
The Stock Market Is Still for Suckers - Anon84
http://blogmaverick.com/2010/08/20/the-stock-market-is-still-for-suckers-and-why-you-should-put-your-money-in-the-bank/
======
jakarta
This is a weak article. There are plenty of ways to beat the market averages
while being just one individual with a small sum of capital.

A while back Buffett said that he thinks he could average 50% annually if he
only had a small sum of capital. Here are some of the things he would likely
be doing:

1\. Go where the big investors can't

Many large institutional fund managers cannot go below certain market caps.
Typically you can find a rich hunting ground of undervalued and ignored
companies below $100M.

During the crisis I found it pretty useful to actually screen for negative
enterprise value stocks. These were companies where they were trading BELOW
the cash they had on their balance sheets. (EV = Market Cap + Debt - Cash).
Some of these companies were pretty tiny, $10 to $50M mkt cap, but they worked
out well. You have to be willing to deal with illiquidity though.

2\. Odd lot tender offers

You can find situations where a company wants to go private and delist. To do
that they need to buy out shareholders and get below 300 public shareholders.
To do that sometimes they will pay a premium for you to tender shares if you
have below 100 shares. Again, this is an area where a small investor can do
well but where large institutions are precluded from being active.

3\. Look for areas where institutions are forced to sell

Spinoffs are the classic example. Academic research has shown that spinoffs
will in general outperform the greater market. Why?

Many index funds are mandated to only hold stocks that are a part of the
index. Sometimes an index member will spinoff a smaller unit which cannot make
it into the index. The index funds will be forced to sell that company and so
its pricing may get below its actual value. That's why spinoffs tend to
outperform the market in their 2nd and 3rd year of trading.

\---

There are plenty of other areas too. These are just a few but it is all pretty
well publicized.

~~~
Femur
Fascinating. I imagine you are ludicrously rich via these obvious and well-
publicized methods? How long did it take you to learn and implement these
tactics? I would also love to see pictures of your yacht and/or Mansion.

~~~
Kliment
You will notice he/she is quoting someone who did in fact become fairly rich,
and not speaking from first-hand experience.

------
sage_joch
"Because people buy stocks for only one reason, they want them to go up in
price."

Actually I've been buying them for their dividends, with the hope that the
stock price itself will just keep pace with inflation.

~~~
tkahn6
When I was younger, I could never understand the purpose of stocks that don't
give off dividends. I just could not wrap my head around the concept of buying
something for the sole purpose of expecting it to increase in value. It still
boggles my mind.

~~~
vomjom
At least in economic theory, a company does not give out dividends if it
believes that it can get a better return on its cash (in terms of profit) than
the investor can in the overall market.

But, companies must eventually give out dividends. There's a certain point at
which the company's cash hoard gets so large that investors become unhappy
(see Microsoft).

~~~
afusiak
Stock buybacks are an excellent alternative to providing dividends for a
company that wants to return money back to it's owners.

~~~
dirtae
Yes, theoretically. In practice, managements have a long history of buying
stock back at inflated prices and buying back stock simply to hide the
shareholder dilution that is occurring due to management equity compensation.
I prefer dividends to buybacks.

Companies tend to announce buybacks when things are going well and their stock
is fully priced. How many companies were announcing buybacks in December 2008
when it would have really made sense?

------
joelhaus
Nassim Taleb comes to a similar conclusion, but with much better examples (one
of the best Planet Money Podcasts ever IMO... just posted it here:
<http://news.ycombinator.com/item?id=1623713>)

 _Taleb slams Obama & the media, prefers recession over high deficits,
advocates clawbacks, slams forecasting models when high debt levels are
present and predicts the broad failure of public companies due to
fundamentally misaligned incentives._

That said, here are two (rather discomforting) counter arguments to both Cuban
and Taleb:

    
    
      1) A warning against credit derivatives 
      (or betting the market will go down): 
      "The market can stay irrational longer 
      than you can stay solvent." - Keynes
    
      2) In an inflationary environment, high levels of 
      long-term debt can actually be a good thing for the 
      issuers. It's the short-term debt that must be rolled
      over that creates most of the problems (e.g. ARM mortgages 
      and a majority of commercial loans).

------
Symmetry
You don't need to know more than the other market participants to do well in
the stock market, you just need to know one thing that other people don't
(assuming your investment is a tiny fraction of the money in the stocks you
pick). You should always expect that all the information on a product that is
accessible to Wallstreet traders is already factored into a stocks price, but
there may be things (does this product really make sense for someone like me
who lives in a small appartment, how will this inovation interact with the
stuff I learned in all those technical courses I took in college) that you
might better information about than the market makers.

Of course, it might just be that random chance has caused the author of the
post to do badly in the market and me to do well - causing us both to be
biased. You should always diversify your investing and its probably a good
idea to put most of your stock money into index funds.

------
hop
Bolshevism. An S&P 500 index will crush any bond, CD, whatever, over the next
20 years. When you are investing long term, the ups and downs and whatever
volatility traders and hedge funds cause do not matter, you are still owning a
piece of the company that on average will grow exponentially in value.

