20 ms·

Why I don't trade stocks and (probably) neither should you

• lkrubner 13y ago
  My sense is that all the people who should read this either won't read it or, if they do, won't understand its message. Over the last 20 years there have been dozens of books, and thousands of articles, pointing out that few people can beat the market averages. Even professional investors, who devote their lives to following the market, only occasionally beat the market. Posts such as this one are logical and well-reasoned. There is ample documentation of the basic facts of the situation: chances are you can not beat the market average. Any person who, in the year 2013, is still managing their own investments, in hopes of beating the market averages, probably can not be swayed by a post such as this one. Who should manage their own investments? One could make an argument in favor of investing that is similar to the argument some people make in favor of gambling: think of it as a form of entertainment. There are also the rare individuals who have some method that has been shown to work and they follow it with great discipline. But aside from those who find it entertaining, like gambling, and those who have a proven track record, people should avoid trading stocks. But this advice will be ignored.
  • derleth 13y ago
    > There are also the rare individuals who have some method that has been shown to work and they follow it with great discipline. People like this can win at roulette, too. (Well, for a while.)
    • gjmulhol 13y ago
      There are a few traders in history that beat the market in a statistically significant way for basically their entire career. It is a small number <20, but they exist. The issue is that everyone thinks "I can do that". Most people can't.
      • bradleyjg 13y ago
        You'd expect that too. Get enough people flipping coins and a few of them are going to have long streaks of heads. Plus once you've had a record of success opportunities come your way that aren't generally available. You try and buy GS preferred stock with a 10% dividend and warrants on top and see how far you get.
        • zero_intp 13y ago
          one of the best ways to evidence a falsified data set on coin flips is to determine if long enough streaks are not present.
      • gabemart 13y ago
        >There are a few traders in history that beat the market in a statistically significant way for basically their entire career. Given the vast number of market players, what counts as "statistically significant"? A probability of seeing results at least as good as theirs by chance of 1 in 20? 1 in 100? 1 in 1000? 1 in 10,000?
  • grmarcil 13y ago
    I can't agree enough. Most (95-97%) of my investments are low-cost index funds. My strategy is built roughly off this article (http://www.forbes.com/sites/thebogleheadsview/2011/01/28/three-funds-to-own-now/ http://www.forbes.com/sites/thebogleheadsview/2011/01/28/thr...), adjusted for what I see as my short, medium, and long term goals (eg okay with some money in riskier, higher-return target assets for retirement savings, some more conservative things for saving for house downpayment, etc). That said, I do the occasional amateur stock trade with a small amount of funny money. Much to your point and the OP's point, these often go against me despite my hunch. CF my recent purchase of TSLA at $145 ('buying at the bottom') and my recent sale of bitcoin at $350 ('sell before the crash and buy back in').
    • sp4ke 13y ago
      The laws of stock markets do not apply to Bitcoin because is not a stock. It looks like money, a store of value, a free public ledger, a decentralized trustless information synchronization network ... it's all of these and probably much more than what we might think of.
      • grmarcil 13y ago
        The OP's advice, while phrased in terms of "trading stocks", is relevant to trading any individual financial assets. Not sure why some people have fixated on this as stock-qua-equity-only advice. The same advice applies to trading bonds, forex, options, etc. From a trading perspective, bitcoin is just a ridiculously volatile forex currency.
  • hsitz 13y ago
    "Even professional investors, who devote their lives to following the market, only occasionally beat the market." There are lots of investors and traders/speculators who beat the market. I think this is one of the main reasons people persist in trading despite reading articles/posts like the one of this thread. The key thing these people don't understand, though, is that the number of investors who do beat the market (at any given level of outperformance) is no greater than what is predicted by investment decisions governed solely by chance. In other words, there is no or at least very little evidence that the people who beat the market do so by making use of _skill_ (there is some evidence that skilled investors can expect to outperform the market by a percentage point or so per annum, i.e., small outperformance and few of these "skilled" investors). The statistical analysis of the performance of investors over last half century and more is basis of so-called "efficient market theory" (EMT), which most misunderstand. EMT does not say that investors can't outperform the market. This is obviously false, since many do. EMT says basically that investors should not expect to be able to use skill to outperform market; if they in fact outperform it is the result of chance, and there was equal chance of underperforming the market. I'm always amused at the number of people who read about EMT and discard it as "obviously false". Do they really think that high-powered intellects have been analyzing this stuff for decades and come up with something that can be rejected by a man-on-the-street as "obviously false"? Hmm, perhaps the man-on-the-street is misunderstanding what they're saying. Two good sources to start with are Malkiel's classic _A Random Walk Down Wall Street_, and William Bernstein's dependable investing guide _The Four Pillars of Investing_.
    • rdtsc 13y ago
      > at least very little evidence that the people who beat the market do so by making use of _skill_ Also there is a strong selection bias component. People who lose don't usually brag to their friends/news station/co-workers/blogs/twitter, those that beat the market do. This is the same as lottery. If you had to sit and watch a 1 min clip of everyone who bought a ticket and didn't win, just like people watch those that played and won. Nobody would probably buy lottery tickets. But because of the selection bias, it seems there is always so and so how "made lots of money on the stock market, so why can't you?"
    • brc 13y ago
  • rdtsc 13y ago
    > But this advice will be ignored. Another reason -- banks and other places that offer investment as a choice will heavily influence their client to invest. In anything, as long as it pays the fee. "Check out this new investment research tool, you can sort your stocks by such and such feature now". They don't care. They want you to click the "Trade" because they get paid when you do that.
  • Mikeb85 13y ago
    > Even professional investors, who devote their lives to following the market, only occasionally beat the market. It really depends how much money you're managing, and whose... If it's your own money, and it's not a massive amount, you can easily double your money or better every year. Returns go down as numbers go up, especially when you have clients.
    • chavesn 13y ago
      I'm sorry, but huh? By "easily" do you mean it happens for some measurable number of small-money participants (of which there are many, of course)? Or do you possibly mean that you invest in 10 different stocks and one doubles? This sounds like optimism bias. There is no basis for returns to "go down as numbers go up", except if you are forgetting to average in the losses when the numbers were small. (Maybe because they are small they don't feel like they "count"?)
      • Mikeb85 13y ago
        One word - liquidity. As the numbers go up, it's more difficult to trade since as your transactions become larger there's less potential buyers/sellers at a given price level. And when I say it's easy, I mean logistically and realistically possible. Few are good enough to make those returns, but it's very possible. No trader ever expects one stock to double. 5 percent a trade can get you 400 percent a year...
      • Mikeb85 13y ago
        More detailed response: > By "easily" do you mean it happens for some measurable number of small-money participants (of which there are many, of course)? I mean a relatively sophisticated trader, one who actually understands markets and understands where he can take advantage of markets, can achieve very high returns if he takes advantage of his, you could call it 'agile' position. For instance, it's quite common for a stock to gain 1-2 percent per day, and to go on a 10% rally within a week or two. Let's say I'm bullish on a stock. I'll wait for a 5% or so pullback, then watch it on a down day. I see a dip, I'll buy in. I could be up half a percent by day's end. Then, if I'm right, it'll rally up to 10% within 2 weeks. If I'm investing an 'optimized' amount (ie. one that's small enough to unload quickly, but big enough to make commissions a no-factor), then I can make money on a half-percent move. I can be happy with 2%, and very happy with 5-10%. If you repeat this enough, and have a batting average of 60% or higher (ie. consistently just over half with a very disciplined strategy), the interest compounds when you sell one stock to buy another. Let's add up numbers in 2 percent moves, times 10 trades. You wind up at ~122 dollars, or 22% percent up from your original amount. 50 trades, you're at 269 dollars. Over double. 50 trades isn't very much for a dedicated trader, and that's not even what you'd call 'day trading'. Compounding interest and math is fun, eh? > Or do you possibly mean that you invest in 10 different stocks and one doubles? That would be stupid. Investing isn't about shooting in the dark and hoping you hit something. It's about optimizing your return through solid principles, and not giving a shit about any single stock. > There is no basis for returns to "go down as numbers go up", except if you are forgetting to average in the losses when the numbers were small. (Maybe because they are small they don't feel like they "count"?) Volume is everything when trading. If your position in a single stock is too big, you'll have a hard time loading or unloading a position. When you get into managing large amounts of money, it gets more difficult to get in and out of positions, which affects how much of a return you can make.
