
Teaching People to Trade Stocks Is Like Starting Them on Heroin – Munger - deegles
https://www.evidenceinvestor.com/teaching-people-to-trade-stocks-is-like-starting-them-on-heroin-munger/
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ChuckMcM
Well that is a click baity title. What he really meant was that _encouraging_
people to trade stocks is a bad idea period (he is a big proponent of index
funds).

I can't say I disagree with that, not that I would categorically lump all
financial managers into the 'useless' category either.

But it is important to note that he uses 'trading' in the sense of actively
taking and releasing positions in different stocks in order to capture their
short term change in value. Not 'investing' which is buying and holding equity
(stocks) in company that are growing or otherwise generating wealth (and
ideally paying a dividend).

~~~
usaar333
A follow-up question is if Robinhood (by massively reducing trading
costs/friction) is socially positive or not. Their career pitch is that they
democratize America's financial system
([https://careers.robinhood.com/](https://careers.robinhood.com/)), but
looking at how the reduced friction just leads to Average Joe losing more
money, you could credibly view this as a type of destructive "excessive
democracy".

~~~
mandelbrotwurst
They are increasing access to markets for the average person. They're also
encouraging uninformed investment decision-making by doing things like sending
push notifications when big name stocks swing way up or down, earning money by
selling users' trading data to the highest bidder (increasing the overall
fraction of "national product" that ends up in the pockets of financiers as
the purchasers of that data make fast moves on that info) , plus that whole
debacle with their "checking & savings" product.

~~~
andrei_says_
What do you mean by “users’ trading data”? If different from the trades
themselves?

~~~
mandelbrotwurst
I just meant the transaction history.

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dsmithatx
People who fail to read and educate themselves will listen to snake oils
salesman pitches and trade stocks like a junkie on heroin. I spent years
learning industries, learning how to read quarterly report, to identify signs
of fraud, and pay attention to the news every single day.

Like anything you do you have to be committed and determined to be successful.
It's not a dark secret that there are no short cuts in life. This article
assumes we are all much dumber than I prefer to believe we are. We being
people who have money to trade stocks and suffer from big losses.

I learned how to trade stocks by reading books about value investing and
accounting practices. Very simple stuff that like anything worth learning
takes a bit of time and effort. I don't get the upvotes on this article.

~~~
whitepoplar
Given all your preparation and work, do you think you're able to beat the
market on a risk-adjusted basis? What marginal edge do you have over
professional institutions + quant funds, who are also reading reports and
paying attention to the news? (to say the least)

~~~
fucking_tragedy
> do you think you're able to beat the market on a risk-adjusted basis?

I don't think anyone is going to beat the market doing their due diligence.
It's more about making sound investments instead of treating investing like
gambling at a casino or rooting for a particular sports team.

~~~
orojackson
If that is the case, why not just buy the entire US stock market through
something like FZROX, SWTSX, or VTSAX? That feels like a sound investment to
me.

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sammycdubs
I think that companies like Robinhood gamifying highly risky trading
strategies are super irresponsible. There should definitely be a higher burden
to educate end users, and to more tightly limit crazy shit like leveraged
positions.

~~~
abvdasker
Robinhood sells shares in a bunch of ETFs as well as individual stocks. Their
selection isn't as good as a Fidelity or a Vanguard but the value proposition
is the lack of transaction fees. There's nothing inherently irresponsible
about Robinhood (except maybe how easy it is to get a margin account). It
allows individuals to make the same mistakes as any of the larger investment
banks.

~~~
sammycdubs
You can absolutely get lower risk investments through Robinhood, but they
actively market things like margin trading under the "Robinhood Gold" banner.
I don't think most investment banks would let you do things that risky, and
you'd still have an advisor in the middle.

You can always lose money while investing, it's just Robinhood makes it feel
like you're losing at Candy Crush while you're doing it. Certain financial
transactions shouldn't be as frictionless as Robinhood makes them, and I can't
help but feel that their platform is irresponsibly built. Their "Checking and
Savings" debacle show how fast and loose they play with regulations and
educating consumers.

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jppope
Super wise gentleman, thoughtful speaker, inspirational story... not always
right though... Trading stocks, or active investment is important for the
ecosystem, and having people learn hard lessons like not to gamble with money
they can't afford to lose is equally valuable. Free Markets depend on willing
participants, and progressively greater efficiencies (including in investment)

Epsilon Theory has a couple of notes regarding Berkshire => e.g. \-
[https://twitter.com/EpsilonTheory/status/1098596558495453187](https://twitter.com/EpsilonTheory/status/1098596558495453187)
\- [thread]
[https://twitter.com/EpsilonTheory/status/1096360266416209920](https://twitter.com/EpsilonTheory/status/1096360266416209920)

