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There's a simple lesson. Buy and hold a low-fee index fund. Stop trying to pick stocks. And for God's sake stop trying to day trade stocks. Deviating from buy-

There's a simple lesson. Buy and hold a low-fee index fund. Stop trying to pick stocks. And for God's sake stop trying to day trade stocks. Deviating from buy-and-hold indexing is mathematically a zero-sum game. Winning this game is also one of the most monetarily rewarding games on Earth. It's extremely unlikely that you're anywhere near good enough to win this game. If you don't know who the fool at the table is, it's probably you.

Gunax 6y ago
I think you're absolutely correct. Stock picking is roughly a winner-take all game where you are facing off against incredibly smart and prepared people. Unfortunately, I have heard of several people[1] that have switched from passive funds to research and stock picking. One week of market silliness may have un-did decades of teaching the public to not pick individual stocks. While it's nice that more people are going to start reading 10-Qs and learning what a put is, it's almost certainly going to be a net-negative. [1]https://twitter.com/TrumpSC/status/1354197824494325764 https://twitter.com/TrumpSC/status/1354197824494325764
WA 6y ago
Not as simple. With buy and hold of index funds, you limit your upside. There is close to zero chance to make 1,000% within a year. Stock picking has potentially a bigger downside, but also more upside. This being a zero-sum game doesn’t matter, if you have either an edge or are simply lucky. So instead of saying it’s all bullshit, it probably makes more sense to put 90% in index funds but expose yourself to a bigger upside with stock picking.
- GordonS 6y ago
  I think that's kind of the GP's point - they are advocating for not being lured by the (scant) potential for enormous gains, and instead taking the easy route to moderate gains (which will amount to large gains over time, as long as you reinvest). > it probably makes more sense to put 90% in index funds but expose yourself to a bigger upside with stock picking. Does it though? Unless you are an experienced professional financial trader (or are in possession of inside information), you are almost certain to have higher gains over time with indexed funds. If you really want to gamble on individual stocks, you may as well put 90% in index funds and put the rest on a roulette wheel.
  - WA 6y ago
    If you think that your chances are higher at roulette, good for you. Other people take other chances. A few more thoughts: - Maybe you don’t have to be THAT smart to beat the index. - Maybe you don’t have to be consistently good or right or lucky, but only once or twice, because money has a nonlinear utility. If you strike it big in your early thirties, you have a different life than if you consistently save up till 65. - Of course, gambling away your small investment in the beginning might give you less to compound over the years, which results in significant less money at age 65. - Maybe stock picking helps you better to stay invested during booms and busts. I have no answers to these questions and I’m in the process to figure things out for myself right now. However, buying puts on DAX and SPX in February 2020 made me a small fortune, which is now a very real house I just bought. YMMV
    - JacobSuperslav 6y ago
      of course it's all possible. but chances are you aren't as bright as you think and just as the other 95-97% of retail investors (actual number based on studies) you won't outgrow the s&p500
- FabHK 6y ago
  True. Just like in the casino, if you want to make real money, you must put all you have on one lucky number. Betting small amounts on red or black limits your upside severely.
- gopalv 6y ago
  > This being a zero-sum game doesn’t matter, if you have either an edge or are simply lucky Picking stocks is basically "I'm feeling lucky". People do win the lottery and not buying a ticket prevents you from ever winning it. The upside definitely exists, but you get emotionally invested rather than financially. Picking stocks is good for your sense of agency in investment & feeling connected to the results of your actions - the emotional part of that shouldn't be ignored. Trading stocks at that risk level is very much a tribal gladiatorial feeling, rather than actual financial sense. We're actually seeing that in action recently - poor financial sense, massive entertainment value.
- yibg 6y ago
  same can be said for investing in lotteries. Also more upside, and if you're lucky, well that's all you need. So why not put 90% of your money into index funds and use the remaining 10% to buy lottery tickets?
  - WA 6y ago
    Because the chance for return is so small with lottery tickets. Futhermore: Most people don't need $50 million but rather 50k-500k. It makes sense to pick a bet with better odds. 10% in a stock that has a 50% chance of better performance than the SPX? Sounds reasonable. Or an event-driven trade where you do a short-term bet on a thing. These opportunities don't come very often, but once in a while, they do. Why not expose yourself to them?
JumpCrisscross 6y ago
