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> Step 0: Forget trading on the stock market. You will lose. This does not have to be the case. I don’t mean to encourage people not to invest in index funds (

by dsacco 9y ago

> Step 0: Forget trading on the stock market. You will lose. This does not have to be the case. I don’t mean to encourage people not to invest in index funds (passive indexing is generally the best idea!), but if they’re going to try it anyway, it’s not helpful to simply declare it to be unprofitable from the outset. Your guide is well tailored for people who want to pursue consistent, modest gains on their capital beyond what inflation will gradually eat away. If someone with the right technical skills wants to generate a profit that consistently beats the market, they can do so with two caveats: 1) they will have significantly less capital than institutional funds, and 2) they will have to engage in the research and deployment of trading strategies on their own (as opposed to with the support of a full infrastructure and team). But profiting in the market is, at its core, a game of identifying price inefficiencies. Prices become more efficient through greater information diffusion and greater liquidity. If you have data that is not available in the broader market, you can make forecasts with an edge over what e.g. the aggregate analyst consensus suggests. In essence, programmers can take advantage of their smaller capital capacities to utilize strategies that might not be given as much attention by larger funds, because they’ll become capacity constrained much sooner (i.e. won’t scale). A software engineer who finds, collects and curates a source of data entirely on their own that maps directly to the revenue of particular companies (or more abstractly, to the future price of particular securities) can do well reliably. It’s not easy (or everyone would do it), but if you’re determined and understand what’s required, you can do it. I outlined how this can be done in several steps in an HN comment just yesterday: https://news.ycombinator.com/item?id=16349011 https://news.ycombinator.com/item?id=16349011 This is not to say that you should abandon index funds and try to beat the market. But if you’re already inclined to try, you might as well hear this advice and a gentle caution that it’s very difficult instead of hearing “don’t do it, you’ll lose” over and over. Some people will want to actively trade to be contrarian, or because they enjoy the intellectual challenges (there are plenty!), or simply because they think they can profit. They might as well go into it clear-eyed.

solipsism 9y ago
An honest take on the idea of a personal active trading should always mention the opportunity cost. Doing the necessary research is a job. One that takes significant time to learn, and one that will continue to take significant time once you've mastered it. So, like any job, you better either like it better then the other things you'd be doing instead, or you'd better be confident you can make it pay more than the other things you'd be doing instead.
- dsacco 9y ago
  > An honest take on the idea of a personal active trading should always mention the opportunity cost. Doing the necessary research is a job. One that takes significant time to learn, and one that will continue to take significant time once you've mastered it. I agree - this is why it’s a particularly important caveat that even if you have the skill and wherewithal to beat the market, you’ll need to also do it without a team or software infrastructure. I’d generally recommend that people interested in this learn as employees of an established firm, then go out on their own if it makes sense.
  - closeparen 9y ago
    I have read arguments that if you believe you have the skills to beat the market, a job on Wall Street is the best course of action - Other People’s Money means no risk to you, and the expected value of your incentive pay exceeds your own returns unless you have a ton of personal capital to play with already. If it turns out you’re right, take your saved bonuses and strike out on your own. If you’re wrong, being a Wall Stret alum opens plenty of career opportunities.
  - njwi332 9y ago
    What are some examples of established firms that would be good places to learn?
- ternaryoperator 9y ago
  That's exactly right. You might be able to beat the market if you put a lot of time into your stock picking research, but can you beat the market and pay yourself more than minimum wage for your time? Almost certainly not. And unfortunately, doing it as a hobby for the fun of it, isn't a workable compromise, precisely b/c beating the market requires so much work.
pbhjpbhj 9y ago
>If someone with the right technical skills wants to generate a profit that consistently beats the market, they can do so [...] by playing on-line Poker?!? Just because clever people win doesn't mean you will win because you're clever. In order for you to win someone else has to lose. "But I'm recognising inherent market inefficiencies and adding value, not profiting off other's failed gambles". Phooey.
- dsacco 9y ago
  > Just because clever people win doesn't mean you will win because you're clever. No, there is no guarantee. But you can develop an edge that is statistically distinguishable from random outcomes, and less formally, that distinguishes your activity from gambling. > In order for you to win someone else has to lose. Single trades imply a zero sum game in which one counterparty has to lose for the other to profit, yes. But the market itself is not a zero sum game. The net, aggregate result of trading activity is positive value. > "But I'm recognising inherent market inefficiencies and adding value, not profiting off other's failed gambles". Phooey. You’re doing both, if we’re being frank about it. This is a positive statement - it’s plainly true and follows from reasonably agreed upon definitions. You can assign a normative (moral) value to the concept of arbitrage in zero sum games one way or the other, but that’s not really relevant to the discussion at hand. If you don’t want to participate in active trading, you don’t have to - you can invest in passive index funds, which is a perfectly sane and well-reasoned decision. Professional traders don’t try to disguise the fact that they profit from a zero sum activity between consenting adults. But that has nothing to do with the process of price discovery, which is a well-recognized economic concept that is facilitated by active trading. Price discovery is not a moral imperative, it’s just a thing that happens through economically incentivized asset exchange.
  - roenxi 9y ago
    > No, there is no guarantee. But you can develop an edge that is statistically distinguishable from random outcomes, and less formally, that distinguishes your activity from gambling. Sure, it isn't gambling, but there are lies, damn lies and statistics. The effect of survivorship bias in this field is massive. Consider that the random element isn't necessarily the stock performance over 12 months. The indicators the traders use are, in a sense, randomly determined by the trader's personality and knowledge. If the stock market operates in a deterministic fashion for, say, 10 year stretches (which I think is about the time between major recessions) then the rules get changed in a major way, this "statistically distinguishable" edge may well disappear taking a hypothetical small-time saver's retirement fund with it. We see this every time there is a crash, where a bunch of firms with a clear statistical edge go bankrupt because the statistical edge relied on some specific market condition. A lot of people make more money than me with clever deals, but at the end of the day the only strategy that everyone can follow simultaneously is creating more than they consume and stockpiling the excess. Maybe stockpile a little on the low side if they have faith in continuing benefits from technology growth outpacing population growth.