• tedunangst 13y ago
  Better title would be about not picking stocks. If you're buying index funds, you're trading stocks by definition.
  • sseveran 13y ago
    That is factually inaccurate. There are a wide variety of ETFs which have non-equity instruments as the underlying assets.
    • tedunangst 13y ago
      Well, I did say index fund, not ETF. I assume the article was talking about stock index funds. I'd add that if you're not smart enough to pick a stock, you're maybe not smart enough to pick a different asset class.
      • grmarcil 13y ago
        You can have index funds composed of non-stock assets. Eg Vanguard's Total Bond Market Index Fund https://personal.vanguard.com/us/funds/snapshot?FundId=0084&FundIntExt=INT https://personal.vanguard.com/us/funds/snapshot?FundId=0084&...
      • sseveran 13y ago
        Asset class correlations are more stable then stock correlations and thus can be used more reliably in portfolio construction. If you are not smart enough to pick a stock or asset classes then your money will whither away.
• wpietri 13y ago
  Well put. I used to work for financial traders. I even used to have a brightly colored coat and a trading floor badge, back when that mattered. I've read The Economist for 20 years. Despite understanding the financial markets better than most, I never trade individual stocks. Everything's in low-load funds; I look at the allocations every year or two. Why? Because I know what I'm up against. I have friends who are still in the industry, deploying vast computational and financial resources to make money. For any given stock, there are people who follow the company and its markets more closely than I ever will. And all of those people regularly fuck up, losing millions. I'm not interested in stepping to that. And there's another big reason: it's a giant minefield of cognitive biases and emotional weirdness. For example, you can think of the market as a random walk with an upward bias. Year on year, you're generally up. But day by day, you're can be down nearly as often as up. Because of loss aversion [1], you'll feel the losses more strongly than the gains. Looking at your stocks every day will at least add to your stress levels, and maybe your decisions will get thrown off. (This example is taken from the excellent Fooled by Randomness [2], which I recommend to anybody who wants to trade, or even understand the financial markets.) I focus my energies on areas where I have a an actual advantage, and I encourage others to do the same. [1] http://en.wikipedia.org/wiki/Loss_aversion http://en.wikipedia.org/wiki/Loss_aversion [2] http://www.amazon.com/Fooled-Randomness-Hidden-Chance-Markets/dp/0812975219 http://www.amazon.com/Fooled-Randomness-Hidden-Chance-Market...
  • nickff 13y ago
    Another interesting read in this vein is "Luck Versus Skill in Mutual Fund Performance" by Eugene Fama (who won the Nobel prize in economics this year).[1] He shows that even the most well-informed and intelligent investors cannot predictably outperform the market; some do very well and some do very badly, but this is exactly what you would expect from a large number of market participants pursuing different rational strategies. [1] http://www.dimensional.com/famafrench/2009/11/luck-versus-skill-in-mutual-fund-performance-1.html http://www.dimensional.com/famafrench/2009/11/luck-versus-sk...
    • mjn 13y ago
      some do very well and some do very badly, but this is exactly what you would expect from a large number of market participants pursuing different rational strategies This suggests a possible scam (probably not an original suggestion). Set up some large-enough number, maybe 30 or 40, shell investment companies. Each one trades according to a very specific but randomly generated strategy, which it publicly announces in advance. (Some care would have to be taken in generating the strategies, but they should be such that they're expected to match the market, when taken as an ensemble.) After a few years, some of these strategies will have turned out to be successful, others haven't. Quietly wind down the unsuccessful ones. The successful ones now look prescient: this firm announced in, say, 2008, that the market conditions were such that strategy X is clearly correct going forward. And history has now borne them out: here, five years later, their prediction was right and their portfolio is up 1000%. Of course, there is missing information, that this was just one of 40 shell companies, and overall returns across all companies did not beat the market. But now this successful company can sell investment services/consulting/whatever on the basis of its individual track record. I suspect actual investment consultants are effectively doing a distributed, non-coordinated version of this, even if not intentionally.
• ac1294 13y ago
  This blog post gives off the impression that you must beat the market to make money. Given the author's CFA and enrollment at a top business school, I'm sure the author knows this isn't true. But if I didn't know much about the stock market, I'd think it was zero-sum just from reading this blog post. Nevertheless, I agree with the premise of this blog post, but I think the author should put more emphasis on the difference between passive management and active management. Passively investing makes sense -- you can earn higher returns if you're willing to take on higher risk. Actively investing is what the author and I have issue with -- picking individual companies rather than trading the market as a whole.
  • xerophtye 13y ago
    From what i understand, he's not saying that it's a zero sum game. (atleast i didnt get that impression). His major point is very elegantly summarized in the Cecil and Yves story. If you're one of the early few who recognized the opportunity, then yes, you may benefit from it. Because THAT is when the price of the stock is comparatively more accurate. But if you're late (which means you're the avg case), then by the time you buy the stock, the price has already gone "up" due to people buying a lot of it. Sure, it may still go even further up, (case in point: bitcoins), but you can never be sure of that. So he just means you need to be better than the avg at predicting stuff to make some serious profit (and also to make up for your opportunity cost)
• colanderman 13y ago
  I mostly agree, but what of stocks with clear value (say utilities stocks with consistent dividends) that are underpriced due to a market downturn? The market isn't 100% efficient and there are plenty of dumb investors who follow herd mentality. EDIT: To clarify, this is a question; the article seems to be based on the assumption that the market is perfectly efficient; I am wondering how does the fact that it isn't factor in? I would think that one could make money by being reasonable in the face of unreason.
  • grmarcil 13y ago
    The same logic applies from the OP's article. You are assuming in these situations that you know better than the entire brain trust and computational resources of every Wall Street firm that these "stocks of clear value" are underpriced.
    • colanderman 13y ago
      But if that – the unstated assumption that the market is 100% efficient – is true, why do we see herd mentality in the stock market? (Why are SEC regulations in place to prevent runs on a stock?) Is your claim that there is enough "smart" capital to more than counter whatever "dumb" capital exists, and that it is fruitless for individual investors to make any money by betting against moves that seem largely caused by "dumb" capital? I'm not claiming I personally am smarter than every Wall Street investor combined. I'm claiming that every smart Wall Street investor combined might not have enough total capital to counter all the dumb investors out there, and hence there's money on the table. I don't know whether my claim is true, but the article doesn't address the effect of "dumb" money.
      • nickff 13y ago
        I would compare the stock market to a race track; not every betting man (or woman) is familiar with the horses and track, but if there are a few gamblers who have a reasonably good idea of the odds, they can 'correct' the odds by strategically betting for horses that are under-valued. This works for race tracks, and has never been disproved (or proved) in the stock market.
• drinkzima 13y ago
  I'm going to be a contrarian on this one. Markets are clearly more efficient at the top (and all but the most inclined wont be running their own hedge funds). Buffetts, Paulsons, etc cannot just move into a position on a whim. They thus require more asymmetric information for a trade to make sense. Inversely, smaller traders avoid the enormous position sizes that can make transacting difficult, and thus can benefit from increased mobility in the markets. This means less lucrative information advantages can be harnessed more easily. Additionally, there are inefficiencies that simply cannot be realized by large funds (see the Norilsk Nickel tender in 2011, "free" money for small investors: http://kiddynamitesworld.com/norilsk-nickel-russian-odd-lot-arbitrage-anatomy-of-a-trade/ http://kiddynamitesworld.com/norilsk-nickel-russian-odd-lot-...). I'll temper my entire statement by saying I agree with you for 99% of the population, but I do think people too easily punt on efficient market theory. I do believe the small, inclined trader can profit.