> There's a simple lesson. Buy and hold a low-fee index fund. Stop trying to pick stocks. And for God's sake stop trying to day trade stocks. It's a tough lesson to learn. When I realized, I think last Wednesday evening, that intelligent people honestly believed Ken Griffin was ordering Robinhood to block traders from buying GameStop stock so a short of his could make money, I started pricing out puts. (Didn't do anything.) I burned my hands with thankfully little money in the '08 crisis. It chastened me, and I've been more disciplined since. And I was a professional options market maker. (It's a bit of a running joke: sell-side traders running godawful personal accounts with a handful of hero trades and boatloads of losers.) I'm not sure I would have been more disciplined had I entered the markets at the tail of a 10-year bull market. Certainly not if the most-accessible trading app encouraged me to day trade. And if my financial identity was largely based on a subreddit that egged me on. It's a difficult problem, and I don't think there are easy answers. (Counterfactual: individual investing is not hopeless. There is ample evidence that individual investors can and do generate abnormal returns. But it's seldom the people day trading, and when it is, it's not them holding concentrated positions over multiple days.)
- dcolkitt 6y ago
  > There is ample evidence that individual investors can and do generate abnormal returns. I actually agree with this. But didn't want to put it in, because so many people hear this qualification and just assume it means they can be the next /u/deepfuckingvalue. To put it in the larger framework, I would say individuals can win in opportunities that are too awkward for institutions. Like patiently holding beaten down value stocks. But there's two caveats. One, is that most times this style of investing is painful, with long periods of underperformance. Two is that the outperformance is reasonably capped. Maybe an extra two or three percent a year. It's not going to catapult you to /u/deepfuckingvalue levels. For large enough opportunities, the institutions will swallow the awkwardness. That only leaves small rewards for a lot of pain. Thanks. I do appreciate you bringing this point up.
- Gunax 6y ago
  This is the first time i've heard of individual investors beating the market. If some can do so consistently, shouldn't they be running a hedge fund instead of twiddling with their retirement?
ChrisLomont 6y ago
>Deviating from buy-and-hold indexing is mathematically a zero-sum game. If buy and hold indexing is not mathematically zero (which I agree it is not), then plenty of deviations from it are also not zero sum (which is empirically true). Any stock gives partial ownership of a (hopefully) productive asset. Larger collections of them (like index funds) provide some reduction in volatility, but index funds are by no means the only way to structure risk/volatility tradeoffs.
- dcolkitt 6y ago
  I mostly agree with what you're saying. But the probability that that the average WSB retail investor reconstructs a Robinhood account with superior mean-variance optimization than an index fund, is about the same chance that my dog builds a fusion reactor after getting into my toolbox.
PartiallyTyped 6y ago
I disagree. The lesson here is 1) figure out the memestocks before they become memes, 2) buy low and depending on memefication potential sell high. At some point I was > 1200% with GME, but, I got greedy. I could have made bank in nearly every swing but hindsight is 20/20. The goal is to outpace the market even with small amounts while investing most of the portfolio at safer stocks/long term plays. Ended up my GME saga at > 300%.
- yibg 6y ago
  I don't see how those lessons are actionable? I mean yes to make money in stock picking all you have to do is buy low and sell high. Question is can you do that consistently enough to make a better return than index funds?
  - PartiallyTyped 6y ago
    As long as it averages out you are fine. I was in GME at 33ish. I was also at 17 and I was impatient (and I really didn't know what the heck I was doing then, too impatient, not that I do know now..). I am not suggesting to do that instead of index funds, I suggest doing both, throwing a small portion of your portfolio in meme stocks before they gain traction, this is where sentiment analysis comes in, can yield very good results. As long as you get out fast enough. By fast enough, I do not suggest chasing old returns, that is, returns like TSLA/GME. You only need to outrun the market at that particular day, do it often enough whilst throwing profits in index funds and you are getting ahead. I am willing to bet (hah), and I will try to verify (at least in virtual) that after GME, sentiment analysis on WSB, r/stocks, r/investing and news can provide good enough yields by exploiting people's FOMO, in particular the chase for TLSA/GME returns and the belief that we are in control. The goal is to track potential trends in WSB, observe them getting traction in r/stocks and r/investing, and once they are mentioned on the news to start getting out.
    - yibg 6y ago
      Problem with TSLA and GME is they are only meme stocks in hindsight. You may have gotten lucky on those and gotten in early enough, but that’s not a strategy. Hypothetically let’s say analyzing sentiment on some narrow range of data like WSB reliably produced outsized returns, that will very quickly self correct as people catch on. I suppose if you are the only one that has the secret sauce then sure. But if that’s the case you probably should’ve be posting it here.

