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As an outside observer, I used to believe the stock market was solid and mostly rational, and that obviously it could not be influenced by a single actor or a s
by tarsinge 6y ago
As an outside observer, I used to believe the stock market was solid and mostly rational, and that obviously it could not be influenced by a single actor or a subreddit community, contrary to a "playground" like the Bitcoin market. I get the feeling everyone says they see the emperor's clothes in the stock market reliability, anticipating everything, but in reality it's just short term gambling and post rationalization.
Edit: punctuation
- WrtCdEvrydy 6y agoThe stock market is just hysteria fueled by 401k retirement funds.
- hinkley 6y agoYou can find plenty of people who will argue vehemently that it isn't legalized gambling on top of a pyramid scheme. One that can collapse faster than you can say "bank run". We were talking about banks 'making money' by giving out loans the other day. The banks actually have collateral and the fractional reserve. The only 'money' in the stock market is during active trading. Every penny of it leaves after the last trade is settled. At night the Dow is only worth the liquidation value of the companies (and that's if there are only common shares, otherwise forget it), and that's a smaller fraction than either the collateral or the fractional reserve banks maintain. Let alone both together.
- ClumsyPilot 6y agofractional reserve is an outdated myth, read "Money creation in the modern economy" by the Bank of England https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
- blackearl 6y agoI don't know how much or how little influence things like Robinhood and WSB have but it sure is entertaining to read about. I'm just hoping my conservative retirement investments don't get tanked for the lols
- JumpCrisscross 6y ago> how much or how little influence things like Robinhood and WSB Every attempt at seriously measuring this, and there haven’t been many I’ve found that can be publicly shared [1], found close to negligible levels of broader-market effects. $4bn in options buying, on the other hand, will do it. [1] https://ofdollarsanddata.com/robinhood-trader/ https://ofdollarsanddata.com/robinhood-trader/
- ra7 6y agoWith the way the market moved last few weeks (especially AAPL and TSLA), you could be forgiven to think the Robinhood effect was real. Especially when people like Matt Levine and even WSJ starts talking about it. People working from home, nowhere to spend money, seeing market news everyday and then jumping on to the most popular app to trade - all very believable for an unsophisticated "investor" like me. I remember seeing a post on r/options this week about exactly this - large volume OTM calls causing MMs to buy stock and inflate price. This news has been very interesting in light of that.
- MiroF 6y ago> all very believable for an unsophisticated "investor" like me. Yeah, the problem here is that irrational picks by these people working from home are just opportunities for arbitrage by the institutional investors, who stabilize the price.
- JumpCrisscross 6y ago> large volume OTM calls causing MMs to buy stock and inflate price I’m a former options market maker. Seeing large volumes of retail flow is very different from seeing a giant institutional order. It affects what goes into the market versus gets internally crossed and what gets hedged and to what degree and how. Individual investors have a moderately bad track record day trading. They have an abysmal one with options. I’m a decade out of the business, but we almost always defaulted to taking retail flow at risk.
- 6y ago
- jayd16 6y agoDo people not realize the market can be easily manipulated? Do they just think all the regulation was made up for no reason?
- a13n 6y agoThe stock market can remain irrational longer than you can remain solvent.
- donkeyd 6y agoGod, this has been so true for me. I was trading puts on the massive increase in US Covid cases, but stocks just kept going up. And now we're hitting ATHs while economists are predicting the worst GDP decline ever. Gold and Stocks are both rapidly rising, which isn't really logical, since Gold is a save haven, usually. I looked back at gold vs stocks and the last time stocks and gold rose at approximately the same speed, was just before the 2008 crash.
- JBiserkov 6y ago>which isn't really logical, since Gold is a save haven, usually. I don't know anything about anything, but it seems to me this is a logical consequence of inflation? Purchasing power of $ goes down, prices (of everything) go up.
- dlp211 6y agoWhat inflation?
- Rury 6y agoThe inflation in asset values (e.g. equities / real estate / gold). People incorrectly assume inflation means "the price of everything goes up". The problem word here being everything. Why? Well because prices aren't merely dictated by supply, but rather supply & demand. Simply comparing inflated money supply to the good supply is naïve, as it ignores to factor in the demand for different goods. As so, for a dumb example, it's entirely possible to have inflated stock prices but not see inflated sock prices, if all the extra money is chasing stocks, and not socks...
- layoric 6y ago
- deleted 6y ago[deleted]
- oso2k 6y agoI am reminded of the movie Pi [0]. [0] - https://en.wikipedia.org/wiki/Pi_(film) https://en.wikipedia.org/wiki/Pi_(film)
- di4na 6y agoPart of that is due to the fact that most of the market is now passive investment. Being pension funds, endowment, etc etc. The latest numbers i have seen is that 80% of the market shares is controlled by institutional investors. That is a looooot of the market tied to a set of investors that cannot bet on anything else than up due to their own long term problems. At this point, the market is better viewed as a gigantic retirement fund/saving account than as a way to decide on price. Once you look at the market that way, a lot more of the behaviours make sense.
- joemazerino 6y agoA rising tide lifts all boats. If the majority of the money in the market is on autopilot then why not fluctuate it?
- jandrese 6y agoTheoretically the disconnect from reality will eventually catch up you and the whole system will suffer from a major correction.
- MiroF 6y agoWhy do institutional investors undermine price discovery? This comment doesn't make sense to me. > The latest numbers i have seen is that 80% of the market shares is controlled by institutional investors. Institutional investor != passive investment. As long as trades are happening, there is some sort pricing mechanism.