  • shortsleeves 13y ago
    Not to mention that the efficient market theory completely fails to explain the most basic boom-bust cycles: http://en.wikipedia.org/wiki/Efficient-market_hypothesis#Criticism_and_behavioral_finance http://en.wikipedia.org/wiki/Efficient-market_hypothesis#Cri...
    • nickff 13y ago
      No one has ever explained the cyclical recessions which we all observe; the efficient markets hypothesis does not directly address it.
• gregrata 13y ago
  AAPL @ 35.72 (430% gain) TIVO @ 8.48 (51% gain) NFLX @ 33.02 (1008% gain) I bought all of these at the above price points because I am in tech, have a strong sense of where things are going to go, and believed these companies (at the time that I bought them) nailed what the future was (and is) going to be. I obviously did so before others realized that they had, in fact, nailed it :) I get that I could have lost out, might have gotten lucky, etc. But I would argue that you CAN figure out that a company has really figured out something new, figure it out before others, and then bet on them... and win.
  • frinxor 13y ago
    there are a million people just like you. some percent of them beat the market, and think they are geniuses. others think they were just unlucky, but had a great idea/strategy. all of them are missing the point.
  • gjmulhol 13y ago
    Over that time was also a massive tech bubble. What did the S&P 500 do over that time? A tech fund? Actually, I have that answer. If you bought AAPL on Feb 25, 2008 (or thereabouts, it was the only time in the last 10 years it was around that price) you could have bought an S&P index fund at 1,222. Today, that would be a 50% unrealized gain -- not that great. BUT, were you rebalancing to your optimal portfolio, you would have been continuously selling as it rose. In the crash of 2008, you would have had no choice -- based on your optimal portfolio -- to buy a bunch more S&P, which you would have then tripled. Again, not near your AAPL number, but the risk profile of that investment is also much lower. Add the fact that you have focused on the tech sector because of your perceived knowledge, and that is why you have a higher return. But you are betting on the belief you have in these companies. There is an emotional component. I personally believe AAPL is laughably undervalued at 550, but there are lots of smart people out there -- smarter than I am -- that have much lower price targets and are actively shorting the stock. I have 5 stocks in my portfolio that I believed in -- thought they had something -- and really know the field well -- graduate degree and years of work experience well. Some have panned out, others haven't. Over the long term -- retirement length (>20-30 years) -- index funds and a balanced investment strategy is objectively better. Also: If you bought AAPL at $35.72, your unrealized gain today is more like 1456% (based on a last trade price of 550.06). Disclaimer: I am also at a business school, so maybe we are all just being sold the same snake oil. I sorta doubt it, though. Both of our schools are respected, and our professors are largely people who have spent a lot of time learning these lessons the hard way.
• minimax 13y ago
  I sold all my stocks and bought into crypto currencies since they're the next big thing. I even opened up a new credit card to leverage up since you can't get a proper margin account on Mount Gox. I'll be able to pay off my mortgage in a few months at this rate! I suggest everyone wait a couple of days and then do the same thing so that I'll have someone to sell to when I need to realize my profits.
  • Afforess 13y ago
    Seems like you could create a startup to help other people do the same thing.
    • jamesbritt 13y ago
      Sell the shovels to the gold-diggers.
  • nostromo 13y ago
    Are you joking? I honestly can't tell.
    • minimax 13y ago
      Yes I thought it was obvious from the last sentence (i.e. selling on to the greater fool).
      • IvyMike 13y ago
        Bitcoin discussions on Hacker News are subject to Poe's Law.
        • simplemath 13y ago
          >discussions
  • nickff 13y ago
    Speculation is a common strategy, you may win or lose, but believing that it is a 'sure thing' is a bet that markets are irrational, where risk/return models do not apply. You may be right, but this has never been proven, despite ample efforts.
• c2 13y ago
  It's patently false the claim that individual investors generally don't beat the market, or that the ones that do only do so by chance. Warren Buffet, a very famous investor you may have heard of, even mentions that he knows plenty of small individual investors who follow many tenets of the philosophy of value investing and they have consistently beat the market. I, personally, have been individually investing, following the principals of value investing, knowing the companies I invest in, and asset allocation, diversification across industries, and I have slaughtered the market for over 20 years. All the points he raised in the article are valid, but they read like pop culture one liners. If you are serious about investing I recommend reading Ben Graham's Intelligent Investor and Security Analysis, and follow along with Buffet's letter to shareholders. Understanding the stock market takes time, and you won't find the answers in a 1000 word blog post.
  • danteembermage 13y ago
    I think the key here is that you are "buying" stocks rather than "trading" stocks. If you invest Warren Buffet style you make a significant investment in a company you think is a good value and you never sell. Thus, your transactions costs are exactly the same as someone buying a broad market ETF and you have more fun at the expense of a little diversification for a while. But once you get to 15 stocks you're basically diversified as long as you didn't industry clump. So, the only reason not to trade is that you should expect to do exactly as well as the market and pay a bunch of transactions costs which makes you strictly worse off, but the Buffet approach doesn't pay more than you would have anyway. A point not mentioned is that individual investors can have planning horizons 3 to 50 years long while a lot of Wall Street money is on a 3 month put up or shut up investment time frame. Strategies that take a long time to mature are tough to do when you can get performance-fired for not having your thesis pan out fast enough. You don't have that restriction with your own money.
    • charleslmunger 13y ago
      >but the Buffet approach doesn't pay more than you would have anyway. https://www.google.com/finance?q=NYSE:BRK.A https://www.google.com/finance?q=NYSE:BRK.A
• a8da6b0c91d 13y ago
  I'd take it a step further and say the advice in the first paragraph to put most of your money into equity index funds is also a bad idea. Going over a third in equities is questionable from a risk perspective.
• lincolnq 13y ago
  Hang on. I hear everyone recommend against stock trading by rolling out "you don't know more than the market". But the market price reflects an average, an expectation. And in certain conditions, it doesn't require much correct information to tip your expectation favorably. Imagine a theoretical market for a stock where the company will either succeed and be worth a billion dollars, or fail and be worth nothing. Right now the company is trading at a valuation of $10MM. So the "market" thinks the company has a 1% chance of succeeding, right? It seems to me that any belief you have which a) has some effect on the success probability of this company and b) differs from the average belief of everyone else can be used to update your probability on the overall success of this stock away from 1%, and cause you to want to buy or short the stock. For example, let's pretend the company were Tesla. You think Elon Musk is a badass, and you think badass founders have a substantially higher probability of their companies succeeding than the base rate. Further, you also think most people don't take this into account as much as you do. Shouldn't you be able to use this information to raise Tesla's success probability above baseline and therefore cause you to want to buy Tesla? To view this idea another way, imagine the market as a bimodal distribution of people who think the company will succeed and people who think it will fail. Most people fall into one of these two buckets. The market price is "obviously too low" if you're looking from the success bucket, and "obviously too high" if you're looking from the failure bucket. Now, if you have no information you should probably assign the "prior" which is the probability of success as determined by the market, but any information which updates you away from the prior makes the stock a good buy or good sell, I think.
  • nickff 13y ago
    For this to be the case, you would have to know more about the impact on 'badass'-ness on stock performance than the rest of the market, or have non-public information on Musk's 'badass' ways; if neither of these are the case, you are just gambling.
    • robmcm 13y ago
      You only have to know more than half of the market.
  • 13y ago
• morgante 13y ago
  Despite knowing this to be true, I still actively trade the majority of my investments. (My retirement fund is in low-cost index funds.) Why? Because I like playing the lottery with stocks. On average, I might do slightly worse than the market but I retain the potential for massive, life-changing upside. And that's really all that matters to me. If I put $100,000 into index funds I might reasonably expect that to be worth $108,000 next year. That would literally not change my lifestyle at all, as it's approximately equivalent to accepting 1 or 2 extra short contracting gigs. If I put $100,000 into stocks I personally pick, I might unreasonably expect it to be worth $1,000,000 next year. That would definitely change my lifestyle. I can also reasonably expect it to be worth $0, which I'm fine with considering I'm young and gainfully employed. I just don't see the problem with buying stocks as lottery tickets whose expected value is 1.03% (sub-market) but whose potential value is 1000%.
