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If Mark Cuban thinks the market is now all about exotic derivatives rather than buying stock in companies you believe in, he's listening to the wrong people. C

If Mark Cuban thinks the market is now all about exotic derivatives rather than buying stock in companies you believe in, he's listening to the wrong people. Commission-based brokers talk about exotic derivatives; Warren Buffet still talks about buy-and-hold. The biggest wins and losses in day trading will come from exotic derivatives simply by their nature: they're highly leveraged bets. Those firms that create the vehicles to make those bets aren't "hackers", they're "Vegas". You ask for a bet against the housing market or for cattle, they set up a structure to let you make that bet, and you play the odds -- and you might beat the other betters in the market over the short term, but it's the house (taking its percentage off the top) that always wins long term. Mark Cuban is right to be uncomfortable playing that game. Meanwhile, people like Warren Buffet continue to look for healthy companies that are underpriced and buy into them for the long term. Day-to-day the market might be driven by short-term bets, but over the course of 3 decades it's still driven by the fundamental health of companies. If anything, those who care about "the performance of specific companies and their returns" benefit from the fact that occasionally, as a result of day traders' bets, healthy companies' stocks get sold at bargain prices. If you try to play Vegas' game, you'll probably get burned. But if you stand back, watch the game, and buy when their game creates a bargain price on good long-term stocks, you stand to get very solid returns.

