5 ms·

If you ask me, daytrading seems riskier because you're essentially trading within noise. A company could rise or fall a few (and more rarely, a lot of) percenta

by jfoster 10y ago

If you ask me, daytrading seems riskier because you're essentially trading within noise. A company could rise or fall a few (and more rarely, a lot of) percentage points within a day. Is it fluctuating based on anything other than the feedback loop and noise? Usually not, I think. It seems far more unpredictable and lacking in reasoning than something like "Amazon's strategy for the next couple of years involves X, Y, and Z, so I think they will be successful/fail."

dllthomas 10y ago
> "Amazon's strategy for the next couple of years involves X, Y, and Z, so I think they will be successful/fail." That's not really the right question. If Amazon's strategy is hugely successful, but everyone else already thought Amazon's strategy was going to be even more hugely successful and had priced that in, then you could be 100% correct about your question and lose money.
- IshKebab 10y ago
  Agreed. You need to ask "Is Amazon's strategy for the next years going to work better than everyone thinks it is going to work?"
  - tome 10y ago
    What other people think is only relevant insomuch as it determines the price. You need to ask "Is Amazon's strategy for the next years going to work well enough that I should buy at the price the stock is currently offered at?".
    - dllthomas 10y ago
      I think if you unpack "should", those wind up being more or less orthogonal.
- Spooky23 10y ago
  > If Amazon's strategy is hugely successful, but everyone else already thought Amazon's strategy was going to be even more hugely successful and had priced that in, then you could be 100% correct about your question and lose money. Yet, Amazon is about 100% more valuable stock wise in 2016 vs. 2014. The strategy is about the same. The real question is: "How will stock X perform vs some baseline". I use a 90/10 VTI/BND portfolio as that baseline. If you have the time to understand how to answer that question, you can make a good return as an individual investor. (Either by identifying good investments, or reverting to the baseline) For example, if as a tech person, you used your insights into the industry and ended up picked any one of Amazon, Apple, Red Hat, Oracle and/or Google as investments 10 years ago, as part of a diversified basket of 4-5 stocks, you would have beat a safe Boglehead portfolio by a significant margin, even factoring in the market implosion in 2008/9. If you picked Apple or Amazon, you hit a home run. It depends on your needs though. If you're saving for college and your kid is 16, you need a portfolio with a lower volatility. If you're retired and need income, you want to minimize volatility and minimize tax impact. If you're a mid-career professional like me who won't need a dime until 2030, you can take more risks.
  - dllthomas 10y ago
    I don't understand why your comment is prefaced with "Yet". Did you misread my comment? It seems like we're agreed that investing should not be done by reasoning like "Amazon's strategy for the next couple of years involves X, Y, and Z, so I think they will be successful/fail." > For example, if as a tech person, you used your insights into the industry [...] ... then I would be radically under-diversified. If tech is doing well, my biggest asset (my career) is performing well. I'm most likely to need to draw on my stocks in an emergency precisely when they'll be doing poorest.
  - _yosefk 10y ago
    "If you picked Apple or Amazon, you hit a home run." Well, sure you did. If you picked Yahoo in the late 90s, a home run hit you. If you picked Intel or Microsoft in the recent past, nothing happened to you. A good article on using insights as a tech person is Phil G's piece on shorting Microsoft in the 80s. (Microsoft was much less appealing to a tech person in the 80s than it is now, and a much better investment.) http://philip.greenspun.com/materialism/money http://philip.greenspun.com/materialism/money This is not to say that tech people can't make money banking on their instincts, just that I personally am not tremendously confident about my own instincts. I can certainly make a very compellingly sounding bull or bear case regarding any currently famous tech company. A great example from recent history is LinkedIn's stock tanking hugely in one day and then Microsoft bringing it back to the original level in one day some time later. And I'll be damned if Microsoft ever makes that money back. But I totally should have bought the dip.
- verbify 10y ago
  And even that isn't necessarily true - the cost of illiquidity and the risk of holding Amazon's stock for a few years could mean that even though you underestimated that everyone else thought that Amazon would be hugely successful, you could still make money.
- bjacokes 10y ago
  That's mostly true with growth stocks. If you buy Amazon trading at 300x earnings with the expectation that earnings will grow 50% per year over the next five years, then it's tough to say whether the price will be higher or lower if they meet your expectations. Value trades rely a bit less on others' expectations. If you were to buy a company trading at 12x earnings with the expectation that earnings would grow 15% per year over the next five years, then it's pretty likely that if your expectations come to fruition then you'll make money on the trade.
nicholas73 10y ago
I think the opposite of every you said. Short term factors are far more predictable, with less noise, but this is only true if you trade defined situations and have good understanding of counterparties. Noise really isn't much of an issue except for illiquid stocks. The rest have highly correlated movements and random noise averages out anyways.

by jfoster 10y ago

dllthomas 10y ago

> "Amazon's strategy for the next couple of years involves X, Y, and Z, so I think they will be successful/fail." That's not really the right question. If Amazon's strategy is hugely successful, but everyone else already thought Amazon's strategy was going to be even more hugely successful and had priced that in, then you could be 100% correct about your question and lose money.

