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Around 20 years ago, I had the opportunity to listen to a member of Nasdaq top management talk about the stock market. It's all a _tiny_ bit blurry, being a lon

by elygre 6y ago

Around 20 years ago, I had the opportunity to listen to a member of Nasdaq top management talk about the stock market. It's all a _tiny_ bit blurry, being a long time ago, but I remember how he talked about three different perspectives for investing in stock: First, the "company perspective". An investor would buy stock in a company they believed in. Maybe they had good products, or good management, or something else. The idea was looking at the how well the company would perform. Second, the "stock perspective". An investor would ignore the underlying company, but look at the stock itself. It didn't really matter if the company was doing good, but only if the stock itself had good potential. The idea was looking at how well the stock would perform. Finally, the "game perspective". An investor would not really care about the stock, but only about the behavior of other investors. Day trading would be the example here, profiting mainly on marketplace dynamics, no matter the stock. The idea was looking at how to be a better player than the others. Then he talked about how the game perspective was the only model that really matched the marketplace, and how the stock market had evolved from being place where people would invest in companies, to a place where they would play a game with other peopl.

WalterBright 6y ago
> the game perspective was the only model that really matched the marketplace I don't buy that. If a company consistently grows and makes money, its stock is going up. The stock value is always going to revert to what the company is doing.
IgorPartola 6y ago
That makes a lot of sense. I think the GME debacle is a good demonstration of that. Shorting stocks is a part of the game. Some people exploited it, others found a counter move. I don’t believe GME is worth what the market currently values it at. But I also don’t see that fundamental value ever matching the market value anytime soon because the market has fully embraced its non-rationality regarding this stock. We aren’t trading shares in a specific company here. We are trading Melvin’a profits and/or losses.
- TeMPOraL 6y ago
  > But I also don’t see that fundamental value ever matching the market value(...). We aren’t trading shares in a specific company here. We are trading Melvin’a profits and/or losses. I think you're still doing L1/L2 thinking. The way I understand L3, there's no such thing as "fundamental value". There's only market value, that's determined by what people think the market value is. The extent to which it's correlated with real-world performance of a company is limited to how likely other people are to take that performance into account. Ordinarily, enough investors look at the state of the company to give rise to a correlation (if only because otherwise there's nothing external to look at!). Meme stocks are kind of extreme here, in that everyone knows that everyone else knows the stock is being traded on its market value. But that feels to me like a difference of a degree, not of a kind. And at this point I ask myself, how any of that is even useful to the society? Could we decouple the parts that let companies loan money and be accountable to the shareholders, separate them from the part where investors just play their spreadsheet MMOFPS? Or is the former always inherently going to turn into the latter, as people will always game it?
  - criticaljudge 6y ago
    But it is obviously bullshit, as the real companies behind some stocks have a real value. Like for example they might own a building that is worth one billion dollars (simple example). If you take away all the stock market shenanigans, you still own part of that building via your stocks. As for the usefulness question: providing liquidity is useful. If an investor considers investing in some project, it helps his decision making if they can be reasonably sure that they will be able to sell their shares later on. And even if it wasn't useful, why would you care what other people do with their money?
    - j4yav 6y ago
      As a shareholder how do you access that value without stock market shenanigans coming into play? The only two that come to mind are companies about to go bankrupt, or a careful focus on dividend value (but dividends may not pay out the value of their static assets without having to sell them.)
YokoZar 6y ago
> An investor would not really care about the stock, but only about the behavior of other investors. This sounds like the idea of a Keynesian Beauty Contest (https://en.wikipedia.org/wiki/Keynesian_beauty_contest https://en.wikipedia.org/wiki/Keynesian_beauty_contest) "It is not a case of choosing those [faces] that, to the best of one's judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees."
- agumonkey 6y ago
  And I believe they orbit around the set of self fulfilling prophecies described in books. Fibonacci or similar simple arithmetic range estimates, deviation from the mean, etc.
  - TeMPOraL 6y ago
    Isn't this the reverse of a self-fulfilling prophecy? A self-fulfilling prophecy attracts reality to the state it describes. The stock market, being anti-inductive, attracts reality away from whatever predictions being made - that is, for example, if I found a pattern that proves $GME reaches the Moon on Tuesday, enough other people would find that pattern too and start buying early, and $GME would reach the Moon on Monday, and probably crash on Tuesday.
    - AbrahamParangi 6y ago
      That’s an artifact of including a specific time in your prediction. If you made that same statement time-invariant “GME will moon” it becomes a self-fulfilling prophecy.
      - Udik 6y ago
        It's true, but making the statement time-invariant is also an oversimplification. Time does not end with the fulfillment of the prophecy and everybody knows that. Where does $GME go after reaching the moon? It can only stay there or go down, and in both cases people would start selling it.
dalbasal 6y ago
Well put. I am picturing as a triangle of three perspectives. That also gives you three (or 6) possible cross-perspective stories. The dynamics between these perspectives are where things start to get squirrely. 2021 memestocks like gme are good examples. Game perspective (no. 3) was the main story. Short squeezes. Retail investors getting cut off, etc. The stock perspective (no. 2) is now all about game investors. Can the stock attract or sustain all this interest from day traders and such. Company performance (perspective 1) is affected more by the company's stock than the other way around.
- hckrnrd 6y ago
  Through technology—global connectivity, mobile accessibility, and apps like Robinhood and their global counterparts—there’s no reason to expect the demand to wane. https://amp.scmp.com/business/article/3119779/futu-restore-trading-gamestop-shares-friday-founder-li-says https://amp.scmp.com/business/article/3119779/futu-restore-t...
- pashamur 6y ago
  The most important concept to understand about today's market is not short squeeze - it's gamma squeeze (which can lead to shorts being squeezed). It's about how traders got their hands on an unusual amounts of leverage (when you buy a call option, the market maker that sells it to you has to buy 5-10x the amount of stock in $$ value that it cost you to buy the option in order to hedge, and the closer the stock gets to your option price, the more hedging stock they have to buy) GME, Tesla, all of the high-flyers and all the craziness of the last few months were driven by gamma squeezes and the YOLO call option buying of /wsb (with some hedge funds obviously jumping on board)
imtringued 6y ago
The problem with stock market trading is that the need for liquidity grows with the size of the market, not with the number of traders. So if traders keep joining the market over and over again at some point there will be an excess of liquidity and there will be no positive sum money left to earn. It's like a real business. Once everyone has a car the only way to grow market share is by displacing other manufacturers. If you want to make a living as a trader you are supposed to look for very volatile and iliquid stocks. Traders make money off the difference of the current price and the actual value of the underlying company and in volatile markets that difference is very high.
hef19898 6y ago
The reason I will never touch day trading is, that it is basically the same thing HF traders do. Only 1000 times slower. So I will loose against these guys every single time. And even HF traders loose money. The only single stock investments I have came from employment, either through RSUs or employer sponsored stock buying programs. RSUs are just coming to you, and why would I not take stock at 50% discount? The only exception would be money I don't need. So gambling, as I don't care if I loose it or not. But usually I do other stuff with that money.
- DSingularity 6y ago
  You are wrong. HF traders front run to profit off individual trades by beating them to better prices. Day traders try to get an edge and exploit it to profit intraday by simply selling higher than they bought.
  - andi999 6y ago
    And why would that be sustainably possible?
    - DSingularity 6y ago
