6 ms·

Regarding "Don't beat the market", Warren Buffet says "The game is really easy when your opponent decides not to play". Unfortunately, giving up has a lot of a

by MCRed 12y ago

Regarding "Don't beat the market", Warren Buffet says "The game is really easy when your opponent decides not to play". Unfortunately, giving up has a lot of appeal: It means it's not your fault you didn't beat the market. It lets people say the game is rigged and take comfort. How many times have you seen buying company stock compared to gambling? Even though, on its face this comparison is ludicrous. (Especially here on HN where so many of you are giving up $40k a year for 0.0004% of a company that is %98 likely to be worthless.) It becomes like a religion, where anyone saying "Hey, it's easy to beat the market" becomes a "bad guy" who is advising "risky strategies". The reality is, the tools available to the individual investor are such that you can control the level of risk you want. You can take a stock of high risk and make it low risk with option hedges. You can take a stock of low risk and make it high risk with different options. "%90 of options expire worthless, the real money is in selling them!" -- Abraham Lincoln Of course, that's true-- if you have the ability to borrow from the Fed at the overnight rate. Most options are bought as they are intended- as a hedge to minimize risk. IF the underlying asset goes the expected direction, then the option will expire worthless. My point is really that you have to read books, and hear many points of view, and figure out what's right for you. Almost every professional and every ideologue is going to lead you down a bad path for you, because there is no one-size-fits all. There is no "best" advice.