- rubber_duck 6y agoI'd guess there is there is too much money in it due to the fact that central banks killed interest rates and started buying government bonds as needed - where pension funds would hold those they now need to search positivie returns and there's just not enough good bets there - would explain why the valuations are sky high
- 6y ago
- dheera 6y agoI always saw the stock market as governed by heavy hands and hype, and always assumed that investors need to MOSTLY base their financial models on a simulation of heavy hand agents and hype rather than fundamentals. If we wanted a stock market based on fundamentals, it should not be a free market. Instead, the power to set prices should be left to qualified experts in each stock's industry, and stocks should be allowed to change hands only at those prices. The experts should come from both scientific and business backgrounds and not analysts who spend their lives on Wall St. and are so incredibly out of touch with technology. Unfortunately the reality of the system we have created is that the more knowledgeable you are about something, typically the less money you have, and the more money you have, the less knowledge you have. We need to reverse that.
- MiroF 6y ago> Instead, the power to set prices should be left to qualified experts in each stock's industry https://www.newyorker.com/magazine/2005/12/05/everybodys-an-expert https://www.newyorker.com/magazine/2005/12/05/everybodys-an-... > Human beings who spend their lives studying the state of the world, in other words, are poorer forecasters than dart-throwing monkeys, who would have distributed their picks evenly over the three choices.
- dheera 6y ago"He picked two hundred and eighty-four people who made their living “commenting or offering advice on political and economic trends,” and he started asking them to assess the probability that various things would or would not come to pass, both in the areas of the world in which they specialized and in areas about which they were not expert" This is a little different from what I was suggesting. Predicting the future is an inherently difficult task for experts and I'll give you that. Rather I'm suggesting that experts set a valuation based on known facts about the company and the state of the industry. Here's an example. I work in the self driving industry. I always knew based on state of the art tech that Tesla couldn't possibly meet their aggressive timelines of full self driving. I think it's realistic one day, but not on the timeline they claimed a couple years ago. However, the reality is that the public is duped into thinking they'll be on time, and so what happens? I have to base my investment based on what the public thinks of Tesla, rather than what I think of Tesla. Here's another example. Uber car crashes. NVIDIA stock crashes the next day because the public thought it had something to do with NVIDIA GPUs. I, and all other ML experts should have been able to call this out and freeze the price of NVDA and say "we have it on good authority that NVDA did not do anything to cause that car crash". The current way the markets work shifts the paradigm from "invest in what you believe in" (which I is the way the world should work) to "invest in what you don't believe in but what everyone else is fooled into believing in". I mean, the incentive structure is such that I've even bought stocks in many companies I hate, and sold or put stocks in companies I believe in from my scientific background on first principles. Somehow that isn't the way things should work.
- ashtonkem 6y agoInteracting with traders would have broken you of that illusion too. Professional traders are much more prone to group think than they’ll ever admit to, which occasionally causes the market to do sub-optimal things.
- Slartie 6y agoI am more and more coming to the conclusion that a huge portion of susceptibility to groupthink even seems to be a central requirement to be a "good" trader (as in: one who outperforms the market). If you just go with the trend most of the time, you take part in a self-amplifying hype cycle that pushes all participants' equities higher. Whereas if you try to "outsmart" the group, you will fail most of the time, even if you might be right in your skepticism, because stock prices aren't strictly based on actual objective reality, but more on the perception of reality by most market participants.
- ethbr0 6y agoAka the important thing is not to be right, but to guess when most people will also decide you're right.
- Slartie 6y agoExactly. If it eventually turns out you were right, but most people didn't realize that at the time you traded according to your eventually-proven theory, you will have incurred huge losses at the point in time you finally are proven right. The icing on the cake is that you might even have given up on your idea and eventually decided to just go with the flow regardless of how stupid you think it is, and that might just be the time the market eventually concludes you were right all the time. Then you lost twice.
- SZJX 6y agoIf one is a true contrarian then one would certainly stick to their position until the end, or at least wait for chances along the way while unyielding in their underlying belief. Otherwise the only conclusion is that they are not firm enough in carrying out what they believe in. Of course if they have a bad timing in their execution, they would still end up losing, but lose twice they won't.
- woeirua 6y agoThe efficient market hypothesis is the biggest lie in modern history. Bubbles don't happen in efficient markets.
- deleted 6y ago[deleted]
- MiroF 6y ago> Bubbles don't happen in efficient markets. But how do you know a bubble ahead of time?
- bumby 6y agoI’m reminded of some research I tried to get published a while back. One editor comment came back with a suggestion to reject simply with “this appears to contradict the EMH.” No further explanation. Well, no shit. It said so right in the introduction. I think this is what’s called “theory induced blindness”
- nickff 6y agoThe (strong form) efficient market hypothesis (EMH) doesn't state or require that there be no bubbles. The EMH means that bubbles are extremely hard to predict/see, largely because of the market's feedback loop.
- 01100011 6y agoIs there a distinction between an efficient market and a efficient market subject to propagation delays? It would seem that there is a limit to how fast information can be disseminated and the resulting reaction time. The market may always tend towards efficiency at some time scales and not at others.
- jhanschoo 6y agoIt's important to note that even a system composed of rational actors influencing a common stock need not be stable in itself, nor are the rational actors guaranteed to collectively settle on the equilibrium that maximizes their collective utility.