      HF firms? Or pattern traders? I’m not sure if my answer is good enough but the volatility is always there to exploit.
  - BasedInfra 6y ago
    Front running is illegal. Its payment for order flow which is earning off the spread while also keep it tight and liquidity in the market.
    - DSingularity 6y ago
      So... basically front running ?? That’s what it seems like you are describing. They make money when they manage to get ahead and provide the liquidity needed to fill the orders. What am I missing?
mgh2 6y ago
What about “ethical” investing? A company can perform good long term without regards to the negative externalities of its business
vasco 6y ago
Piggy backing on OP, if you're new to these topics and are interested in a more in-depth explanation about these stages as well as a number of other really interesting history check out https://en.wikipedia.org/wiki/How_Markets_Fail https://en.wikipedia.org/wiki/How_Markets_Fail
sandworm101 6y ago
Following that model, the variety of crypto currencies is the next evolution. The game can now be played as a pure game, without the economic uncertainties that come with underlying companies. All that matters are the actions of the other gamers. The gamestop fiasco would be an incidence of that crypto market mentality bkeeding back into a market not designed to handle such games.
- DSingularity 6y ago
  GameStop price spiked because of a short squeeze. Short squeeze happened because hedgefunds over extended in their short positions. Do you think GameStop was shorted more than float because of games learned by cryptocurrency traders? That’s a stretch.
  - NOTaCODERR 6y ago
    It’s really interesting seeing how HN can be so uninformed when the topic changes to their area of expertise, this thread is insightful and I’ll use the search button to get an understanding of how many morons are on this forum, this is great for me as I’m not a coder and thought this crowd was ‘smart’.
    - ves 6y ago
      HN is not a smart crowd, but there are smart people on it.
      - hckrnrd 6y ago
        Can you define “smart crowd”? It seems like all large gatherings are by definition “dumb” due to group dynamics that add friction to challenge existing norms. The “smartest crowd” may be the America due to the freedoms to create as many crowds—within reason—as one wants. A crowd of crowds as it were.
    - deleted 6y ago
      [deleted]
criticaljudge 6y ago
I think you can still buy some stock with the intention of collecting the dividends or hoping for the stock's value to grow over time. There are simple calculations like Price/Earnings ratio that are usually published with every stock, that can help to see if it is a "gambling stock". You will of course hear all sorts of opinions about the stock market, including hardcore socialists who believe it is the root of all evil and so on. So take everything with a grain of salt.
- rjbwork 6y ago
  From a socialist (especially labor theory of value) perspective, you're buying and selling people's future labor. Socialists tend to think that the workers should get all of their labor. Obviously "root of all evil" is somewhat hyperbolic, but based on even passing knowledge of socialism, it is easy to see why a socialist might consider it to be an evil game. Per your previous sentences though, a common refrain on /r/WSB is "Sir, this is a casino".
  - criticaljudge 6y ago
    It doesn't make much sense, as owning a stock does not give you any entitlement to the future labor of employees. Also employees can buy stock themselves, which arguably is superior to forcing them to be stakeholders in the company they work for, as it is voluntary. But the labor theory of value also doesn't make sense to begin with (if you disagree, I'd like you to pay me 10000$ to dig a hole in front of your front door, which would be hard work and therefore definitely worth 10000$), it's probably moot to discuss. I don't think /r/WSB is representative of the stock market as a whole. The stock market is just people trading. Some do stupid trades, some do smart trades. To cherry pick some stupid trades and claim it is all a casino is crazy, imo. Personally, I am a freedom guy - I think people's freedoms should be maximized. The alternative to "letting the people trade" is to regulate what people invest in. In my country, it gets harder and harder to invest in anything but the government pension, as every other asset class is being destroyed with taxes and risk of socialist pawning. There are also rules. It is just another tentacle of the "nanny state", preventing people from making potentially harmful decisions. But it limits freedom. Especially people on Hacker News (formerly Startup News) should understand. Should people be allowed to do Startups? It's a very risky undertaking which might lose you money.
jariel 6y ago
It's called: Value investing, technical investing, speculating. 'RobinHood' style 'investing' means that people have access to 'data' which makes them feel 'informed' but for the most part they are making totally random guesses, which implies a kind of distortion of self awareness. In other words - they are RobinHood fish handed to the sharks who have more information, knowledge, and leverage via tech, other services and especially access to capital. But - with the underling caveat that as stocks go up overall, even random trading can yield what is perceived to be a slight win over time as stocks overall go up in value. This has the effect of actually making a lot of small winners and having retail investors believe they are actually making 'smart bets' when really they are just riding the market trend. Compound this with the fact there is a lot of noise in every direction, and that random bets sometimes do turn out relatively well - and a 'single win' will be interpreted by winners as due to 'intelligence' when really it was just random (this happens to everyone, even institutional investors who always over-attribute their wins) - making people feel they are 'smart'. Of course, the 'bad bets' are attributed due to 'bad luck' and not 'bad investing'. With slack in the economy and enough of the proles playing games on the market, it can really do things to stocks (Tesla, Nikola, Game Stop obviously). In the end this means that it's hard to fathom if it's actually good or bad for companies, and that the analogy is a little bit like playing poker with better players but the pot just magically grows a bit without anyone noticing (i.e. market rising). It also creates a little bit of Ponzi-ish mania reminiscent of 2000 where the saying used to be 'when your cab driver is giving you stock tips it's time to get out' with the major caveat that the Fed is creating so much liquidity that is getting dumped into stocks ... that it actually just might be rational to pick stocks randomly and even trade them, because the 'harm' of playing against sharks is less worse than not playing at all, and that being 'in' the market, even on roughshod terms, is better than holding cash. It's a whole pile of weird dynamics playing out at the same time, and I hope it ends well. Edit: I was corrected by a commenter below, I may have misappropriated 'Value Investing' which can be a form of technical investing, but subject to interpretation i.e. Warren Buffet doesn't make a pure technical analysis of 'under valuation', he's definitely looking at the management team, the viability of the company etc. but of course looking at that in the context of pricing itself. No investment strategy can avoid deferring the price of the stock as many 'great companies' are clearly overvalued at any given time.
dfgdghdf 6y ago
Another way of describing the "game perspective" is simply: "a stock is worth what someone else will pay for it". This sounds obvious, but the implication is that the stock price has no direct connection to how a company performs.
- imutemyteam 6y ago
  and not just that, it is literally an information game. You hear that the company's latest car model failed after seeing the quarterly figures. Obviously, the stock price will go down? Wrong, the market already knew that the car model failed, and the current price is already adjusted for that. Stock market trading is only worth it if you have an information advantage. And obviously it is the one with the most capital that has the highest information advantage. Anyone debating on the internet that "one could make money in the stock market by studying books" is such a joke. Who is going to have more information, the average joe with a book he read; or the guy with a billion dollars with information streaming into his AI.
  - dasil003 6y ago
    Yes but what information is important enough to move the stock price? I agree it’s foolish for individuals to try to compete with professionals, especially on a short-term window. For longer-term investing I believe the playing field is more level because once you go 5+ years out no one really has an information advantage and a huge proportion of traders aren’t even thinking on that horizon.
    - kqr 6y ago