  • chavesn 13y ago
    > "it's approximately equivalent to accepting 1 or 2 extra short contracting gigs." Except: - You don't have to do the work (you are free to do more work or relax) - That's one or two gigs every year (until you choose to spend the money) - The gigs compound: in 9 years, it's 2-4, and in 18, 4-8 per year. I'm just providing an alternate viewpoint, but I don't disparage your right to play "the lottery" this way. I think that's a perfectly valid basis for a personal investment strategy. As you pointed out, it might be statistically worse, but you aren't interested in the median return, either.
    • morgante 13y ago
      > - The gigs compound: in 9 years, it's 2-4, and in 18, 4-8 per year. Ideally, my hourly rate also increases, though perhaps not exponentially. Still, I really meant the gigs purely as a comparison point... even $16,000 after 9 years isn't much of a lifestyle difference.
      • chavesn 13y ago
        That's true, and an important point: if you expect your personal earning power to grow at a rate far greater than 8%, then investing your principal now will have little effect one way or the other. But investing later will, so it's good to be prepared with the right strategy for you (whatever that is).
• gfodor 13y ago
  First, as soon as you start using phrases "beating the market" in terms of measuring your performance you get the bozo bit flipped from me. Comparing your performance to the market means nothing since it completely ignores risk. If you take on less risk than an equity fund then you should not automatically be disappointed if this index fund outperforms you. If you are doing no homework, picking stocks by throwing darts at a dartboard, and beat the index fund, then yes, you should be happy. Second, the question is "what is risk?" Academics will tell you risk is best proxied by volatility (or some measure derived from volatility.) Buffett will tell you this is bs and risk is essentially unmeasurable but can be hedged against by buying assets that seem underpriced through analysis and leaving a margin of safety in the price you buy the asset such that you can reasonably expect to have your principal returned if things go completely wrong. At the end of the day if you know something other people don't know, or can see things that other people can't see, your investments based upon this knowledge or vision can arguably be thought of as less risky as those done by those who don't have this perspective, even if they are the same investment. It's easy to think you are always going to be on the losing side of the trade but I also think that in certain scenarios, individuals can make good investing decisions if they have some specific domain knowledge. At the end of the day, Wall Street analysts are good at understanding and predicting certain characteristics of future cash flows, but are completely blind to things they didn't learn how to model in business school. The individual investor, particularly one who has deep understanding of specific domains, seems to me to have an advantage in certain trades not just because of their knowledge but because of the smaller position sizes they need to take as well. This blog post presents conventional wisdom about investing that is generally accepted as "the truth" for people who consider themselves reasonably informed and smarter than people who just gamble on stocks. However there are alternative viewpoints on security selection and overall risk management that stand far afield from the "shut up and buy index funds" camp that are not get rich quick schemes and are worth considering. Stock picking or more active investing in general being a fool's errand is far from a open-and-shut case. Buffett has been saying this for decades and basically makes the claim that every year that these "you can't beat the market, the market is efficient" views get perpetuated and magnified is a gift to those who see otherwise. (And his returns speak for themselves.) http://www.amazon.com/Quantitative-Value-Web-Site-Practitioners/dp/1118328078 http://www.amazon.com/Quantitative-Value-Web-Site-Practition... http://www.amazon.com/Expected-Returns-Investors-Harvesting-Rewards/dp/1119990726 http://www.amazon.com/Expected-Returns-Investors-Harvesting-... http://www.amazon.com/Jackass-Investing-Dont-Profit/dp/0983504016 http://www.amazon.com/Jackass-Investing-Dont-Profit/dp/09835...
• gjmulhol 13y ago
  Even better -- try to find a low-fee fund that rebalances for you. Ever do the financial model for never rebalancing v annual rebalancing v continuous rebalancing. Continuous rebalancing's returns are very significantly higher. This is basically Wealthfront's entire thesis.
• chavesn 13y ago
  A couple of the statements are inaccurate or a bit hyperbolic: - "In other words, the answer to "do we believe that our stock selection ability is significantly above average?" has to be a resounding, objectively justified "yes." " -- Actually, our "selection ability" doesn't need to be above average, since the average stock picker is not picking index funds. Index funds are used to proxy the average of the product (market), not the professional investor. Since index funds are the theoretical alternative, that's all we'd need to beat. - It probably doesn't change the overall point about IPOs, but I don't think having or lacking a "desperation" for money changes anything. What it all really boils down to is this: virtually all the information is already "baked in" to every stock price out there. There's no guaranteed bet, ever. If you aren't living and breathing the markets, it's extremely unlikely you'll be able to account for the market forces in a way that others haven't already. So really "the rest of us" are just guessing. The only justification for an amateur to play the markets is for fun - like sitting down at a Blackjack table in Vegas.
  • Marazan 13y ago
    Actually, our "selection ability" doesn't need to be above average, since the average stock picker is not picking index funds. Index funds are used to proxy the average of the product (market), not the professional investor. Since index funds are the theoretical alternative, that's all we'd need to beat. "The market" is majoritarily made-up of professional investors actively investing. So "The market" is the average result of all those professional investors. So you are saying you have stock selection ability that is above average if you choose to pick individual stocks.
• CurtMonash 13y ago
  Completely correct. When I was a #1-ranked stock analyst, I was good enough to put together a winning portfolio of 5 stocks. 2 went bankrupt, but the other 3 did well enough that the whole portfolio doubled in about 1 1/2 years. But once I no longer worked full-time on Wall Street, I felt I couldn't beat index funds reliably, except in the most special of cases. (E.g., my 1990s Oracle 10-bagger, based on a close relationship with the company; that trade might not even have been legal had Reg FD already been in place.) You can't beat index funds either. Yes, I did well in the Computer Reselling News public stock-picking contests years later -- but mainly, I was channeling picks from a hedge-fund manager friend.
• nthnclrk 13y ago
  This is a really well thought out post and mostly correct. But there is some logic missing here. 1. Risk vs Reward. 2. Someone's motivation to sell isn't necessarily directly tied to a belief that the stock won't go up. It could be a need for liquidity, risk evaluation, etc. Therefore your choice could very well be a smart one. In essence no, "winner" and "loser" scenario as inferred. 3. There are indeed markers that indicate (and only indicate) the likely movement of a stock based on trends. So you can in fact take a somewhat educated guess as to when you are 'Yves or Cecil', as Ed puts it.
• rdtsc 13y ago
  Question [and don't make fun of me if this stupid, I don't know much about stocks]: what about stocks that pay dividends. In other words picking stocks not that would go up necessarily and then sell, but rather pick those that pay dividends? Is it better? Still pick ETFs based on dividends and don't touch stocks?
• Gustomaximus 13y ago
  My 6-ish years trading has lead me to the view (to a point) that by knowing less I trade better. To give context to "the less I know" I studied economics (though don't work in that field) and follow financial press from interest. So my low knowledge is probably better than the average public. Based on this low knowlege trading on my broad stroke feelings, as much on gut as anything, and infrequent trading seem to work best. Previously I traded regularily (changing positions several times a week) and followed/analylised daily micro events within or affecting my target companies. I found I did worse and I was trying to understand market sentiment and buy/sell based on short term humps/dips.... which has no logic. After a couple of years of mixed results, results have been much better by trading when I see those macro events when you feel to your bone the market has got it wrong. And then go in and wait a few months. As a sample of one I cant say if this is right, and there are several industries that exist implying I'm wrong. But it absolutely works best for me.
  • Mikeb85 13y ago
    This is quite true. There is such thing as too much information.
  • crntaylor 13y ago
    It sounds like previously you were losing money because your frequent trading generated a lot of transaction costs. Now you trade less frequently, you have removed a lot of drag on your returns. Essentially, all I am saying is that if your trading were completely random (and buying based on "broad stroke feeling" and "gut" and "feel to your bone" is essentially random) you would expect to do better the less you trade. Which is exactly what you are seeing.
