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I will preface this statement by stating that I know nothing about the stock market and let my retirement account be handled by an investor... What real math i

I will preface this statement by stating that I know nothing about the stock market and let my retirement account be handled by an investor... What real math is involved in predicting the stock market? I understand there is a lot of theory behind TRYING to predict it, just as there is a lot of study in trying to predict trends in the stock market, which is why you are better off investing in groups of stocks as opposed to a singled stock (there you go, that's the grand total of what I know about the stock market). But so far as shorting stocks (betting that they'll fall) and buying stocks (betting that they'll rise), there isn't much real math, is there? Isn't it all just a gamble? Not even a statistical gamble, like dice or cards, but a public market analysis with the uncertainty of public trading and public sentiment thrown in, not to mention the hope of government bailouts on occasion? I don't see a huge amount of difference in crypto except for physical assets, which don't cover the stock price for public companies, generally. Now, how horribly wrong am I? I'm willing to admit I missed the mark, entirely as I don't understand trading. That's what my broker does.

throw1234651234 4y ago
It's important to understand that your average Series 6,7,63-licensed "investment advisor" knows less about the stock market than your average crypto bro. They just follow a script of "invest into retirement-target fund over the long term". None of them adjust anything based on market conditions unless you get into "family office" territory at (at the very least) over 100 million in assets. A lot of people make the mistake thinking "investment advisor" bros know anything. - former "investment advisor" with all those licenses, CFA, etc
dragontamer 4y ago
> But so far as shorting stocks (betting that they'll fall) and buying stocks (betting that they'll rise), there isn't much real math, is there? A lot of the math is automated these days. PE ratios, SMA (simple moving average), etc. etc. The basis of most stock analysis is price per earnings, or also known as "How much does $1 of profits cost?". Ex: PE of 20 means that it costs $20 to buy $1/year of profits. PE of 100 means it costs $100 to buy $1/year of profits. Using this as a baseline, you can estimate the future performance of many stocks. You then correct for public sentiment, bailouts, supply changes (are chips getting rarer and/or more expensive?), and try to predict _future_ profits, not just historical profits. The company with the most profits, at the lowest price, wins in the long run. Buying $100/year worth of profits for just $1000 investment is better than buying $100/year worth of profits for $50,000. But the "math" is easy. You just take the profits from last year, then divide it by the #shares * $value of the shares. You can also try to be "forward-PE" by predicting next year's profits and dividing it with today's #shares * $value of shares. ------- The #shares changes over time. Companies can make new shares or "buyback" shares at any time. That is why when you hear about company "share buybacks", the stock goes up (fewer shares means lower PE, meaning the people who are buying the remaining shares get more $profits per $investment). ----- EDIT: Note that under this theory, it doesn't "matter" what the company does with its profits. Profits can go back to the investors through dividends. Or, profits can be spent back on the same company through Capital-Expenditures (ie: building bigger factories or larger systems). "Growth" companies issue no dividends, because they "recycle" all profits into growing. Or the company can buy another company with the profits. Etc. etc. While "Value" companies tend to return the money as dividends to the share holders. Shareholders don't really care. If the profits are given to the shareholders, then shareholders can buy up more of the stock (growing their %ownership, and they themselves get more % of the profits next cycle). If the profits are invested into itself, then shareholder value goes up as appropriate (instead of $1-million worth of factories, next year the company is doing everything with $1.1-million worth of factories and gets 10% higher profits all around). If another company was bought, same thing, except the factories are separated by different names / locations. Of course, the "details matter". Some industries are better suited for growth than others. But the fundamental assumption is "control more profits for fewer dollars". ------- EDIT2: Anyway, what ends up happening is that the math-part is easy. Its the prediction part that's hard.
skrtskrt 4y ago
The math that most investors (not traders) use isn't necessarily about trying to predict the market, at least in the short term - but to get signals like "this company is over/undervalued compared to competitors or compared to the size of market its targeting" etc. These types of analysis don't necessarily predict anything on their own especially in the short term, though they likely do have value in the long term when you stack up lots of these signals. The problem with applying math to crypto investing (not trading) is that there's no market, no sales, no cash burn rate, no actual accounting going on to base a longer term thesis on.