With inflation on the horizon, stocks are a way better hedge than cash or
bonds.

And that said, if you go hunting for value and well priced stocks, you will be
way better off.

~~~
jeberle
Looking back to 1971, for any 20 year period the S&P 500 netted a gain. For
the last 20 years, that gain was 6% per year. OK, but not what I would term
"crushing" performance.

For the last 10 years, the S&P 500 is down 2.5% on an annual basis. You could
have done better w/ govt bonds & CD ladders.

I think the 20 year plan assumes a greater will power than the greater
investing community possesses.

~~~
illumin8
Right, you can cherry pick 10 year periods of time when the S&P did good, but
don't forget about all those times it crashed. The problem with following Wall
Streets advice to put all your money in stocks is that they make too much
money from trading commissions to trust them for impartial advice.

Typical investment advisors tell you to buy stocks and then point out that
over the last century stocks have done very well. The problem is that none of
us are investing on 100 year long timelines. We are usually investing on 30-40
year timelines and hoping to have a good amount saved when we retire. If you
happen to need to retire and start pulling money out in a bad year like 2008,
you're screwed.

Check out this allocation for returns as good as stocks without the huge
downside risk: [http://crawlingroad.com/blog/2008/12/22/permanent-
portfolio-...](http://crawlingroad.com/blog/2008/12/22/permanent-portfolio-
historical-returns/)

------
dmillar
Aren't we already closer to "blood in the streets" than "cheery consensus"?

Financial people love to say that the stock market grows at roughly 9%
historically, and that is money in the bank. But if you look at any historic
chart these days, the massive amount of wealth and trading volume that has
been generated over the past 10 years has made it obvious that we are in
uncharted waters for future equities growth.

The Internet has been the game changer here. It has allowed access to equities
to a class of investors that really never had access purchase these types of
assets. This changed the game.

Cuban is probably right when he tells us to be weary of the market, but I
think there are different reasons to be weary than those he states.

~~~
mikebo
I think Cuban is comparing vs the March '09 low when the market was down 40%
from now. He made several posts during that time about actual purchasing
stocks.

~~~
dmillar
Right, it was a great time to buy. I do tend to think that we will see DOW
14000 before DOW 7000, barring some unforeseen crisis. And I guess that's
market confidence, right? What investors think the chances of something
unforeseen popping up are.

~~~
lzw
Of course because the more the dollar is devalued via inflation, the hugger
stock prices will go even though they aren't actually appreciating in value.

------
jeffepp
The truth is that most people sell when the market is getting killed and buy
when the market is running up.

It is human nature to follow the crowd. Savvy investors can make several
hundred % returns buying during crashes and bear markets.

The main keys to success: 1) Never use margin (market day-to-day is too
unpredictable 2) Leverage with Options 3) Try to remove emotion from the
investment

~~~
lzw
Good advice, and while I see people repeating common myths in this thread, I
should just be happy that they are there to take the other side of my
positions.

------
yoseph
"It is pretty much impossible for some man or woman or child who devotes a
couple of hours per week to the market to outperform the professionals who
spend 24×7 doing this for a living and when they are asleep, they have a
workforce full of people doing more of the same. In this day and age, none of
us are smarter than the market."

I agree that individual investors can't continue to try and play in the big
leagues. When you're competing with bankers, you're going to lose because
they're doing it 24/7, like Mark said.

However, there is a significant amount of the market (30%? Tried to google the
figure and couldn't find it) that Wall Street doesn't cover, analyze or do
much of anything about. For the most part, this is the playing field for the
individual investor.

My only other advice is buy at a profit. Use value investing tenets to buy
stocks that are significantly discounted to their fair value. It's much easier
to calculate the value of a company than most think.

~~~
kd0amg
_However, there is a significant amount of the market (30%? Tried to google
the figure and couldn't find it) that Wall Street doesn't cover, analyze or do
much of anything about. For the most part, this is the playing field for the
individual investor._

Is "a couple of hours per week" enough to do the research necessary to perform
well in that area?

------
karanbhangui
I stopped reading when the author said everyone wants stocks to go up. You can
make money no matter what direction the market goes. A brief skim of the rest
of the article finds similar errors. The OP doesn't seem to understand the
basics of asset allocation and diversity.

~~~
fanboy123
technically he said people buy stocks because they think stocks will increase
in value. it is an useless/obvious observation but different from what you
stated.