    • Gustomaximus 13y ago
      It was more exiting at a lower price than I paid that was doing the damage. The problem was, in my view, that I was trying to apply logic to an sentiment market. This won't work on the very short term time scale without some kind of knowledge advantage. Or perhaps I was simply not good at it!
  • 13y ago
• Mikeb85 13y ago
  Trading stocks on public markets is like playing poker where 95% of your opponents are professionals. You can win, you just have to be damn good. If you're not that good, don't bother coming to the table.
  • ac1294 13y ago
    Poker is a zero-sum game (it's actually even worse if the house takes a cut). Trading stocks is not zero-sum; it is possible for everyone to win.
    • Mikeb85 13y ago
      It's not possible for everyone to beat the market, which is what counts if you treat it like poker.
  • steveax 13y ago
    If you look around the table and can't spot the mark, it's you!
• fragsworth 13y ago
  I don't know. If you're a tech-minded person, and you have a decent idea about where technology is headed, you can make some bets that will likely outperform the bets that portfolio analysts are making. I doubt, for instance, that the effect of Bitcoin was fully priced into the value of Western Union, as soon as Satoshi's paper was published.
  • NhanH 13y ago
    But that means on aggregate of all bet you made, it would still be worse than market average. Also, that just adds another layer of difficulty altogether. There are probably fewer people that can predict the future of technology than the financial market.
• girvo 13y ago
  I was given $2k when in highschool by my grandfather to trade on the ASX. It was an amazing learning experience over the three years I did it. I stuck to mining companies, got very involved in understanding the industry, and had an amazingly lucky break -- one of the first companies I invested in (most of the money I was given, as my admittedly amateur research made it seem like it was undervalued) increased in price 20 fold over the 3 years (and continued well after I sold). I ended up with $25k when I finally sold all of them. That's when I found out about capital gains tax ;) I was very lucky to hit the jackpot like that, and despite winning numerous Australian wide highschool trading competitions (my favourite was a FOREX day trading sim, in real time with the market against teams from around the country in the room with us! Came first with my best friend) to this day I've not invested another cent into the market, for the reasons outline in the article. It's a lot of fun, and I've done well, but I'm not good enough to compete with the big fish; without that, it's too risky, unless I know something they don't!
  • saryant 13y ago
    I learned my lesson in like that as well. When I started college I had about $2k in savings from my summer job and I decided to invest in the market. This was in 2008. I bought a few stocks (AAPL, INTC, GLD and some others) and watched some tank, some rise. In the end it was essentially a wash, I did well on those three, lost on most of the others and have never invested in individual stocks ever again. All my investments are in Vanguard index funds.
• math 13y ago
  We've been doing a rigorous study of the performance of "the experts" at http://backrecord.com http://backrecord.com . Some results so far: (1) we have no evidence that anyone (via publicly available statements) can time broad market movements, including people who are widely implied by the media as being able to do so. (2) no evidence that anyone can predict anything on a short timescale (< 1 year). (3) Assuming no selection bias [not necessarily a very good assumption], enough statistical evidence to suggest a minority of market commentators can beat the market on longer timescales that we feel it is worth pushing the study further.
• dragontamer 13y ago
  I disagree. Individual stocks tend to be pretty good for hedging out your own risk/rewards. For example, I've taken a rule of thumb to not invest into Technology, because I work for a company who is tied pretty strongly to Technology. Buying "market averages" may have me putting up multiple eggs in one basket. Take SPY for instance, its top holding is Apple right now. Now, I can buy SPY, and then hedge against technology by buying individual stocks in Coke, Johnson and Johnson, and Plum Creek Timber. Will I beat market averages? Probably not. But when the technology sector crashes (and one day in the future, it WILL crash again), I may be out of a job... but at least Coke, J&J, and Plum Creek Timber will not crash with me. I can guarantee that my holdings in SPY (a general S&P Index ETF) will crash in the next "Tech Bubble crash", but I'd be very surprised if my other holdings crashed with it. There is more to investing than just maximizing your average gains. Minimizing risks, and spreading out your assets by nature reduces the amount of gains you will get... but your financial life may be safer as a result.
• lsc 13y ago
  The interesting bit is that this isn't an equilibrium. If a well-managed stock will not sell better than a poorly managed stock (which is the case if everyone uses "whole market" low load index funds, which seem to be the best performers right now) then there is no longer any incentive for management to manage well. Now, I'm not saying that you will make money by picking stocks; what little I have in the stock market is in a broad index fund, too. I'm just saying; this isn't a sustainable situation.
  • thaumasiotes 13y ago
    > If a well-managed stock will not sell better than a poorly managed stock (which is the case if everyone uses "whole market" low load index funds, which seem to be the best performers right now) then there is no longer any incentive for management to manage well. Well, if you assume that a hundred percent of management's compensation is in the form of company stock, sure. I somehow doubt that's the case.
    • lsc 13y ago
      eh, my point is that the more dollars that are invested 'blind' - the less the stock price will reflect anything actually done by the company.
• mojoe 13y ago
  Everything this article says is true if you accept the postulate that people only trade stocks to make money. There are other reasons to trade individual stocks, however -- for instance, I often buy stock in companies that I want to support or just have an interest in. I vastly prefer getting a decent return from companies that I want to succeed to an equivalent return from index funds.
• oofabz 13y ago
  I've been beating the market, albeit by only a few percent, for years. I may just be lucky, but I believe my methods give me an edge. I study the market fundamentals and prioritize the long-term health of a company over short-term profits. I like companies that are never in the news, on the theory that lack of attention lowers demand. I think about long-term economic trends, like the center of US population moving west and the increasing price of oil. But right now the stock market seems too hot, so I am investing in other assets. Eventually, there will be a bust, stocks will fall and gold will rise, and I will sell gold and buy stocks. Nothing apocalyptic, just the normal business cycle that has been repeating for centuries. Corporate investors do not have the luxury of thinking this far in the future, because their management and clients are focused on quarterly profits. I believe patience is a competitive advantage.
  • gabemart 13y ago
    > I've been beating the market, albeit by only a few percent, for years. I may just be lucky, but I believe my methods give me an edge. The problem is that for an outsider to whom you are a stranger, the former is overwhelmingly more likely than the latter.
  • hessenwolf 13y ago
    Normally, being willing to lock up your money for longer gets you the liquidity premium (e.g., term structure of interest rates). This argument of long-term investment I have heard used pro the German and Italian (sleeping giant) economies, which are dominated by family owned SMEs.
• qznc 13y ago
  As a techie I think you can beat the market occasionally. However, I have personally found only one such moment so far: In 2010 Apple released the iPad. After a few days its success was certain. Takes no genius that a lot of copycats will soon arrive. Now the techie knowledge edge: Is there some common supplier they all need? Energy is important, so they will all use ARM chips. Voila, look at ARM stocks in 2010 following. https://www.google.com/finance?q=NASDAQ:ARMH&sa=X&ei=3i6cUsbXMYbOygPH64HACQ&ved=0CC4Q2AEwAA https://www.google.com/finance?q=NASDAQ:ARMH&sa=X&ei=3i6cUsb...
• robomartin 13y ago
  I agree with the general sentiment. I day-traded for about a year and came out of it concluding that long term stock "investing" is bonkers. Long term in this context means holding a position past market close. I put "investing" between quotes because I came out of the experience thinking that holding stocks past a day's closing bell was nothing short than gambling. Some of the things I saw happening after market close were just scary. The minute people stopped recoiling at insane P/E ratios it went from investing to legalized gambling. I did very well day trading but it required massive amounts of work. I devoted no less than four hours pre-market-open and another four post-close to research and data analysis. Taking risks was part and parcel of every single trade. Perhaps the toughest things to get used to was to sell everything --and I do mean everything-- before market close in order to avoid having any open positions overnight. It was tough because there were days when you'd close out at a loss. On any give day you could be up several thousand or down just as much. The reason I concluded intraday trading to be a better idea (assuming you have the time) was that the charts and a number of other data points almost give you all the information you need to trade. You trade a narrow set of stocks that you get to know very well. Each has it's own personality from day to day. You get used to this personality. You look for stocks that don't have crazy volatility or, at the other end of the spectrum, don't put you to sleep waiting for things to happen. With the right amount of action and the enough experience to avoid emotional trading you can pull back, watch the sheep go up and down the charts and play against them. If you are smart, have patience, luck and don't get greedy, you can make money. Why did I stop? Because the time and effort invested never results in a profit center that you can decouple from. In that sense it isn't any different than being a brick layer: If you stop laying bricks you stop earning money. I was laying bricks sixteen hours a day. It's that simple. Instead, if you invest a solid sixteen hours per day, Monday through Friday on a business or a career I firmly believe that, in the long run, you'll be far better off. There are cases where the stock market is a neat place to make lots of money. You don't have to be in the market to take advantage of those. You simply have to be ready, willing and able to do so when the opportunity presents itself. All you are looking for are market crashes. It's that simple. They've happened before and they'll happen again. And, if you are looking for long term passive gains, that's the best time to jump in. Don't bet the farm on it, but be ready and act decisively when it happens. Go against the sheep.