IshKebab 10y ago
Agreed. You need to ask "Is Amazon's strategy for the next years going to work better than everyone thinks it is going to work?"
- tome 10y ago
  What other people think is only relevant insomuch as it determines the price. You need to ask "Is Amazon's strategy for the next years going to work well enough that I should buy at the price the stock is currently offered at?".
  - dllthomas 10y ago
    I think if you unpack "should", those wind up being more or less orthogonal.
Spooky23 10y ago
> If Amazon's strategy is hugely successful, but everyone else already thought Amazon's strategy was going to be even more hugely successful and had priced that in, then you could be 100% correct about your question and lose money. Yet, Amazon is about 100% more valuable stock wise in 2016 vs. 2014. The strategy is about the same. The real question is: "How will stock X perform vs some baseline". I use a 90/10 VTI/BND portfolio as that baseline. If you have the time to understand how to answer that question, you can make a good return as an individual investor. (Either by identifying good investments, or reverting to the baseline) For example, if as a tech person, you used your insights into the industry and ended up picked any one of Amazon, Apple, Red Hat, Oracle and/or Google as investments 10 years ago, as part of a diversified basket of 4-5 stocks, you would have beat a safe Boglehead portfolio by a significant margin, even factoring in the market implosion in 2008/9. If you picked Apple or Amazon, you hit a home run. It depends on your needs though. If you're saving for college and your kid is 16, you need a portfolio with a lower volatility. If you're retired and need income, you want to minimize volatility and minimize tax impact. If you're a mid-career professional like me who won't need a dime until 2030, you can take more risks.
- dllthomas 10y ago
  I don't understand why your comment is prefaced with "Yet". Did you misread my comment? It seems like we're agreed that investing should not be done by reasoning like "Amazon's strategy for the next couple of years involves X, Y, and Z, so I think they will be successful/fail." > For example, if as a tech person, you used your insights into the industry [...] ... then I would be radically under-diversified. If tech is doing well, my biggest asset (my career) is performing well. I'm most likely to need to draw on my stocks in an emergency precisely when they'll be doing poorest.
- _yosefk 10y ago
  "If you picked Apple or Amazon, you hit a home run." Well, sure you did. If you picked Yahoo in the late 90s, a home run hit you. If you picked Intel or Microsoft in the recent past, nothing happened to you. A good article on using insights as a tech person is Phil G's piece on shorting Microsoft in the 80s. (Microsoft was much less appealing to a tech person in the 80s than it is now, and a much better investment.) http://philip.greenspun.com/materialism/money http://philip.greenspun.com/materialism/money This is not to say that tech people can't make money banking on their instincts, just that I personally am not tremendously confident about my own instincts. I can certainly make a very compellingly sounding bull or bear case regarding any currently famous tech company. A great example from recent history is LinkedIn's stock tanking hugely in one day and then Microsoft bringing it back to the original level in one day some time later. And I'll be damned if Microsoft ever makes that money back. But I totally should have bought the dip.
verbify 10y ago
And even that isn't necessarily true - the cost of illiquidity and the risk of holding Amazon's stock for a few years could mean that even though you underestimated that everyone else thought that Amazon would be hugely successful, you could still make money.
bjacokes 10y ago
That's mostly true with growth stocks. If you buy Amazon trading at 300x earnings with the expectation that earnings will grow 50% per year over the next five years, then it's tough to say whether the price will be higher or lower if they meet your expectations. Value trades rely a bit less on others' expectations. If you were to buy a company trading at 12x earnings with the expectation that earnings would grow 15% per year over the next five years, then it's pretty likely that if your expectations come to fruition then you'll make money on the trade.

nicholas73 10y ago

I think the opposite of every you said. Short term factors are far more predictable, with less noise, but this is only true if you trade defined situations and have good understanding of counterparties. Noise really isn't much of an issue except for illiquid stocks. The rest have highly correlated movements and random noise averages out anyways.