davidw 17y ago
> But if you stand back, watch the game, and buy when their game creates a bargain price on good long-term stocks, you stand to get very solid returns. Why? There are oodles of people doing the same thing, who have access to better information, have more experience, have better search/screening systems, and so on. To me it just seems like you're going to be the 'greater fool', unless you really go at it more or less as a job, with the associated time commitments.
- lotharbot 17y ago
  > There are oodles of people doing the same thing, who have access to better information, have more experience, have better search/screening systems, and so on. If you're playing the short-term investment game, all of those things matter hugely. It's a zero-sum game. In order to make money at it, you have to have a better system than the rest of the people playing -- just like making money on sports betting. They don't matter nearly so much in the long term. Long-term investing isn't zero-sum; economies can grow, and your goal is to own a growing piece of the economy. There are oodles of people playing the long-term game, but the market is big enough that even I, with my relatively limited information, can make good solid investments. Consider this a corollary to "the market can stay irrational longer than you can stay solvent". The market can offer irrational bargains to such a degree that even once those with better information have had their fill, there's some left over for people like me.
  - davidw 17y ago
    Today, there's a story on the front page that ends with this paragraph: "Around 3 p.m., the selling pressure abated. Just as swiftly as the market fell, it recovered ground. One factor behind the swift recovery, traders say, were funds that use computers and formulas to sniff out bargains in the market. These funds swooped in on hundreds of cheap stocks, helping push the market higher." It really sounds to me like you have to have insider information, or something close, to have a good chance of getting something on the cheap, because otherwise the price is going to get pushed up again by people with better and faster research tools.
- mbateman 17y ago
  Yeah, investing your money well is a serious time commitment. But saying one can't do it because other people do it too is like saying that you can't invest your money by buying and renting out houses, because there are professional realtors.
hristov 17y ago
I think what Mark Cuban is saying is that because of the way Wall Street operates now it is very dangerous to be the Warren Buffet type of value investor. More specifically, Wall Street's obsession with the big score makes stocks very dangerous and volatile which means that if you try investing based on a company's intrinsic value, the stock you buy can easily swing down for reasons that are completely unrelated to the company value but have to do with some traders or trading algorithms trying to outsmart each other. Now if you are Buffet you probably have enough cash reserves to ride out any such swings, but most people need to rely on the money in their stock holdings, so they cannot afford the new found volatility of Wall Street, so many people are just moving out of the market all together. Now I have to say that I am not sure if this argument is right, but that is his argument.
- lotharbot 17y ago
  > "it is very dangerous to be the Warren Buffet type of value investor." ... "most people need to rely on the money in their stock holdings" If you need to rely on the money from the sale of your stock holdings, you're not a Warren Buffet type of value investor. If you're looking for income from your holdings (dividends and such), the volatility of Wall Street's stock pricing algorithms is not an issue. For those who are nearing retirement and counting on the sale of stock holdings, make sure you have an appropriate stock-bond-short term reserve mix in your portfolio so that you can ride out market swings. Moving out of the market altogether is unnecessary. If you do move out of the market in desperation (like people did in March of last year, selling for whatever they could get), you're providing us value investors the "irrational bargains" I mentioned in my reply to davidw.
  - yummyfajitas 17y ago
    Buying stock for dividends is usually not a great investment since dividend income is taxed at a much higher rate than capital gains.
- cakesy 17y ago
  You shouldn't be investing this way, if you need to get your money back in the short term. Only invest in companies if you can afford to leave that money there, for a reasonable period of time, possibly years.
nandemo 17y ago
I still don't think Cuban knows what he's talking about. For starters, the financial market's function is not to "create capital". There are several other odd claims and unsupported arguments in that article. But in his defense, I don't think he even mentioned "exotic derivatives". Exotics are just derivatives that aren't "vanilla" (standard put or call options, etc). They don't have to be any more leveraged than a standard call option or a futures contract. >If you try to play Vegas' game, you'll probably get burned. But if you stand back, watch the game, and buy when their game creates a bargain price on good long-term stocks, you stand to get very solid returns. When a stock is dropping a lot (like it happened the other day with several stocks), you usually can't tell if it's really a "bargain". In hindsight it's easy to say that some stocks were a bargain a few days ago, but at that moment it would be risky to buy them. It could be that the companies were really in trouble. For instance, even as Lehman stock was dropping, some people were buying it. Another example: this year, Japan Airlines (JAL) went bankrupt. It had been in trouble for some time, but as usual for airline companies, the government was propping it and most people didn't believe it could go down.
code_duck 17y ago
I believe he did recognize that distinction, actually, when he said that traders are not investors, and vice versa.
sireat 17y ago
Problem with the long game is that it can be a very long game indeed, and then not only you are dead, but the market is still irrational. If you read http://en.wikipedia.org/wiki/Reminiscences_of_a_Stock_Operator http://en.wikipedia.org/wiki/Reminiscences_of_a_Stock_Operat... you will notice that people like Warren Buffet have always been in the minority, as much as people hate to admit it, there is always that element of speculation in their investing. The problem, according to Mark Cuban(and I will agree here), that there has been too much emphasis on the creating leveraged bets, and skimming in HFT, and not enough emphasis on capital creation for companies new(read - startups) and old.

davidw 17y ago

> But if you stand back, watch the game, and buy when their game creates a bargain price on good long-term stocks, you stand to get very solid returns. Why? There are oodles of people doing the same thing, who have access to better information, have more experience, have better search/screening systems, and so on. To me it just seems like you're going to be the 'greater fool', unless you really go at it more or less as a job, with the associated time commitments.

lotharbot 17y ago
> There are oodles of people doing the same thing, who have access to better information, have more experience, have better search/screening systems, and so on. If you're playing the short-term investment game, all of those things matter hugely. It's a zero-sum game. In order to make money at it, you have to have a better system than the rest of the people playing -- just like making money on sports betting. They don't matter nearly so much in the long term. Long-term investing isn't zero-sum; economies can grow, and your goal is to own a growing piece of the economy. There are oodles of people playing the long-term game, but the market is big enough that even I, with my relatively limited information, can make good solid investments. Consider this a corollary to "the market can stay irrational longer than you can stay solvent". The market can offer irrational bargains to such a degree that even once those with better information have had their fill, there's some left over for people like me.
- davidw 17y ago
  Today, there's a story on the front page that ends with this paragraph: "Around 3 p.m., the selling pressure abated. Just as swiftly as the market fell, it recovered ground. One factor behind the swift recovery, traders say, were funds that use computers and formulas to sniff out bargains in the market. These funds swooped in on hundreds of cheap stocks, helping push the market higher." It really sounds to me like you have to have insider information, or something close, to have a good chance of getting something on the cheap, because otherwise the price is going to get pushed up again by people with better and faster research tools.
mbateman 17y ago
Yeah, investing your money well is a serious time commitment. But saying one can't do it because other people do it too is like saying that you can't invest your money by buying and renting out houses, because there are professional realtors.

