10 ms·

The quote from that caller is pretty amazing. There are just so many things wrong his statement that it's hard to even know where to start. 1. A 7% weekly loss

by smabie 6y ago

The quote from that caller is pretty amazing. There are just so many things wrong his statement that it's hard to even know where to start. 1. A 7% weekly loss isn't really anything that a buy and hold investor should be worried out. Yes losing money sucks, but are you really so afraid of volatility you would rather earn practically nothing from 3 month T-bills? 2. It's super easy to call shorting GME risky after the fact.It's incredible what people call "obvious" and "risky" once a particular situation has blown up. Captain Hindsight strikes again. 3. He claims he is worried about "market manipulation", but I doubt he would be complaining or have his faith shaken in the markets if he just realized a 7% gain this week. This guy is looking to blame someone and hedge funds are a convenient populist target. On an aside, it seems the market can't ever get a break. If it crashes and unemployment skyrockets, it was due to some fat cats gambling. If the market skyrockets and unemployment is high, now the fat cats are making money off the backs of everyone else. If the market skyrockets and unemployment is low, well, everyone isn't sharing in the gains equally. Give me a break.

fortran77 6y ago
Also if someone "came into money" and the market is at an all-time-high (during a pandemic, no less!) why not roll it into the stock market over a one- or two-year period? Same dollar amount each month for two years.
- squeaky-clean 6y ago
  Research generally shows that if you have a lump sum of cash, it's better to invest it all at once rather than average it out. https://investor.vanguard.com/investing/online-trading/invest-lump-sum https://investor.vanguard.com/investing/online-trading/inves... Time in the market > Timing the market, and all that jazz.
  - dnautics 6y ago
    yeah but cost averaging is often a psychological technique. It's easier to commit yourself to cost average than it is to commit yourself to a lump sum investment.
  - kelnos 6y ago
    The page you link to does admit, though, that dollar cost averaging minimizes possible downside risk. Agreed that you shouldn't try to time the market, but it is of course possible that you invest that lump sump at a high, and then see a significant drop soon after. Sure, over time that drop will almost certainly rectify itself, but psychologically you might feel better about buying in over a longer period of time. Living with slightly lower long-term returns in exchange for peace of mind is a perfectly valid trade off that people can choose to make.
    - OscarCunningham 6y ago
      You should choose your asset allocation to fit your risk-reward preferences. Once you've done that it's suboptimal to further reduce risk at the expense of reward by holding more cash for longer.
      - lmm 6y ago
        So what has the better expected return between a) invest lump sum all at once into a low-volatility portfolio b) invest the lump sum progressively into a slightly higher-volatility portfolio, such that the expected regret remains the same?
        OscarCunningham 6y ago
        It's (a). The optimal strategy can't possibly be (b), because it would have the bizarre implication that two investors who have exactly the same preferences and who currently have the same amount of wealth would want to allocate their investments differently depending on how far in the past they started investing. Edit: I'm quite sleepy right now, but I think the way the mathematics works out is that the risk arising from an asset is a convex function of the amount allocated to it. So by Jensen's inequality it's less risky to invest 50/50 in cash and stocks for two years than to invest for one year in cash and one year in stocks, for the same reward.
    - sooheon 6y ago
      That page is inaccurate, according to historical data the downside risk is always greater with dollar cost averaging: https://ofdollarsanddata.com/lump-sum-investing/ https://ofdollarsanddata.com/lump-sum-investing/ This is because there are always two downsides, the risk of investing just before a huge crash, but also the risk of holding out while a boom passes you by. People always psychologically overweight the former due to loss aversion, but the latter is more pernicious.
  - nightski 6y ago
    Notice how it says "Expected Return". The problem is that it is better "on average" to invest it all at once (and doesn't even talk about variance). But an individual is not an average. They will lie somewhere on that spectrum. I'd rather take a small hit to the expected value of my returns in order to reduce risk of being on the wrong side of that average.
    - sooheon 6y ago
      > I'd rather take a small hit to the expected value of my returns in order to reduce risk of being on the wrong side of that average. This is a common fallacy. That is not actually the tradeoff you are making, in fact you are taking a hit to the mean value, and also greatly increasing the chances of being on the wrong side of the average[1]. Dollar cost averaging increases variance and decreases the expected return in proportion to your averaging period. You earn less and have a much lower floor for almost no increase in the ceiling. There are nice visualizations here: https://ofdollarsanddata.com/lump-sum-investing/ https://ofdollarsanddata.com/lump-sum-investing/ [1] at least according to history. Who knows what the future holds.
      - deleted 6y ago
        [deleted]
      - nightski 6y ago
        Good post thanks for sharing. It's true, the market grows more often than it shrinks and I could see how that skews the distribution in favor of lump sum.
    - prepend 6y ago
      You’re still an individual either way. So it’s still better to use expected return. Maybe you could compare and choose an option with less variability or standard deviation even though the mean return is worse. But these studies don’t compare the size of average losses and gains. I expect that the variance is also better for lump sum.
  - nullc 6y ago
    This stops being generally true if you assign a non-linear utility to future dollars. Above some point more dollars are less valuable to you, below some point they are much more valuable to you. If your investment objectives will be very likely satisfied from the returns of the DCA and the lump sump has a higher probability of failure -- why wouldn't you DCA even though it has lower expected returns?
    - sooheon 6y ago
      > the lump sump has a higher probability of failure For this to be true, you must be a successful market timer. Whatever your DCA period is, at the end of the period, you are fully invested -- a crash at that point in time would hurt you just as much as a crash would hurt a 100% equities from day 1 investor. DCA'ing is a bet that a crash will occur sometime before you are fully in. In every other scenario, the DCA is strictly worse. If you don't happen to know the timing of future crashes, it's better to put your money to work now than later, come what may. To account for non-linearly increasing dollar utility, it's better to choose a less volatile asset allocation, not to delay your investment period.
