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As a junior trader navigating the markets during that time I noticed that nobody has a clue about anything. Pundits, researchers, analysts, Junior guys, Senior

by anonu 9y ago

As a junior trader navigating the markets during that time I noticed that nobody has a clue about anything. Pundits, researchers, analysts, Junior guys, Senior guys... They all pretend to know. I'm not suggesting the markets are truly random. Systematic profits are feasible year over year... But only to the select few who are in the right product or looking at the market in the right way. I suppose it's those guys that keep attracting fresh blood to a zero sum game where there are mostly losers.

ryandrake 9y ago
> Systematic profits are feasible year over year... But only to the select few who are in the right product or looking at the market in the right way. You seem to be falling for the same myth: That "certain wizards" can get +EV. Every casino on Earth makes money from this myth. I believe that there are no wizards in the stock market (or in business in general), and everyone's gains and losses vs the total market are for the most part random chance. I'm reminded of the coin flip exercise one of my statistics professors did. Everyone in the class stand up and get a coin. Flip the coin, if it's tails, sit down, and the rest of the class repeats the exercise until only one person remains standing. Then interview that student and ask them how they became such a good heads-flipper, and what great strategy he/she used to flip so many heads in a row. This illustrates the survivorship bias we fall victim to when we look at someone successful and try to determine what wizardry they used to become that way.
- Danihan 9y ago
  Your comment seems so ignorant to me. Maybe that's true if you are day trading, or picking dozens of short-term holds each year instead of long-term buys. My stock picks have been: * Google in 2003, because I worked in a call center and saw EVERYONE using it all the sudden to find answers on tech support calls. * Chipotle at their IPO because I saw the huge lines at every location in my city. * Amazon in 2008 after the big stock market crash, simply because it just seemed super undervalued considering everyone was still using it / loved it. * Broadcom in 2014 because it was obvious the cellular industry was going to keep growing and they were well-positioned / undervalued at the time. None of that thinking required me being a wizard. Nor was it luck. More just seeing obvious momentum and being willing to act.
  - ryandrake 9y ago
    That a great example of survivorship bias! Take a successful outcome and look back for decisions that must have led to it. This ignores the people who also "saw the obvious" in 2003, 2008, and 2014 who lost their shirt.
    - Danihan 9y ago
      The issue with your argument is pretending the stock market is similar to a coin flip. That's a very facile comparison. In reality each company is a very complex black box in which you can only see very limited internals. The examples I listed were not random chance. They are companies that had absolutely dominated their market positioning and were later massively rewarded for doing so. It's fairly easy to see when a company is eating everyone else's lunch. Again, it isn't just random chance. It also isn't rocket science..
      - golangnews 9y ago
        Please tell us about your big failures as well - statistically you must have had some, and I’m sure you’ve been tracking them with equal rigour?
        Danihan 9y ago
        I've only invested in five stocks. Four are listed above, the fifth was basically an OTC penny stock in 2009 that eventually went out of business.
      - noobhacker 9y ago
        The typical argument why traders don't make money is not that the stock market behaves as a coin flip. The argument is that, if you see "obvious momentum," many others in the market are likely to see that too, and the current stock price already factors all of that information in. Of course, it is possible that one beats the market if either 1) one has privileged information, or 2) one has exceptional insight. Both situations are possible, but rather implausible.
- beagle3 9y ago
  And yet, you have rentec medallion, virtu, buffet, gross and quite a few others who have quite consistently beat the market. Each has their own secret sauce, and you won’t get their returns just by sitting at home and picking stocks. But they do prove that the market is far from random.
  - zeefoo 9y ago
