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Very sound advice. I would add this quote from Fooled by Randomness: Unfortunately, the inherent randomness of stock markets means that, just like millions of
by Kosirich 6y ago
Very sound advice.
I would add this quote from Fooled by Randomness:
Unfortunately, the inherent randomness of stock markets means that, just like millions of monkeys hammering on typewriters for long enough can eventually produce Shakespeare, so can unskilled investors produce great track records. In fact, it is very likely that some will.
Consider for example a cohort of 10,000 investors who, for the sake of argument, are relatively incompetent: each year they only have a 45% chance of being profitable. In other words, you would basically be better off investing based on the flip of a coin.
Nevertheless, despite their lack of skills, after 5 years based on probabilities alone we can expect almost 200 of them to have been profitable every year. They would boast flawless track records and enjoy praise for their exceptional skills.
Of course, in the long run, the randomness that sustains these “acute successful randomness fools” will turn against them. Wall Street has seen many traders, who after years of success have one devastating quarter where they lose everything in one huge blow-up.
Often their short-lived success was due to the fact that they simply happened to be at the right place at the right time, i.e. pure luck.
We often mistake luck and randomness for skill and determinism.
- acdha 6y agoIt’s interesting how that idea has been around for so long - it wasn’t new when A Random Walk Down Wall Street came out in the 1970s - but there’s a never ending supply of people who think they can beat the odds and investors who want to believe.
- jefftk 6y agoIt's not new, but it also took a while to become the mainstream advice: https://www.jefftk.com/p/survey-of-historical-stock-advice https://www.jefftk.com/p/survey-of-historical-stock-advice
- throw0101a 6y agoIt was also difficult to implement in a practical way for most people. While mutual funds (SICAV in EU, OEIC in UK) have technically been around since stocks have been around, implementing an index-tracking fund needed (a) indexes to be invented, and (b) computers to be able to do data processing: * https://en.wikipedia.org/wiki/Mutual_fund https://en.wikipedia.org/wiki/Mutual_fund Perhaps the Dow Jones was small enough of an index to keep track of manually, but things like the S&P 500 would have been harder (never mind the Russell 3000 or total market): * https://en.wikipedia.org/wiki/S%26P_500_Index#History https://en.wikipedia.org/wiki/S%26P_500_Index#History Then there had to be interest from investors. So it's not entirely surprising that it took until the 1970s with Vanguard to really create something.
- dade_ 6y agoNo it wasn’t, and everyone should read the Intelligent Investor. https://www.goodreads.com/book/show/106835.The_Intelligent_Investor https://www.goodreads.com/book/show/106835.The_Intelligent_I...
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- vsareto 6y ago>but there’s a never ending supply of people who think they can beat the odds and investors who want to believe. Based on how the stock market didn't die during the pandemic vs. how many people lost their jobs, I'd say they are right to believe that.
- shawnz 6y agoYou are talking about a different issue (correlation between the stock market and the economy). The person you are replying to is talking about active versus passive investment (i.e. betting on individual stocks to beat the market rather than investing in total market index funds)
- vsareto 6y agoPeople that compare the two outcomes will decide to become new active investors that fuels what the parent to my comment is talking about
- shawnz 6y agoWhy would they do that? Passive strategies also did well over the last few months.
- vsareto 6y agoIf you get lucky gains starting out doing riskier things like WSB does, you might be more inclined to keep that style until you take some losses. And if you're swept up in WSB's fun, you'll probably end up taking more losses. WSB is basically an accelerant for investing psychology.
- shawnz 6y agoSure, but what does that have to do with the pandemic or the current state of the economy? It will always be true that active investors are more likely to get "lucky" gains than passive investors. The allure of gambling isn't going to suddenly go away once the overall economy stabilizes.
- CydeWeys 6y agoThe crazy thing is, /r/wallstreetbets is fully cognizant of this fact. They just do it anyway for the lulz. They egg each other into increasingly degenerate highly risky options trading, and huge losses are lionized just as much as huge gains.
- lordgrenville 6y agoMatt Levine calls this the "bored market hypothesis": people are investing purely for fun, in significant enough numbers to actually move the market.
- whimsicalism 6y agoEh. If retail investors are investing in the same direction "just for fun" then the real institutional investors will just short their bet.
- lordgrenville 6y agoUnless the market can remain bored longer than institutional investors can remain solvent...
- whimsicalism 6y ago> Unless the market can remain bored longer than institutional investors can remain solvent... Don't let nit-picky facts like that institutional investors control substantially more capital than retail investors get in the way of a good narrative.
- dralley 6y agoTell that to all of the institutional investors that have lost money shorting Tesla. No, there is no good reason for Tesla to be valued the way it is - but there is no shortage of people willing to buy it without putting too much thought into the price, either.
- tomlue 6y agoIt is also possible to mistake results based on skill for luck and randomness. It feels better to believe that the success of others is due to luck and that your failures are due to randomness. Sometimes, other people are more intelligent / skilled / harder working. It is certainly possible to beat index funds, many do so, some of them are mostly lucky, some of them are mostly skillful.
- 0xEFF 6y agoPerhaps, but skill is more rare than luck. More importantly there’s no way to tell the difference.
- Kosirich 6y agoI think I agree with the point you are trying to make, but I would do a hard distinction between entrepreneurship and allocating funds on the stock market. Strong arguments for what I think you are trying to say by Sometimes, other people are more intelligent / skilled / harder working are made by Peter Thiel in his "Zero to One". The argument he makes is that there are more people who have succeed more than once. (success defined here as a multi billion business) It is certainly possible to beat index funds, many do so, some of them are mostly lucky, some of them are mostly skillful. - That is the trick ain't it? The hole point is that there is no way to distinguish between the two (a priori) and no way to deduct if it will lead to future success (posteriori).
- eloff 6y agoThat's an interesting tidbit from Zero to One that I've forgotten. It's very rare to find someone who has founded more than one billion dollar plus company. There are some good reasons for this: - If you created such a company, you may still be running it. Jeff Bezos, Mark Zuckerburg, Larry Ellison. By the time you retire from that you're super wealthy and old, there's little reason to start over. - Founding a company is HARD. Few people who went through that once are interested in doing it again. Paul Graham wrote about how he feels that way, although he did do it again with YC. But I think the point is fair that success at that level requires not just skill but a lot of luck of being in the right place at the right time with the right idea and the right combination of skill and connections to pull it off. It's extremely unlikely. You can certainly say Bill Gates and Mark Zuckerburg are skilled and they work hard. But it's clear they were also very lucky.
- misiti3780 6y agoi find myself reminding people of this excerpt often.
- throwaway9d0291 6y agoThis phenomenon is also exploited in unregulated areas like forex trading robots. A scammer will set up a bunch of systems trading some relatively small amount of real money and let them do their thing. After some time, some number of their robots will have actually made a decent amount of money, at which point the scammer will start offering the trading robot for sale on various marketplaces. Hundreds of people buy the robot and quickly find that it doesn't really make money.
- adwi 6y agoI had an Econ professor who explained this in similar way with a joke about the sure fire way to get rich in the market: Start a paid newsletter with stock tips, send half your subscribers one tip, the other half the opposite. Remove the people you sent the bad tips to, repeat.