Gunax 6y ago

I think you're absolutely correct. Stock picking is roughly a winner-take all game where you are facing off against incredibly smart and prepared people. Unfortunately, I have heard of several people[1] that have switched from passive funds to research and stock picking. One week of market silliness may have un-did decades of teaching the public to not pick individual stocks. While it's nice that more people are going to start reading 10-Qs and learning what a put is, it's almost certainly going to be a net-negative. [1]https://twitter.com/TrumpSC/status/1354197824494325764 https://twitter.com/TrumpSC/status/1354197824494325764

WA 6y ago

Not as simple. With buy and hold of index funds, you limit your upside. There is close to zero chance to make 1,000% within a year. Stock picking has potentially a bigger downside, but also more upside. This being a zero-sum game doesn’t matter, if you have either an edge or are simply lucky. So instead of saying it’s all bullshit, it probably makes more sense to put 90% in index funds but expose yourself to a bigger upside with stock picking.

GordonS 6y ago
I think that's kind of the GP's point - they are advocating for not being lured by the (scant) potential for enormous gains, and instead taking the easy route to moderate gains (which will amount to large gains over time, as long as you reinvest). > it probably makes more sense to put 90% in index funds but expose yourself to a bigger upside with stock picking. Does it though? Unless you are an experienced professional financial trader (or are in possession of inside information), you are almost certain to have higher gains over time with indexed funds. If you really want to gamble on individual stocks, you may as well put 90% in index funds and put the rest on a roulette wheel.
- WA 6y ago
  If you think that your chances are higher at roulette, good for you. Other people take other chances. A few more thoughts: - Maybe you don’t have to be THAT smart to beat the index. - Maybe you don’t have to be consistently good or right or lucky, but only once or twice, because money has a nonlinear utility. If you strike it big in your early thirties, you have a different life than if you consistently save up till 65. - Of course, gambling away your small investment in the beginning might give you less to compound over the years, which results in significant less money at age 65. - Maybe stock picking helps you better to stay invested during booms and busts. I have no answers to these questions and I’m in the process to figure things out for myself right now. However, buying puts on DAX and SPX in February 2020 made me a small fortune, which is now a very real house I just bought. YMMV
  - JacobSuperslav 6y ago
    of course it's all possible. but chances are you aren't as bright as you think and just as the other 95-97% of retail investors (actual number based on studies) you won't outgrow the s&p500
FabHK 6y ago
True. Just like in the casino, if you want to make real money, you must put all you have on one lucky number. Betting small amounts on red or black limits your upside severely.
gopalv 6y ago
> This being a zero-sum game doesn’t matter, if you have either an edge or are simply lucky Picking stocks is basically "I'm feeling lucky". People do win the lottery and not buying a ticket prevents you from ever winning it. The upside definitely exists, but you get emotionally invested rather than financially. Picking stocks is good for your sense of agency in investment & feeling connected to the results of your actions - the emotional part of that shouldn't be ignored. Trading stocks at that risk level is very much a tribal gladiatorial feeling, rather than actual financial sense. We're actually seeing that in action recently - poor financial sense, massive entertainment value.
yibg 6y ago
same can be said for investing in lotteries. Also more upside, and if you're lucky, well that's all you need. So why not put 90% of your money into index funds and use the remaining 10% to buy lottery tickets?
- WA 6y ago
  Because the chance for return is so small with lottery tickets. Futhermore: Most people don't need $50 million but rather 50k-500k. It makes sense to pick a bet with better odds. 10% in a stock that has a 50% chance of better performance than the SPX? Sounds reasonable. Or an event-driven trade where you do a short-term bet on a thing. These opportunities don't come very often, but once in a while, they do. Why not expose yourself to them?

