5 ms·

Excuse my meta-comment, but I notice that HN seems to have an obsession with proving that active trading is bad and that we should all buy low-cost indexes. An

by habosa 10y ago

Excuse my meta-comment, but I notice that HN seems to have an obsession with proving that active trading is bad and that we should all buy low-cost indexes. And before anyone jumps on me, I 100% agree with that investment strategy and use it myself. I'd just like to comment on the intersection of that belief and tech enthusiasts. It seems to generally come from a place of binary/analytical thinking which we're all so good at. Studies show that active investing is a losing battle for the average investor, so we assert that as fact and invest our money that way. But I think deep down in myself (and probably others) it comes from a place of wanting to justify risk aversion. It seems that many people that we all know do become quite rich as investors, and the secret to their good fortune is not apparent. Studies promising us "they'll all lose in the long run!" makes us feel good about our decision not to participate in the game. It's similar to the derision of startup equity, etc. I know many people who have become very rich at a very young age by latching on to the right startup, but I like my comfortable BigCorp job. The HN comments are a place where I can feel smart about my decision to not take risks even as we celebrate those who took risks and won. Anyway I don't know why I chose to write this comment or explore this topic at this moment, I hope someone else reads it and understands my sentiment.

seagreen 10y ago
It seems that many people that we all know do become quite rich as investors, and the secret to their good fortune is not apparent. Studies promising us "they'll all lose in the long run!" makes us feel good about our decision not to participate in the game. This would be a way stronger argument if the king of the buy-index-fund team wasn't Warren Buffett:)
- streblo 10y ago
  Buffett isn't exactly buying index funds for BRK
  - seagreen 10y ago
    The parent comment said criticisms of private day traders were motivated by jealousy, and I said that's certainly not the case for the most notable of the critics. Buffett could have made his success as a rodeo clown for all it matters to my point.
  - mgirdley 10y ago
    He isn't buying a stock here or there either. He's mostly doing deals in bulk that the average investor can't. For example, his investment in Goldman Sachs during 2008.
- eldavido 10y ago
  Buffet wouldn't have gotten rich in today's environment. When he was growing up, the stock market was a plaything of the rich. Valuations were lower across the board, markets weren't nearly as efficient (in the technical sense) as they are now, volumes were much thinner, in general it was a lot less systematized. Nowadays, much like YC, he's a brand, so while he might be a very smart and capable investor, it's his deal flow that puts him in such a strong position. He gets calls normal people don't get because he's made a name for himself over the past 50 years and people want his name for their company, as much as anything else. I wonder what lesson can be drawn from all this. The primacy of reputation in today's world?
  - slv77 10y ago
    An investor with low funding costs and stable funding source can always beat the market in theory. Studies suggest that the bulk of BRKs excess returns are due to leverage and deep balance sheets that allows him to buy deep value but more importantly to be able to hold those stocks long term. A smaller investor who tried to duplicate that strategy would have been stopped out due to margin calls. For example it isn't everyone that can sell, and hold, a ten year billion dollar put on the S&P 500 like BRK did in 2008.
  - nicholas73 10y ago
    In my first year investing, I read The Intelligent Investor, then promptly found out that no stocks were trading below their value. Not even close; more often at multiples. The only time shares trade below book these days are either when book is seriously questionable, or when cash burn is expected to deplete the value.
eldavido 10y ago
Risk aversion or maybe laziness. I've had a similar line of thinking recently. Sure, average investors lose money on active trading. Well, let me tell you what an average investor looks like. They have little to no accounting background, no coherent thesis for their investments other than "it's hot", they lack even a rudimentary understanding of 101-level finance topics like NPV/IRR/cost of capital, they have no informational edge one gets from working in an industry, no understanding of tax law (either personal or corporate). They're basically gamblers. They look at stock charts, see a big line going up and to the right, and guess / let FOMO take the driver's seat. Oh, and they probably think watching Jim Cramer counts as "research". They also have no appreciation for the fact that individual securities within an asset class are highly correlated and misattribute the asset class's performance to their "stock-picking" prowess. I've been thinking, if one is willing to do actual primary research -- reading financial statements, getting on investor calls, really thinking hard about long-term trends, reading history, etc., there's almost certainly alpha to be had. Do people honestly think indexing is the best way? The UK just mandated that all coal generation will be gone by 2025. Is this really a time to be buying coal stocks? Or cigarette companies? For me it's about risk/reward. I was talking to a friend at a wedding two weekends ago who manages a prop book (his own cash) of about 2-3 million. If he can get 15%/year consistently, that's about 300-400k pretax. He lives in Puerto Rico where there's apparently a tax loophole where capital gains of any character -- short or long-term -- aren't taxed. I'd bet he's coming out ahead of 95% of the people reading this thread. And yet, life isn't all about money. I guess what I'm saying is, I also disagree with this "orthodoxy" of index, index, index. Maybe I'll sound arrogant saying this, but I'm not an "Average" investor. I trade once/quarter, read the Ks and Qs for every company I'm investing in, and have written theses that guide my decisions. I'm not a millionaire yet but I'll let you guys know how it goes after a while. I was a pure, 10+ year indexer until about 6 months ago.
- angry_octet 10y ago
  While I would agree that there are many uninformed participants in the market, it is often found that professional market analysts are outperformed or on par with a random stock picker (dartboard, spinning wheel etc). These are people trying to estimate true value and market value with models and acting accordingly. http://www.smh.com.au/money/shares-race-week-4-the-dartboard-takes-it-20160616-gpl49f.html http://www.smh.com.au/money/shares-race-week-4-the-dartboard...
unabst 10y ago
> wanting to justify risk aversion I don't think this is it. In fact, I think it's the exact opposite. I think risk aversion is what's justified by default. You don't need to defend being steadily employed or your lack of interest in stocks. It's the reasons people give to take risks that most of us are challenging. Stock trading is gambling. It just is. So to deny it's gambling is already a red flag. To say you have more information than other people is another. And to say you're smarter so you're okay, well, maybe you are, but no one is smart enough to compete with those who cheat. And if you're cheating, none of these comments apply to you. So for those who insist day trading is profitable, the empirically backed scientifically proven answer is simply, no it's not. And that's why it's so easy to knock on those who disagree with this claim. Yes, people make money, but so does every single person who continues to gamble. If you never won, you wouldn't keep gambling. But to be fair, for entrepreneurs, it's the decision to not have a steady job that needs defending and that is analogous to the irrationality of the day trader. They may claim it's a great idea, but the empirically backed scientifically proven answer is, no it's not. But I think a key difference in values is that entrepreneurs feel like they're actually building something. They value their work. And that's where you just have to agree to disagree. Passion is not an opinion.
- seanmcdirmid 10y ago
  Given an efficient market, stock trading with non-inside information is gambling, while stock trading with inside information is illegal. Markets exist to allocate capital efficiently, where the market invariably is designed to draw out information and intelligence that was previously not visible (a fine line between that and inside info). If we all just bought indexes, of course, none of that would happen, capital would be divided conservatively according to the index manager. So at a higher level, there has to be some strategy that works beyond a brain dead index one, or markets wouldn't be successful at all. There must be some smart players out there that are doing efficient capital allocation (maybe not day traders, maybe not most of us, but someone...).
  - qmalzp 10y ago
    I think what you're talking about lies between index funds and day trading, and it's called value investing. You buy stock in companies that you believe in for whatever reason (maybe you know someone really smart who works there and likes it), and hold that stock for several years.
femto113 10y ago
"they'll all lose in the long run!" Even as stated in the article they don't all lose, which is why most of us know a few winners. But for each of those winners we probably know four losers, though they're likely not as vocal about it.
Waterluvian 10y ago
I don't even consciously think of risk aversion. For me, it's purely about making the locally optimal decision. Money is a tool to me, and an annoying one at that. I kind of hate it. I want to think about it and handle it as little as possible in my life. So I make the financial fire and forget decisions. I take all the exciting and potentially rewarding risks in the other parts of life.

