5 ms·

If you want "fun investing", go to Vegas. I personally don't think of investing as a source of entertainment.

matt_wulfeck 10y ago
I quite enjoy listening to the conference call for a company. It really does tell you a lot about what's happening behind the scenes, and before anyone else knows it. It's like the company telling you little secrets :-)
savanaly 10y ago
Investing in specific companies rather than indexes (which I assume is what everyone means by "fun investing"?) isn't very much like gambling in Vegas. With gambling in vegas you have a negative expected return with a high variance. With stock picking you have a positive expected return with a high variance (where do index funds fit in? positive expected return with low-ish variance). Although picking stocks is still not rational if your only concern is your long run wealth, it's not irrational for the same reason as gambling. It's bad because you have the same expected return as low cost index funds, and you exert effort or pay fees for the privilege. That doesn't mean I look down on everyone who actively invests though-- they may have good reason to think they are special and can pick stocks better than average or they may just enjoy it, as the person to whom you responded said he did. And then it would be rational to actively invest at least some of the time.
- vibrato 10y ago
  I disagree that you have +EV with stock picking in general. Most companies go out of business, most stocks go to $0. Index funds, however, do have +EV.
  - evanpw 10y ago
    If you want to be sure of positive expected value, just pick randomly, with probability proportional to market cap. That gives the same expected value as an index fund, with much higher variance.
    - vibrato 10y ago
      if you rebalance / repick, yes. If it's just buy and hold, I don't agree. The benefit of index funds is the failing companies are dropped before they hit $0.
      - evanpw 10y ago
        That seems like a strange perspective to me. All of the theoretical justification for passive investing (you get the average return without the fees, maximum diversification, etc.) implies that you'll get the best result from holding every possible security in some proportion. You're saying that index funds work not because of any of that, but because they've observed a market inefficiency (low market-cap or recently-fallen stocks underperform the market), and make an active decision to deviate from the market portfolio in order to exploit it. Why believe that there's exactly one easily-exploitable market inefficiency, but no others?
        deleted 10y ago
        [deleted]
    - vibrato 10y ago
      I see the error in my thinking here. My suggestion of rebalancing loses the high end component of variance while avoiding the 0 value case. I guess im just too cynical to believe a company can operate indefinitely with indefinite growth!
  - savanaly 10y ago
    The very essence of the EMH (which is frequently oversold, but holds to some degree) is that we can't know which stocks are going to go down or up just by looking at the current state of the market. The expected value of any given stock is the same as that of an index fund, assuming it's no transaction cost to obtain it. So ignoring fees, picking stocks randomly does have the same positive expected return as holding all a small bit of all stocks at once (which is what owning an index is), just a much higher variance and thus people choose to own indexes.

I quite enjoy listening to the conference call for a company. It really does tell you a lot about what's happening behind the scenes, and before anyone else knows it. It's like the company telling you little secrets :-)

savanaly 10y ago

Investing in specific companies rather than indexes (which I assume is what everyone means by "fun investing"?) isn't very much like gambling in Vegas. With gambling in vegas you have a negative expected return with a high variance. With stock picking you have a positive expected return with a high variance (where do index funds fit in? positive expected return with low-ish variance). Although picking stocks is still not rational if your only concern is your long run wealth, it's not irrational for the same reason as gambling. It's bad because you have the same expected return as low cost index funds, and you exert effort or pay fees for the privilege. That doesn't mean I look down on everyone who actively invests though-- they may have good reason to think they are special and can pick stocks better than average or they may just enjoy it, as the person to whom you responded said he did. And then it would be rational to actively invest at least some of the time.

vibrato 10y ago
I disagree that you have +EV with stock picking in general. Most companies go out of business, most stocks go to $0. Index funds, however, do have +EV.
- evanpw 10y ago
  If you want to be sure of positive expected value, just pick randomly, with probability proportional to market cap. That gives the same expected value as an index fund, with much higher variance.
  - vibrato 10y ago
    if you rebalance / repick, yes. If it's just buy and hold, I don't agree. The benefit of index funds is the failing companies are dropped before they hit $0.
    - evanpw 10y ago
      That seems like a strange perspective to me. All of the theoretical justification for passive investing (you get the average return without the fees, maximum diversification, etc.) implies that you'll get the best result from holding every possible security in some proportion. You're saying that index funds work not because of any of that, but because they've observed a market inefficiency (low market-cap or recently-fallen stocks underperform the market), and make an active decision to deviate from the market portfolio in order to exploit it. Why believe that there's exactly one easily-exploitable market inefficiency, but no others?
      - deleted 10y ago
        [deleted]
  - vibrato 10y ago
    I see the error in my thinking here. My suggestion of rebalancing loses the high end component of variance while avoiding the 0 value case. I guess im just too cynical to believe a company can operate indefinitely with indefinite growth!
- savanaly 10y ago
  The very essence of the EMH (which is frequently oversold, but holds to some degree) is that we can't know which stocks are going to go down or up just by looking at the current state of the market. The expected value of any given stock is the same as that of an index fund, assuming it's no transaction cost to obtain it. So ignoring fees, picking stocks randomly does have the same positive expected return as holding all a small bit of all stocks at once (which is what owning an index is), just a much higher variance and thus people choose to own indexes.