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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 d

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.

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.