      - nullc 6y ago
        And yet, back tested it shows significantly lower variance. (of course, that isn't a guarantee... but it's the same kind of analysis that says lumpsumming is better, in terms of expected return) > In every other scenario, the DCA is strictly worse. Yes. And so what? It will always be the case that a lower variance approach will be better in the cases where the higher variance approach did poorly and worse otherwise. > it's better to choose a less volatile asset allocation These are not mutually exclusive. One can lump sum all into the lowest risk allocation and then risk on over time. It doesn't help that right now there is not much freedom in asset allocation at all. Your choices are pretty limited to higher risk things and things with a negative real yield.
        sooheon 6y ago
        > back tested it shows significantly lower variance Not sure what you're using as the measure of variance, but Morningstar found DCA has higher variance in IRR: https://www.morningstar.com.au/learn/article/the-dollar-cost-averaging-myth-why-lump-sum-i/197410 https://www.morningstar.com.au/learn/article/the-dollar-cost... > These are not mutually exclusive. One can lump sum all into the lowest risk allocation and then risk on over time I never said they were mutually exclusive, just that it is suboptimal.
- ra7 6y ago
  I'm not a big fan of Dollar Cost Averaging. If you have a lump sum amount you were going to invest, do it fully at once and let all of the money work. If you divide it and invest over a period of time, you are (1) letting the un-invested money be idle. (2) chasing a market downturn to invest the rest in hopes of "averaging down". Remember, market goes up more often than it goes down, so you will likely end up increasing your cost basis than if you had invested at once.
  - imtringued 6y ago
    Bitcoin is highly volatile. If you do a lump sum payment you might end up joining the market at the top of a bubble where the value of Bitcoin is 12x times its long term value. Sure it will not crash 12x down but going 70% down after the bubble could be enough to cause a panic sale and thus lose your money. >If you divide it and invest over a period of time, you are (1) letting the un-invested money be idle No, that's not always true. For example. When you earn $5000 in excess income per year you can decide to invest it monthly. That's dollar cost averaging and you didn't let your uninvested money sit idle. You can save up $5000 until the end of the year and then invest it. That's a lumpsum and you did let your uninvested money sit idle.
    - squeaky-clean 6y ago
      Investing your excess income as you get it isn't really Dollar Cost Averaging the way firms talk about it. It's called DCA on forums and such, but it's really just investing your excess lump sum each time as soon as you get it. Lump Sum vs DCA comparisons are usually made in the context that you have your lump sum now. Not that you're accumulating a lump sum and trying to time the market for when to invest it. The page is titled "How to invest a lump sum of money" after all. > Suppose you received a windfall. Someone gave you a gift or you inherited a lot of money. Maybe you hit the lottery jackpot or got a huge bonus. > Here's the question you face: Should you invest it all right away or in smaller increments over time, a strategy known as dollar-cost averaging?
      - prepend 6y ago
- vmception 6y ago
  historical performance in equities shows that lump sum investing has beaten dollar cost averaging over almost any time period I’m aware of the macroeconomic policies that coincide with that observation, but people will lean on those papers In higher volatile assets or periods, dollar cost averaging is the better move, so people that come from more volatile markets are correct to lean on that
ESTheComposer 6y ago
>On an aside, it seems the market can't ever get a break. If it crashes and unemployment skyrockets, it was due to some fat cats gambling. If the market skyrockets and unemployment is high, now the fat cats are making money off the backs of everyone else. If the market skyrockets and unemployment is low, well, everyone isn't sharing in the gains equally. I mean...this was due to fat cats gambling. Illegal gambling in fact. What else do you call shorting 140% of a company's stock? Also, this might just be me, but it feels disingenuous for you to not mention a disclaimer while posting this that you're a quant trader at a market maker. EDIT: As others have pointed out I seem to be misinformed about the legality of it, but my original point does stand. This IS happening due to fat cats gambling, and retail investors catching wind of it and blowing it up on social media (to be clear I'm aware that the majority of GME holders are still institutional)
- russell_h 6y ago
  I mean this as a genuine question: What law would shorting 140% of a company’s stock break?
  - ESTheComposer 6y ago
    Disclaimer: I've been trading for ~8 years but only heavily researching trading strategies ~1 year, so I'm no expert in these things. But, unless I'm misinformed (which I'm hopefully not considering how much I've been reading into this lately), there's ~72.4m shares of GME floating around right now, but only 69.5m were issued; which would mean that ~3m are counterfeit or naked shorts, which are illegal
    - deleted 6y ago
      [deleted]
    - smabie 6y ago
      Hate to break it to you, but I can borrow a share and sell it to you and then I can borrow it back over and over again.
MuffinFlavored 6y ago
> Yes losing money sucks, but are you really so afraid of volatility you would rather earn practically nothing from 3 month T-bills? Isn't the market's current valuation actually not that expensive given the fact that it isn't only 3 month T-bills that earn practically nothing? 1, 5, and 10 year bonds are equally bad in terms of ROI at the moment, right?
- bhk 6y ago
  Jeremy Grantham: "We've got an artificial rate structure ... And we're going to use that as a yardstick? We're going to say 'Stocks are cheap because they are less utterly ludicrous than a 30 year bond, or cash which is deeply negative?'" https://www.bloomberg.com/news/videos/2021-01-22/why-grantham-says-the-next-crash-will-rival-1929-2000-video https://www.bloomberg.com/news/videos/2021-01-22/why-grantha... @14:51
sigmaprimus 6y ago
Last year when the Dow dropped from 28K to 18K all my friends were selling off their holdings. I was going to do the same but spoke to my father, he told me selling off at 18K does nothing but guarantee my losses. I decided to take his advice and am up 115K on the year. I don't think the gamestop story is over and just because these hedge funds are showing a loss right now, they still have the opportunity to milk that stock all the way down to zero, and they will. What is really unfair (but good for me) is from my investments and house value increase, I have made more in one year doing nothing than I did the 1st 15 years of my post school employment. I don't know how a young person can make it in these late stages of capatlism let alone support a family, maybe that's why there are so many riots.