encoderer 12y ago
I agree. The awful conventional wisdom that options are "riskier" than stock, that they're not appropriate for retail investors, has not done retail investors any favors. To me, it's like saying that sharp knives are too dangerous for the home cook. If you want returns similar to professional investors, you have to use professional tools. There's a learning curve, but that's true of most things in life that are worth knowing. Edit: People downvote what they don't understand, that's fine. But if you care about this subject at some point you will ask yourself "why do retail investors underperform" and you can either throw your hands up, call it a rigged game, and blame High Frequency Trading or El Nino or whatever. Or you can look at what a professional trader does differently, and adapt those techniques yourself.
- thedufer 12y ago
  Statistically, professional investors don't beat the market. People aren't "downvot[ing] what they don't understand", they're downvoting demonstrably poor advice.
  - encoderer 12y ago
    It's not about "beating the market." It's about retail investors underperforming professional asset managers AND underperforming the market. Tell me this: Other than reducing basis, what can you do to increase your chances of success in an investment? If success is defined as "not losing money"? One way to reduce basis is by selling covered calls on your stock positions, limiting potential profit but adding no additional risk and substantially decreasing your basis month after month. It's not rocket science, and it's not "poor advice". You and retail investors as a class have been scared into thinking that it's "riskier" to spend $300 on a call spread in Tesla than it is to go out and buy 100 shares of TSLA for around $25,000. That doesn't compute. Edit: It's not that an investment strategy that uses options is the only way to be a successful retail trader -- just like you can cook without sharp knives -- but dismissing them without being able to articulate why, well, that's not doing any favors for the regular investor. Edit: I've been here for a long time and have plenty of karma to burn in the name of standing up and making a point I believe in. Something is wrong with retail investing when, as a class, we've consistently underperformed, and at the same time we have this dogmatic insistence that options are "too complicated" for the small investor. Mutual Fund? Front Load? Compound Interest? These are all ok but writing a covered call on a stock position is verboten and scary and too hard? Please. Buying (Edit: shouldn't have said "buying", what I meant was "making money on a") stock is a 50/50 bet. (Random Walk theory; Efficient Market). The price can either go up or down. There's no reason a retail investor should not tilt those odds a few points in their favor the same way professional traders do every day.
    - deleted 12y ago
      [deleted]
    - chollida1 12y ago
      http://www.theglobeandmail.com/globe-investor/funds-and-etfs/etfs/the-case-against-covered-call-etfs/article18831460/ http://www.theglobeandmail.com/globe-investor/funds-and-etfs... Look you're an adult and free to do as you please but I'll try any way, please don't sell covered calls. Its very easy to make money and fool yourself into thinking you can beat the market. Its really the worst of all possible worlds... you have to hold the stock but don't get the upside when it rises. you have to hold the stock but still loose if it falls by more than the premium you still have the down side of being long the stock. All you're doing is collecting pennies infront of the steam roller that is the market. The reason indexing works is that you are always invested when the market has its big moves up. With covered calls you can't participate on the big moves up but you still get hammered when the market moves down. The reason people do it is that the market can be calm for months and then move. So you get: small income in month 1 small income in month 2 then suddenly you either miss a 25% move up by the market as you get exercised on your calls or the market drops and you lose as the market falls 15% and you've lost not only the premium from writing your calls but also some of your principle as well. Or put in laymans terms, the down side far outweighs the upside. Also be careful here: > Buying stock is a 50/50 bet. (Random Walk theory; Efficient Market). The price can either go up or down. There's no reason a retail investor should not tilt those odds a few points in their favor the same way professional traders do every day. Please note this is just wrong. There are actually 3 outcomes, which you should know if writing covered calls because you are essentially betting on the third option, which is that the stock stays flat, ie it doesn't move. My whole point is that selling covered calls does tilt the odds, just not in your favour:(
tormeh 12y ago
1. Not everyone has the time to study finance. 2. According to Piketty, the market is doing pretty well over time, so simply following it is perfectly ok. That said, I've heard the best way to beat the market is to invest in undervalued, small, unglamorous and mostly unknown companies. Obviously, that requires some serious study and resistance to hype.
- lmm 12y ago
  > That said, I've heard the best way to beat the market is to invest in undervalued, small, unglamorous and mostly unknown companies. There's an almost opposite approach that has been beating the market at least in recent years, "dogs of the dow": the idea is to buy the large companies that no longer have much growth potential (I remember McDonalds and AT&T as examples). People like to own small companies that they can imagine making it big, so the market undervalues large, old, "boring" companies that generate steady returns. The underlying idea is the same for both approaches though: find a human bias that makes people over- or undervalue certain companies, and do the opposite. If there's any way to beat the market, that'll be it - and even that will fall as more trading is done by impartial algorithms that're immune to hype.
enraged_camel 12y ago
>>Regarding "Don't beat the market", Warren Buffet says "The game is really easy when your opponent decides not to play". Except Warren Buffet himself is a huge proponent of low-cost index funds, and recommends them for the average person. You really can't use him as an example because he's at the extreme end of the spectrum: wealthy to the point where managing his wealth is his full-time job. He has decades of experience and the knowledge that brings. So to him, it does look as if no one else is playing the game. That's the real context of his quote.
- richard_cubano 12y ago
  Or you could, uh, buy Berkshire Hathaway...
  - conanbatt 12y ago
    At 214k a single stock, that doesnt seem very attainable.
    - elsewhen 12y ago
      there is a "b" class of berkshire hathaway shares that track almost identically with the "a" class that cost $214k: https://www.google.com/finance?cid=9614464 https://www.google.com/finance?cid=9614464 the b shares are currently selling for $143/share
12423gsd 12y ago
The reality is that the professionals have better tools. It's not just gambling, it's gambling against someone that can see the cards. If there is some method to turn $1 into $2 then there is a whole sea of people who are better and smarter than me who will keep doing it till that method no longer works.
- snowwrestler 12y ago
  Professionals also have a much more diverse set of goals, obligations, and restrictions. For example a professional running an SP500 index fund is not going to buy a great deal just because they can see it. Their goal is to track the SP500 and that is how they will decide which deals to do. Even for non-index managed funds there are often objectives or restrictions like cap size, geographical location, industry, time horizon, etc. So while they might have better tools, they're not necessarily competing with you directly.
- Mikeb85 12y ago
  > The reality is that the professionals have better tools. It's not just gambling, it's gambling against someone that can see the cards. They may have better tools, but small investors have the advantage of being nimble. If you're trading say, 10K per trade on large-cap stocks, you can have your entire trade executed within 10 seconds without moving the stock price (thanks to HFT, but that's another story). This makes trading on swings much easier for the small investor. And there are plenty of tools available for the small investor, most brokers will give you access to them when you sign up for an account. Sure, you may not get streaming L2 quotes on a basic account, but you'll get all the company information you need and access to basic real-time quotes. If you want to get a little more sophisticated, you can use something like R to automate some of the information-gathering process, run models against historic data, or simply use it for very fancy charts (with every technical indicator known to mankind). And, as has been mentioned, hedge funds, mutual funds, etc..., have different motives for trading. Sometimes they are hedging, sometimes diversifying, often they're very long term, etc... They're not always trading. Even HFT is mostly arbitrage. There's still plenty of room for small to medium traders to make money.
serve_yay 12y ago
I don't think it's impossible for anyone to make money in the stock market, I just think it's impossible for me. OK, not impossible but it still strikes me as rather foolish to try. And I'm not even uninitiated, I used to work at one of the companies mentioned in this article.
sliverstorm 12y ago
I'm an engineer. I don't have the time to become a brilliant investor too. For people who don't quite know what they are doing, it is gambling.
noname123 12y ago
> "%90 of options expire worthless, the real money is in selling them!" -- Abraham Lincoln It's risk-reward thing, akin to 90% of disaster insurance policyholders won't make claims, but when the hurricane happens, you're gonna be screwed because the premium of the insurance is not calculated by an actuary but by the market where if you're an overzealous option seller, will have underpriced such that you may not have enough capital to cover the cost. If you want to read more about option selling, I highly recommend Malcom Gladwell's New Yorker piece http://gladwell.com/blowing-up/ http://gladwell.com/blowing-up/ or you can also learn the way I did, by trading and being humbled by the market. P.S. Options came into fashion in the 60's, so I don't think Lincoln ever got into financial engineering with financing the Civil War...
- wlievens 12y ago
  Maybe if you mean the 1860's :-)