      The information flows are also incredibly complex and self-reinforcing with all sorts of impenetrable feedback loops. Low wheat yield one year can cause reverberations throughout the world for many years to come. These can affect strategic decisions by businesses, which then affect strategic decisions among their suppliers, and so on. Eventually the effects of weather patterns die out, but not before they have (perhaps almost imperceptibly) affected every business around the world, perhaps many decades after the initial event. This, anyway, is how Mandelbrot speculated the autoregression, correlation, and long-term dependence of the markets might arise. Trying to figure out the effects of an event in that world beyond the simplest, first-order ones is futile, no matter your resources.
anonu 6y ago
I 100% agree with that breakdown. But I disagree that the game perspective "matches the market". The beauty of the marketplace is that there are all types of people in the sandbox: fundamentals, macro, hedgers, short-sellers, punters, high-frequency traders, mean-reverters, money managers, pension plan managers. And all of these people have slightly different time horizons ranging from microseconds to years. The market concept is this beautiful thing that supports all these people: aided by strong regulation, strong oversight, and better technology.
- ilkan 6y ago
  One could say marketplace is a category of game field where the rules and objectives are different for many participants. I want to sell my apples for the maximum possible profit today; she wants to sell both her apples at max profit and lettuce at max speed within its shelf life; the customer wants a decent lunch. Different measures for success, different time limits, different strategies in the common marketplace.
JohnJamesRambo 6y ago
I think the problem with this is it works great in a bull market but when the recession man comes the stock values get pared down to what the companies are really worth.
- GuB-42 6y ago
  It is the same thing with a bear market, that's the reason why shorts exist. It I think people will think a company is overvalued, then I can short a very good company and make money.
gen220 6y ago
The value investor type (buffet etc) would call this speculation, not investing. Speculators control all of the short term movements (everything on a time scale of <1 year). Sometimes when new financial instruments (what value investors would call fads) are created, they can control it for years (securitized junk bonds, in the 80s, sub prime mortgages in the 2000s). But the pricing of securities in the market has always regressed to fundamentals in the long arc of history. The value investor types agree with the nasdaq guy, though. All institutional investors (even the pension fund managers!) behave like speculators, since at least the 80s. It’s just how the incentives are structured. It’s important to understand how they think, because you don’t want to be trampled by them. But playing their game is not the way to win in the long term.
- guerrilla 6y ago
  > But the pricing of securities in the market has always regressed to fundamentals in the long arc of history. I don't doubt this but got any good references?
  - gen220 6y ago
    Whenever markets have "crashed", it's usually been a reversion to fundamentals. See the bond market crash of the 80s, the sub-prime mortgage crisis of the 00s. The reality is that the cash flow and assets underlying these securities were overpriced. In spite of it, institutional investors speculated the price up for years. People thought they had found a way to "cheat" risk, turning fundamentally risky (and therefore, low-value) assets into something more valuable. They were wrong! Other times, the market is simply too optimistic (dot-com bubble), and attaches large valuations to companies with non-existent cash flows (i.e. little fundamental value). We're arguably in a similar current today, although it's not nearly as bad, imo. The companies that get overblown valuations today at least have revenue, albeit some more legitimately than others (TSLA vs UBER).
RivieraKid 6y ago
The correct perspective, aka reality, is that market value gravitates towards the intrinsic value in the long-term. And if you're a very long-term investor, you can ignore the market price and just collect the dividends. By intrinsic value I mean the sum of all expected future cash-flows where each cash flow is adjusted for time and variance (risk).
- throw14082020 6y ago
  This is the conventional retail investor perspective. But also, its a tautology. gravitates toward intrinsic value? The current price is the intrinsic value, the market prices in all durations, short or long run. What you're trying to say long term market value correlates with technical analysis, but is this true? You can't prove/ disprove this, because its "intrinsic value" can just be replaced with "price". So IMHO, your words are equivalent to: "The correct perspective, aka reality, is that price gravitates towards the price in the long-term."
  - RivieraKid 6y ago
    I would say that what you're saying is the typical retail perspective, this view is common. Market price and intrinsic value are different concepts. Google Aswath Damodaran's writing on this topic. When GameStop was $400, the price was well above intrinsic value for example so I knew it would gravitate down.
- rdtwo 6y ago
  That’s fundamentally true because all stock values tend to go to zero over a long enough period of time. Not a lot of companies survive 100 years for example
  - RivieraKid 6y ago
    If a company goes bankrupt, you can get a good estimate of the true intrinsic value at a previous point in time by summing all cash flows paid to shareholders adjusted for time and estimated risk.
- 6y ago
dmos62 6y ago
I'd say that the second and third perspectives are really the same. You'd be left with the actual in-world company vs. the in-market stock. The duality stems from a stock having two values that can be at odds with each other: real-world value and market value. In some circles the two perspectives are called fundamental trading and technical trading. One extreme of technical analysis is looking only at price and volume charts, sometimes even vertically flipping the chart to more completely detach from any real-world notions you might have about the instrument.
shawnz 6y ago
I think a better distinction would simply be whether you are aiming to profit from speculative movements (gambling) or risk premiums (investing). Any kind of technical analysis, fundamental analysis, day trading, etc falls into the first category. Passive investing, factor investing, investing in ETFs, etc falls into the second.
- Closi 6y ago
  Technical analysis is definitely part of long-term investing (e.g. at the most basic, work out how much profit the company is making compared to the market cap and what dividends will be paid over the investment period)
  - acover 6y ago
    Technical analysis refers to only looking at the price history of a stock. You are referring to fundamental analysis. https://en.m.wikipedia.org/wiki/Technical_analysis https://en.m.wikipedia.org/wiki/Technical_analysis Fundamental analysis still requires you have an edge over other investors. Passive does not.
    - Closi 6y ago
      Doh.
koboll 6y ago
It's odd to read this, since so much of my money is parked in index funds, probably for decades, simply because stocks are more likely to perform well over the long term than other asset classes. I guess this can be read as an outgrowth of the "company perspective" in the sense that I think the American economy is fundamentally sound, but it's odd to call it that, since I couldn't care less about individual companies for the most part.
hourislate 6y ago
I believe "Market Wizards - Jack D. Schwager" highlights this. When speaking with some of the best and most successful traders in the markets, he found that the one common thing between them was "Game Perspective". They understood human emotion and had this desire to be the best at the game. The money/wealth was not the focus but the reward. If I remember correctly (read the book a couple of decades ago), most did not even have much of a Financial background if any. I recently read a blog post by Martin Shkreli who wrote that he was really bad at trading and doesn't participate. It takes very unique individual to be successful at trading and he is not one of them. He used the analogy where you can think of trading like a professional sport. Could you get into the Octagon with a UFC Fighter and expect to win because that is what you're doing when you try to trade. My take away is if a person like Shkreli doesn't stand a chance, then how would I....
- VectorLock 6y ago
  Being amoral loses its advantage when every other player is similarly feckless.
  - DataWorker 6y ago
    Your point is that everyone who buys or sells assets is implicitly amoral? That seems a bit extreme though you are not the first to say it. One wonders how you can escape such condemnation yourself. Everything is a marketplace in some sense.
    - VectorLock 6y ago
      No I was simply saying that I can see why Martin's success with pharmaceuticals wasn't as easily replicated playing the stock market.
- jw1224 6y ago