like cuban i do wonder why individuals think they can beat the market. well
connected and well capitalized groups have access to far more information than
is publicly available. with the rise of hft and the like not only are you
under attack by players who understand the fundamentals better but also by
people who can game the exchange platforms themselves.

~~~
yoseph
I agree the odds are stacked against the individual investor. However, I'm an
individual investor who consistently beats the market. I don't do anything
special. I just follow the tenets of value investing. IMHO, this is the only
way to invest as an individual. Otherwise, stick your money in an index fund
and hope for the best.

------
whyme
_"Because people buy stocks for only one reason, they want them to go up in
price."_

Indicates the author knows little to nothing.

 _"It is pretty much impossible for some man or woman or child who devotes a
couple of hours per week to the market to outperform the professionals who
spend 24×7 doing this for a living and when they are asleep"_

There are so many people performing so poorly - even professionals, that
working 24x7 obviously doesn't buy you much _"performance"_. While it's true
you're competing against everyone else on the market, that doesn't mean
there's a large group of professionals performing so well that you can't
compete. In fact it's the opposite.

 _"So what does this mean for you ? It means that I don’t know if the market
will go up or down, or by how much."_

I'm thanking God that _what it all means to me_ is not dependant upon what
this author knows.

As for the remaining "scarcity of capital" argument - it's like the author can
only see one point in time, and not the big picture. There's a reason why all
the capital being made available is not being borrowed. It's because smart
companies know growing for the sake of growing, without demand is a bad reason
to borrow, thus they don't. It's your job to determine who they are, and the
fact you can't does not mean that it can't be done.

There's more to comment on, but overall - I couldn't find much I could agree
with.

~~~
chunkbot
After selling his company to Yahoo for $5.9 billion in Yahoo stock, Mark Cuban
personally architected a hedge of his enormous wealth with synthetic indexes,
taking a $20 million cut for six months of protection before he could hedge
the actual Yahoo shares.

Compare this to John Z. Rigos, who sold his dotcom for $42 million and walked
away with $8 million of stock. Between the day of the sale until the day when
he could legally sell his shares, the stock tanked, and Mr. Rigos was left
with virtually nothing. Mr. Cuban came from a poor Jewish family; Mr. Rigos
from a poor Greek family. Same story, two outcomes...

Today Mr. Cuban's net worth is more than $2 billion. I'd say he knows more
than "little to nothing" about the market.

~~~
mattmaroon
He also ran a successful hedge fund if memory serves me. From his writing you
could easily get the idea that he is more opinionated than informed,
especially since he seems to jump from talking about stocks to bonds and back
again as if he didn't know the difference between them. I'm pretty sure it's
just because he is such a poor writer though. While I don't ever agree with
someone who thinks they can time the market, he certainly is knowledgable.

------
david927
I agree. We're about to face a huge liquidity crisis for additional reasons
that he missed here.

In the very near future, cash (different currencies, precious metals) will be
king.

~~~
lzw
The indicator that gold, etc is not overpriced is that in 2008 when everyone
panicked, gold went down cause they sold it.

When everyone panics, and gold goes up, that will be the beginning of the bull
market in gold.

------
joshfraser
mark cuban is a smart guy & also a billionaire so i tend to listen to his
advice.

the part i don't get is why we should be putting our money in the bank. our
government is printing money at a record pace and our money is being devalued
by the minute. as much as i hate having my money in the stock market, at least
it has some protection against inflation.

~~~
mikebo
Despite quantitative easing, we haven't experienced any significant inflation.
In fact, we are getting very close to a deflation.

If you have a very pessimistic view of the stock market's future, reducing
risk by being in cash make a lot of sense.

~~~
joshfraser
that's partly because the fed plays all sorts of tricks to hide the real
amount of inflation they are causing. regardless of whether that inflation is
visible now, it's inevitably coming. it's the only option we have to deal with
that 13.3 trillion debt that we can't afford to pay.

~~~
kargdt
I heard somewhere that Deflation right now is a fact, inflation a belief. One
would've lost a lot of money being short long-dated treasuries this year with
that belief. If inflation is the answer to this (most likely the case), would
you say that it could be hyperinflation versus the milder demand-driven
inflation that America is used to?- Specifically, if the Fed devalues the
dollar.

------
known
Unless you're doing <http://en.wikipedia.org/wiki/Front_running> you cannot
make significant money via stock markets.

------
chopsueyar
...says the man who sold a $5.9 billion dollar domain name to Yahoo.

Who else here has sold a company for $5.9 billion?

------
c00p3r
_if you were the innovator that was smarter and faster than the other guys,
you could make money [on the long and / or short side of the market] before
the imitators and then the idiots flooded the market._ \- That seems to be a
market universal.

Same shit happens with Blogs, SEO and Internet in general.

------
lzw
It is easy to beat the market and invest well because most of thevworld is
operating from a position of ignorance. You don't need secret or insider
knowledge, you just need to know what you know, and know what you don't know.
Buffett calls his a circle of competence. I studied investing, did ok, studied
economics and then discovered that the world is full of ignorant or
misinformed people who cling to their misinformation. Example- look at
everyone bashing gold.

The conventional wisdom is you need someone to manage your money for you
because you can't beat the market, and because that is such a common belief, I
find it easy to beater the market.

~~~
tocomment
So what's the truth about gold?

~~~
illumin8
Gold is a good hedge against financial crisis. Whenever the Dow has a day of
selling, you'll usually see people buying lots of commodity ETFs like GLD or
IAU.

The thing I like about gold is that it responds well to all types of financial
crisis. Inflation risk? Gold goes up. Deflation/deleveraging risk? Gold goes
up as well.