- techsupporter 6y ago
  From my point of view, this is exactly the point. Among all of the physical and mental pain and misery this virus inflicted, it also deepened the chasm between people who were already doing pretty well...and everyone else. Several people in this thread are commenting that "well of course staying in the market is the smart thing to do since stable savings instruments don't pay for shit!" Yeah, and that's the problem. In just thirty short years, we've gone from pension plans and savings rates that might actually leave you with more purchasing power than you started (when considering inflation) to...better gamble it all in the stonkz. So much money has been put into stock market-based retirement funds (401k, IRA, 403b, and so on) that the stock market, which used to be for large institutions doing large institution things, cannot fail because it will sink everyone with it. And yet, the stock market has become so detached from the economy at large precisely because of that yawning gap getting even larger. For those of us who can stay home yet still earn our massive salaries of which we are now spending a fraction, we have huge stacks of cash just looking for somewhere to sit. For the first time in a decade, the average American's savings rate has increased, because consumerism ground to a halt. Yet for those who lost their jobs--because that consumerism failed--or who go out and risk infection because that's the only way to draw a paycheck, they are even more screwed. We've left our society with no stable way to save and no mechanism to provide for ourselves except ever-increasing spending relying on the wages and efforts of an ever-gigified economy. That sucks.
anonu 6y ago
Shorting is riskier than going long by definition of what an equity is. Equity in a company means in a worst case scenario you go to 0 when you are long. If you flip that, when you are short, your loss potential is infinite.
- smabie 6y ago
  It's not that simple you have to consider the total portfolio. To give a simple example, longing AMD and shorting Intel is less risky than just longing AMD.
  - anonu 6y ago
    Yes and no. You are referring to calculating the variance of a portfolio which takes into the consideration the covariance of components. You can assume your normal or lognorm distribution of returns. All fine and good. But if INTC becomes the ire of r/wsb, you can throw any sort of historical covariance out the window. There is NO hedge for this.
    - harry8 6y ago
      >You can assume your normal or lognorm distribution of returns. I think we're seeing how that all comes unstuck on a grand scale right about now. The assumption doesn't hold at the times you really need it and boom!
      - anonu 6y ago
        If you're talking about GME its not really a grand scale. The US Stock market cap is $50 trillion. GME is $22bn as of Friday afternoon or 5 basis points of the rest of the market. Yes, big SD moves happen frequently enough that we have to revisit our normal distribution models. But GME isn't really the reason to do this.
        harry8 6y ago
        Have you tried that advice at Melvin? Size of the market doesn't change the risk you carry of wrong assumptions. Have LTCM if you want another spectacular failure of risk management with wrong assumptions like these. There's plenty more when you're done with that one.
bb88 6y ago
> 3. He claims he is worried about "market manipulation", but I doubt he would be complaining or have his faith shaken in the markets if he just realized a 7% gain this week. That's Bernie Madoff in a nutshell. As long as people kept putting money in, it was fine. It was when people pulled their money out during a financial crisis when Madoff was exposed. It's also a favorite scheme of con-men, that is, to make you feel like you are winning, when in fact, you're losing. You'd only know that until after it's too late.
animalgonzales 6y ago
he's diagnosing the issue wrong but he's not wrong to feel like the game is rigged. very few people own stocks and the "people" that do own a disproportionately larger amount that everyone else.
baryphonic 6y ago
Don't you think this straw-manning is just a little bit excessive? Also, point #2 seems flat out wrong. Short interest accounting for 140% of all outstanding stock is extremely reckless. It's like the Beirut port authority storing tons upon tons of explosive fertilizer in a warehouse so they could shake down a ship owner for some port fees. Sure, it didn't seem so bad for years when nothing happened, but the giant crater (not to mention human carnage) says they've got a much bigger problem than port fees. > On an aside, it seems the market can't ever get a break. If it crashes and unemployment skyrockets, it was due to some fat cats gambling. If the market skyrockets and unemployment is high, now the fat cats are making money off the backs of everyone else. If the market skyrockets and unemployment is low, well, everyone isn't sharing in the gains equally. Guess what: people complain about all sorts of things. It's a human thing. Financial markets would appeal to more people if they didn't appear biased, particularly biased in favor of the wealthy. I think if the players in the '08 crisis had at least gone into disgrace running gas stations in Middle America (I'm not even asking for jail time, unlike some), some of these populists might think there's some form of justice. But that didn't happen. The big banks got bailouts, and millions of people lost homes and jobs. The just, ethical thing to do would be to end too big to fail. If a bank makes too many promises it can't keep, it should go under. The most the government should do is supervise a swift and orderly bankruptcy. If I were a lawmaker today, I'd be doing that exact thing: make these "too big to fail" companies keep meticulous records of exactly which assets they have, which liabilities, and let the thousands of smaller banks bid on them like vultures in the event of a failure (which is inevitable, given a decade plus moral hazard). Here's another thing (more related to the GME situation): when the repo market started showing weird signs in 2019, the Fed stepped in and added massive liquidity. Fair enough, a financial crisis is something the Fed is supposed to prevent (ancillary to its somewhat silly dual - actually triple - mandate for high economic growth, low unemployment and steady long-run interest rates). However, when we were supposedly minutes from a financial crisis on Thursday, the Fed was nowhere to be found to inject cash into these brokerages and clearinghouses to secure retail trades. Are people on