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> But wouldn't the logic you employ apply to any strategy? You ask a good question. Consider a game like rock-paper-scissors. The goal is to predict your oppo

by czl 2y ago

> But wouldn't the logic you employ apply to any strategy? You ask a good question. Consider a game like rock-paper-scissors. The goal is to predict your opponent's move. Among all possible strategies, the random strategy is unique because it can't be predicted. Any other strategy can be anticipated by a smarter opponent. Being random means you can't lose to a smarter opponent. In trading, buying low and selling high requires prediction. Any strategy that relies on prediction becomes predictable to smarter opponents. Buy-and-hold index investing is the only strategy immune to this exploitation because you're effectively betting on everything. With passive index investing, your investments grow at the rate of business growth, making this strategy special.

mmarian 2y ago
I agree that competitors could outsmart you. But that's just like in any other kind of business. Doesn't mean entrepreneurs should give up trying to start a business. And the probabilities of you succeeding won't be good, of course. But neither are the chances of a startup succeeding good either.
- czl 2y ago
  Trading, particularly short-term "buy low, sell high" strategies, differs fundamentally from businesses that create products or deliver services. In trading, profits are often directly linked to the losses of other market participants, making it a zero-sum activity. In other words, for every winner, there must be a corresponding loser on the other side of the trade. This dynamic is similar to gambling games like Texas Hold'em poker in a casino setting. While skilled players may consistently profit at the expense of less experienced participants, the overall wealth within the game remains constant. No new value is generated; instead, existing wealth is redistributed among the players based on their relative performance and luck. When research time and fees are added trading is largely “negative sum”. NOTE: Some trading activities, such as market making and arbitrage, provide liquidity and help maintain fair pricing in financial markets but these operations require expensive low latency market access and are dominated by market insiders and are not possible for retail traders.
  - mmarian 2y ago
    While I do believe it provides liquidity in all cases, let's just focus on the zero-sum aspect. My response is - so what if it's a zero sum game? Why should someone care if that's the case? It's not as if all startups out there add value to the world.
    - czl 2y ago
      > It’s not as if all startups out there add value There is a fundamental difference between startups and "buy low, sell high" trading. Even if only a minority of startups succeed, they can create significant value for society by introducing innovative products, services, or technologies. In contrast, even if the majority of traders were "successful," there would be no net value created, as one trader's gain is another's loss, and the overall wealth in the system remains unchanged. > so what if it’s a zero sum game? While you may not initially be concerned about the distinction between positive-sum and zero-sum activities in society, studying history and economics may change your perspective. Positive-sum activities, such as entrepreneurship and innovation, contribute to economic growth and improved living standards, whereas zero-sum activities, like “buy low sell high” trading, do not. > why should someone care? Consider this analogy: if "buy low, sell high" trading is like playing chess, and your opponents are a collection of the best chess engines money can buy, operated by the world's top experts (think Magnus Carlsen), how profitable can you realistically expect your trading to be? The odds are heavily stacked against the retail trader. Some professional traders pay brokers to have retail orders routed to them for this reason much like how professional poker players want to play amateurs for their income. While a small fraction of professional traders manage to beat the returns of buy-and-hold index investing, the fleeting existence of market-beating strategies is not a valid reason for the average investor to attempt them. Just as you cannot predict which lottery tickets will be winners, you cannot foresee which trading strategies will outperform. If this was possible highly paid professional traders that devote their life to it would be able to do it but only a few actually do and luck plays a big role in their success. Markets have “seasons” and what seems to work in one season can be devastating in another. Markets also change in response to the trading strategies being used (aka “reflexivity”) and “paper testing” can give false confidence.

by czl 2y ago

mmarian 2y ago

I agree that competitors could outsmart you. But that's just like in any other kind of business. Doesn't mean entrepreneurs should give up trying to start a business. And the probabilities of you succeeding won't be good, of course. But neither are the chances of a startup succeeding good either.

czl 2y ago
Trading, particularly short-term "buy low, sell high" strategies, differs fundamentally from businesses that create products or deliver services. In trading, profits are often directly linked to the losses of other market participants, making it a zero-sum activity. In other words, for every winner, there must be a corresponding loser on the other side of the trade. This dynamic is similar to gambling games like Texas Hold'em poker in a casino setting. While skilled players may consistently profit at the expense of less experienced participants, the overall wealth within the game remains constant. No new value is generated; instead, existing wealth is redistributed among the players based on their relative performance and luck. When research time and fees are added trading is largely “negative sum”. NOTE: Some trading activities, such as market making and arbitrage, provide liquidity and help maintain fair pricing in financial markets but these operations require expensive low latency market access and are dominated by market insiders and are not possible for retail traders.
- mmarian 2y ago
  While I do believe it provides liquidity in all cases, let's just focus on the zero-sum aspect. My response is - so what if it's a zero sum game? Why should someone care if that's the case? It's not as if all startups out there add value to the world.
  - czl 2y ago
    > It’s not as if all startups out there add value There is a fundamental difference between startups and "buy low, sell high" trading. Even if only a minority of startups succeed, they can create significant value for society by introducing innovative products, services, or technologies. In contrast, even if the majority of traders were "successful," there would be no net value created, as one trader's gain is another's loss, and the overall wealth in the system remains unchanged. > so what if it’s a zero sum game? While you may not initially be concerned about the distinction between positive-sum and zero-sum activities in society, studying history and economics may change your perspective. Positive-sum activities, such as entrepreneurship and innovation, contribute to economic growth and improved living standards, whereas zero-sum activities, like “buy low sell high” trading, do not. > why should someone care? Consider this analogy: if "buy low, sell high" trading is like playing chess, and your opponents are a collection of the best chess engines money can buy, operated by the world's top experts (think Magnus Carlsen), how profitable can you realistically expect your trading to be? The odds are heavily stacked against the retail trader. Some professional traders pay brokers to have retail orders routed to them for this reason much like how professional poker players want to play amateurs for their income. While a small fraction of professional traders manage to beat the returns of buy-and-hold index investing, the fleeting existence of market-beating strategies is not a valid reason for the average investor to attempt them. Just as you cannot predict which lottery tickets will be winners, you cannot foresee which trading strategies will outperform. If this was possible highly paid professional traders that devote their life to it would be able to do it but only a few actually do and luck plays a big role in their success. Markets have “seasons” and what seems to work in one season can be devastating in another. Markets also change in response to the trading strategies being used (aka “reflexivity”) and “paper testing” can give false confidence.