~~~
longerthoughts
>Trading stocks, or active investment is important for the ecosystem, and
having people learn hard lessons like not to gamble with money they can't
afford to lose is equally valuable. Free Markets depend on willing
participants, and progressively greater efficiencies

How do ignorant investors making senseless trades and learning "hard lessons"
improve market efficiency?

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QuackingJimbo
I work in HFT. He is completely correct

I always laugh when people say Robinhood is a good thing for society. Their
zero fees, cool app, and gamification of trading is simply ushering fools into
a casino

~~~
whitepoplar
Cool. What's the best way to minimize transactional costs when buying ETFs (as
a buy-and-hold strategy)? E.g. Should I only purchase marketable round lots?
Can I do any better than Fidelity/Interactive Brokers for price improvement?
Any tips to make my trades as efficient as possible? Or would you avoid ETFs
altogether and just purchase mutual funds directly from Vanguard, without any
transactional costs? Thanks!

~~~
QuackingJimbo
You are pretty much already there

For the majority of people, I would recommend just buying Vanguard funds

If you really want to trade anything else, IB is the way to go

~~~
whitepoplar
Gotcha, thanks! As for lot size, I know I mentioned round lots, but I
typically trade odd lots out of convenience. What does this cost me in
practice? Am I missing out on any investor protections that only apply to
round lots?

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dont-trd-charts
It’s common for a programmer to want to write an algorithm that tries to beat
the market. For better or worse, that’s what motivated me to want to learn how
to code.

The wisdom of driving people away from trading does make sense however

~~~
AznHisoka
Instead of writing code to beat the market, they are better off writing code
to create valuable datasets they can then _sell_ to wall street. Or
applications to help Wall street analyze huge datasets, sentiment or news
feeds.

Selling shovels, so to speak.

~~~
orojackson
Those same programmers would be better off just following Munger's advice and
putting money into index funds. Doesn't require writing any code; all it takes
is a few minutes to place an order.

I'm not exactly sure why the general sentiment here on HN discourages index
funds. It's pretty jarring coming from /r/personalfinance and Bogleheads.

~~~
AznHisoka
There's nothing wrong with index funds, and I think most people should dump
the majority of their money into them as well.

However, for those people who feel the obsessive need to game the system, and
make money faster, I would suggest not trading, but rather developing tools
and gathering data to sell to Wall Street.

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snazz
> _“Never underestimate a man who overestimates himself.”_

