created an app for teens to anonymously compliment each other, called "tbh". He sold it to Facebook in 2017.
Once the non-compete was over (early 2022), what did he do next? He created a new app for teens to anonymously compliment each other. Called "Gas" this time. He sold it to Discord in Jan 2023.

It's clear that no one else can see this opportunity - and capitalize on it - in exactly the way he does.

For all we know, he will create another 20 apps for teens to anonymously compliment each other, before he calls it a day.

#3: An efficient market breaks apart in front of a determined mind.

My favorite example of this is Sarah Moore, who I spoke about in Fortune favors the brave (and the restless):

Luck, but not an accident.
[Sarah Moore] decided that she wanted to buy a business. And she *literally* looked at every single business (400,000 of them) to decide which one to buy.
her "office" was the school library
her "fund" was non-existent as she had no money
her "analysts" were 50+ interns she found on Craigslist
She participated in random research studies to make side $$. She even went blind for a while, from a deodorant study (note to self: Don't spray deodorant into eyes).
She had her 50+ interns look through >400,000 private companies in a year and a half, to find the perfect one.
She reached out to 100 banks to pitch that company. 99 said no, and one finally gave her the loan she needed.
And just like that, she made it happen.
A "break through walls" mindset can help you, well, break walls.

From the same article:

The market may be efficient as a whole, but it isn't efficient all the time. And not all parts of the market are efficient.
A determined person (or company) will find the hole, through sheer force of will.
He who hustles will be rewarded.
Don't expect that you'll know what to do, just by "thinking real hard".
The answer might not be obvious.
It might be obvious, but not to you.
It might be obvious, but still need spelling out.
Throw things against the wall, see what sticks.
Speak to a hundred people, see what comes out.
This was how I struck a partnership that got my app to 250K users in one month (back in 2015), with 2 developers and zero funding. Tried a lot of things, spoke to a lot of people, till we had the one conversation that mattered.

And I love the story of Jim Simons and Renaissance Technologies.

A former math professor, Simons is arguably the most successful trader in the history of modern finance. Since 1988, Renaissance’s flagship Medallion hedge fund has generated average annual returns of 66 percent, racking up trading profits of more than $100 billion.

Markets are efficient to a certain degree of effort.

But if you're ready to throw the kitchen sink at them, and keep throwing it... the efficiencies melt away.

Jim Simon's partner-in-crime Robert Mercer shares their secret, in The Man Who Solved the Market:

“We’re right 50.75 percent of the time . . . but we’re 100 percent right 50.75 percent of the time,” Mercer told a friend. “You can make billions that way.”
Renaissance enjoyed a slight advantage in its collection of thousands of simultaneous trades, one that was large and consistent enough to make an enormous fortune.
By analyzing and estimating hundreds of financial metrics, social media feeds, barometers of online traffic, and pretty much anything that can be quantified and tested, they uncovered new factors, some borderline impossible for most to appreciate.

A market may be efficient to the naked eye. But the relentless mind will find inefficiencies.

OK, great. Markets are inefficient if you work hard. What else can I do with this information?

Do you live in a power law world?

Do you live in a world where outcomes are unevenly distributed? Where winners win disproportionately?

For most of us, the answer is yes. The worlds of startups, technology, writing, the Internet - are all “winner-take-all” worlds.

And in such a world, there's a simple asymmetry you can exploit.

→ The cost of trying something new is small and bounded.

→ The upside of getting it right is large and almost boundless.

So try things. Try a LOT of things. Throw stuff on the wall, and see what sticks.

The wisdom of Jimmy Greaves, England’s fifth-highest international goal-scorer:

dave trott @davetrott

RIP Jimmy Greaves: "What I had to do was get in the box 500 times a season. 100 times I'd connect. 50 times the goalkeeper would save it. Half of the rest would go in and 25 goals a season would do me - just by making sure I got in the box 500 times" (Great life lesson)

Before we continue, a quick note:

Did a friend forward you this email?