    No, they're the good head flippers in the story; they simply got lucky, someone had to, random doesn't mean no one wins, it means the winner wins by chance.
  - ryandrake 9y ago
    Those would be the few on the right-most side of the distribution who flipped heads 10 times in a row. As soon as they inevitably flip tails, we'll post facto find others who have gotten consistent returns and declare them to be the ones with the secret sauce.
    - hidenotslide 9y ago
      Virtu trades 3 million shares a day, they are way out on the bell curve in terms of statistical significance. There are of course many risks to their business model, e.g. high fixed costs, competition, regulatory risk, technical malfunctions, etc. They are "lucky" to be in a position to capitalize on the opportunity, but investment luck does not play a role on a day to day basis.
      - mrchicity 9y ago
        Virtu trades far more than 3 million shares a day. They may even make 3 million trades a day. If you've seen a system like this in action, it's a beautiful thing to behold and cannot be mere luck. Transactions stream in constantly. It's not just one big, lucky bet, but thousands of tiny bets with a slight edge. A plot of profit & loss with respect to time looks like an almost perfectly smooth upward line. And if you're good, you can do this every single day for years and years. Still, I wouldn't say guys like that have beaten the market in a real way. I've certainly never felt like I did. This style of trading doesn't need outside capital and can't scale. If I gave you $100 and armed you with a scalping bot, I bet you could easily turn it into $200 buying hot tickets on Ticketmaster and reselling them. But would anyone call you a genius trader? Could you do it with a million? A billion? As a business net of all costs like employee compensation and technology, returns to owners are pretty lousy. Compare owning Virtu stock to an index fund since their IPO. Ouch.
- yters 9y ago
  If that student flipped 200 heads in a row it isn't survivorship bias. That student has a two headed coin.
  - zeefoo 9y ago
    It most certainly can be. 200 heads in a row is entirely possible in a random run.
  - yters 9y ago
    If you think 200 heads in a row is practically possible on a random flip, I have a bet to make with you.
    - seanmcdirmid 9y ago
      Flipping heads 200 Times is definitely possible, I can do the math to prove that. It is just greatly improbable to happen in the space or lifetime of the universe.
      - yters 9y ago
        Probabilities can be so small they are only possible in a mathematical sense, but impossible practically speaking. When faced with such small probabilities we can use Bayes theorem to infer a better explanation than chance, such as a two headed coin.
        the_cat_kittles 9y ago
        lol @ u spouting nonsense. i think your trying to say you can use bayes to adjust for small sample sizes, like with beta-binomial models, or comparing posterior distributions for different models and params.
        yters 9y ago
        Two sequences of coin flips: HHHHHHHHHHHHHHHHHHHHHHHHHHHHHH THTHTHHTHTHHHHHHHTTTHTHHHTHHTT Which was generated by fair coin, which by 2 headed? How did you decide?
- anonu 9y ago
  Yeah, I hear ya. My "systematic profits" comments was in reference to a few firms and individuals I've observed over time. These people have some sort of structural or informational edge in the markets. There are commodity trading firms that are such substantial players in the markets they trade that they control that market. Certain High Frequency firms have scale and breadth of resources to get higher quality data, faster connections and hire guys that rewrite Linux process schedulers in assembly. Warren Buffet's secret weapon is that he never sells (so you never realize a loss!). The point being - anything else is gambling. And these guys - who look at a market structurally instead of some sort of casino - will eat your lunch in the long run. Their "edge" is actually orthogonal to price fluctuations. Just my 2 cents.
  - notyourday 9y ago
    > Warren Buffet's secret weapon is that he never sells (so you never realize a loss!). That's not how mark-to-market accounting works.
    - anonu 9y ago
      Roughly speaking - if you mark an asset lower than its purchase price you have an unrealized loss. You still hold the asset and - if you're taking the super long-term investment horizon view as Buffet does - eventually your asset will go up. In addition, Buffett gets into investments that probably wont have their business models disrupted anytime soon - and are tied to the success of the USA as a country: railroads, insurance, housing.If he does his stock picking right, he doesn't need to sell...