Robinhood trading repos or commercial paper or something? Of course not. That's for the big boys, the ones who get bailed out because they're "too big to fail." (Please spare me in advance with comments about how this violates X, Y or Z rule or something. Rules and norms have clearly not constrained the Fed much since September 2008, so why should the GME situation stop them now? The Fed has been creative - ingenious, even - at figuring out how to expand its balance sheet and take other policy actions - interest on reserves, anyone? - that were have novel effects.) It's easy to make straw-man arguments against populist comments from an Internet blog, especially ones that were somewhat ignorant (I happen to agree with you about the comment betraying some ignorance about buy-and-hold). But that does not mean such a comment is representative. Does there exist a version of the story of what happened with GME that is much tighter in terms of facts but has the same "I don't trust the system!" sentiment? If there is, shouldn't the defenders of the market take it seriously, particularly those who do HFT for market makers?
sombremesa 6y ago
Thanks for the voice of reason. It appears that, as always, people are interested in free money and not in learning how to invest. There's good advice worth millions out there for free, but people would rather pay YouTube 'gurus' to fluff their egos and then claim to be poor because of 'the establishment'. At least Thanksgiving forces Americans to be thankful once a year.
- candiodari 6y ago
  Good advice would have told you (and still does today) to short $GME ... as it's currently at the very least 500% of anything remotely resembling a reasonable valuation. It's value is completely artificial. And the same is true. A DCF of, say, Google, Facebook, Intel or (working from revenue) Amazon does not yield anything remotely close to their market cap, and of course market cap should be quite a bit below that (because if you actually start buying those shares it will go up). So feel free to point me to this advice worth millions ...
  - deleted 6y ago
    [deleted]
  - sombremesa 6y ago
    Sorry, I don't owe you anything, especially with that nasty attitude.
oivey 6y ago
The problem is a perception that the stock market continues to go up, yet the lot of the average person is either stagnant or getting worse. It isn’t an impossible double standard. The frustration is with the ever increasing wealth inequality.
- anonu 6y ago
  return on assets over the last 2 decades has far outpaced wage growth. Read: The rich get richer. In addition, with inflation at or above 2%, the average person needs to see a substantial hike in their wages to keep pace with their current standard of living.
  - sooheon 6y ago
    Return to capital > growth of economy. This is the central dogma of Piketty's Capital.
    - AnthonyMouse 6y ago
      > Return to capital > growth of economy. This is the central dogma of Piketty's Capital. The problem with this is taking it as a law of nature rather than an observed behavior over a specific period of history. And notably one with a stark lack of antitrust enforcement. Suppose you bust up monopolies and require companies to compete with each other. Then prices go down, which increases growth (lower price, higher demand), but decreases return on capital (lower margins). Is r > g still true then? Maybe not. I say we try it and find out.
      - sooheon 6y ago
        I mean, it is kind of a law of nature, like gravity wells accumulating, that power and wealth beget power and wealth at a greater rate than the global mean. But yes, I agree, the whole idea of pointing out r > g is to advocate for policy changes that would counteract this. The question is which policies? It's easy to say "break up monopolies", much harder to devise elegant countermeasures that align interests across the whole spectrum and are robust to defection.
op03 6y ago
"Now, here, you see, it takes all the running you can do, to keep in the same place" - https://en.wikipedia.org/wiki/Red_Queen_hypothesis https://en.wikipedia.org/wiki/Red_Queen_hypothesis
brutal_chaos_ 6y ago
Maybe the "the fat cats" can just go away. They sound bad either way.
pietrovismara 6y ago
> Give me a break. I can hear the remaining 99% of the world that doesn't invest financially, but whose lives are often very negatively affected by the financial market, ask the same: "Give me a break". Like many, I'm tired of being told the economy is broken and we will all have to "sacrifice" something to make it better, when we have no responsibility in a financial crisis. We are asked to pay for someone else's gambling gone bad, but when their gambling is successful we don't get any of the rewards. Collectivized risk, individual rewards AKA "Socialism for the rich and Capitalism for the poor". Sounds like a great incentive to keep an economy healthy.
- LatteLazy 6y ago
  Who are the 99% who don't invest but are regularly very negatively effected? Everyone seems to dislike big finance, but as far as I can tell, they dislike it because it's big and they don't understand what it does. Not because of anything it's done. It's like the mysterious "elites" trump railed against: they're numerous enough to decide elections, but no one has ever met one. They include all the city dwellers, but are less than 1% of the population etc.
  - pietrovismara 6y ago
    > Who are the 99% who don't invest but are regularly very negatively effected? Literally anyone that never interacted with the financial markets voluntarily, with a speculative intent. I include for example, people with IRAs. > It's like the mysterious "elites" There's nothing misterious here. It's banks, hedge funds, financial institutions. It's all the actors that caused the 2008 crisis, among the others. We have names, patterns and everything needed to analyze the issue, but I don't certainly require the average person to have to understand the financial markets in order to be able to be aware that something is deeply wrong in the way our economy is structured. Hedge funds themselves don't seem to fully grasp how the market works!
    - deleted 6y ago
      [deleted]
    - 6y ago
LatteLazy 6y ago
I pretty much agree completely. My question is, how long can we have hedge funds AND loads of people who blindly hate hedge funds? The same question applies to pretty much anything that's a bit opaque, complex and useful (most of finance, recently international trade, alliances like nato, even elections recently). I worry that we have a real issue here. If we can't maintain complex social and economic structures, we're at a massive disadvantage to less democratic countries that can.
prepend 6y ago
This is the amazing part about retail investors. There are all sorts of diverse ideas out there and most aren’t rational. This is one of my main reasons for not trying to consciously invest as my urges are pretty dumb and shouldn’t be followed. This caller’s message is so bizarre as to make me wonder what their long term plan is.