- deleted 4y ago
  [deleted]
- piva00 4y ago
  Exactly, the industry of trading relies on building good models. Running analysis to uncover more data points is part of it.
DeathArrow 4y ago
>I don't see a huge amount of difference in crypto except for physical assets, which don't cover the stock price for public companies, generally. Stocks represent part of real businesses which produce real goods or real services. So they are tangible. Crypto are just some bits somewhere. They don't represent anything meaningful.
- vladoski 4y ago
  Is a "dollar" tangible? It's just a number on a paper.
  - jfengel 4y ago
    There is a very large organization out there who pays in those dollars and demands taxes in those dollars. If you want to live in a certain piece of dirt, you will deal with that organization. That dirt is very tangible. So is the vast organization running that dirt: it builds roads, runs a military, and (in extreme cases) sends out people with guns if you don't pay those taxes. That makes those dollars pretty darn tangible.
    - robobonobo 4y ago
      I think the point being made is that we assign a value to arbitrary things. People often cite cryptocurrency as not having real tangible value but the same could be said about anything we collectively assign some value to it. I'd further argue that nothing truly has tangible value because by definition, value is an intangible concept. The question isn't whether it's tangible, but whether its value to risk ratio is good enough for you.
- junofan 4y ago
  Well, unless we’re talking about shares in a SPAC, which is a few pieces of paper filed with the State of Delaware’s Division of Corporations…
- id 4y ago
  Technically, stocks are also just some bits somewhere. Ownership in general is just an agreement. If you own a house, it's only really yours as long as people agree that it's yours and respect your ownership.
logifail 4y ago
> What real math is involved in predicting the stock market? Given the apparently inability of active funds to routinely outperform passive funds[0], "not much" would be my response. One could be really cynical and reduce it to: some people get lucky, some of the time. That's all. [0] https://www.ft.com/content/06317e0e-b6bf-4fdc-9255-cf664cb92062 https://www.ft.com/content/06317e0e-b6bf-4fdc-9255-cf664cb92... ( https://archive.ph/NumMp https://archive.ph/NumMp )
- DeathArrow 4y ago
  >Given the apparently inability of active funds to routinely outperform passive funds[0], "not much" would be my response. Renaissance Technologies and Two Sigmas are just two examples of firms that constantly beat the market using math, algorithms and machine learning. It's doable, but not easy.
  - Kranar 4y ago
    It's silly to say Two Sigma consistently beat the market. They have multiple funds and only one of their numerous funds (Two Sigma Enhanced Compass) has managed to outperform the S&P 500 over a 5 year period, the rest have significantly underperformed.
  - lbrito 4y ago
    Until the day they don't. This kind of thing is inherently un-provable. You can have a method that works stupidly well for decades, and then it stops working. Building a model that provenly (in the mathematical sense) works with X% efficiency would be akin to building a free energy device.
    - nightski 4y ago
      It's very likely you put your life on the line every day with things that can't be proven. That is engineering after all.
      - logifail 4y ago
epolanski 4y ago
> What real math is involved in predicting the stock market? Are we really comparing the two markets? Owning a stock means owning a piece of a business. If you have all the stock in the world, you seized all means of production, good job. If you own all the UnpossibleJimCoins in the world what exactly has changed? Oh but that coin is not insert another coin, it doesn't have the consensus/cult.
- capableweb 4y ago
  > Owning a stock means owning a piece of a business That is clearly not true. What you own, is something worth X amount of Y, where Y is what other believe it is worth. "Means of production" has a very specific meaning and what you're saying is not it.
  - conorcleary 4y ago
    Branching off, what I feel is more important is that in brokers like Robinhood you don't even OWN the underlying security of your investment; you're renting it. Not even that... you're being lied to about owning it.
    - throwawaytemp27 4y ago
      What are you talking about?
      - zrail 4y ago
