EMH
EMERALD HEALTH THERAPEUTICS INC
stock CVE

>On the long run, the same uncompensated risk is not as lucky and often lead to rough hits.
Uncompensated risk initially sounds like a dumb risk to take, but it might not necessarily be. Most of academic finance assumes that investors should and only do want to optimize their expected return per unit of risk, but this isn't actually a rational assumption (although it sounds like it is at first glance).
Uncompensated risk, regardless of average expected return being less, widens the possible distribution of outcomes, and those outcomes can and do include ones that are genuinely life changing or meaningful. If an investing strategy does not include an outcome that is meaningful (even if technically better when optimizing for risk), there isn't any rational reason to expect someone to consistently stick to it.To add, economic decisions (especially when it comes to investing) aren't driven by trying to maximize for maximum expected returns, but rather for maximum utility.
This is explained well by [this video](https://youtu.be/o-ovbHxSmuk?si=uEfFihwjvWDYWxdX), and can likely explain why so many people in poverty today play to try and win the lottery consistently. If someone is struggling with trying to increase their income and at the end of the month, after being frugal, can only scrape by $100, and they're doing this consistently from the age of 30 to 65 (and this is assuming no emergencies), assuming a 7% nominal return, would leave them with ~$60k (inflation adjusted) by the time they're 65. Assuming the 4% withdrawal rule, they'd only be getting $200 a month.
Sure, that's better than getting nothing, but not remotely enough to be meaningful in any way or even be enough to survive. There might be other benefits, but realistically, we shouldn't expect someone to stick to this because there really isn't a good reason too. Even if they're smart with their budgeting, a sub par outcome is to be expected for a lifetime of frugality and sacrifice. If they were to take a much more risky investment that could result in an outcome that might actually be meaningful to them if they win, and even if they lose, the loss isn't necessarily meaningful.
>The reality is that on a 10 year period, 90% of actively managed equity funds under perform their index. And we are talking about groups of people who definitely know how to analyse markets and companies...
This is net of fees. The EMH implies that the average expected return of the actively managed dollar is the same as the average expected return of the passively managed dollar before fees, and only after fees does the actively managed dollar trail the passively managed dollar.
Additionally, active management has lots of closet indexing, so even if active managers do know how to analyze markets, it doesn't mean that that's what they have every intention of doing. An active manager's incentive is to keep their job, not necessarily try to earn the highest risk adjusted return.
What if someone could outperform the market, and was skilled, but their strategy and outperformance wasn't straight/smooth, but rather went through periods of stagnant returns with short bursts of outperformance consistently? Would anyone else realistically want to invest in their fund? Would other people try to employ this strategy? Would their fund survive, or would investors pull out before the fund had a chance to outperform the market on a risk adjusted basis?

>On the long run, the same uncompensated risk is not as lucky and often lead to rough hits.
Uncompensated risk initially sounds like a dumb risk to take, but it might not necessarily be. Most of academic finance assumes that investors should and only do want to optimize their expected return per unit of risk, but this isn't actually a rational assumption (although it sounds like it is at first glance).
Uncompensated risk, regardless of average expected return being less, widens the possible distribution of outcomes, and those outcomes can and do include ones that are genuinely life changing or meaningful. If an investing strategy does not include an outcome that is meaningful (even if technically better when optimizing for risk), there isn't any rational reason to expect someone to consistently stick to it.To add, economic decisions (especially when it comes to investing) aren't driven by trying to maximize for maximum expected returns, but rather for maximum utility.
This is explained well by [this video](https://youtu.be/o-ovbHxSmuk?si=uEfFihwjvWDYWxdX), and can likely explain why so many people in poverty today play to try and win the lottery consistently. If someone is struggling with trying to increase their income and at the end of the month, after being frugal, can only scrape by $100, and they're doing this consistently from the age of 30 to 65 (and this is assuming no emergencies), assuming a 7% nominal return, would leave them with ~$60k (inflation adjusted) by the time they're 65. Assuming the 4% withdrawal rule, they'd only be getting $200 a month.
Sure, that's better than getting nothing, but not remotely enough to be meaningful in any way or even be enough to survive. There might be other benefits, but realistically, we shouldn't expect someone to stick to this because there really isn't a good reason too. Even if they're smart with their budgeting, a sub par outcome is to be expected for a lifetime of frugality and sacrifice. If they were to take a much more risky investment that could result in an outcome that might actually be meaningful to them if they win, and even if they lose, the loss isn't necessarily meaningful.
>The reality is that on a 10 year period, 90% of actively managed equity funds under perform their index. And we are talking about groups of people who definitely know how to analyse markets and companies...
This is net of fees. The EMH implies that the average expected return of the actively managed dollar is the same as the average expected return of the passively managed dollar before fees, and only after fees does the actively managed dollar trail the passively managed dollar.
Additionally, active management has lots of closet indexing, so even if active managers do know how to analyze markets, it doesn't mean that that's what they have every intention of doing. An active manager's incentive is to keep their job, not necessarily try to earn the highest risk adjusted return.
What if someone could outperform the market, and was skilled, but their strategy and outperformance wasn't straight/smooth, but rather went through periods of stagnant returns with short bursts of outperformance consistently? Would anyone else realistically want to invest in their fund? Would other people try to employ this strategy? Would their fund survive, or would investors pull out before the fund had a chance to outperform the market on a risk adjusted basis?