by MCRed 12y ago

encoderer 12y ago

I agree. The awful conventional wisdom that options are "riskier" than stock, that they're not appropriate for retail investors, has not done retail investors any favors. To me, it's like saying that sharp knives are too dangerous for the home cook. If you want returns similar to professional investors, you have to use professional tools. There's a learning curve, but that's true of most things in life that are worth knowing. Edit: People downvote what they don't understand, that's fine. But if you care about this subject at some point you will ask yourself "why do retail investors underperform" and you can either throw your hands up, call it a rigged game, and blame High Frequency Trading or El Nino or whatever. Or you can look at what a professional trader does differently, and adapt those techniques yourself.

thedufer 12y ago
Statistically, professional investors don't beat the market. People aren't "downvot[ing] what they don't understand", they're downvoting demonstrably poor advice.
- encoderer 12y ago
  It's not about "beating the market." It's about retail investors underperforming professional asset managers AND underperforming the market. Tell me this: Other than reducing basis, what can you do to increase your chances of success in an investment? If success is defined as "not losing money"? One way to reduce basis is by selling covered calls on your stock positions, limiting potential profit but adding no additional risk and substantially decreasing your basis month after month. It's not rocket science, and it's not "poor advice". You and retail investors as a class have been scared into thinking that it's "riskier" to spend $300 on a call spread in Tesla than it is to go out and buy 100 shares of TSLA for around $25,000. That doesn't compute. Edit: It's not that an investment strategy that uses options is the only way to be a successful retail trader -- just like you can cook without sharp knives -- but dismissing them without being able to articulate why, well, that's not doing any favors for the regular investor. Edit: I've been here for a long time and have plenty of karma to burn in the name of standing up and making a point I believe in. Something is wrong with retail investing when, as a class, we've consistently underperformed, and at the same time we have this dogmatic insistence that options are "too complicated" for the small investor. Mutual Fund? Front Load? Compound Interest? These are all ok but writing a covered call on a stock position is verboten and scary and too hard? Please. Buying (Edit: shouldn't have said "buying", what I meant was "making money on a") stock is a 50/50 bet. (Random Walk theory; Efficient Market). The price can either go up or down. There's no reason a retail investor should not tilt those odds a few points in their favor the same way professional traders do every day.
  - deleted 12y ago
    [deleted]
  - chollida1 12y ago
    http://www.theglobeandmail.com/globe-investor/funds-and-etfs/etfs/the-case-against-covered-call-etfs/article18831460/ http://www.theglobeandmail.com/globe-investor/funds-and-etfs... Look you're an adult and free to do as you please but I'll try any way, please don't sell covered calls. Its very easy to make money and fool yourself into thinking you can beat the market. Its really the worst of all possible worlds... you have to hold the stock but don't get the upside when it rises. you have to hold the stock but still loose if it falls by more than the premium you still have the down side of being long the stock. All you're doing is collecting pennies infront of the steam roller that is the market. The reason indexing works is that you are always invested when the market has its big moves up. With covered calls you can't participate on the big moves up but you still get hammered when the market moves down. The reason people do it is that the market can be calm for months and then move. So you get: small income in month 1 small income in month 2 then suddenly you either miss a 25% move up by the market as you get exercised on your calls or the market drops and you lose as the market falls 15% and you've lost not only the premium from writing your calls but also some of your principle as well. Or put in laymans terms, the down side far outweighs the upside. Also be careful here: > Buying stock is a 50/50 bet. (Random Walk theory; Efficient Market). The price can either go up or down. There's no reason a retail investor should not tilt those odds a few points in their favor the same way professional traders do every day. Please note this is just wrong. There are actually 3 outcomes, which you should know if writing covered calls because you are essentially betting on the third option, which is that the stock stays flat, ie it doesn't move. My whole point is that selling covered calls does tilt the odds, just not in your favour:(

tormeh 12y ago

1. Not everyone has the time to study finance. 2. According to Piketty, the market is doing pretty well over time, so simply following it is perfectly ok. That said, I've heard the best way to beat the market is to invest in undervalued, small, unglamorous and mostly unknown companies. Obviously, that requires some serious study and resistance to hype.