        In the US stock ownership is ... complicated. Effectively all shares in all public companies are owned by the Depository Trust & Clearing Corporation[1]. When you buy a share of a company, you hold that share at a broker. That broker in turn uses a clearing company which then in turn moves shares around between accounts at DTCC on a net basis between brokers. The only company in this chain that knows what shares you own is your broker. To everyone else in the world your share is held by, for example, Fidelity or Vanguard. You retain every economic right to the share, you just don't _technically_ own it. This gets more complicated with margin accounts, where as part of the margin agreement you agree to allow your broker to lend your shares to shorts, so for some periods of time you may not actually own the shares you think you own. [1]: https://en.wikipedia.org/wiki/Depository_Trust_%26_Clearing_Corporation https://en.wikipedia.org/wiki/Depository_Trust_%26_Clearing_...
MattyMc 4y ago
> What real math is involved in predicting the stock market? I have a MSC in Statistics, studied quantitative finance. Generally I'd agree with you. For general investing there's often little math involved other than some simple ratios and comparisons. Three numbers I look at most often are the Price-to-Sales ratio, Gross Profit %, and annual revenue growth. There's no complex math involved here at all. Where investing does get mathy is in calculating risk. When constructing a portfolio, generally the aim is to maximize returns while minimizing risk below some threshold. There is some very interesting and fun maths involved in this process that is beyond the scope of general investing.
- surfpel 4y ago
  > There is some very interesting and fun maths involved in this process that is beyond the scope of general investing. Are there some search terms or resources you would recommend looking into to learn more about this fun maths?
  - FabHK 4y ago
    Look at the CAPM for the financial content, and mean-variance optimisation for the maths. It's basically minimising a quadratic function, but in many dimensions, with two constraints - the efficient frontier. You use Lagrange multipliers and arrive at a neat linear system. Lots of fun parabolas and hyperbolas :-)
    - UnpossibleJim 4y ago
      Awesome! Thank you!
  - scoofy 4y ago
    Nassim Taleb's academic papers are all about the fun math of risk-management. He basically invented the barbell/butterfly strategy which is effectively a "normal distribution risk profile" to "students t distribution risk profile" arbitrage, where you are making a big bet that the market underestimates both the downside risk and upside rewards of equities in general. Very bizarre strategy, but really, really interesting.
FabHK 4y ago
> What real math is involved in predicting the stock market? 1. Stock market valuation has a fairly tidy theoretical foundation that is not too much use in practice for prediction. (It is used for IPOs etc. in some form, when a market price hasn't been established yet.) It involves basic algebra, along the lines of sum_t=1^infty D/(1+r)^t = D/r, etc. Fisher Black (of Black-Scholes fame) memorably wrote: "An efficient market is one in which price is within a factor 2 of value", where price = market price, and value = true value, as determined by that tidy formula assuming you had all the correct inputs, which you don't. 2. Similar for FX and Rates, though there is a bit more to it. 3. In derivatives, you have much more sophisticated maths (stochastic processes, Ito calculus, PDEs, Monte Carlo). Its focus is not so much prediction of the future, but a) deducing the true current state of the market from observable prices, and then b) from that true state deduce the price of derivative products, and c) computing risks (partial derivatives), which then lets you d) synthesise these derivative products. But that's not very relevant here. 4. Trying to predict the market is a whole other ballgame. You can work with time series analysis, regression and more sophisticated statistical methods and ML, and use any number of inputs: price history, company fundamentals, macro fundamentals, text/sentiment analysis, order book (market micro structure), etc. Funny thing about this business is that there's a lot written about it, but those that have figured it out use it to make money, and don't write about it. 5. Now, cryptography involves real maths, but entirely different again, mostly number theory (such as n^p = n (mod p), for p prime). GP might have been complaining that many vociferous crypto bros lack the basics to understand the mathematical foundations of cryptography. Though, I must say, I think one can understand e.g. hash functions and asymmetric encryption etc. quite well from their functionality alone, without needing to understand the math behind it (just as you don't need to understand transistors to understand what a NAND gate does).
nurettin 4y ago
I write execution systems for hedge funds. Don't have fancy quantstatistician titles. Stock market has something called "fundamentals" which gives you insights into the real value of stocks. If a company invests $1bn to develop their business, their value will go up. Major oil producer goes to war? Crude oil futures will go up. 100% every time. It is not rocket science, and no astrology is involved. It is what people do that turns it into a gambling machine. They try to predict tomorrow's price by looking at chicken entrails and they get cocky and confident during bull runs. This behavior is not restricted to the crypto space.