  I’m a terrible trader, and had no shame in admitting it. The moment I saw red, I panicked and sold. If I had open orders on the market, I couldn’t concentrate on anything else. I found trading to be all-consuming, exhausting, and completely demoralising. But I also couldn’t bear to just let my hard-earned savings sit there, wasting away. A cup of coffee cost more than I was earning in annual interest! About 3 months ago, it suddenly dawned on me... If I know I’m too emotionally volatile to trade effectively, why not get an algorithm to do it for me? I don’t know much about the stock market, but I’m good with statistics and can write code. Why should the hedge funds have all the fun? I spent a month researching technical indicators and quantitative analysis, then another few weeks building my automated trading system from scratch. I put it on a server last week, and it’s been chugging along quietly, 24/7, ever since. I don’t have to get involved in any way — it picks stocks automatically, A/B tests different algorithms against one another, and manages its own budgets. I just set it and forget it. The only time I hear from it is when it sends me a Slack notification — with moneybags emoji, of course — whenever it makes a profitable trade. Honestly, it’s been the most fun I’ve had on a personal project for years. It’s taught me lots, kept me busy during lockdown, and might one day provide a little extra cash. We’ll see!
throw0101a 6y ago
> Second, the "stock perspective". An investor would ignore the underlying company, but look at the stock itself. It didn't really matter if the company was doing good, but only if the stock itself had good potential. […] > Finally, the "game perspective". An investor would not really care about the stock, but only about the behavior of other investors. Well, momentum investing does give good returns over the market average: > Momentum investing is a system of buying stocks or other securities that have had high returns over the past three to twelve months, and selling those that have had poor returns over the same period.[1][2] * https://en.wikipedia.org/wiki/Momentum_investing https://en.wikipedia.org/wiki/Momentum_investing * https://en.wikipedia.org/wiki/Momentum_(finance) https://en.wikipedia.org/wiki/Momentum_(finance) Basically: > Every January 1st you look at the newspaper and find the best performing stocks of the prior year. You invest your money among those stocks and then go about your life for 12 months. > On January 1st of the next year you check the newspaper again to find the best performing stocks over the past year. Any of your current holdings that are no longer on the list are sold and any newcomers are added to your portfolio. > Repeat every year until rich. * https://ofdollarsanddata.com/let-them-vote/ https://ofdollarsanddata.com/let-them-vote/ Excess returns are respectable: > From 1927 to 2011, momentum had a monthly excess return of 1.75%, controlling for the Fama and French factors. Moreover, momentum is not just a US stock market anomaly. Momentum has been shown in European equities, emerging markets, country stock indices, industry portfolios, currency markets, commodities, and across asset classes. * https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2041429 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2041429
- spekcular 6y ago
  It seems like these excess returns are a special case of the general principle that taking on more risk yields higher average rewards at the cost of more volatility. (Compare stocks vs. bonds, for example [0].) Quoting from the third link above: > So it has high excess returns and has worked basically everywhere it has been tested, what’s not to like? As the authors go on to say, this incredible performance is also accompanied by periodic, soul-crushing declines: > "In 1932, the winners-minus-losers (WML) strategy [momentum] delivered a -91.59% return in just two months. In 2009, momentum experienced a crash of -73.42% in three months. Even the large returns of momentum do not compensate an investor with reasonable risk aversion for these sudden crashes that take decades to recover from." > This is why momentum investing can be so deadly. When things are going right, they can go very right, but when they go wrong, it can get ugly fast. [0] See https://www.investopedia.com/terms/e/equityriskpremium.asp https://www.investopedia.com/terms/e/equityriskpremium.asp or the corresponding Wikipedia article.
dustingetz 6y ago
The idea of "game" is emergent from "competition" which is the bottom principle of markets. Further, markets discover "price" which is a measurement of "balance of power" or simply "power" which is a base principle of "people"
aphextron 6y ago
I'd say this precisely mirrors my journey through day trading. You start out with the naive mindset, thinking you can make money by finding strong undervalued companies and investing in them with stocks/LEAPS. Then when you've lost enough money trying that, you move on to technical analysis, thinking you can time the momentum and price action of "predictable" securities. Still thinking it's the "market" you're trying to figure out. Then once you've lost enough money trying that, it finally hits you. I've been the sucker all along! The way you make money at this is by realizing it's all a game that you're playing against other individual people, not some abstract "market". You buy lots of the underlying stock of something that's trending and start selling OTM "lottery ticket" contracts to the hapless fools (of which you used to be), and you finally start winning.
- rtx 6y ago
  There is an old saying, two kind of people enter the market in the morning, one with money and the other with experience. They switch postions by day end.
- wlll 6y ago
  > You buy lots of the underlying stock of something that's trending and start selling OTM "lottery ticket" contracts to the hapless fools (of which you used to be), and you finally start winning. I'm relatively new to the stock market and still learning, can you confirm I understand? You buy (say) n * 100 of the underlying, then you just sell OTM options. There's no link between the the underlying and the option, it's just collateral for the options in case the purchaser decides to exercise? Your upside is that you make the premium + the strike price. You lose out if the share goes up past the strike + premium, but you win if it goes down, or not up enough? So for example with ABNB, last trade 203.25. You buy 100, sell one option bundle for Mar'19 '21 202.5 strike for $15.60 per share. If the share price goes above $218.85, you lose out on the difference, but you still get to keep the premium + strike, so you didn't really "lose" anything, you just didn't make as much. If the share never goes above $218.85, you keep the shares, and are up by the premium price (in simple terms). Is that the gist? Are there any other mechanics of this I've missed out? It seems Interactive Brokers will let me sell a call option without owning the underlying (edit: it seems there's a separate "write option" tool), so I guess if the option owner decides to exercise your broker somehow either just take the shares out of your account or makes you buy some? How far out do you sell OTM options for?
Galanwe 6y ago
This all looks like some kind of simple analogy to explain the factor model. The overall idea is that the price of a stock is explained by information (price, earnings, estimates, whatever...). If you then try to reduce the dimensions of this information, you could find various underlying drivers of the stock price. One could do that with a PCA, but the sheer amount of data, potential high collinearity between them, and difficulty of then making sense of the resulting coefficients is not practical. So traditionally the drivers are explained by carefully crafted factors defined by economists, and it works rather well. Some of these factors exist since a long time, and have proven to be persistent across decades. Interestingly, most of these factors are not tied to companies themselves (idiosyncratic) but rather on whole groups of stocks. Beta, country, sector, explain the vast majority of stock price movements. Your first quote seems to sort of describe fundamental factors (quality, value). The underlying idea being that fundamental indicators of the company (price of the stock versus amount of assets, versus earnings, etc), while compared one against each other, should tell you which stocks will perform better than others. These factors have proven to be less and less predictive in the last 20 years, with "value" even being notoriously a "bad bet". It's cyclic though, and we could expect (and it starts to be the case since some month now) a come back. Your second quote seems to describe more technical factors, such as momentum/reversal. The main idea being that there is inertia and correction in the way stock returns fluctuate. If a stock performs well, it will continue to do so, until some correction happens and it will revert to its short term mean, then it will restart, etc. Funds focused on these strategies are often labeled "CTAs" or "trend followers". The last part of the quote seems to describe well more modern factors, such as those found in "behavioral finance". The underlying idea being that actors of the stock market are humans, and as such are not fully rational and exhibit bias. If you understand these biases, you can benefit from them.
dehrmann 6y ago
> the game perspective was the only model that really matched the marketplace I agree, but I suspect the "company" and "stock" investors implicitly do, too. They invest with their strategy knowing that if they're right, they'll be rewarded by other investors demanding more of the stock, driving up the price. The main exception is dividend investors who just want their utility stock to keep paying the same dividend every quarter--that's a true "company perspective."