lmm 12y ago
> That said, I've heard the best way to beat the market is to invest in undervalued, small, unglamorous and mostly unknown companies. There's an almost opposite approach that has been beating the market at least in recent years, "dogs of the dow": the idea is to buy the large companies that no longer have much growth potential (I remember McDonalds and AT&T as examples). People like to own small companies that they can imagine making it big, so the market undervalues large, old, "boring" companies that generate steady returns. The underlying idea is the same for both approaches though: find a human bias that makes people over- or undervalue certain companies, and do the opposite. If there's any way to beat the market, that'll be it - and even that will fall as more trading is done by impartial algorithms that're immune to hype.

enraged_camel 12y ago

>>Regarding "Don't beat the market", Warren Buffet says "The game is really easy when your opponent decides not to play". Except Warren Buffet himself is a huge proponent of low-cost index funds, and recommends them for the average person. You really can't use him as an example because he's at the extreme end of the spectrum: wealthy to the point where managing his wealth is his full-time job. He has decades of experience and the knowledge that brings. So to him, it does look as if no one else is playing the game. That's the real context of his quote.

richard_cubano 12y ago
Or you could, uh, buy Berkshire Hathaway...
- conanbatt 12y ago
  At 214k a single stock, that doesnt seem very attainable.
  - elsewhen 12y ago
    there is a "b" class of berkshire hathaway shares that track almost identically with the "a" class that cost $214k: https://www.google.com/finance?cid=9614464 https://www.google.com/finance?cid=9614464 the b shares are currently selling for $143/share

12423gsd 12y ago

The reality is that the professionals have better tools. It's not just gambling, it's gambling against someone that can see the cards. If there is some method to turn $1 into $2 then there is a whole sea of people who are better and smarter than me who will keep doing it till that method no longer works.

snowwrestler 12y ago
Professionals also have a much more diverse set of goals, obligations, and restrictions. For example a professional running an SP500 index fund is not going to buy a great deal just because they can see it. Their goal is to track the SP500 and that is how they will decide which deals to do. Even for non-index managed funds there are often objectives or restrictions like cap size, geographical location, industry, time horizon, etc. So while they might have better tools, they're not necessarily competing with you directly.
Mikeb85 12y ago
> The reality is that the professionals have better tools. It's not just gambling, it's gambling against someone that can see the cards. They may have better tools, but small investors have the advantage of being nimble. If you're trading say, 10K per trade on large-cap stocks, you can have your entire trade executed within 10 seconds without moving the stock price (thanks to HFT, but that's another story). This makes trading on swings much easier for the small investor. And there are plenty of tools available for the small investor, most brokers will give you access to them when you sign up for an account. Sure, you may not get streaming L2 quotes on a basic account, but you'll get all the company information you need and access to basic real-time quotes. If you want to get a little more sophisticated, you can use something like R to automate some of the information-gathering process, run models against historic data, or simply use it for very fancy charts (with every technical indicator known to mankind). And, as has been mentioned, hedge funds, mutual funds, etc..., have different motives for trading. Sometimes they are hedging, sometimes diversifying, often they're very long term, etc... They're not always trading. Even HFT is mostly arbitrage. There's still plenty of room for small to medium traders to make money.

serve_yay 12y ago

I don't think it's impossible for anyone to make money in the stock market, I just think it's impossible for me. OK, not impossible but it still strikes me as rather foolish to try. And I'm not even uninitiated, I used to work at one of the companies mentioned in this article.

sliverstorm 12y ago

I'm an engineer. I don't have the time to become a brilliant investor too. For people who don't quite know what they are doing, it is gambling.

noname123 12y ago

> "%90 of options expire worthless, the real money is in selling them!" -- Abraham Lincoln It's risk-reward thing, akin to 90% of disaster insurance policyholders won't make claims, but when the hurricane happens, you're gonna be screwed because the premium of the insurance is not calculated by an actuary but by the market where if you're an overzealous option seller, will have underpriced such that you may not have enough capital to cover the cost. If you want to read more about option selling, I highly recommend Malcom Gladwell's New Yorker piece http://gladwell.com/blowing-up/ http://gladwell.com/blowing-up/ or you can also learn the way I did, by trading and being humbled by the market. P.S. Options came into fashion in the 60's, so I don't think Lincoln ever got into financial engineering with financing the Civil War...

wlievens 12y ago
Maybe if you mean the 1860's :-)