• return0 13y ago
  This is what Peter Thiel calls indefinite pessimism, where instead of money being invested confidently in companies that can use it, it is being forwarded to abstract financial entities that generate no value. Not something that a single investor could change, more a reflection of a growth crisis.
  • krakensden 13y ago
    Buying shares in a public company is not an investment. You are not giving them money to spend on things with a payoff. You are betting, either that you will get a dividend or that you can find another sucker. It is remotely possible that you are giving liquidity to someone who will invest the money into something useful. Probably not, though, it's a very small demographic.
    • return0 13y ago
      That's how it looks to you, but stock markets weren't meant to be betting houses. > You are not giving them money to spend on things with a payoff. how so?
      • gsw2 13y ago
        I believe the parent comment was meant to point out that buying shares on the secondary market does not transfer any money to the company, but instead transfers money to current(or future) stock holders looking to sell(or sell short) their long position. The company would have already received money from the sale of its stock to primary dealers during the IPO ... so for the most part, all subsequent transactions in the market are between investors/speculators.
    • icefox 13y ago
      A company can also buy back shares a way of returning value to the shareholder.
• dmourati 13y ago
  Agree with buying index funds. Disagree you shouldn't buy stocks. Buy index funds with your real retirement and long term investment. Buy stocks with money you can afford to lose.
• k_os 13y ago
  I'm not even a dabbler in this kind of stuff but wouldn't it be fair to assume that individuals that invest small ammounts of money ( up to 100k let's say ) could potentially see larger ROI than big investors since big investors change the market prices so much when they trade with tens of millions? For example in bitcoin if you trade with 5 BTC you could scalp for some nice poket money but you couldn't possibly do this with 10000 btc
• ScottBurson 13y ago
  I think it can be put more bluntly. By trading stocks you are entering an arena filled with professional gladiators. Unless you're their equal, you're going to come out missing several body parts. And simply being smart doesn't begin to make you their equal: these people are smart too, and have been doing this for years.
  • digler999 13y ago
    Bullshit. I can buy $4000 of GE or wal-mart and just hold it. The chances a company that big failing are near 0. The stocks won't do shit, but they will pay a dividend, which is a hell of a lot more than a savings account interest payment.
    • crntaylor 13y ago
      That is not trading - that is investing.
    • gaius 13y ago
      Buying (investing) and trading are different games.
• digler999 13y ago
  so how come equities have consistently outperformed every other investment YoY since 1930 ? There is no other investment that consistently yields what equities do. Nor does he say what investment one should make instead (because of inflation, you are losing your money simply by having cash).
  • mcdougle 13y ago
    actually, at the beginning, he does say that you should invest in low-cost index funds
• aaronbrethorst 13y ago
  That's funny. The shares of GM that I own are up about 40% since I bought them. I keep wondering if my investment thesis is simply better than the mean, or if I'm due for an ass-whipping in the market. Maybe the answer is 'both.'
  • enoch_r 13y ago
    I think the answer is "neither," exactly like the gambler on a hot streak is neither good at roulette or due for a loss.
• stkni 13y ago
  I came to the same conclusion about ten years ago and switched into index funds. So I did ok from the financial perspective but I think the biggest benefit was not having to care so much about the mood swings of the market. With my new spare time I developed software instead, which I sell, and has made me far more dough than my investments ever could.
• yason 13y ago
  I don't think you should trade stocks but buy companies instead. I think there's a mental shift in between stocks & the market and investing in a company. Owning companies existed before stocks: stock markets grew to add easier funding and liquidity of ownership but I think that these days the markets are way more detached from the actual business the companies are doing than before. It's my perception that those who buy parts of a company aren't generally interested in the stock market. You could as well buy part of the company privately and there would be no stock market for that particular company. If your calculations say it's likely to be a good investment for you then that holds even if the company is public. What the stock market seems to provide is lots of noise. You generally don't want to hear any of that. I think that when you do your research on interesting companies, some companies light up, and then you should start investing in those companies as long as the light is up. If it goes out, then you should start selling the stock. To compensate against the market noise, you should buy in smaller chunks and spread the purchases over a longer period of time: this way you don't need to care as much as about the dips and spikes.
  • brazzy 13y ago
    > If your calculations say it's likely to be a good investment for you then that holds even if the company is public. No, it doesn't because you still have to buy and sell your shares on the stock market, and if you do that at a time when the company is grotesquely overvalued you could end up losing money over a quite long timeframe. And even in a normal case the "noise" of the stock market can easily neutralize the advantages of your fundamental analysis.
• wonnage 13y ago
  It's strange to me that the "prudent"/"rational" thing to do as a retail investor is to park your money in index funds/ETFs. I don't doubt that it works, but I wonder why. To me, it's totally irrational. By virtue of being included on an index, a stock spikes in trading volume as all the index funds/ETFs adjust to include it; vice versa if it ever gets removed. These transactions aren't free, in fact the simultaneous dumping/buying of the affected stock serves to drive the price further in the favor of sellers or buyers (i.e, not you). And none of that money is coming from rational investors, it's coming from people with no understanding of the stock market blindly parking their money in index investments, which then blindly spew it across a bunch of blue-chip stocks. So it seems to me like any stock that's part of an index/benchmark is being inflated by index funds. But as long as people buy into the idea of index investing as smart investing, there's no way to bet against it. Sounds vaguely bubbly to me.
• rcthompson 13y ago
  So, if trading stocks is folly for the vast majority of people, why do so many trade stocks? Is it nothing more than the same reason that people play slots or buy lottery tickets?
• rl3 13y ago
  The article narrowly assumes "trading" stocks to mean purchasing shares based primarily on company fundamentals, in the hope that the share price will rise, and with absolutely no mention of any exit strategy or position sizing/risk management. Here's a better definition of trading stocks: The purchase or short sale of shares with the intent of profiting on either upward or downward price movement, based off any of the following: a) Technical information (market data such as price, volatility, volume, etc). b) Fundamental information (company financial information) c) News d) Premonition e) Completely random selection f) Literally anything else, including a combination of the aforementioned. The vast majority of people who trade completely neglect the concepts of position sizing, exit strategies, or other components of a solid trading methodology. In my opinion, this is due to an unhealthy industry obsession with entry signals. Entry signals determine when you enter into a position, and that's it. They don't tell you how to stop losing money when the stock moves against you, and they don't tell you what quantity of stock to trade in the first place so that you don't expose yourself to undue risk. It is possible to construct a profitable trading system that utilizes completely random entry signals. You won't make a lot of money, but most people are surprised by the very notion that something like this is even possible. For example, say you randomly select 100 stocks to trade, and you allocate 1% of your equity to be risked per position. Your exit signals, assuming they're properly designed, will terminate a position once its losses have reached 1% of your total equity. Conversely, these exit signals will also allow for favorable price movement. In other words, they cut your losses and let your profits run. If you replaced random stock selection with quality entry signals, the trading system I just described would be even better. Point being, even if you have the sexiest, most profitable stock selection method/entry signals in the world, but you fail to give thought to the other parts of your trading methodology/system, it's very possible, if not probable, that it will fail miserably. - Psychology is an absolutely huge component of trading. The best traders, whether they're automated systems traders or discretionary traders, overwhelmingly tend to be utterly emotionally detached from the design and execution of their chosen system or methodology, as well as the outcome. Elation from profits can be just as dangerous as sorrow from losses. Exercising this kind of discipline is incredibly hard in practice. Top traders also tend to be fiercely independent in regards to the synthesis of the ideas and opinions they hold concerning the market; there's a reason very few people get rich trading on the advice of newsletters. I tend to agree with the article's premise though, in that that most people are probably better off not trading. Ultimately, markets are wealth transfer mechanisms that tend to concentrate wealth into the hands of the advantaged and competent. If this were anything but, things like high-frequency trading and private firms with vast profits wouldn't exist, or at least not to the degree they do today. - As an aside, if anyone has an interest in trading and hasn't read them, I highly recommend Market Wizards: Interviews with Top Traders and The New Market Wizards: Conversations with America's Top Traders, by Jack D. Schwager. They were published in 1993 and 1994, respectively. Although written in a period where automated systems trading was in its infancy (HFT didn't even exist), their value in terms of trading psychology remains intact. Arguably they're even more interesting today, considering they're now period pieces.