by habosa 10y ago

seagreen 10y ago

It seems that many people that we all know do become quite rich as investors, and the secret to their good fortune is not apparent. Studies promising us "they'll all lose in the long run!" makes us feel good about our decision not to participate in the game. This would be a way stronger argument if the king of the buy-index-fund team wasn't Warren Buffett:)

streblo 10y ago
Buffett isn't exactly buying index funds for BRK
- seagreen 10y ago
  The parent comment said criticisms of private day traders were motivated by jealousy, and I said that's certainly not the case for the most notable of the critics. Buffett could have made his success as a rodeo clown for all it matters to my point.
- mgirdley 10y ago
  He isn't buying a stock here or there either. He's mostly doing deals in bulk that the average investor can't. For example, his investment in Goldman Sachs during 2008.
eldavido 10y ago
Buffet wouldn't have gotten rich in today's environment. When he was growing up, the stock market was a plaything of the rich. Valuations were lower across the board, markets weren't nearly as efficient (in the technical sense) as they are now, volumes were much thinner, in general it was a lot less systematized. Nowadays, much like YC, he's a brand, so while he might be a very smart and capable investor, it's his deal flow that puts him in such a strong position. He gets calls normal people don't get because he's made a name for himself over the past 50 years and people want his name for their company, as much as anything else. I wonder what lesson can be drawn from all this. The primacy of reputation in today's world?
- slv77 10y ago
  An investor with low funding costs and stable funding source can always beat the market in theory. Studies suggest that the bulk of BRKs excess returns are due to leverage and deep balance sheets that allows him to buy deep value but more importantly to be able to hold those stocks long term. A smaller investor who tried to duplicate that strategy would have been stopped out due to margin calls. For example it isn't everyone that can sell, and hold, a ten year billion dollar put on the S&P 500 like BRK did in 2008.
- nicholas73 10y ago
  In my first year investing, I read The Intelligent Investor, then promptly found out that no stocks were trading below their value. Not even close; more often at multiples. The only time shares trade below book these days are either when book is seriously questionable, or when cash burn is expected to deplete the value.