JumpCrisscross 6y ago

> There's a simple lesson. Buy and hold a low-fee index fund. Stop trying to pick stocks. And for God's sake stop trying to day trade stocks. It's a tough lesson to learn. When I realized, I think last Wednesday evening, that intelligent people honestly believed Ken Griffin was ordering Robinhood to block traders from buying GameStop stock so a short of his could make money, I started pricing out puts. (Didn't do anything.) I burned my hands with thankfully little money in the '08 crisis. It chastened me, and I've been more disciplined since. And I was a professional options market maker. (It's a bit of a running joke: sell-side traders running godawful personal accounts with a handful of hero trades and boatloads of losers.) I'm not sure I would have been more disciplined had I entered the markets at the tail of a 10-year bull market. Certainly not if the most-accessible trading app encouraged me to day trade. And if my financial identity was largely based on a subreddit that egged me on. It's a difficult problem, and I don't think there are easy answers. (Counterfactual: individual investing is not hopeless. There is ample evidence that individual investors can and do generate abnormal returns. But it's seldom the people day trading, and when it is, it's not them holding concentrated positions over multiple days.)

dcolkitt 6y ago
> There is ample evidence that individual investors can and do generate abnormal returns. I actually agree with this. But didn't want to put it in, because so many people hear this qualification and just assume it means they can be the next /u/deepfuckingvalue. To put it in the larger framework, I would say individuals can win in opportunities that are too awkward for institutions. Like patiently holding beaten down value stocks. But there's two caveats. One, is that most times this style of investing is painful, with long periods of underperformance. Two is that the outperformance is reasonably capped. Maybe an extra two or three percent a year. It's not going to catapult you to /u/deepfuckingvalue levels. For large enough opportunities, the institutions will swallow the awkwardness. That only leaves small rewards for a lot of pain. Thanks. I do appreciate you bringing this point up.
Gunax 6y ago
This is the first time i've heard of individual investors beating the market. If some can do so consistently, shouldn't they be running a hedge fund instead of twiddling with their retirement?

ChrisLomont 6y ago

>Deviating from buy-and-hold indexing is mathematically a zero-sum game. If buy and hold indexing is not mathematically zero (which I agree it is not), then plenty of deviations from it are also not zero sum (which is empirically true). Any stock gives partial ownership of a (hopefully) productive asset. Larger collections of them (like index funds) provide some reduction in volatility, but index funds are by no means the only way to structure risk/volatility tradeoffs.

dcolkitt 6y ago
I mostly agree with what you're saying. But the probability that that the average WSB retail investor reconstructs a Robinhood account with superior mean-variance optimization than an index fund, is about the same chance that my dog builds a fusion reactor after getting into my toolbox.

PartiallyTyped 6y ago

I disagree. The lesson here is 1) figure out the memestocks before they become memes, 2) buy low and depending on memefication potential sell high. At some point I was > 1200% with GME, but, I got greedy. I could have made bank in nearly every swing but hindsight is 20/20. The goal is to outpace the market even with small amounts while investing most of the portfolio at safer stocks/long term plays. Ended up my GME saga at > 300%.

yibg 6y ago
I don't see how those lessons are actionable? I mean yes to make money in stock picking all you have to do is buy low and sell high. Question is can you do that consistently enough to make a better return than index funds?
- PartiallyTyped 6y ago
  As long as it averages out you are fine. I was in GME at 33ish. I was also at 17 and I was impatient (and I really didn't know what the heck I was doing then, too impatient, not that I do know now..). I am not suggesting to do that instead of index funds, I suggest doing both, throwing a small portion of your portfolio in meme stocks before they gain traction, this is where sentiment analysis comes in, can yield very good results. As long as you get out fast enough. By fast enough, I do not suggest chasing old returns, that is, returns like TSLA/GME. You only need to outrun the market at that particular day, do it often enough whilst throwing profits in index funds and you are getting ahead. I am willing to bet (hah), and I will try to verify (at least in virtual) that after GME, sentiment analysis on WSB, r/stocks, r/investing and news can provide good enough yields by exploiting people's FOMO, in particular the chase for TLSA/GME returns and the belief that we are in control. The goal is to track potential trends in WSB, observe them getting traction in r/stocks and r/investing, and once they are mentioned on the news to start getting out.
  - yibg 6y ago
    Problem with TSLA and GME is they are only meme stocks in hindsight. You may have gotten lucky on those and gotten in early enough, but that’s not a strategy. Hypothetically let’s say analyzing sentiment on some narrow range of data like WSB reliably produced outsized returns, that will very quickly self correct as people catch on. I suppose if you are the only one that has the secret sauce then sure. But if that’s the case you probably should’ve be posting it here.