• MarkMc 13y ago
  Even if you only invest in low-cost index funds you can usually beat the market by following this advice: "Be fearful when others are greedy and greedy when others are fearful" - Warren Buffett [1] That means if the Fed Chairman is talking about "irrational exuberance" sell. If people are talking about another great depression, buy (but only with money that you won't need for the next 15 years). [1] http://en.wikiquote.org/wiki/Warren_Buffett http://en.wikiquote.org/wiki/Warren_Buffett
• plam 13y ago
  I wrote some R scripts to perform historical data-driven asset allocation for long-only, low-load funds investment for the long term. This seem like a good time to put it here: https://github.com/Quantisan/touzi https://github.com/Quantisan/touzi It scrapes not only price data but management fees, etc to minimise cost and risk. The goal is not to make profit but just to keep up with the market but at a lower risk.
• PhantomGremlin 13y ago
  Forget stocks, there isn't enough profit in that. I'm looking for a good futures broker. I want to give him $1,000 in cash and wind up with $100,000 a mere ten months later. It's happened before, why can't it happen to me? http://en.wikipedia.org/wiki/Hillary_Rodham_cattle_futures_controversy http://en.wikipedia.org/wiki/Hillary_Rodham_cattle_futures_c...
• tehwalrus 13y ago
  This article focuses on financial reasons not to trade - but there is also an ethical concern. The stock market is a zero sum game - for every buyer, there should be a seller (whether it's another punter or a broker). for every win, there is a corresponding loss. As such, the stock market (trading on companies already invested in) is 100% unproductive - it's not doing any useful work (except valuing stocks, if that's useful.) Therefore, if you want to contribute to humanity, if you want to feel like your job actually accomplishes something, you are literally better off as a Barista at Starbucks, like my 17 year old self, than trading stocks. The stock market drains too many clever brains from other real industries - it is a tragedy. Think what we could accomplish if return actually reflected value added/economic utility!
  • maxerickson 13y ago
    Some stocks do pay dividends or otherwise find a way to return earnings to investors. (So it is possible to overall make money on shares that are eventually sold for a loss) Certainly, the current market is not particularly dominated by those stocks. It is an interesting question though, what mechanism for providing large amounts of capital would result in the least whinging?
    • tehwalrus 13y ago
      I'm not objecting to people owning stocks for the dividends - buying part of a debt and getting the return on it isn't a bad way to fund stuff, and it is a good way to keep your savings scaled to the economy when savings interest is puny (as now). As the author of this post suggests, the way to do this is to buy into an index-averaged fund. I do think far too much is made of price fluctuation profit, which is essentially a casino game, rigged to those with better information (i.e. not you) and completely unproductive to boot. I don't see why it should be an industry, nor why trades should count towards GDP.
      • onebaddude 13y ago
        >buying part of a debt and getting the return on it isn't a bad way to fund stuff" Receiving dividends isn't buying part of a debt; it's receiving your share of the profits of the company due to ownership. >when savings interest is puny (as now) What do you suppose happens when you "save" money? You think your cash just sits in a bank vault? No, it's put to work by capital allocators, using the same methods you find so unappealing. There is nothing "honorable" about "saving" as opposed to buying and selling individual stocks yourself. >which is essentially a casino game, rigged to those with better information I think you have an odd view of casino games. Such games reveal all probabilities, but those probabilities are titled against you. There is no unknown information, and you will lose in the long run. On the other hand, buying a stock in a company requires you to take some educated guesses about the future. What will future earnings be? What will the economy look like? What technological advances will occur? There is far more uncertainty. At the same time, you know the price you are paying for the stock, and hence, based on your forecasts, can determine whether the company offers a suitable rate of return. What other people are doing is irrelevant. For a site that is so encouraging towards investing in businesses with good ideas, I don't understand the aversion to doing the same through the stock market.
• salient 13y ago
  Are there tools to find out about tech companies that have recently IPO'ed? I'm not talking about the most popular ones like FB, Twitter, etc, that the whole press is talking about, but lesser known ones. Or are tech IPO's so rare, that they all pretty much show up on Techcrunch and the like?
• aaron695 13y ago
  It's a bit misleading. Stocks are fine, but you won't beat the market, you'll just get it's better rate of return than the banks and many other investments. Just buy safe stocks and sit on them. And the important point is, you don't sit on them to out ride the ups and downs. You sit on them to lower fees. This is the most important part, low fees (And tax advantages) If fees were actually 0, then randomly(Coin flip) buying and selling everyday is the same as sitting. If you don't get this then you're just gambling(in a bad way)
• atmosx 13y ago
  Hm, If the other side is GS and you don't have inside info, you better look for a carrier in some other field.
• walshemj 13y ago
  The problem with buying the index is that you also buy the dogs that go bust. Also if an index is heavy in say banks as the FTSE 100 was when the recession hit you get hit harder. You should see shares as an Investment not as trade its the difference between an investor and a speculator go read Grahams (Warren Buffets mentor) Intelligent Investor
• junto 13y ago
  I find the idea of trading stocks on a frequent basis too much work. Therefore I keep it simple. Every time we have a stock market crash I buy once the market seems to be stabilizing again. Then I sit on those shares for years. Then I sell (hopefully before the next crash). I think we are nearing the next crash, therefore I'll be selling it all again (probably before 2014 or early 2014). I only buy tech stocks. I don't know the companies in other verticals and I don't have the time or energy to research them.
• spo81rty 13y ago
  I couldn't agree more. Paying retail brokers is a rip off. Low cost ETFs are the way to go. Buy HDV ETF.
• spo81rty 13y ago
  I couldn't agree more. Paying retail brokers is a rip off. Low cost ETFs are the way to go. Buy HDV ETF.
• spo81rty 13y ago
  I couldn't agree more. Paying retail brokers is a rip off. Low cost ETFs are the way to go. Buy HDV ETF.
• spo81rty 13y ago
  I couldn't agree more. Paying retail brokers is a rip off. Low cost ETFs are the way to go. Buy HDV ETF.
• gws 13y ago
  You cannot convince people to stop going to casinos and play against the odds, imagine convincing them not to pick stocks. I agree 100% with the author but I'm still picking up my stocks and not ready to give up the fun
• kerkeslager 13y ago
  This also goes for everyone speculating on cryptocurrencies.
• goshx 13y ago
  I'd suggest for people that are interested in, in fact, trade stocks, to learn about technical analysis. You have way more control over your gains and losses. If you are well disciplined you can "beat the market" quite often.