      - notyourday 9y ago
        That's not correct for public companies - the unrealized mark to market losses will be reported as losses via correctly (mark-to-market) valuing the asset on the balance sheet.
- deleted 9y ago
  [deleted]
- pfisch 9y ago
  The stock market is not random though. If you have a person who previously worked at the fda specializing in kidneys for example, having that person analyze which kidney drugs/devices they think will get approved is not luck. People can have an informational advantage and use it to make intelligent trades.
  - beiller 9y ago
    You would be right if the stock prices actually 1:1 tracked business success. The reality is that they do not. The are an approximation of future growth, and that adds a great deal of uncertainty, sometimes enough to even make your anecdote moot.
- johnvonneumann 9y ago
  So he is falling for a myth, yet what you're referring to is the Efficient Market Hypothesis, does the word "hypothesis" ring any bells for you? Even more so, does the fact that a theory that originated in the 1960's, still bares the name EMH. Almost 60 years on and it still hasn't been proven. Your thought process seems incredibly flawed, the idea you have about coin flipping being at all similar to stock picking is laughable. And this to me would indicate that whilst you may believe that your analogy is a good indication of survivorship bias, it is clear to me that you are suffering from confirmation bias. You're looking for examples that suit your belief, and ignoring some basic elements. Let's look at this one seriously, coin-flipping is an statistically independent event, whilst if we apply even some fundamentals of finance and EMH (which I don't agree with, btw), we will quickly find ourselves in the realm of correlation. I never stuck around Uni long enough to get deep into this stuff, but you could do with some reading on the CAPM model. To quote from wikipedia on the CAPM model: "Financial correlations play a key role in modern finance." You only have to look at the fact that many companies have been put out of business by companies like Amazon, which means that at the very minimum, you have at least ONE external factor that has an influence on the performance and price of other securities. And this is all without even starting on the even more hilarious notion that information across the market is symmetrical, that's right, I as a lowly consumer exchange peasant, have the exact same information available to me as Jim Simons and the team at RenTec. Who's Medallion Fund, by the way, returned a 35% CAR over a 20 year period. You have to be mental to believe the shit they teach in undergraduate Finance.
- csomar 9y ago
  You got a nice story out there. Random, bla bla bla... How instead you come up with real numbers? Like you pick a stock or say an index like the Nasdaq and analyse if its movements are truly random or not? Also you are aware that true random might mean perfect distribution? You don't know whether the tick is up or down but you know you'll have a distribution that is 50/50 up or down. So you can market make based on it (buy and sell on the same time). There are more to trading than day trading: Collecting premium on futures or options, arbitrage, collecting interest on bonds, etc...
martin1975 9y ago
> But only to the select few who are in the right product or looking at the market in the right way. like RenTec/Medallion... who sometimes look too good to be true, then again, if they were doing something illegal for 30+ years, you'd think by now they'd be caught. The only alternative explanation is they indeed have a unique model of the markets they continuously refine that allows them to outperform most everyone.
- mrchicity 9y ago
  Most money in Medallion is from employees with a bit from friends and family. You can't invest in it at all, because they don't need or want your money. If they're fooling anyone, they're just fooling themselves, or maybe using it as marketing for their other funds. In absolute terms Renaissance isn't even spectacular. There are capacity constrained traders whose Sharpe Ratios and return on capital are multiples of RenTech's. What's impressive is that they manage to do it with a billion dollar AUM. That's small compared to some of the biggest HFs, but far more than a typical high turnover strategy can put to use.