by elygre 6y ago

WalterBright 6y ago

> the game perspective was the only model that really matched the marketplace I don't buy that. If a company consistently grows and makes money, its stock is going up. The stock value is always going to revert to what the company is doing.

IgorPartola 6y ago

That makes a lot of sense. I think the GME debacle is a good demonstration of that. Shorting stocks is a part of the game. Some people exploited it, others found a counter move. I don’t believe GME is worth what the market currently values it at. But I also don’t see that fundamental value ever matching the market value anytime soon because the market has fully embraced its non-rationality regarding this stock. We aren’t trading shares in a specific company here. We are trading Melvin’a profits and/or losses.

TeMPOraL 6y ago
> But I also don’t see that fundamental value ever matching the market value(...). We aren’t trading shares in a specific company here. We are trading Melvin’a profits and/or losses. I think you're still doing L1/L2 thinking. The way I understand L3, there's no such thing as "fundamental value". There's only market value, that's determined by what people think the market value is. The extent to which it's correlated with real-world performance of a company is limited to how likely other people are to take that performance into account. Ordinarily, enough investors look at the state of the company to give rise to a correlation (if only because otherwise there's nothing external to look at!). Meme stocks are kind of extreme here, in that everyone knows that everyone else knows the stock is being traded on its market value. But that feels to me like a difference of a degree, not of a kind. And at this point I ask myself, how any of that is even useful to the society? Could we decouple the parts that let companies loan money and be accountable to the shareholders, separate them from the part where investors just play their spreadsheet MMOFPS? Or is the former always inherently going to turn into the latter, as people will always game it?
- criticaljudge 6y ago
  But it is obviously bullshit, as the real companies behind some stocks have a real value. Like for example they might own a building that is worth one billion dollars (simple example). If you take away all the stock market shenanigans, you still own part of that building via your stocks. As for the usefulness question: providing liquidity is useful. If an investor considers investing in some project, it helps his decision making if they can be reasonably sure that they will be able to sell their shares later on. And even if it wasn't useful, why would you care what other people do with their money?
  - j4yav 6y ago
    As a shareholder how do you access that value without stock market shenanigans coming into play? The only two that come to mind are companies about to go bankrupt, or a careful focus on dividend value (but dividends may not pay out the value of their static assets without having to sell them.)

YokoZar 6y ago

> An investor would not really care about the stock, but only about the behavior of other investors. This sounds like the idea of a Keynesian Beauty Contest (https://en.wikipedia.org/wiki/Keynesian_beauty_contest https://en.wikipedia.org/wiki/Keynesian_beauty_contest) "It is not a case of choosing those [faces] that, to the best of one's judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees."

agumonkey 6y ago
And I believe they orbit around the set of self fulfilling prophecies described in books. Fibonacci or similar simple arithmetic range estimates, deviation from the mean, etc.
- TeMPOraL 6y ago
  Isn't this the reverse of a self-fulfilling prophecy? A self-fulfilling prophecy attracts reality to the state it describes. The stock market, being anti-inductive, attracts reality away from whatever predictions being made - that is, for example, if I found a pattern that proves $GME reaches the Moon on Tuesday, enough other people would find that pattern too and start buying early, and $GME would reach the Moon on Monday, and probably crash on Tuesday.
  - AbrahamParangi 6y ago
    That’s an artifact of including a specific time in your prediction. If you made that same statement time-invariant “GME will moon” it becomes a self-fulfilling prophecy.
    - Udik 6y ago
      It's true, but making the statement time-invariant is also an oversimplification. Time does not end with the fulfillment of the prophecy and everybody knows that. Where does $GME go after reaching the moon? It can only stay there or go down, and in both cases people would start selling it.

dalbasal 6y ago

Well put. I am picturing as a triangle of three perspectives. That also gives you three (or 6) possible cross-perspective stories. The dynamics between these perspectives are where things start to get squirrely. 2021 memestocks like gme are good examples. Game perspective (no. 3) was the main story. Short squeezes. Retail investors getting cut off, etc. The stock perspective (no. 2) is now all about game investors. Can the stock attract or sustain all this interest from day traders and such. Company performance (perspective 1) is affected more by the company's stock than the other way around.

hckrnrd 6y ago
Through technology—global connectivity, mobile accessibility, and apps like Robinhood and their global counterparts—there’s no reason to expect the demand to wane. https://amp.scmp.com/business/article/3119779/futu-restore-trading-gamestop-shares-friday-founder-li-says https://amp.scmp.com/business/article/3119779/futu-restore-t...
pashamur 6y ago
The most important concept to understand about today's market is not short squeeze - it's gamma squeeze (which can lead to shorts being squeezed). It's about how traders got their hands on an unusual amounts of leverage (when you buy a call option, the market maker that sells it to you has to buy 5-10x the amount of stock in $$ value that it cost you to buy the option in order to hedge, and the closer the stock gets to your option price, the more hedging stock they have to buy) GME, Tesla, all of the high-flyers and all the craziness of the last few months were driven by gamma squeezes and the YOLO call option buying of /wsb (with some hedge funds obviously jumping on board)

imtringued 6y ago

The problem with stock market trading is that the need for liquidity grows with the size of the market, not with the number of traders. So if traders keep joining the market over and over again at some point there will be an excess of liquidity and there will be no positive sum money left to earn. It's like a real business. Once everyone has a car the only way to grow market share is by displacing other manufacturers. If you want to make a living as a trader you are supposed to look for very volatile and iliquid stocks. Traders make money off the difference of the current price and the actual value of the underlying company and in volatile markets that difference is very high.

hef19898 6y ago

The reason I will never touch day trading is, that it is basically the same thing HF traders do. Only 1000 times slower. So I will loose against these guys every single time. And even HF traders loose money. The only single stock investments I have came from employment, either through RSUs or employer sponsored stock buying programs. RSUs are just coming to you, and why would I not take stock at 50% discount? The only exception would be money I don't need. So gambling, as I don't care if I loose it or not. But usually I do other stuff with that money.