Good life advice, especially for dealing with people who have a tendency to
boast of their accomplishments.

~~~
repsilat
I totally agree. Also important to note that "always overestimate yourself"
and "bank on people who overestimate themselves" are _not_ solid corrolaries.

The boastful are high variance, even taking your own judgement into account.
And where there are power-law outcomes, exposing yourself to the wrong kind of
tail risk can be fatal.

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latencyloser
I feel like there's a lot of misinformation in this thread, not about the
article necessarily, but markets and trading in general.

Stocks are kind of the "beginner's" asset. They're fairly easy to understand
conceptually. "Trading" them is even easier. However, trading them in
isolation for a profit _consistently_ is very difficult or just a product of
luck. I don't know anyone who does it and wasn't burned eventually.

The thing to remember is, people doing funds or "trading" professionally
aren't just buying and selling FANG stocks all day. They're balancing these
trades with futures and options or options on futures and other alternative
assets. They're hedging their positions and setting themselves up so that
their probability of coming out ahead is much greater than you're standard "it
either goes up or down" stock movement.

A simple example is the "wheel" strategy in options. A short put at a .30
delta on the underlying, assuming 1 stddev movements gives about a 70% chance
of collecting the premium without assignment (of course this isn't perfectly
true, it's an approximation). This is already better than buying the stock,
which under the same methodology, would have a 50% chance of profit (either
going up or down from the purchase price). When assigned, turn around and open
a short call against the assigned shares at a similar delta and repeat. In the
flat market we've seen the last year or so, this is reasonably profitable and
very low effort.

Edit: The reason the "buy and hold an index forever" strategy is recommended
is because it's the lowest effort, highest probability of profit strategy one
can probably take. I agree with it entirely for 99.9% of people. But that's
not to say there isn't other opportunity out there if you're willing to learn
about it.

Source: spent a few years at the Chicago Mercantile Exchange working on these
sorts of things exchange side and now trade regularly on my own.

~~~
thoughtstheseus
Picking up those pennies in front of a bulldozer... Agreed, you can structure
trades to greatly improve your risk/return. There are whole other levels of
investing like selecting how to interact with capital structures or even the
market microstructure of how the trades work.

~~~
marketgod
No this is actually a good strategy if you want small gains of 20%~ per year.
The idea is you are long on the stock but you run the wheel against it so you
make money without the downside risk, since you are planning to bag hold it. A
lot of people who don't trade don't understand there are lots of ways to make
money in the market.

Edit: I posted in my history a way to automate something like this.

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pspencer
It's interesting to read how Buffett and Munger made their money. They
definitely didn't make it by investing in index funds.

What Munger is really encouraging in his talks is intelligent allocation of
money, knowing the boundaries of your knowledge, educating yourself, and
recognizing basic human psychological shortcomings (like mistaking speculating
for investing).

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AlphaWeaver
What exactly is the analogy being drawn here?

~~~
pakitan
The more appropriate analogy is that trading stocks is like gambling. And it's
not even analogy. Unless you _really_ know what you're doing, trading stocks
_is_ gambling, just with less house edge.

~~~
walshemj
I think what your talking about is speculating vs investing - the term
Benjamin Garnham uses.

~~~
unforeseen9991
Exactly. Few people get the difference.

Speculative trading is not investing.

Professional trading, esp with leverage, is extraordinarily difficult to gain
the required mentality, discipline, knowledge, and skills be consistently
profitable. The common saying is that 90% fail, I believe it's higher, perhaps
much higher. Learning trading was the most difficult thing I've done in my
life. It's hard in a way most people don't grasp.

------
hristov
This obsession with index funds is getting a little out of hand. Sure for many
people buying an index might be a good idea. I myself recommend that many
people buy an S&P 500 index. But to criticize all active managers is a little
wrong. For one, Warren Buffet and Charlie Munger are active managers
themselves, you do not see them buying an index fund.

Lets think about what happens when you buy the S&P 500 index. This is usually
the most recommended index, and the one I recommend too. You basically give
your money to own stocks of the 500 biggest publicly listed companies in the
US. If a company is big enough and it gets their stock listed on the major
markets it usually gets included in the S&P 500. (There are some exceptions
but generally this is the way it works). Does that make these companies good
investments? Not necessarily. There is a way to get big without being
especially good at what you do (through mergers). It is possible that certain
companies were very good investments before, had their stock appreciate, got
into the S&P 500, had a change of management or experienced a change of end
markets, and became bad investments. This is what happened to GE, for example.

The theory of indexing says that, yes there will be some companies in the S&P
500 that are not very good, but others will be excellent and it will all even
itself out and you will make money in general as the economy grows. But that
will only work if there are no secondary effects. If putting all money in
indexes becomes the usual course of action for institutions as well as
individuals then it would be very easy to exploit this. A company just needs
to get large enough to get send to the S&P 500 (again this can be done with
mergers and without necessarily being very successful or profitable) and then
they get a bunch free money send their way by way of indexing. And if you get
a bunch of badly run companies merging together to get into the index,
indexing will certainly become a rather money losing proposition.

