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I see no problem with unsophisticated people trading stocks on their phones, because one consequence of markets being efficient (or close to efficient) is that

I see no problem with unsophisticated people trading stocks on their phones, because one consequence of markets being efficient (or close to efficient) is that it’s really hard to underperform the market consistently. Just as hard as outperforming the market consistently, in fact. They’re wasting their time, but time you enjoy wasting is not wasted, etc. I don’t really feel the same way about options though. I don’t have a great explanation as to why. But options and the associated leverage are a totally distinct issue from picking individual stocks - options trading by retail investors is just gambling even if the underlying is SPY and not a psilocybin penny stock or whatever.

scott00 6y ago
It's actually quite easy to underperform the market if you make a lot of trades and cross the spread when you do it. Which is exactly the behavior that all retail brokerages are incentivized to encourage.
fullshark 6y ago
It's easy to underperform if you buy options that can go to zero on an incredibly short time horizon.
tryptophan 6y ago
Nope, not true. A very small fraction of stocks account for a large majority of the return of an index. If you miss these few in your portfolio, you will under-perform. It's not 50:50 whether or not you over-perform or under, its more like 1:50(over a significant period of time).
- tfehring 6y ago
  Yeah the distribution of returns isn't symmetrical, but the expected return is still equal to the market return. You could make the argument that that means that expected utility is lower because of decreasing marginal utility, but I'm not confident enough in my understanding of others' utility functions to make that claim.
caeril 6y ago
Those of us who care about silly, antiquated things like P/E ratios, or even having earnings at all, have definitely consistently underperformed the market. Value investing is a widowmaker in the ZIRP era.
- erulabs 6y ago
  Value investing is quite interesting, but when trying to come up with "value" picks, I wind up finding out about companies I'd never heard of in my life before. I do a tiny bit of this. Mostly, I invest in companies whose products I'd love to buy. I buy Apple gear, I bought a Tesla, I buy stuff on Amazon all the time and I love CloudFlare. Simply following the products I'd like to buy in the future and ignoring P/E ratios and ignoring the screams of much more experienced investors (who all hated TSLA because "they lose so much money!") has worked out gang-busters. I find it hard to square the "value investing" concept with the idea of following my own product instincts. What publicly traded company has products people DESPERATELY want, but fails to make profits eventually? Are there... any? That's a death only start-ups who don't know enough VCs ever face these days. There is close to unlimited liquid cash in the world - but there are very very few interesting products.
  - im3w1l 6y ago
    Numbers matter a lot, but you are right that P/E ratio is way simplistic. I think if you want to quantify your strategy, you should look at which market the company is in, and how much of it their amazing products can capture, and how soon. How big market share in % will Tesla's headstart in EV and autopilot give them in 10 years? That's the kind of question you should ask.
- tfehring 6y ago
  Isn't outperformance by assets with greater duration - e.g., stock in companies whose expected earnings are way off in the future - what fundamentals would suggest should happen in a decreasing interest rate environment?

scott00 6y ago

It's actually quite easy to underperform the market if you make a lot of trades and cross the spread when you do it. Which is exactly the behavior that all retail brokerages are incentivized to encourage.

fullshark 6y ago

It's easy to underperform if you buy options that can go to zero on an incredibly short time horizon.

tryptophan 6y ago

Nope, not true. A very small fraction of stocks account for a large majority of the return of an index. If you miss these few in your portfolio, you will under-perform. It's not 50:50 whether or not you over-perform or under, its more like 1:50(over a significant period of time).

tfehring 6y ago
Yeah the distribution of returns isn't symmetrical, but the expected return is still equal to the market return. You could make the argument that that means that expected utility is lower because of decreasing marginal utility, but I'm not confident enough in my understanding of others' utility functions to make that claim.

caeril 6y ago

Those of us who care about silly, antiquated things like P/E ratios, or even having earnings at all, have definitely consistently underperformed the market. Value investing is a widowmaker in the ZIRP era.

erulabs 6y ago
Value investing is quite interesting, but when trying to come up with "value" picks, I wind up finding out about companies I'd never heard of in my life before. I do a tiny bit of this. Mostly, I invest in companies whose products I'd love to buy. I buy Apple gear, I bought a Tesla, I buy stuff on Amazon all the time and I love CloudFlare. Simply following the products I'd like to buy in the future and ignoring P/E ratios and ignoring the screams of much more experienced investors (who all hated TSLA because "they lose so much money!") has worked out gang-busters. I find it hard to square the "value investing" concept with the idea of following my own product instincts. What publicly traded company has products people DESPERATELY want, but fails to make profits eventually? Are there... any? That's a death only start-ups who don't know enough VCs ever face these days. There is close to unlimited liquid cash in the world - but there are very very few interesting products.
- im3w1l 6y ago
  Numbers matter a lot, but you are right that P/E ratio is way simplistic. I think if you want to quantify your strategy, you should look at which market the company is in, and how much of it their amazing products can capture, and how soon. How big market share in % will Tesla's headstart in EV and autopilot give them in 10 years? That's the kind of question you should ask.
tfehring 6y ago
Isn't outperformance by assets with greater duration - e.g., stock in companies whose expected earnings are way off in the future - what fundamentals would suggest should happen in a decreasing interest rate environment?