Thread by @AnthonyLeeZhang

A sort of incredible thing about markets is that they aggregate information and coordinate behavior, often without any participant really seeing/understanding the "big picture"

https://twitter.com/elonmusk/status/1393993975019749382

In this case, if Xinjiang miners were sufficiently decentralized, perhaps even they were surprised that they collectively made up 35% of hash rate!

I speculate this is true of most markets: nobody really understands, for example, the exact breakdown of who is doing what in cases like GME, treasury market craziness of March, etc

Markets are kind of perpetually shrouded in an N-party "fog of war" so to speak. Each market participant sees a small ball around their own behavior, speculates what the broader landscape looks like

but it's entirely possible everyone - even the eventual winners! - is basically wrong about the "big picture"

Market participants also tend to really like "narratives", discussion of the big picture, etc. But anecdotally, I think like such macro-understanding is only weakly correlated with performance as a market participant

Being successful in the market requires being very good at one particular niche, and sufficiently insulated against happenings in other niches, but one can do this tolerably well without understanding other niches extremely well

At some level this is pretty elementary - Hayek's point is that the pencil lead factory just needs to be very good at producing pencil lead, doesn't particularly need to understand what the wood and rubber companies are doing

What motivated me to write this is observing finance twitter, reading a few hedge fund memoirs, etc. Most people in the markets are very opinionated, but the correctness of one's opinions seem at best weakly correlated with perf

For some this seems to be because their job is essentially marketing rather than perf, and their stories are really designed to be convincing rather than correct

But for others it seems their outperformance is based more on "execution" in some sense, and being able to "dodge" macro risk, rather than getting macro right

This kind of makes sense: "macro" v generally defined involves a relatively small # of events, which is hard to juice a very high Sharpe ratio out of. If your goal is a high Sharpe, better to try to hedge out macro risk and focus on something relatively diversifiable

I mean this not only about trading, etc. but also if you are, e.g. a tech company, a clothes factory, etc. If your business involves essentially winning a big "sector bet", there's just not enough N to juice out a very high Sharpe ratio

I think there is a Soros quote that's somewhat related: "It's not whether you're right or wrong, but how much money you make when you're right and how much you lose when you're wrong"