by smabie 6y ago

fortran77 6y ago

Also if someone "came into money" and the market is at an all-time-high (during a pandemic, no less!) why not roll it into the stock market over a one- or two-year period? Same dollar amount each month for two years.

squeaky-clean 6y ago
Research generally shows that if you have a lump sum of cash, it's better to invest it all at once rather than average it out. https://investor.vanguard.com/investing/online-trading/invest-lump-sum https://investor.vanguard.com/investing/online-trading/inves... Time in the market > Timing the market, and all that jazz.
- dnautics 6y ago
  yeah but cost averaging is often a psychological technique. It's easier to commit yourself to cost average than it is to commit yourself to a lump sum investment.
- kelnos 6y ago
  The page you link to does admit, though, that dollar cost averaging minimizes possible downside risk. Agreed that you shouldn't try to time the market, but it is of course possible that you invest that lump sump at a high, and then see a significant drop soon after. Sure, over time that drop will almost certainly rectify itself, but psychologically you might feel better about buying in over a longer period of time. Living with slightly lower long-term returns in exchange for peace of mind is a perfectly valid trade off that people can choose to make.
  - OscarCunningham 6y ago
    You should choose your asset allocation to fit your risk-reward preferences. Once you've done that it's suboptimal to further reduce risk at the expense of reward by holding more cash for longer.
    - lmm 6y ago
      So what has the better expected return between a) invest lump sum all at once into a low-volatility portfolio b) invest the lump sum progressively into a slightly higher-volatility portfolio, such that the expected regret remains the same?
      - OscarCunningham 6y ago
        It's (a). The optimal strategy can't possibly be (b), because it would have the bizarre implication that two investors who have exactly the same preferences and who currently have the same amount of wealth would want to allocate their investments differently depending on how far in the past they started investing. Edit: I'm quite sleepy right now, but I think the way the mathematics works out is that the risk arising from an asset is a convex function of the amount allocated to it. So by Jensen's inequality it's less risky to invest 50/50 in cash and stocks for two years than to invest for one year in cash and one year in stocks, for the same reward.
  - sooheon 6y ago
    That page is inaccurate, according to historical data the downside risk is always greater with dollar cost averaging: https://ofdollarsanddata.com/lump-sum-investing/ https://ofdollarsanddata.com/lump-sum-investing/ This is because there are always two downsides, the risk of investing just before a huge crash, but also the risk of holding out while a boom passes you by. People always psychologically overweight the former due to loss aversion, but the latter is more pernicious.
- nightski 6y ago
  Notice how it says "Expected Return". The problem is that it is better "on average" to invest it all at once (and doesn't even talk about variance). But an individual is not an average. They will lie somewhere on that spectrum. I'd rather take a small hit to the expected value of my returns in order to reduce risk of being on the wrong side of that average.
  - sooheon 6y ago
    > I'd rather take a small hit to the expected value of my returns in order to reduce risk of being on the wrong side of that average. This is a common fallacy. That is not actually the tradeoff you are making, in fact you are taking a hit to the mean value, and also greatly increasing the chances of being on the wrong side of the average[1]. Dollar cost averaging increases variance and decreases the expected return in proportion to your averaging period. You earn less and have a much lower floor for almost no increase in the ceiling. There are nice visualizations here: https://ofdollarsanddata.com/lump-sum-investing/ https://ofdollarsanddata.com/lump-sum-investing/ [1] at least according to history. Who knows what the future holds.
    - deleted 6y ago
      [deleted]
    - nightski 6y ago
      Good post thanks for sharing. It's true, the market grows more often than it shrinks and I could see how that skews the distribution in favor of lump sum.
  - prepend 6y ago
    You’re still an individual either way. So it’s still better to use expected return. Maybe you could compare and choose an option with less variability or standard deviation even though the mean return is worse. But these studies don’t compare the size of average losses and gains. I expect that the variance is also better for lump sum.
- nullc 6y ago
  This stops being generally true if you assign a non-linear utility to future dollars. Above some point more dollars are less valuable to you, below some point they are much more valuable to you. If your investment objectives will be very likely satisfied from the returns of the DCA and the lump sump has a higher probability of failure -- why wouldn't you DCA even though it has lower expected returns?
  - sooheon 6y ago
    > the lump sump has a higher probability of failure For this to be true, you must be a successful market timer. Whatever your DCA period is, at the end of the period, you are fully invested -- a crash at that point in time would hurt you just as much as a crash would hurt a 100% equities from day 1 investor. DCA'ing is a bet that a crash will occur sometime before you are fully in. In every other scenario, the DCA is strictly worse. If you don't happen to know the timing of future crashes, it's better to put your money to work now than later, come what may. To account for non-linearly increasing dollar utility, it's better to choose a less volatile asset allocation, not to delay your investment period.
    - nullc 6y ago
      And yet, back tested it shows significantly lower variance. (of course, that isn't a guarantee... but it's the same kind of analysis that says lumpsumming is better, in terms of expected return) > In every other scenario, the DCA is strictly worse. Yes. And so what? It will always be the case that a lower variance approach will be better in the cases where the higher variance approach did poorly and worse otherwise. > it's better to choose a less volatile asset allocation These are not mutually exclusive. One can lump sum all into the lowest risk allocation and then risk on over time. It doesn't help that right now there is not much freedom in asset allocation at all. Your choices are pretty limited to higher risk things and things with a negative real yield.
      - sooheon 6y ago
        > back tested it shows significantly lower variance Not sure what you're using as the measure of variance, but Morningstar found DCA has higher variance in IRR: https://www.morningstar.com.au/learn/article/the-dollar-cost-averaging-myth-why-lump-sum-i/197410 https://www.morningstar.com.au/learn/article/the-dollar-cost... > These are not mutually exclusive. One can lump sum all into the lowest risk allocation and then risk on over time I never said they were mutually exclusive, just that it is suboptimal.
ra7 6y ago
I'm not a big fan of Dollar Cost Averaging. If you have a lump sum amount you were going to invest, do it fully at once and let all of the money work. If you divide it and invest over a period of time, you are (1) letting the un-invested money be idle. (2) chasing a market downturn to invest the rest in hopes of "averaging down". Remember, market goes up more often than it goes down, so you will likely end up increasing your cost basis than if you had invested at once.
- imtringued 6y ago
  Bitcoin is highly volatile. If you do a lump sum payment you might end up joining the market at the top of a bubble where the value of Bitcoin is 12x times its long term value. Sure it will not crash 12x down but going 70% down after the bubble could be enough to cause a panic sale and thus lose your money. >If you divide it and invest over a period of time, you are (1) letting the un-invested money be idle No, that's not always true. For example. When you earn $5000 in excess income per year you can decide to invest it monthly. That's dollar cost averaging and you didn't let your uninvested money sit idle. You can save up $5000 until the end of the year and then invest it. That's a lumpsum and you did let your uninvested money sit idle.
  - squeaky-clean 6y ago
    Investing your excess income as you get it isn't really Dollar Cost Averaging the way firms talk about it. It's called DCA on forums and such, but it's really just investing your excess lump sum each time as soon as you get it. Lump Sum vs DCA comparisons are usually made in the context that you have your lump sum now. Not that you're accumulating a lump sum and trying to time the market for when to invest it. The page is titled "How to invest a lump sum of money" after all. > Suppose you received a windfall. Someone gave you a gift or you inherited a lot of money. Maybe you hit the lottery jackpot or got a huge bonus. > Here's the question you face: Should you invest it all right away or in smaller increments over time, a strategy known as dollar-cost averaging?
    - prepend 6y ago
vmception 6y ago
historical performance in equities shows that lump sum investing has beaten dollar cost averaging over almost any time period I’m aware of the macroeconomic policies that coincide with that observation, but people will lean on those papers In higher volatile assets or periods, dollar cost averaging is the better move, so people that come from more volatile markets are correct to lean on that