The reason why indexing tends to work and it has worked so far, is that
indexers are kind of free riding on active investors. Active investors buy and
sell stocks and they thus cause the price to move up and down. The price of
the most wanted companies moves up and they get put into the top indexes,
where the free riding index investors buy their shares. The active investors
do not mind because they were first into the shares, and the free riders just
increase the value of their holdings. The free riders do not mind because the
active investors in a way pick stocks for them.

This all works fine but the whole system relies on there being enough active
investors to free ride upon. And if this whole buying indexes trend goes out
of hand there might not be.

Buffet and Munger have some good cause to criticize active managers. Many of
them have not been very good at all. Money management is one of those
professions where it is not easy to determine ahead of time where someone is
good or bad at it. Even excellent money managers can have a couple of bad
years and terrible money managers can get lucky once or twice. Thus, you have
to wait several years to see whether someone is actually good at managing
money and during that time they actually have to have money to manage. So to
even test whether someone is a good money manager requires taking on a lot of
risk. And because being a money manager can be so very lucrative and glamorous
and because it is so hard to distinguish the good ones from the bad ones the
whole field attracts a lot of smooth operators that know how to ape the look
and talk of a person the public would expect to be a successful money manager
but they do not know how to do it.

This is a problem with many other professions that are glamorous but where it
is hard to initially tell the good from the bad. These include TV/Movie
director, TV/Movie writer, politician, newspaper column writer, artist etc.

That being said there are money managers that are undoubtedly very good.
Buffet and Munger are themselves a couple of examples. There are many others.
Perhaps there aren't enough of them. Perhaps we as an economy are having a
problem of not being able to train and recognize able money managers. That may
be the case, but that does not mean we should abandon the concept of an active
investor. The world actually needs active investors, money managers and asset
alocators in general. The dream of simple, cheap and easy passive investing
cannot work without them.

------
RickJWagner
I really like to listen to Munger, Buffett, Dalio and recordings of Jack
Bogle.

These guys have won the game, they are trying to teach others how to do it. We
have much to gain, just by listening.

~~~
ydnaclementine
Non facetious question, did they make their money doing what they're
suggesting (passive investing), or do they have the knowledge that for most
people passive is the best answer?

I guess I answered myself (the second)

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JohnFen
Since I know how to trade stocks, but find that activity massively unpleasant,
I guess I can assume that I wouldn't like heroin either?

~~~
fucking_tragedy
I don't think anyone goes into heroin liking to put questionable needles into
their body, but that's what they usually end up doing.

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throwaway-1283
More like trading options

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cde-v
It is addictive like any other sort of gambling/speculation.

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LeicaLatte
What about equity to employees? founders?

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number_six
and r/wsb is like the flophouse I guess?

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BucketSort
I heard that if you give opiates to patients at a hospital they don't get
addicted because it is in a controlled environment where the patient is not
seeking out those drugs for pleasure. If someone is getting heroin off the
streets, the are looking to fill a void and it's perfect for that ( not
perfect for your health or lifestyle obviously ). Obviously if people are
looking to stocks as a gambler does, it can be like an addiction. Whereas if
people are looking to trade stocks as a principled investor, this analogy does
not apply.

~~~
carbocation
> I heard that if you give opiates to patients at a hospital they don't get
> addicted because it is in a controlled environment where the patient is not
> seeking out those drugs for pleasure.

I am not sure if this is sarcasm, and I don't think it is, but just want to
mention that I can't always tell on the Internet.

In-hospital opiate use can be important. But, there is good reason to believe
that people using opiates appropriately for pain can still ultimately develop
dependence and may develop addiction. Opiates have an important role right
now, but the "fifth vital sign" is one of the things that presumably got us
into big trouble with the current opiate crisis. We should tread lightly.

I know this is slightly off-topic, but if since the whole topic is reasoning
by analogy, it seems worth a brief mention.