DSingularity 6y ago
You are wrong. HF traders front run to profit off individual trades by beating them to better prices. Day traders try to get an edge and exploit it to profit intraday by simply selling higher than they bought.
- andi999 6y ago
  And why would that be sustainably possible?
  - DSingularity 6y ago
    HF firms? Or pattern traders? I’m not sure if my answer is good enough but the volatility is always there to exploit.
- BasedInfra 6y ago
  Front running is illegal. Its payment for order flow which is earning off the spread while also keep it tight and liquidity in the market.
  - DSingularity 6y ago
    So... basically front running ?? That’s what it seems like you are describing. They make money when they manage to get ahead and provide the liquidity needed to fill the orders. What am I missing?

mgh2 6y ago

What about “ethical” investing? A company can perform good long term without regards to the negative externalities of its business

vasco 6y ago

Piggy backing on OP, if you're new to these topics and are interested in a more in-depth explanation about these stages as well as a number of other really interesting history check out https://en.wikipedia.org/wiki/How_Markets_Fail https://en.wikipedia.org/wiki/How_Markets_Fail

sandworm101 6y ago

Following that model, the variety of crypto currencies is the next evolution. The game can now be played as a pure game, without the economic uncertainties that come with underlying companies. All that matters are the actions of the other gamers. The gamestop fiasco would be an incidence of that crypto market mentality bkeeding back into a market not designed to handle such games.

DSingularity 6y ago
GameStop price spiked because of a short squeeze. Short squeeze happened because hedgefunds over extended in their short positions. Do you think GameStop was shorted more than float because of games learned by cryptocurrency traders? That’s a stretch.
- NOTaCODERR 6y ago
  It’s really interesting seeing how HN can be so uninformed when the topic changes to their area of expertise, this thread is insightful and I’ll use the search button to get an understanding of how many morons are on this forum, this is great for me as I’m not a coder and thought this crowd was ‘smart’.
  - ves 6y ago
    HN is not a smart crowd, but there are smart people on it.
    - hckrnrd 6y ago
      Can you define “smart crowd”? It seems like all large gatherings are by definition “dumb” due to group dynamics that add friction to challenge existing norms. The “smartest crowd” may be the America due to the freedoms to create as many crowds—within reason—as one wants. A crowd of crowds as it were.
  - deleted 6y ago
    [deleted]

criticaljudge 6y ago

I think you can still buy some stock with the intention of collecting the dividends or hoping for the stock's value to grow over time. There are simple calculations like Price/Earnings ratio that are usually published with every stock, that can help to see if it is a "gambling stock". You will of course hear all sorts of opinions about the stock market, including hardcore socialists who believe it is the root of all evil and so on. So take everything with a grain of salt.

rjbwork 6y ago
From a socialist (especially labor theory of value) perspective, you're buying and selling people's future labor. Socialists tend to think that the workers should get all of their labor. Obviously "root of all evil" is somewhat hyperbolic, but based on even passing knowledge of socialism, it is easy to see why a socialist might consider it to be an evil game. Per your previous sentences though, a common refrain on /r/WSB is "Sir, this is a casino".
- criticaljudge 6y ago
  It doesn't make much sense, as owning a stock does not give you any entitlement to the future labor of employees. Also employees can buy stock themselves, which arguably is superior to forcing them to be stakeholders in the company they work for, as it is voluntary. But the labor theory of value also doesn't make sense to begin with (if you disagree, I'd like you to pay me 10000$ to dig a hole in front of your front door, which would be hard work and therefore definitely worth 10000$), it's probably moot to discuss. I don't think /r/WSB is representative of the stock market as a whole. The stock market is just people trading. Some do stupid trades, some do smart trades. To cherry pick some stupid trades and claim it is all a casino is crazy, imo. Personally, I am a freedom guy - I think people's freedoms should be maximized. The alternative to "letting the people trade" is to regulate what people invest in. In my country, it gets harder and harder to invest in anything but the government pension, as every other asset class is being destroyed with taxes and risk of socialist pawning. There are also rules. It is just another tentacle of the "nanny state", preventing people from making potentially harmful decisions. But it limits freedom. Especially people on Hacker News (formerly Startup News) should understand. Should people be allowed to do Startups? It's a very risky undertaking which might lose you money.

jariel 6y ago

It's called: Value investing, technical investing, speculating. 'RobinHood' style 'investing' means that people have access to 'data' which makes them feel 'informed' but for the most part they are making totally random guesses, which implies a kind of distortion of self awareness. In other words - they are RobinHood fish handed to the sharks who have more information, knowledge, and leverage via tech, other services and especially access to capital. But - with the underling caveat that as stocks go up overall, even random trading can yield what is perceived to be a slight win over time as stocks overall go up in value. This has the effect of actually making a lot of small winners and having retail investors believe they are actually making 'smart bets' when really they are just riding the market trend. Compound this with the fact there is a lot of noise in every direction, and that random bets sometimes do turn out relatively well - and a 'single win' will be interpreted by winners as due to 'intelligence' when really it was just random (this happens to everyone, even institutional investors who always over-attribute their wins) - making people feel they are 'smart'. Of course, the 'bad bets' are attributed due to 'bad luck' and not 'bad investing'. With slack in the economy and enough of the proles playing games on the market, it can really do things to stocks (Tesla, Nikola, Game Stop obviously). In the end this means that it's hard to fathom if it's actually good or bad for companies, and that the analogy is a little bit like playing poker with better players but the pot just magically grows a bit without anyone noticing (i.e. market rising). It also creates a little bit of Ponzi-ish mania reminiscent of 2000 where the saying used to be 'when your cab driver is giving you stock tips it's time to get out' with the major caveat that the Fed is creating so much liquidity that is getting dumped into stocks ... that it actually just might be rational to pick stocks randomly and even trade them, because the 'harm' of playing against sharks is less worse than not playing at all, and that being 'in' the market, even on roughshod terms, is better than holding cash. It's a whole pile of weird dynamics playing out at the same time, and I hope it ends well. Edit: I was corrected by a commenter below, I may have misappropriated 'Value Investing' which can be a form of technical investing, but subject to interpretation i.e. Warren Buffet doesn't make a pure technical analysis of 'under valuation', he's definitely looking at the management team, the viability of the company etc. but of course looking at that in the context of pricing itself. No investment strategy can avoid deferring the price of the stock as many 'great companies' are clearly overvalued at any given time.

dfgdghdf 6y ago

Another way of describing the "game perspective" is simply: "a stock is worth what someone else will pay for it". This sounds obvious, but the implication is that the stock price has no direct connection to how a company performs.

imutemyteam 6y ago
and not just that, it is literally an information game. You hear that the company's latest car model failed after seeing the quarterly figures. Obviously, the stock price will go down? Wrong, the market already knew that the car model failed, and the current price is already adjusted for that. Stock market trading is only worth it if you have an information advantage. And obviously it is the one with the most capital that has the highest information advantage. Anyone debating on the internet that "one could make money in the stock market by studying books" is such a joke. Who is going to have more information, the average joe with a book he read; or the guy with a billion dollars with information streaming into his AI.
- dasil003 6y ago
  Yes but what information is important enough to move the stock price? I agree it’s foolish for individuals to try to compete with professionals, especially on a short-term window. For longer-term investing I believe the playing field is more level because once you go 5+ years out no one really has an information advantage and a huge proportion of traders aren’t even thinking on that horizon.
  - kqr 6y ago
    The information flows are also incredibly complex and self-reinforcing with all sorts of impenetrable feedback loops. Low wheat yield one year can cause reverberations throughout the world for many years to come. These can affect strategic decisions by businesses, which then affect strategic decisions among their suppliers, and so on. Eventually the effects of weather patterns die out, but not before they have (perhaps almost imperceptibly) affected every business around the world, perhaps many decades after the initial event. This, anyway, is how Mandelbrot speculated the autoregression, correlation, and long-term dependence of the markets might arise. Trying to figure out the effects of an event in that world beyond the simplest, first-order ones is futile, no matter your resources.

anonu 6y ago

I 100% agree with that breakdown. But I disagree that the game perspective "matches the market". The beauty of the marketplace is that there are all types of people in the sandbox: fundamentals, macro, hedgers, short-sellers, punters, high-frequency traders, mean-reverters, money managers, pension plan managers. And all of these people have slightly different time horizons ranging from microseconds to years. The market concept is this beautiful thing that supports all these people: aided by strong regulation, strong oversight, and better technology.

ilkan 6y ago
One could say marketplace is a category of game field where the rules and objectives are different for many participants. I want to sell my apples for the maximum possible profit today; she wants to sell both her apples at max profit and lettuce at max speed within its shelf life; the customer wants a decent lunch. Different measures for success, different time limits, different strategies in the common marketplace.