throw1234651234 4y ago

It's important to understand that your average Series 6,7,63-licensed "investment advisor" knows less about the stock market than your average crypto bro. They just follow a script of "invest into retirement-target fund over the long term". None of them adjust anything based on market conditions unless you get into "family office" territory at (at the very least) over 100 million in assets. A lot of people make the mistake thinking "investment advisor" bros know anything. - former "investment advisor" with all those licenses, CFA, etc

dragontamer 4y ago

> But so far as shorting stocks (betting that they'll fall) and buying stocks (betting that they'll rise), there isn't much real math, is there? A lot of the math is automated these days. PE ratios, SMA (simple moving average), etc. etc. The basis of most stock analysis is price per earnings, or also known as "How much does $1 of profits cost?". Ex: PE of 20 means that it costs $20 to buy $1/year of profits. PE of 100 means it costs $100 to buy $1/year of profits. Using this as a baseline, you can estimate the future performance of many stocks. You then correct for public sentiment, bailouts, supply changes (are chips getting rarer and/or more expensive?), and try to predict _future_ profits, not just historical profits. The company with the most profits, at the lowest price, wins in the long run. Buying $100/year worth of profits for just $1000 investment is better than buying $100/year worth of profits for $50,000. But the "math" is easy. You just take the profits from last year, then divide it by the #shares * $value of the shares. You can also try to be "forward-PE" by predicting next year's profits and dividing it with today's #shares * $value of shares. ------- The #shares changes over time. Companies can make new shares or "buyback" shares at any time. That is why when you hear about company "share buybacks", the stock goes up (fewer shares means lower PE, meaning the people who are buying the remaining shares get more $profits per $investment). ----- EDIT: Note that under this theory, it doesn't "matter" what the company does with its profits. Profits can go back to the investors through dividends. Or, profits can be spent back on the same company through Capital-Expenditures (ie: building bigger factories or larger systems). "Growth" companies issue no dividends, because they "recycle" all profits into growing. Or the company can buy another company with the profits. Etc. etc. While "Value" companies tend to return the money as dividends to the share holders. Shareholders don't really care. If the profits are given to the shareholders, then shareholders can buy up more of the stock (growing their %ownership, and they themselves get more % of the profits next cycle). If the profits are invested into itself, then shareholder value goes up as appropriate (instead of $1-million worth of factories, next year the company is doing everything with $1.1-million worth of factories and gets 10% higher profits all around). If another company was bought, same thing, except the factories are separated by different names / locations. Of course, the "details matter". Some industries are better suited for growth than others. But the fundamental assumption is "control more profits for fewer dollars". ------- EDIT2: Anyway, what ends up happening is that the math-part is easy. Its the prediction part that's hard.

skrtskrt 4y ago

The math that most investors (not traders) use isn't necessarily about trying to predict the market, at least in the short term - but to get signals like "this company is over/undervalued compared to competitors or compared to the size of market its targeting" etc. These types of analysis don't necessarily predict anything on their own especially in the short term, though they likely do have value in the long term when you stack up lots of these signals. The problem with applying math to crypto investing (not trading) is that there's no market, no sales, no cash burn rate, no actual accounting going on to base a longer term thesis on.

deleted 4y ago
[deleted]
piva00 4y ago
Exactly, the industry of trading relies on building good models. Running analysis to uncover more data points is part of it.