by dsacco 9y ago

solipsism 9y ago

An honest take on the idea of a personal active trading should always mention the opportunity cost. Doing the necessary research is a job. One that takes significant time to learn, and one that will continue to take significant time once you've mastered it. So, like any job, you better either like it better then the other things you'd be doing instead, or you'd better be confident you can make it pay more than the other things you'd be doing instead.

dsacco 9y ago
> An honest take on the idea of a personal active trading should always mention the opportunity cost. Doing the necessary research is a job. One that takes significant time to learn, and one that will continue to take significant time once you've mastered it. I agree - this is why it’s a particularly important caveat that even if you have the skill and wherewithal to beat the market, you’ll need to also do it without a team or software infrastructure. I’d generally recommend that people interested in this learn as employees of an established firm, then go out on their own if it makes sense.
- closeparen 9y ago
  I have read arguments that if you believe you have the skills to beat the market, a job on Wall Street is the best course of action - Other People’s Money means no risk to you, and the expected value of your incentive pay exceeds your own returns unless you have a ton of personal capital to play with already. If it turns out you’re right, take your saved bonuses and strike out on your own. If you’re wrong, being a Wall Stret alum opens plenty of career opportunities.
- njwi332 9y ago
  What are some examples of established firms that would be good places to learn?
ternaryoperator 9y ago
That's exactly right. You might be able to beat the market if you put a lot of time into your stock picking research, but can you beat the market and pay yourself more than minimum wage for your time? Almost certainly not. And unfortunately, doing it as a hobby for the fun of it, isn't a workable compromise, precisely b/c beating the market requires so much work.

pbhjpbhj 9y ago

>If someone with the right technical skills wants to generate a profit that consistently beats the market, they can do so [...] by playing on-line Poker?!? Just because clever people win doesn't mean you will win because you're clever. In order for you to win someone else has to lose. "But I'm recognising inherent market inefficiencies and adding value, not profiting off other's failed gambles". Phooey.

dsacco 9y ago
> Just because clever people win doesn't mean you will win because you're clever. No, there is no guarantee. But you can develop an edge that is statistically distinguishable from random outcomes, and less formally, that distinguishes your activity from gambling. > In order for you to win someone else has to lose. Single trades imply a zero sum game in which one counterparty has to lose for the other to profit, yes. But the market itself is not a zero sum game. The net, aggregate result of trading activity is positive value. > "But I'm recognising inherent market inefficiencies and adding value, not profiting off other's failed gambles". Phooey. You’re doing both, if we’re being frank about it. This is a positive statement - it’s plainly true and follows from reasonably agreed upon definitions. You can assign a normative (moral) value to the concept of arbitrage in zero sum games one way or the other, but that’s not really relevant to the discussion at hand. If you don’t want to participate in active trading, you don’t have to - you can invest in passive index funds, which is a perfectly sane and well-reasoned decision. Professional traders don’t try to disguise the fact that they profit from a zero sum activity between consenting adults. But that has nothing to do with the process of price discovery, which is a well-recognized economic concept that is facilitated by active trading. Price discovery is not a moral imperative, it’s just a thing that happens through economically incentivized asset exchange.
- roenxi 9y ago
  > No, there is no guarantee. But you can develop an edge that is statistically distinguishable from random outcomes, and less formally, that distinguishes your activity from gambling. Sure, it isn't gambling, but there are lies, damn lies and statistics. The effect of survivorship bias in this field is massive. Consider that the random element isn't necessarily the stock performance over 12 months. The indicators the traders use are, in a sense, randomly determined by the trader's personality and knowledge. If the stock market operates in a deterministic fashion for, say, 10 year stretches (which I think is about the time between major recessions) then the rules get changed in a major way, this "statistically distinguishable" edge may well disappear taking a hypothetical small-time saver's retirement fund with it. We see this every time there is a crash, where a bunch of firms with a clear statistical edge go bankrupt because the statistical edge relied on some specific market condition. A lot of people make more money than me with clever deals, but at the end of the day the only strategy that everyone can follow simultaneously is creating more than they consume and stockpiling the excess. Maybe stockpile a little on the low side if they have faith in continuing benefits from technology growth outpacing population growth.