by anonu 9y ago

ryandrake 9y ago

> Systematic profits are feasible year over year... But only to the select few who are in the right product or looking at the market in the right way. You seem to be falling for the same myth: That "certain wizards" can get +EV. Every casino on Earth makes money from this myth. I believe that there are no wizards in the stock market (or in business in general), and everyone's gains and losses vs the total market are for the most part random chance. I'm reminded of the coin flip exercise one of my statistics professors did. Everyone in the class stand up and get a coin. Flip the coin, if it's tails, sit down, and the rest of the class repeats the exercise until only one person remains standing. Then interview that student and ask them how they became such a good heads-flipper, and what great strategy he/she used to flip so many heads in a row. This illustrates the survivorship bias we fall victim to when we look at someone successful and try to determine what wizardry they used to become that way.

Danihan 9y ago
Your comment seems so ignorant to me. Maybe that's true if you are day trading, or picking dozens of short-term holds each year instead of long-term buys. My stock picks have been: * Google in 2003, because I worked in a call center and saw EVERYONE using it all the sudden to find answers on tech support calls. * Chipotle at their IPO because I saw the huge lines at every location in my city. * Amazon in 2008 after the big stock market crash, simply because it just seemed super undervalued considering everyone was still using it / loved it. * Broadcom in 2014 because it was obvious the cellular industry was going to keep growing and they were well-positioned / undervalued at the time. None of that thinking required me being a wizard. Nor was it luck. More just seeing obvious momentum and being willing to act.
- ryandrake 9y ago
  That a great example of survivorship bias! Take a successful outcome and look back for decisions that must have led to it. This ignores the people who also "saw the obvious" in 2003, 2008, and 2014 who lost their shirt.
  - Danihan 9y ago
    The issue with your argument is pretending the stock market is similar to a coin flip. That's a very facile comparison. In reality each company is a very complex black box in which you can only see very limited internals. The examples I listed were not random chance. They are companies that had absolutely dominated their market positioning and were later massively rewarded for doing so. It's fairly easy to see when a company is eating everyone else's lunch. Again, it isn't just random chance. It also isn't rocket science..
    - golangnews 9y ago
      Please tell us about your big failures as well - statistically you must have had some, and I’m sure you’ve been tracking them with equal rigour?
      - Danihan 9y ago
        I've only invested in five stocks. Four are listed above, the fifth was basically an OTC penny stock in 2009 that eventually went out of business.
    - noobhacker 9y ago
      The typical argument why traders don't make money is not that the stock market behaves as a coin flip. The argument is that, if you see "obvious momentum," many others in the market are likely to see that too, and the current stock price already factors all of that information in. Of course, it is possible that one beats the market if either 1) one has privileged information, or 2) one has exceptional insight. Both situations are possible, but rather implausible.
beagle3 9y ago
And yet, you have rentec medallion, virtu, buffet, gross and quite a few others who have quite consistently beat the market. Each has their own secret sauce, and you won’t get their returns just by sitting at home and picking stocks. But they do prove that the market is far from random.
- zeefoo 9y ago
  No, they're the good head flippers in the story; they simply got lucky, someone had to, random doesn't mean no one wins, it means the winner wins by chance.
- ryandrake 9y ago
  Those would be the few on the right-most side of the distribution who flipped heads 10 times in a row. As soon as they inevitably flip tails, we'll post facto find others who have gotten consistent returns and declare them to be the ones with the secret sauce.
  - hidenotslide 9y ago
    Virtu trades 3 million shares a day, they are way out on the bell curve in terms of statistical significance. There are of course many risks to their business model, e.g. high fixed costs, competition, regulatory risk, technical malfunctions, etc. They are "lucky" to be in a position to capitalize on the opportunity, but investment luck does not play a role on a day to day basis.
    - mrchicity 9y ago
      Virtu trades far more than 3 million shares a day. They may even make 3 million trades a day. If you've seen a system like this in action, it's a beautiful thing to behold and cannot be mere luck. Transactions stream in constantly. It's not just one big, lucky bet, but thousands of tiny bets with a slight edge. A plot of profit & loss with respect to time looks like an almost perfectly smooth upward line. And if you're good, you can do this every single day for years and years. Still, I wouldn't say guys like that have beaten the market in a real way. I've certainly never felt like I did. This style of trading doesn't need outside capital and can't scale. If I gave you $100 and armed you with a scalping bot, I bet you could easily turn it into $200 buying hot tickets on Ticketmaster and reselling them. But would anyone call you a genius trader? Could you do it with a million? A billion? As a business net of all costs like employee compensation and technology, returns to owners are pretty lousy. Compare owning Virtu stock to an index fund since their IPO. Ouch.
yters 9y ago
If that student flipped 200 heads in a row it isn't survivorship bias. That student has a two headed coin.
- zeefoo 9y ago
  It most certainly can be. 200 heads in a row is entirely possible in a random run.
- yters 9y ago
  If you think 200 heads in a row is practically possible on a random flip, I have a bet to make with you.
  - seanmcdirmid 9y ago
    Flipping heads 200 Times is definitely possible, I can do the math to prove that. It is just greatly improbable to happen in the space or lifetime of the universe.
    - yters 9y ago