DeathArrow 4y ago

>I don't see a huge amount of difference in crypto except for physical assets, which don't cover the stock price for public companies, generally. Stocks represent part of real businesses which produce real goods or real services. So they are tangible. Crypto are just some bits somewhere. They don't represent anything meaningful.

vladoski 4y ago
Is a "dollar" tangible? It's just a number on a paper.
- jfengel 4y ago
  There is a very large organization out there who pays in those dollars and demands taxes in those dollars. If you want to live in a certain piece of dirt, you will deal with that organization. That dirt is very tangible. So is the vast organization running that dirt: it builds roads, runs a military, and (in extreme cases) sends out people with guns if you don't pay those taxes. That makes those dollars pretty darn tangible.
  - robobonobo 4y ago
    I think the point being made is that we assign a value to arbitrary things. People often cite cryptocurrency as not having real tangible value but the same could be said about anything we collectively assign some value to it. I'd further argue that nothing truly has tangible value because by definition, value is an intangible concept. The question isn't whether it's tangible, but whether its value to risk ratio is good enough for you.
junofan 4y ago
Well, unless we’re talking about shares in a SPAC, which is a few pieces of paper filed with the State of Delaware’s Division of Corporations…
id 4y ago
Technically, stocks are also just some bits somewhere. Ownership in general is just an agreement. If you own a house, it's only really yours as long as people agree that it's yours and respect your ownership.

logifail 4y ago

> What real math is involved in predicting the stock market? Given the apparently inability of active funds to routinely outperform passive funds[0], "not much" would be my response. One could be really cynical and reduce it to: some people get lucky, some of the time. That's all. [0] https://www.ft.com/content/06317e0e-b6bf-4fdc-9255-cf664cb92062 https://www.ft.com/content/06317e0e-b6bf-4fdc-9255-cf664cb92... ( https://archive.ph/NumMp https://archive.ph/NumMp )

DeathArrow 4y ago
>Given the apparently inability of active funds to routinely outperform passive funds[0], "not much" would be my response. Renaissance Technologies and Two Sigmas are just two examples of firms that constantly beat the market using math, algorithms and machine learning. It's doable, but not easy.
- Kranar 4y ago
  It's silly to say Two Sigma consistently beat the market. They have multiple funds and only one of their numerous funds (Two Sigma Enhanced Compass) has managed to outperform the S&P 500 over a 5 year period, the rest have significantly underperformed.
- lbrito 4y ago
  Until the day they don't. This kind of thing is inherently un-provable. You can have a method that works stupidly well for decades, and then it stops working. Building a model that provenly (in the mathematical sense) works with X% efficiency would be akin to building a free energy device.
  - nightski 4y ago
    It's very likely you put your life on the line every day with things that can't be proven. That is engineering after all.
    - logifail 4y ago

epolanski 4y ago

> What real math is involved in predicting the stock market? Are we really comparing the two markets? Owning a stock means owning a piece of a business. If you have all the stock in the world, you seized all means of production, good job. If you own all the UnpossibleJimCoins in the world what exactly has changed? Oh but that coin is not insert another coin, it doesn't have the consensus/cult.

capableweb 4y ago
> Owning a stock means owning a piece of a business That is clearly not true. What you own, is something worth X amount of Y, where Y is what other believe it is worth. "Means of production" has a very specific meaning and what you're saying is not it.
- conorcleary 4y ago
  Branching off, what I feel is more important is that in brokers like Robinhood you don't even OWN the underlying security of your investment; you're renting it. Not even that... you're being lied to about owning it.
  - throwawaytemp27 4y ago
    What are you talking about?
    - zrail 4y ago
      In the US stock ownership is ... complicated. Effectively all shares in all public companies are owned by the Depository Trust & Clearing Corporation[1]. When you buy a share of a company, you hold that share at a broker. That broker in turn uses a clearing company which then in turn moves shares around between accounts at DTCC on a net basis between brokers. The only company in this chain that knows what shares you own is your broker. To everyone else in the world your share is held by, for example, Fidelity or Vanguard. You retain every economic right to the share, you just don't _technically_ own it. This gets more complicated with margin accounts, where as part of the margin agreement you agree to allow your broker to lend your shares to shorts, so for some periods of time you may not actually own the shares you think you own. [1]: https://en.wikipedia.org/wiki/Depository_Trust_%26_Clearing_Corporation https://en.wikipedia.org/wiki/Depository_Trust_%26_Clearing_...