Hi, I’m Jitha. Every Sunday I share ONE key learning from my work in business development and with startups; and ONE (or more) golden nuggets. Subscribe (if you haven’t) and join nearly 1,400 others who read my newsletter every week (its free!) 👇

Subscribe now

2. Return to Hustle - Lil Nas X edition.

Talking about hustle and a determined mind, I absolutely love this origin story of Lil Nas X.

Marketing Examples @GoodMarketingHQ

💡The marketing genius of Lil Nas X THREAD ...

3. The Indian Century.

This is the Republic Day weekend in India. So let's talk about India!

India is winning its fight against poverty.

I read this stat last week, which astounded me!

From the Economic Times:

In a "historical change" for India, 415 million people exited multidimensional poverty in the country in 15 years between 2005-06 and 2019-21, the United Nations (UN) said on Monday.
The incidence of poverty in the country dropped from 55.1% in 2005-06 to 16.4% in 2019-21, as per the latest Multidimensional Poverty Index (MPI) compiled jointly by the UN Development Programme (UNDP) and Oxford Poverty and Human Development Initiative (OPHI).
Of the nearly 415 million people who exited poverty in India in the 15 years before the Covid-19 pandemic, roughly 275 million did so between 2005-06 and 2015-16 and another 140 million did so between 2015-16 and 2019-21, the report said.

India lifted 415 million people out of poverty in 15 years! Why is this not bigger news?

Brain drain? What brain drain?

From the Times of India:

“Compared to 20 years ago, a very small percentage of students go abroad today. This is contrary to the general perception ,” says IIT-Delhi director V Ramgopal Rao. “Twenty years ago, 80% of the BTech class used to go abroad. Now these numbers are insignificant.”
Not even 200 of the approximate 10,000 students from the Indian Institutes of Technology took up positions outside India last year. Fifty students, who make up the largest contingent, will be leaving from IIT-Bombay, followed by 40 from Delhi, 25 from Kharagpur, 19 from Kanpur, 13 from Madras, 17 from Roorkee and five from Guwahati. In 2012, 84 IIT-B candidates had accepted international job offers.

Now, I'm sure this data is at least a tad sensationalized. And it may be only directionally accurate. But still, what a direction!

India en route to becoming a manufacturing hub?

From the Wall Street Journal in Dec 2022:

In recent weeks, Apple Inc. has accelerated plans to shift some of its production outside China, long the dominant country in the supply chain that built the world’s most valuable company, say people involved in the discussions. It is telling suppliers to plan more actively for assembling Apple products elsewhere in Asia, particularly India and Vietnam, they say, and looking to reduce dependence on Taiwanese assemblers led by Foxconn Technology Group.
Apple’s longer-term goal is to ship 40% to 45% of iPhones from India, compared with a single-digit percentage currently, according to Ming-chi Kuo, an analyst at TF International Securities who follows the supply chain. Suppliers say Vietnam is expected to shoulder more of the manufacturing for other Apple products such as AirPods, smartwatches and laptops.

Moving half of iPhone production to India! Would this be the fillip that Indian manufacturing needs?

4. If only they taught Geography like this, school would be so much fun!

I loved this thread from Noah Smith. This is the only way I will now discuss geopolitics.

Noah Smith 🐇🇺🇦 @Noahpinion

🇮🇳: We're going to skip industry and go directly to services! 🇧🇩: We make shirts 🇮🇳: We're going to ban physical money! 🇧🇩: Buy our shirts 🇮🇳: Here's an incredibly complicated tax plan! 🇧🇩: Would you like a shirt? 🇮🇳: Education? Who needs it!! 🇧🇩: Shirts

Hilarious. Click through and read to the end.

That’s it for this week. Hope you enjoyed it.

As always, stay safe, healthy and sane, wherever you are.

I’ll see you next week.

Jitha

Sunday Reads

Sunday Reads #171: The rise of the NBA…