JohnJamesRambo 6y ago

I think the problem with this is it works great in a bull market but when the recession man comes the stock values get pared down to what the companies are really worth.

GuB-42 6y ago
It is the same thing with a bear market, that's the reason why shorts exist. It I think people will think a company is overvalued, then I can short a very good company and make money.

gen220 6y ago

The value investor type (buffet etc) would call this speculation, not investing. Speculators control all of the short term movements (everything on a time scale of <1 year). Sometimes when new financial instruments (what value investors would call fads) are created, they can control it for years (securitized junk bonds, in the 80s, sub prime mortgages in the 2000s). But the pricing of securities in the market has always regressed to fundamentals in the long arc of history. The value investor types agree with the nasdaq guy, though. All institutional investors (even the pension fund managers!) behave like speculators, since at least the 80s. It’s just how the incentives are structured. It’s important to understand how they think, because you don’t want to be trampled by them. But playing their game is not the way to win in the long term.

guerrilla 6y ago
> But the pricing of securities in the market has always regressed to fundamentals in the long arc of history. I don't doubt this but got any good references?
- gen220 6y ago
  Whenever markets have "crashed", it's usually been a reversion to fundamentals. See the bond market crash of the 80s, the sub-prime mortgage crisis of the 00s. The reality is that the cash flow and assets underlying these securities were overpriced. In spite of it, institutional investors speculated the price up for years. People thought they had found a way to "cheat" risk, turning fundamentally risky (and therefore, low-value) assets into something more valuable. They were wrong! Other times, the market is simply too optimistic (dot-com bubble), and attaches large valuations to companies with non-existent cash flows (i.e. little fundamental value). We're arguably in a similar current today, although it's not nearly as bad, imo. The companies that get overblown valuations today at least have revenue, albeit some more legitimately than others (TSLA vs UBER).

RivieraKid 6y ago

The correct perspective, aka reality, is that market value gravitates towards the intrinsic value in the long-term. And if you're a very long-term investor, you can ignore the market price and just collect the dividends. By intrinsic value I mean the sum of all expected future cash-flows where each cash flow is adjusted for time and variance (risk).

throw14082020 6y ago
This is the conventional retail investor perspective. But also, its a tautology. gravitates toward intrinsic value? The current price is the intrinsic value, the market prices in all durations, short or long run. What you're trying to say long term market value correlates with technical analysis, but is this true? You can't prove/ disprove this, because its "intrinsic value" can just be replaced with "price". So IMHO, your words are equivalent to: "The correct perspective, aka reality, is that price gravitates towards the price in the long-term."
- RivieraKid 6y ago
  I would say that what you're saying is the typical retail perspective, this view is common. Market price and intrinsic value are different concepts. Google Aswath Damodaran's writing on this topic. When GameStop was $400, the price was well above intrinsic value for example so I knew it would gravitate down.
rdtwo 6y ago
That’s fundamentally true because all stock values tend to go to zero over a long enough period of time. Not a lot of companies survive 100 years for example
- RivieraKid 6y ago
  If a company goes bankrupt, you can get a good estimate of the true intrinsic value at a previous point in time by summing all cash flows paid to shareholders adjusted for time and estimated risk.
6y ago

dmos62 6y ago

I'd say that the second and third perspectives are really the same. You'd be left with the actual in-world company vs. the in-market stock. The duality stems from a stock having two values that can be at odds with each other: real-world value and market value. In some circles the two perspectives are called fundamental trading and technical trading. One extreme of technical analysis is looking only at price and volume charts, sometimes even vertically flipping the chart to more completely detach from any real-world notions you might have about the instrument.

shawnz 6y ago

I think a better distinction would simply be whether you are aiming to profit from speculative movements (gambling) or risk premiums (investing). Any kind of technical analysis, fundamental analysis, day trading, etc falls into the first category. Passive investing, factor investing, investing in ETFs, etc falls into the second.

Closi 6y ago
Technical analysis is definitely part of long-term investing (e.g. at the most basic, work out how much profit the company is making compared to the market cap and what dividends will be paid over the investment period)
- acover 6y ago
  Technical analysis refers to only looking at the price history of a stock. You are referring to fundamental analysis. https://en.m.wikipedia.org/wiki/Technical_analysis https://en.m.wikipedia.org/wiki/Technical_analysis Fundamental analysis still requires you have an edge over other investors. Passive does not.
  - Closi 6y ago
    Doh.

koboll 6y ago

It's odd to read this, since so much of my money is parked in index funds, probably for decades, simply because stocks are more likely to perform well over the long term than other asset classes. I guess this can be read as an outgrowth of the "company perspective" in the sense that I think the American economy is fundamentally sound, but it's odd to call it that, since I couldn't care less about individual companies for the most part.

hourislate 6y ago

I believe "Market Wizards - Jack D. Schwager" highlights this. When speaking with some of the best and most successful traders in the markets, he found that the one common thing between them was "Game Perspective". They understood human emotion and had this desire to be the best at the game. The money/wealth was not the focus but the reward. If I remember correctly (read the book a couple of decades ago), most did not even have much of a Financial background if any. I recently read a blog post by Martin Shkreli who wrote that he was really bad at trading and doesn't participate. It takes very unique individual to be successful at trading and he is not one of them. He used the analogy where you can think of trading like a professional sport. Could you get into the Octagon with a UFC Fighter and expect to win because that is what you're doing when you try to trade. My take away is if a person like Shkreli doesn't stand a chance, then how would I....