hristov 17y ago

I think what Mark Cuban is saying is that because of the way Wall Street operates now it is very dangerous to be the Warren Buffet type of value investor. More specifically, Wall Street's obsession with the big score makes stocks very dangerous and volatile which means that if you try investing based on a company's intrinsic value, the stock you buy can easily swing down for reasons that are completely unrelated to the company value but have to do with some traders or trading algorithms trying to outsmart each other. Now if you are Buffet you probably have enough cash reserves to ride out any such swings, but most people need to rely on the money in their stock holdings, so they cannot afford the new found volatility of Wall Street, so many people are just moving out of the market all together. Now I have to say that I am not sure if this argument is right, but that is his argument.

lotharbot 17y ago
> "it is very dangerous to be the Warren Buffet type of value investor." ... "most people need to rely on the money in their stock holdings" If you need to rely on the money from the sale of your stock holdings, you're not a Warren Buffet type of value investor. If you're looking for income from your holdings (dividends and such), the volatility of Wall Street's stock pricing algorithms is not an issue. For those who are nearing retirement and counting on the sale of stock holdings, make sure you have an appropriate stock-bond-short term reserve mix in your portfolio so that you can ride out market swings. Moving out of the market altogether is unnecessary. If you do move out of the market in desperation (like people did in March of last year, selling for whatever they could get), you're providing us value investors the "irrational bargains" I mentioned in my reply to davidw.
- yummyfajitas 17y ago
  Buying stock for dividends is usually not a great investment since dividend income is taxed at a much higher rate than capital gains.
cakesy 17y ago
You shouldn't be investing this way, if you need to get your money back in the short term. Only invest in companies if you can afford to leave that money there, for a reasonable period of time, possibly years.

nandemo 17y ago

I still don't think Cuban knows what he's talking about. For starters, the financial market's function is not to "create capital". There are several other odd claims and unsupported arguments in that article. But in his defense, I don't think he even mentioned "exotic derivatives". Exotics are just derivatives that aren't "vanilla" (standard put or call options, etc). They don't have to be any more leveraged than a standard call option or a futures contract. >If you try to play Vegas' game, you'll probably get burned. But if you stand back, watch the game, and buy when their game creates a bargain price on good long-term stocks, you stand to get very solid returns. When a stock is dropping a lot (like it happened the other day with several stocks), you usually can't tell if it's really a "bargain". In hindsight it's easy to say that some stocks were a bargain a few days ago, but at that moment it would be risky to buy them. It could be that the companies were really in trouble. For instance, even as Lehman stock was dropping, some people were buying it. Another example: this year, Japan Airlines (JAL) went bankrupt. It had been in trouble for some time, but as usual for airline companies, the government was propping it and most people didn't believe it could go down.

code_duck 17y ago

I believe he did recognize that distinction, actually, when he said that traders are not investors, and vice versa.

sireat 17y ago

Problem with the long game is that it can be a very long game indeed, and then not only you are dead, but the market is still irrational. If you read http://en.wikipedia.org/wiki/Reminiscences_of_a_Stock_Operator http://en.wikipedia.org/wiki/Reminiscences_of_a_Stock_Operat... you will notice that people like Warren Buffet have always been in the minority, as much as people hate to admit it, there is always that element of speculation in their investing. The problem, according to Mark Cuban(and I will agree here), that there has been too much emphasis on the creating leveraged bets, and skimming in HFT, and not enough emphasis on capital creation for companies new(read - startups) and old.