ESTheComposer 6y ago

>On an aside, it seems the market can't ever get a break. If it crashes and unemployment skyrockets, it was due to some fat cats gambling. If the market skyrockets and unemployment is high, now the fat cats are making money off the backs of everyone else. If the market skyrockets and unemployment is low, well, everyone isn't sharing in the gains equally. I mean...this was due to fat cats gambling. Illegal gambling in fact. What else do you call shorting 140% of a company's stock? Also, this might just be me, but it feels disingenuous for you to not mention a disclaimer while posting this that you're a quant trader at a market maker. EDIT: As others have pointed out I seem to be misinformed about the legality of it, but my original point does stand. This IS happening due to fat cats gambling, and retail investors catching wind of it and blowing it up on social media (to be clear I'm aware that the majority of GME holders are still institutional)

russell_h 6y ago
I mean this as a genuine question: What law would shorting 140% of a company’s stock break?
- ESTheComposer 6y ago
  Disclaimer: I've been trading for ~8 years but only heavily researching trading strategies ~1 year, so I'm no expert in these things. But, unless I'm misinformed (which I'm hopefully not considering how much I've been reading into this lately), there's ~72.4m shares of GME floating around right now, but only 69.5m were issued; which would mean that ~3m are counterfeit or naked shorts, which are illegal
  - deleted 6y ago
    [deleted]
  - smabie 6y ago
    Hate to break it to you, but I can borrow a share and sell it to you and then I can borrow it back over and over again.

MuffinFlavored 6y ago

> Yes losing money sucks, but are you really so afraid of volatility you would rather earn practically nothing from 3 month T-bills? Isn't the market's current valuation actually not that expensive given the fact that it isn't only 3 month T-bills that earn practically nothing? 1, 5, and 10 year bonds are equally bad in terms of ROI at the moment, right?

bhk 6y ago
Jeremy Grantham: "We've got an artificial rate structure ... And we're going to use that as a yardstick? We're going to say 'Stocks are cheap because they are less utterly ludicrous than a 30 year bond, or cash which is deeply negative?'" https://www.bloomberg.com/news/videos/2021-01-22/why-grantham-says-the-next-crash-will-rival-1929-2000-video https://www.bloomberg.com/news/videos/2021-01-22/why-grantha... @14:51

sigmaprimus 6y ago

Last year when the Dow dropped from 28K to 18K all my friends were selling off their holdings. I was going to do the same but spoke to my father, he told me selling off at 18K does nothing but guarantee my losses. I decided to take his advice and am up 115K on the year. I don't think the gamestop story is over and just because these hedge funds are showing a loss right now, they still have the opportunity to milk that stock all the way down to zero, and they will. What is really unfair (but good for me) is from my investments and house value increase, I have made more in one year doing nothing than I did the 1st 15 years of my post school employment. I don't know how a young person can make it in these late stages of capatlism let alone support a family, maybe that's why there are so many riots.