MattyMc 4y ago

> What real math is involved in predicting the stock market? I have a MSC in Statistics, studied quantitative finance. Generally I'd agree with you. For general investing there's often little math involved other than some simple ratios and comparisons. Three numbers I look at most often are the Price-to-Sales ratio, Gross Profit %, and annual revenue growth. There's no complex math involved here at all. Where investing does get mathy is in calculating risk. When constructing a portfolio, generally the aim is to maximize returns while minimizing risk below some threshold. There is some very interesting and fun maths involved in this process that is beyond the scope of general investing.

surfpel 4y ago
> There is some very interesting and fun maths involved in this process that is beyond the scope of general investing. Are there some search terms or resources you would recommend looking into to learn more about this fun maths?
- FabHK 4y ago
  Look at the CAPM for the financial content, and mean-variance optimisation for the maths. It's basically minimising a quadratic function, but in many dimensions, with two constraints - the efficient frontier. You use Lagrange multipliers and arrive at a neat linear system. Lots of fun parabolas and hyperbolas :-)
  - UnpossibleJim 4y ago
    Awesome! Thank you!
- scoofy 4y ago
  Nassim Taleb's academic papers are all about the fun math of risk-management. He basically invented the barbell/butterfly strategy which is effectively a "normal distribution risk profile" to "students t distribution risk profile" arbitrage, where you are making a big bet that the market underestimates both the downside risk and upside rewards of equities in general. Very bizarre strategy, but really, really interesting.

FabHK 4y ago

> What real math is involved in predicting the stock market? 1. Stock market valuation has a fairly tidy theoretical foundation that is not too much use in practice for prediction. (It is used for IPOs etc. in some form, when a market price hasn't been established yet.) It involves basic algebra, along the lines of sum_t=1^infty D/(1+r)^t = D/r, etc. Fisher Black (of Black-Scholes fame) memorably wrote: "An efficient market is one in which price is within a factor 2 of value", where price = market price, and value = true value, as determined by that tidy formula assuming you had all the correct inputs, which you don't. 2. Similar for FX and Rates, though there is a bit more to it. 3. In derivatives, you have much more sophisticated maths (stochastic processes, Ito calculus, PDEs, Monte Carlo). Its focus is not so much prediction of the future, but a) deducing the true current state of the market from observable prices, and then b) from that true state deduce the price of derivative products, and c) computing risks (partial derivatives), which then lets you d) synthesise these derivative products. But that's not very relevant here. 4. Trying to predict the market is a whole other ballgame. You can work with time series analysis, regression and more sophisticated statistical methods and ML, and use any number of inputs: price history, company fundamentals, macro fundamentals, text/sentiment analysis, order book (market micro structure), etc. Funny thing about this business is that there's a lot written about it, but those that have figured it out use it to make money, and don't write about it. 5. Now, cryptography involves real maths, but entirely different again, mostly number theory (such as n^p = n (mod p), for p prime). GP might have been complaining that many vociferous crypto bros lack the basics to understand the mathematical foundations of cryptography. Though, I must say, I think one can understand e.g. hash functions and asymmetric encryption etc. quite well from their functionality alone, without needing to understand the math behind it (just as you don't need to understand transistors to understand what a NAND gate does).

nurettin 4y ago

I write execution systems for hedge funds. Don't have fancy quantstatistician titles. Stock market has something called "fundamentals" which gives you insights into the real value of stocks. If a company invests $1bn to develop their business, their value will go up. Major oil producer goes to war? Crude oil futures will go up. 100% every time. It is not rocket science, and no astrology is involved. It is what people do that turns it into a gambling machine. They try to predict tomorrow's price by looking at chicken entrails and they get cocky and confident during bull runs. This behavior is not restricted to the crypto space.