What if you had perfect information, could you make money? A new study suggests that even if you had the headlines of new announcements before the event, you would still have a problem. The study was quite simple. Assume you have perfect knowledge of some news, but you don't know what is the market reaction. Could you still make money? The answer is no. This has been tested in the paper, "When a crystal ball isn't enough to make you rich."
This study is based on the Nassim Taleb conjecture that if you gave an investor the next day's news 24 hours in advance, he would go bust in less than a year. Markets are complex. They will not behave as expected even when you know in advance what will happen in the news. For the study, the researchers found that of the 1500 participants of this game, half lost money and one in six went bust. Does this make any sense? They guessed the direction of stocks with a 51.5% accuracy and bonds with 56% accuracy. In general, the investors who played the game over-levered. They did not size their bets correctly by using some form of risk management.
This is a variation of the efficient market hypothesis. On average, it is hard to make money in the markets even if you have clarity on the news. There will be some winners - investors who know how to size bets and be careful with their decisions. There will also be players who do not know how to size bets and make good decisions - they will go bust. What decision you make and how you make them matters. Knowing is one thing; doing is something else.
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