techsupporter 6y ago
From my point of view, this is exactly the point. Among all of the physical and mental pain and misery this virus inflicted, it also deepened the chasm between people who were already doing pretty well...and everyone else. Several people in this thread are commenting that "well of course staying in the market is the smart thing to do since stable savings instruments don't pay for shit!" Yeah, and that's the problem. In just thirty short years, we've gone from pension plans and savings rates that might actually leave you with more purchasing power than you started (when considering inflation) to...better gamble it all in the stonkz. So much money has been put into stock market-based retirement funds (401k, IRA, 403b, and so on) that the stock market, which used to be for large institutions doing large institution things, cannot fail because it will sink everyone with it. And yet, the stock market has become so detached from the economy at large precisely because of that yawning gap getting even larger. For those of us who can stay home yet still earn our massive salaries of which we are now spending a fraction, we have huge stacks of cash just looking for somewhere to sit. For the first time in a decade, the average American's savings rate has increased, because consumerism ground to a halt. Yet for those who lost their jobs--because that consumerism failed--or who go out and risk infection because that's the only way to draw a paycheck, they are even more screwed. We've left our society with no stable way to save and no mechanism to provide for ourselves except ever-increasing spending relying on the wages and efforts of an ever-gigified economy. That sucks.

anonu 6y ago

Shorting is riskier than going long by definition of what an equity is. Equity in a company means in a worst case scenario you go to 0 when you are long. If you flip that, when you are short, your loss potential is infinite.

smabie 6y ago
It's not that simple you have to consider the total portfolio. To give a simple example, longing AMD and shorting Intel is less risky than just longing AMD.
- anonu 6y ago
  Yes and no. You are referring to calculating the variance of a portfolio which takes into the consideration the covariance of components. You can assume your normal or lognorm distribution of returns. All fine and good. But if INTC becomes the ire of r/wsb, you can throw any sort of historical covariance out the window. There is NO hedge for this.
  - harry8 6y ago
    >You can assume your normal or lognorm distribution of returns. I think we're seeing how that all comes unstuck on a grand scale right about now. The assumption doesn't hold at the times you really need it and boom!
    - anonu 6y ago
      If you're talking about GME its not really a grand scale. The US Stock market cap is $50 trillion. GME is $22bn as of Friday afternoon or 5 basis points of the rest of the market. Yes, big SD moves happen frequently enough that we have to revisit our normal distribution models. But GME isn't really the reason to do this.
      - harry8 6y ago
        Have you tried that advice at Melvin? Size of the market doesn't change the risk you carry of wrong assumptions. Have LTCM if you want another spectacular failure of risk management with wrong assumptions like these. There's plenty more when you're done with that one.

bb88 6y ago

> 3. He claims he is worried about "market manipulation", but I doubt he would be complaining or have his faith shaken in the markets if he just realized a 7% gain this week. That's Bernie Madoff in a nutshell. As long as people kept putting money in, it was fine. It was when people pulled their money out during a financial crisis when Madoff was exposed. It's also a favorite scheme of con-men, that is, to make you feel like you are winning, when in fact, you're losing. You'd only know that until after it's too late.

animalgonzales 6y ago

he's diagnosing the issue wrong but he's not wrong to feel like the game is rigged. very few people own stocks and the "people" that do own a disproportionately larger amount that everyone else.

baryphonic 6y ago

Don't you think this straw-manning is just a little bit excessive? Also, point #2 seems flat out wrong. Short interest accounting for 140% of all outstanding stock is extremely reckless. It's like the Beirut port authority storing tons upon tons of explosive fertilizer in a warehouse so they could shake down a ship owner for some port fees. Sure, it didn't seem so bad for years when nothing happened, but the giant crater (not to mention human carnage) says they've got a much bigger problem than port fees. > On an aside, it seems the market can't ever get a break. If it crashes and unemployment skyrockets, it was due to some fat cats gambling. If the market skyrockets and unemployment is high, now the fat cats are making money off the backs of everyone else. If the market skyrockets and unemployment is low, well, everyone isn't sharing in the gains equally. Guess what: people complain about all sorts of things. It's a human thing. Financial markets would appeal to more people if they didn't appear biased, particularly biased in favor of the wealthy. I think if the players in the '08 crisis had at least gone into disgrace running gas stations in Middle America (I'm not even asking for jail time, unlike some), some of these populists might think there's some form of justice. But that didn't happen. The big banks got bailouts, and millions of people lost homes and jobs. The just, ethical thing to do would be to end too big to fail. If a bank makes too many promises it can't keep, it should go under. The most the government should do is supervise a swift and orderly bankruptcy. If I were a lawmaker today, I'd be doing that exact thing: make these "too big to fail" companies keep meticulous records of exactly which assets they have, which liabilities, and let the thousands of smaller banks bid on them like vultures in the event of a failure (which is inevitable, given a decade plus moral hazard). Here's another thing (more related to the GME situation): when the repo market started showing weird signs in 2019, the Fed stepped in and added massive liquidity. Fair enough, a financial crisis is something the Fed is supposed to prevent (ancillary to its somewhat silly dual - actually triple - mandate for high economic growth, low unemployment and steady long-run interest rates). However, when we were supposedly minutes from a financial crisis on Thursday, the Fed was nowhere to be found to inject cash into these brokerages and clearinghouses to secure retail trades. Are people on Robinhood trading repos or commercial paper or something? Of course not. That's for the big boys, the ones who get bailed out because they're "too big to fail." (Please spare me in advance with comments about how this violates X, Y or Z rule or something. Rules and norms have clearly not constrained the Fed much since September 2008, so why should the GME situation stop them now? The Fed has been creative - ingenious, even - at figuring out how to expand its balance sheet and take other policy actions - interest on reserves, anyone? - that were have novel effects.) It's easy to make straw-man arguments against populist comments from an Internet blog, especially ones that were somewhat ignorant (I happen to agree with you about the comment betraying some ignorance about buy-and-hold). But that does not mean such a comment is representative. Does there exist a version of the story of what happened with GME that is much tighter in terms of facts but has the same "I don't trust the system!" sentiment? If there is, shouldn't the defenders of the market take it seriously, particularly those who do HFT for market makers?