      Probabilities can be so small they are only possible in a mathematical sense, but impossible practically speaking. When faced with such small probabilities we can use Bayes theorem to infer a better explanation than chance, such as a two headed coin.
      - the_cat_kittles 9y ago
        lol @ u spouting nonsense. i think your trying to say you can use bayes to adjust for small sample sizes, like with beta-binomial models, or comparing posterior distributions for different models and params.
        yters 9y ago
        Two sequences of coin flips: HHHHHHHHHHHHHHHHHHHHHHHHHHHHHH THTHTHHTHTHHHHHHHTTTHTHHHTHHTT Which was generated by fair coin, which by 2 headed? How did you decide?
anonu 9y ago
Yeah, I hear ya. My "systematic profits" comments was in reference to a few firms and individuals I've observed over time. These people have some sort of structural or informational edge in the markets. There are commodity trading firms that are such substantial players in the markets they trade that they control that market. Certain High Frequency firms have scale and breadth of resources to get higher quality data, faster connections and hire guys that rewrite Linux process schedulers in assembly. Warren Buffet's secret weapon is that he never sells (so you never realize a loss!). The point being - anything else is gambling. And these guys - who look at a market structurally instead of some sort of casino - will eat your lunch in the long run. Their "edge" is actually orthogonal to price fluctuations. Just my 2 cents.
- notyourday 9y ago
  > Warren Buffet's secret weapon is that he never sells (so you never realize a loss!). That's not how mark-to-market accounting works.
  - anonu 9y ago
    Roughly speaking - if you mark an asset lower than its purchase price you have an unrealized loss. You still hold the asset and - if you're taking the super long-term investment horizon view as Buffet does - eventually your asset will go up. In addition, Buffett gets into investments that probably wont have their business models disrupted anytime soon - and are tied to the success of the USA as a country: railroads, insurance, housing.If he does his stock picking right, he doesn't need to sell...
    - notyourday 9y ago
      That's not correct for public companies - the unrealized mark to market losses will be reported as losses via correctly (mark-to-market) valuing the asset on the balance sheet.
deleted 9y ago
[deleted]
pfisch 9y ago
The stock market is not random though. If you have a person who previously worked at the fda specializing in kidneys for example, having that person analyze which kidney drugs/devices they think will get approved is not luck. People can have an informational advantage and use it to make intelligent trades.
- beiller 9y ago
  You would be right if the stock prices actually 1:1 tracked business success. The reality is that they do not. The are an approximation of future growth, and that adds a great deal of uncertainty, sometimes enough to even make your anecdote moot.
johnvonneumann 9y ago
So he is falling for a myth, yet what you're referring to is the Efficient Market Hypothesis, does the word "hypothesis" ring any bells for you? Even more so, does the fact that a theory that originated in the 1960's, still bares the name EMH. Almost 60 years on and it still hasn't been proven. Your thought process seems incredibly flawed, the idea you have about coin flipping being at all similar to stock picking is laughable. And this to me would indicate that whilst you may believe that your analogy is a good indication of survivorship bias, it is clear to me that you are suffering from confirmation bias. You're looking for examples that suit your belief, and ignoring some basic elements. Let's look at this one seriously, coin-flipping is an statistically independent event, whilst if we apply even some fundamentals of finance and EMH (which I don't agree with, btw), we will quickly find ourselves in the realm of correlation. I never stuck around Uni long enough to get deep into this stuff, but you could do with some reading on the CAPM model. To quote from wikipedia on the CAPM model: "Financial correlations play a key role in modern finance." You only have to look at the fact that many companies have been put out of business by companies like Amazon, which means that at the very minimum, you have at least ONE external factor that has an influence on the performance and price of other securities. And this is all without even starting on the even more hilarious notion that information across the market is symmetrical, that's right, I as a lowly consumer exchange peasant, have the exact same information available to me as Jim Simons and the team at RenTec. Who's Medallion Fund, by the way, returned a 35% CAR over a 20 year period. You have to be mental to believe the shit they teach in undergraduate Finance.
csomar 9y ago
You got a nice story out there. Random, bla bla bla... How instead you come up with real numbers? Like you pick a stock or say an index like the Nasdaq and analyse if its movements are truly random or not? Also you are aware that true random might mean perfect distribution? You don't know whether the tick is up or down but you know you'll have a distribution that is 50/50 up or down. So you can market make based on it (buy and sell on the same time). There are more to trading than day trading: Collecting premium on futures or options, arbitrage, collecting interest on bonds, etc...

martin1975 9y ago

> But only to the select few who are in the right product or looking at the market in the right way. like RenTec/Medallion... who sometimes look too good to be true, then again, if they were doing something illegal for 30+ years, you'd think by now they'd be caught. The only alternative explanation is they indeed have a unique model of the markets they continuously refine that allows them to outperform most everyone.

mrchicity 9y ago
Most money in Medallion is from employees with a bit from friends and family. You can't invest in it at all, because they don't need or want your money. If they're fooling anyone, they're just fooling themselves, or maybe using it as marketing for their other funds. In absolute terms Renaissance isn't even spectacular. There are capacity constrained traders whose Sharpe Ratios and return on capital are multiples of RenTech's. What's impressive is that they manage to do it with a billion dollar AUM. That's small compared to some of the biggest HFs, but far more than a typical high turnover strategy can put to use.