VectorLock 6y ago
Being amoral loses its advantage when every other player is similarly feckless.
- DataWorker 6y ago
  Your point is that everyone who buys or sells assets is implicitly amoral? That seems a bit extreme though you are not the first to say it. One wonders how you can escape such condemnation yourself. Everything is a marketplace in some sense.
  - VectorLock 6y ago
    No I was simply saying that I can see why Martin's success with pharmaceuticals wasn't as easily replicated playing the stock market.
jw1224 6y ago
I’m a terrible trader, and had no shame in admitting it. The moment I saw red, I panicked and sold. If I had open orders on the market, I couldn’t concentrate on anything else. I found trading to be all-consuming, exhausting, and completely demoralising. But I also couldn’t bear to just let my hard-earned savings sit there, wasting away. A cup of coffee cost more than I was earning in annual interest! About 3 months ago, it suddenly dawned on me... If I know I’m too emotionally volatile to trade effectively, why not get an algorithm to do it for me? I don’t know much about the stock market, but I’m good with statistics and can write code. Why should the hedge funds have all the fun? I spent a month researching technical indicators and quantitative analysis, then another few weeks building my automated trading system from scratch. I put it on a server last week, and it’s been chugging along quietly, 24/7, ever since. I don’t have to get involved in any way — it picks stocks automatically, A/B tests different algorithms against one another, and manages its own budgets. I just set it and forget it. The only time I hear from it is when it sends me a Slack notification — with moneybags emoji, of course — whenever it makes a profitable trade. Honestly, it’s been the most fun I’ve had on a personal project for years. It’s taught me lots, kept me busy during lockdown, and might one day provide a little extra cash. We’ll see!

throw0101a 6y ago

> Second, the "stock perspective". An investor would ignore the underlying company, but look at the stock itself. It didn't really matter if the company was doing good, but only if the stock itself had good potential. […] > Finally, the "game perspective". An investor would not really care about the stock, but only about the behavior of other investors. Well, momentum investing does give good returns over the market average: > Momentum investing is a system of buying stocks or other securities that have had high returns over the past three to twelve months, and selling those that have had poor returns over the same period.[1][2] * https://en.wikipedia.org/wiki/Momentum_investing https://en.wikipedia.org/wiki/Momentum_investing * https://en.wikipedia.org/wiki/Momentum_(finance) https://en.wikipedia.org/wiki/Momentum_(finance) Basically: > Every January 1st you look at the newspaper and find the best performing stocks of the prior year. You invest your money among those stocks and then go about your life for 12 months. > On January 1st of the next year you check the newspaper again to find the best performing stocks over the past year. Any of your current holdings that are no longer on the list are sold and any newcomers are added to your portfolio. > Repeat every year until rich. * https://ofdollarsanddata.com/let-them-vote/ https://ofdollarsanddata.com/let-them-vote/ Excess returns are respectable: > From 1927 to 2011, momentum had a monthly excess return of 1.75%, controlling for the Fama and French factors. Moreover, momentum is not just a US stock market anomaly. Momentum has been shown in European equities, emerging markets, country stock indices, industry portfolios, currency markets, commodities, and across asset classes. * https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2041429 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2041429

spekcular 6y ago
It seems like these excess returns are a special case of the general principle that taking on more risk yields higher average rewards at the cost of more volatility. (Compare stocks vs. bonds, for example [0].) Quoting from the third link above: > So it has high excess returns and has worked basically everywhere it has been tested, what’s not to like? As the authors go on to say, this incredible performance is also accompanied by periodic, soul-crushing declines: > "In 1932, the winners-minus-losers (WML) strategy [momentum] delivered a -91.59% return in just two months. In 2009, momentum experienced a crash of -73.42% in three months. Even the large returns of momentum do not compensate an investor with reasonable risk aversion for these sudden crashes that take decades to recover from." > This is why momentum investing can be so deadly. When things are going right, they can go very right, but when they go wrong, it can get ugly fast. [0] See https://www.investopedia.com/terms/e/equityriskpremium.asp https://www.investopedia.com/terms/e/equityriskpremium.asp or the corresponding Wikipedia article.

dustingetz 6y ago

The idea of "game" is emergent from "competition" which is the bottom principle of markets. Further, markets discover "price" which is a measurement of "balance of power" or simply "power" which is a base principle of "people"

aphextron 6y ago

I'd say this precisely mirrors my journey through day trading. You start out with the naive mindset, thinking you can make money by finding strong undervalued companies and investing in them with stocks/LEAPS. Then when you've lost enough money trying that, you move on to technical analysis, thinking you can time the momentum and price action of "predictable" securities. Still thinking it's the "market" you're trying to figure out. Then once you've lost enough money trying that, it finally hits you. I've been the sucker all along! The way you make money at this is by realizing it's all a game that you're playing against other individual people, not some abstract "market". You buy lots of the underlying stock of something that's trending and start selling OTM "lottery ticket" contracts to the hapless fools (of which you used to be), and you finally start winning.

rtx 6y ago
There is an old saying, two kind of people enter the market in the morning, one with money and the other with experience. They switch postions by day end.
wlll 6y ago
> You buy lots of the underlying stock of something that's trending and start selling OTM "lottery ticket" contracts to the hapless fools (of which you used to be), and you finally start winning. I'm relatively new to the stock market and still learning, can you confirm I understand? You buy (say) n * 100 of the underlying, then you just sell OTM options. There's no link between the the underlying and the option, it's just collateral for the options in case the purchaser decides to exercise? Your upside is that you make the premium + the strike price. You lose out if the share goes up past the strike + premium, but you win if it goes down, or not up enough? So for example with ABNB, last trade 203.25. You buy 100, sell one option bundle for Mar'19 '21 202.5 strike for $15.60 per share. If the share price goes above $218.85, you lose out on the difference, but you still get to keep the premium + strike, so you didn't really "lose" anything, you just didn't make as much. If the share never goes above $218.85, you keep the shares, and are up by the premium price (in simple terms). Is that the gist? Are there any other mechanics of this I've missed out? It seems Interactive Brokers will let me sell a call option without owning the underlying (edit: it seems there's a separate "write option" tool), so I guess if the option owner decides to exercise your broker somehow either just take the shares out of your account or makes you buy some? How far out do you sell OTM options for?

Galanwe 6y ago

This all looks like some kind of simple analogy to explain the factor model. The overall idea is that the price of a stock is explained by information (price, earnings, estimates, whatever...). If you then try to reduce the dimensions of this information, you could find various underlying drivers of the stock price. One could do that with a PCA, but the sheer amount of data, potential high collinearity between them, and difficulty of then making sense of the resulting coefficients is not practical. So traditionally the drivers are explained by carefully crafted factors defined by economists, and it works rather well. Some of these factors exist since a long time, and have proven to be persistent across decades. Interestingly, most of these factors are not tied to companies themselves (idiosyncratic) but rather on whole groups of stocks. Beta, country, sector, explain the vast majority of stock price movements. Your first quote seems to sort of describe fundamental factors (quality, value). The underlying idea being that fundamental indicators of the company (price of the stock versus amount of assets, versus earnings, etc), while compared one against each other, should tell you which stocks will perform better than others. These factors have proven to be less and less predictive in the last 20 years, with "value" even being notoriously a "bad bet". It's cyclic though, and we could expect (and it starts to be the case since some month now) a come back. Your second quote seems to describe more technical factors, such as momentum/reversal. The main idea being that there is inertia and correction in the way stock returns fluctuate. If a stock performs well, it will continue to do so, until some correction happens and it will revert to its short term mean, then it will restart, etc. Funds focused on these strategies are often labeled "CTAs" or "trend followers". The last part of the quote seems to describe well more modern factors, such as those found in "behavioral finance". The underlying idea being that actors of the stock market are humans, and as such are not fully rational and exhibit bias. If you understand these biases, you can benefit from them.

dehrmann 6y ago

> the game perspective was the only model that really matched the marketplace I agree, but I suspect the "company" and "stock" investors implicitly do, too. They invest with their strategy knowing that if they're right, they'll be rewarded by other investors demanding more of the stock, driving up the price. The main exception is dividend investors who just want their utility stock to keep paying the same dividend every quarter--that's a true "company perspective."