sombremesa 6y ago

Thanks for the voice of reason. It appears that, as always, people are interested in free money and not in learning how to invest. There's good advice worth millions out there for free, but people would rather pay YouTube 'gurus' to fluff their egos and then claim to be poor because of 'the establishment'. At least Thanksgiving forces Americans to be thankful once a year.

candiodari 6y ago
Good advice would have told you (and still does today) to short $GME ... as it's currently at the very least 500% of anything remotely resembling a reasonable valuation. It's value is completely artificial. And the same is true. A DCF of, say, Google, Facebook, Intel or (working from revenue) Amazon does not yield anything remotely close to their market cap, and of course market cap should be quite a bit below that (because if you actually start buying those shares it will go up). So feel free to point me to this advice worth millions ...
- deleted 6y ago
  [deleted]
- sombremesa 6y ago
  Sorry, I don't owe you anything, especially with that nasty attitude.

oivey 6y ago

The problem is a perception that the stock market continues to go up, yet the lot of the average person is either stagnant or getting worse. It isn’t an impossible double standard. The frustration is with the ever increasing wealth inequality.

anonu 6y ago
return on assets over the last 2 decades has far outpaced wage growth. Read: The rich get richer. In addition, with inflation at or above 2%, the average person needs to see a substantial hike in their wages to keep pace with their current standard of living.
- sooheon 6y ago
  Return to capital > growth of economy. This is the central dogma of Piketty's Capital.
  - AnthonyMouse 6y ago
    > Return to capital > growth of economy. This is the central dogma of Piketty's Capital. The problem with this is taking it as a law of nature rather than an observed behavior over a specific period of history. And notably one with a stark lack of antitrust enforcement. Suppose you bust up monopolies and require companies to compete with each other. Then prices go down, which increases growth (lower price, higher demand), but decreases return on capital (lower margins). Is r > g still true then? Maybe not. I say we try it and find out.
    - sooheon 6y ago
      I mean, it is kind of a law of nature, like gravity wells accumulating, that power and wealth beget power and wealth at a greater rate than the global mean. But yes, I agree, the whole idea of pointing out r > g is to advocate for policy changes that would counteract this. The question is which policies? It's easy to say "break up monopolies", much harder to devise elegant countermeasures that align interests across the whole spectrum and are robust to defection.

op03 6y ago

"Now, here, you see, it takes all the running you can do, to keep in the same place" - https://en.wikipedia.org/wiki/Red_Queen_hypothesis https://en.wikipedia.org/wiki/Red_Queen_hypothesis

brutal_chaos_ 6y ago

Maybe the "the fat cats" can just go away. They sound bad either way.

pietrovismara 6y ago

> Give me a break. I can hear the remaining 99% of the world that doesn't invest financially, but whose lives are often very negatively affected by the financial market, ask the same: "Give me a break". Like many, I'm tired of being told the economy is broken and we will all have to "sacrifice" something to make it better, when we have no responsibility in a financial crisis. We are asked to pay for someone else's gambling gone bad, but when their gambling is successful we don't get any of the rewards. Collectivized risk, individual rewards AKA "Socialism for the rich and Capitalism for the poor". Sounds like a great incentive to keep an economy healthy.

LatteLazy 6y ago
Who are the 99% who don't invest but are regularly very negatively effected? Everyone seems to dislike big finance, but as far as I can tell, they dislike it because it's big and they don't understand what it does. Not because of anything it's done. It's like the mysterious "elites" trump railed against: they're numerous enough to decide elections, but no one has ever met one. They include all the city dwellers, but are less than 1% of the population etc.
- pietrovismara 6y ago
  > Who are the 99% who don't invest but are regularly very negatively effected? Literally anyone that never interacted with the financial markets voluntarily, with a speculative intent. I include for example, people with IRAs. > It's like the mysterious "elites" There's nothing misterious here. It's banks, hedge funds, financial institutions. It's all the actors that caused the 2008 crisis, among the others. We have names, patterns and everything needed to analyze the issue, but I don't certainly require the average person to have to understand the financial markets in order to be able to be aware that something is deeply wrong in the way our economy is structured. Hedge funds themselves don't seem to fully grasp how the market works!
  - deleted 6y ago
    [deleted]
  - 6y ago

LatteLazy 6y ago

I pretty much agree completely. My question is, how long can we have hedge funds AND loads of people who blindly hate hedge funds? The same question applies to pretty much anything that's a bit opaque, complex and useful (most of finance, recently international trade, alliances like nato, even elections recently). I worry that we have a real issue here. If we can't maintain complex social and economic structures, we're at a massive disadvantage to less democratic countries that can.

prepend 6y ago

This is the amazing part about retail investors. There are all sorts of diverse ideas out there and most aren’t rational. This is one of my main reasons for not trying to consciously invest as my urges are pretty dumb and shouldn’t be followed. This caller’s message is so bizarre as to make me wonder what their long term plan is.