• Spooky23 13y ago
  You can absolutely beat the index, and it doesn't require any unusual skill to do so as an individual investor.If special skills were required, Vanguard would be the only financial services company. People pushing the Bogglehead philosophy also push the fallacy that owning stocks == trading every day. On a more serious note, diversity in investment is the key to success, and I include individual stocks as part of a diversity strategy, provided you have the time and inclination to do the work required. I have 70% of my investments in various index and actively managed mutual funds 10% in cash. The remaining 20% I put in a mix of other assets, mostly individual stocks. (Although I did some metal investments a few years ago.) I spend 3-5 hours a week, mostly while travelling on investing and enjoy doing it. I've been fairly successful, as over the last 10-12 years my annual rebalancing has seen money flow from my 20% fund to the 80%. Some things you cannot do with a fund. During the 2008 crisis, I pumped cash into investments that were unjustly punished by the crash. So I have a substantial investment in an energy MLP yielding a net yield of about 13%.
• hexagonc 13y ago
  Here is a very good interview with economist William Sharpe (Nobel prize winner, http://en.wikipedia.org/wiki/William_Forsyth_Sharpe http://en.wikipedia.org/wiki/William_Forsyth_Sharpe) that also explains why cheap index funds are better for most investors. The whole interview is very interesting (and long) but for the investing theory on why this true, you can just skip to around 30:00 minutes. https://www.youtube.com/watch?v=pGIzygsvqck https://www.youtube.com/watch?v=pGIzygsvqck *Edited to include Wikipedia article of Sharpe for those that don't know who he is.
• vasilipupkin 13y ago
  Here is my 5 cents. You can beat the market, because markets do not efficiently price all available information. The efficient markets theory, however, establishes a baseline and explains how that baseline relates to risk. Basically, you absolutely can beat the market, but it is very difficult and requires a lot of work/effort. Same way that you could create a startup that becomes the next Facebook, but it's very difficult to do that
• mcdougle 13y ago
  For the longest time, this is pretty much what I believed, and so I never touched the stock market, preferring to invest in other assets. And, depending on how your investing mindset, it's still true. I was recently introduced to the dividend investing strategy. Basically, you pick big, stable companies with a strong history of paying dividends and increasing them every year, and which are very unlikely to go out of business any time soon. You invest in those stocks over the course of years (using a dollar-cost-averaging strategy or something similar) and set up a dividend reinvestment plan on each. After a few years the dividends should be pretty high and once you decide to end the reinvestment plan and keep the dividends, you have a cashflowing asset. The problem with investing for appreciation is that it's speculation (i.e. gambling). If you're looking for appreciation then index funds are probably your best bet. The strategy above would probably produce a portfolio where the stocks themselves probably won't appreciate more than the market as a whole, but everything I've read about it says that, between a bit of overall appreciation and lots of dividends, you should end up with a pretty massive return on your investment over time. Of course, I haven't actually begun investing in this strategy yet, so my input may not actually be useful -- this is just what I've found in my research lately.
  • pnathan 13y ago
    FYI, there are a couple ETFs that focus on high-dividend companies. I hold a small position in HDV, for instance.
• mathattack 13y ago
  Very well put. It is VERY hard to beat the market unless you have inside information. The cost of buying enough stocks to have a broad portfolio is more than a few basis points to a cheap index fund. Even most active mutual funds fail to beat the market. Many hedge funds fail to beat the broad market. Since the market is a self correcting average, even the top professionals are just that - average.
• vikas5678 13y ago
  How has low cost index investing worked out for the investors in the Japanese Nikkei? Low cost index buying works if you are willing to accept significant drawdowns, similar to 2008-09. Even if one bought index funds alone, its important to have an exit plan. Maybe learn what a simple moving average is and dont be long when price is below it. Risk adjusted returns doing this beats buy and hold.
• wehadfun 13y ago
  My original plan to get rich once I got my $60,000 software engineering job was to live in a cheap apartment and use TradeStation to write a program to make me a bunch of money. failed. (fees to high, stocks went the opposite of the way i bought) Plan two: Read fundamentals, read stock history, make smart investments, use cheaper trading company failed. (Stocks go the opposite of the way i bought) Plan three: Options, Paid Optionetics $5,000 for "education". I would make trade low risk iron eagles, canaries, or whatever the fuck they were. failed. Fuck the stock market
• vikas5678 13y ago
  The idea of "beating the market" which refers to beating the S & P index returns is quite flawed. If anyone tries to impose capital protection measures, like a stop loss, then there's a good chance they would underperform the S & P by getting stopped out at inflection points. Thats why I feel looking at risk adjusted returns is critical. How much risk does a buy-and-hold investor accept to see those returns? If the stock market tanks 50% next year, what is your exit strategy?
• pyrrhotech 13y ago
  I agree with the general sentiment. However, many studies have shown that selling slightly in the money, at the money or slightly out of the money puts on the S&P 500 actually beats it's returns over the long run. This is because with selling puts, you make money in 4 out of the 5 possible scenarios. If the stock goes up a lot, you win; if the stock goes up a little, you win; if the stock stays flat, you win; if the stock goes down a little, you win (not quite as much, but still positive); if stock goes down a lot, you lose. That's pretty good odds, much better than being long straight-out IMHO. I mostly sell puts on indexes, but occasionally on stocks that have very high put premiums that I think will at least hold their value. It is riskier and has higher opportunity cost than simply holding indexes, but the potential returns are almost double so it may be worth it. Everyone has to evaluate whether being active or passive investor makes sense for themselves.
  • Dwolb 13y ago
    One thing I'd like to mention is using 'you make money in 4 out of 5 scenarios' does not take in to account that each scenario does not have equal probability of occurring nor have weighted risk (how much you can possibly lose) associated with it.
• kingmanaz 13y ago
  After years of applying the KISS principle to software development I became curious whether others were applying the same philosophy to investing. Random searches for "suckless" and "investing" converged upon softpanorama.org's investing articles. The articles, while rambling and poorly formatted, were both skeptical and simplicity-oriented - a sort of Unix approach to the problem of investing. As a 401k investor, this article in particular resonated with me: http://www.softpanorama.org/Skeptics/Financial_skeptic/Protecting_your_401K/Protecting_401K_from_yourself/naive_siegelism.shtml http://www.softpanorama.org/Skeptics/Financial_skeptic/Prote... I studied the writings for several days and began to question my retirement plan's fees, limited fund selection, as well as my 100%-stock-because-I'm-young approach to investing. Eventually I worked with my company to institute a brokerage window, began holding ETFs rather than mutual funds, and set up a Harry Browne portfolio. While this allocation's performance has been good historically ( http://www.crawlingroad.com/blog/2008/12/22/permanent-portfolio-historical-returns/ http://www.crawlingroad.com/blog/2008/12/22/permanent-portfo... ), 2013's gold tumble has negatively affected returns. Still, cutting out middle men and better knowing what is held is a relief. Softpanorama.org may convince others to review their finances, or at least give Ksh and Tcl/Tk another try.
• Havoc 13y ago
  Well its been working well for me. I approached it with favorable starting conditions though (CFA/CPA background, young enough to absorb dangers & I play in a market that isn't full of Goldman style players). That being said I push everyone towards EFTs too unless I can feel this person has a reasonable shot at actually not getting murdered on the market.
• georgeecollins 13y ago
  This is good advice, but you should be careful about the index fund you invest in. Some index funds are specific to industries. Some are "synthetic" Some have a cost nearly as high as mutual fund. In those cases you may not be getting the advantages the author is talking about.
• nicholas73 13y ago
  All of us will at some point in time come across an investment opportunity where we can be fairly certain of price movement. The problem is, most people have trouble playing even when they are not certain, or even telling if they are certain. Nor can they discipline themselves to get out of a bad situation. The people who trade successfully all have very high understanding of when to play, and high emotional control.
• mcv 13y ago
  I've had plenty of times in the past where I just knew some company was going to do really well and their stock would skyrocket. Every time, I wanted to buy stock but didn't know how or didn't have money, and, in fact, in one case I did buy some Apple when they introduced the Nano. Every single time I was correct, and would have made somewhere between 40-200% profit. I only got the 40% profit out of Apple (because I sold too early), but generally, I seem to have a pretty good eye for this. The big thing though is: I'm patient. I don't need to invest all the time. I only get this kind of insight every few years, but this kind of profit every few years is still pretty good. Next time I get this kind of insight about something, I'm going in big.