eldavido 10y ago

Risk aversion or maybe laziness. I've had a similar line of thinking recently. Sure, average investors lose money on active trading. Well, let me tell you what an average investor looks like. They have little to no accounting background, no coherent thesis for their investments other than "it's hot", they lack even a rudimentary understanding of 101-level finance topics like NPV/IRR/cost of capital, they have no informational edge one gets from working in an industry, no understanding of tax law (either personal or corporate). They're basically gamblers. They look at stock charts, see a big line going up and to the right, and guess / let FOMO take the driver's seat. Oh, and they probably think watching Jim Cramer counts as "research". They also have no appreciation for the fact that individual securities within an asset class are highly correlated and misattribute the asset class's performance to their "stock-picking" prowess. I've been thinking, if one is willing to do actual primary research -- reading financial statements, getting on investor calls, really thinking hard about long-term trends, reading history, etc., there's almost certainly alpha to be had. Do people honestly think indexing is the best way? The UK just mandated that all coal generation will be gone by 2025. Is this really a time to be buying coal stocks? Or cigarette companies? For me it's about risk/reward. I was talking to a friend at a wedding two weekends ago who manages a prop book (his own cash) of about 2-3 million. If he can get 15%/year consistently, that's about 300-400k pretax. He lives in Puerto Rico where there's apparently a tax loophole where capital gains of any character -- short or long-term -- aren't taxed. I'd bet he's coming out ahead of 95% of the people reading this thread. And yet, life isn't all about money. I guess what I'm saying is, I also disagree with this "orthodoxy" of index, index, index. Maybe I'll sound arrogant saying this, but I'm not an "Average" investor. I trade once/quarter, read the Ks and Qs for every company I'm investing in, and have written theses that guide my decisions. I'm not a millionaire yet but I'll let you guys know how it goes after a while. I was a pure, 10+ year indexer until about 6 months ago.

angry_octet 10y ago
While I would agree that there are many uninformed participants in the market, it is often found that professional market analysts are outperformed or on par with a random stock picker (dartboard, spinning wheel etc). These are people trying to estimate true value and market value with models and acting accordingly. http://www.smh.com.au/money/shares-race-week-4-the-dartboard-takes-it-20160616-gpl49f.html http://www.smh.com.au/money/shares-race-week-4-the-dartboard...

unabst 10y ago

> wanting to justify risk aversion I don't think this is it. In fact, I think it's the exact opposite. I think risk aversion is what's justified by default. You don't need to defend being steadily employed or your lack of interest in stocks. It's the reasons people give to take risks that most of us are challenging. Stock trading is gambling. It just is. So to deny it's gambling is already a red flag. To say you have more information than other people is another. And to say you're smarter so you're okay, well, maybe you are, but no one is smart enough to compete with those who cheat. And if you're cheating, none of these comments apply to you. So for those who insist day trading is profitable, the empirically backed scientifically proven answer is simply, no it's not. And that's why it's so easy to knock on those who disagree with this claim. Yes, people make money, but so does every single person who continues to gamble. If you never won, you wouldn't keep gambling. But to be fair, for entrepreneurs, it's the decision to not have a steady job that needs defending and that is analogous to the irrationality of the day trader. They may claim it's a great idea, but the empirically backed scientifically proven answer is, no it's not. But I think a key difference in values is that entrepreneurs feel like they're actually building something. They value their work. And that's where you just have to agree to disagree. Passion is not an opinion.

seanmcdirmid 10y ago
Given an efficient market, stock trading with non-inside information is gambling, while stock trading with inside information is illegal. Markets exist to allocate capital efficiently, where the market invariably is designed to draw out information and intelligence that was previously not visible (a fine line between that and inside info). If we all just bought indexes, of course, none of that would happen, capital would be divided conservatively according to the index manager. So at a higher level, there has to be some strategy that works beyond a brain dead index one, or markets wouldn't be successful at all. There must be some smart players out there that are doing efficient capital allocation (maybe not day traders, maybe not most of us, but someone...).
- qmalzp 10y ago
  I think what you're talking about lies between index funds and day trading, and it's called value investing. You buy stock in companies that you believe in for whatever reason (maybe you know someone really smart who works there and likes it), and hold that stock for several years.

femto113 10y ago

"they'll all lose in the long run!" Even as stated in the article they don't all lose, which is why most of us know a few winners. But for each of those winners we probably know four losers, though they're likely not as vocal about it.

Waterluvian 10y ago

I don't even consciously think of risk aversion. For me, it's purely about making the locally optimal decision. Money is a tool to me, and an annoying one at that. I kind of hate it. I want to think about it and handle it as little as possible in my life. So I make the financial fire and forget decisions. I take all the exciting and potentially rewarding risks in the other parts of life.