
Why I don't trade stocks and (probably) neither should you - xyzelement
http://edmarkovich.blogspot.com/2013/12/why-i-dont-trade-stocks-and-probably.html
======
wpietri
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-
Market...](http://www.amazon.com/Fooled-Randomness-Hidden-Chance-
Markets/dp/0812975219)

~~~
slykat
"Naturally the disservice done students and gullible investment professionals
who have swallowed EMT has been an extraordinary service to us and other
followers of Graham. In any sort of a contest - financial, mental, or physical
- it's an enormous advantage to have opponents who have been taught it's
useless even to try." \- Warren Buffet

This quote neatly summarizes what I fundamentally don't accept about this
viewpoint. Specifically, most of the article's arguments are those you
encounter from Efficient Market Theory which has pervaded our financial
education to the point of being accepted as blindly as faith and has lead to a
lot of pain & suffering by investors. Here are some key messages from the
article which I find incredibly dangerous and damaging:

1) UNLESS YOU ARE "SPECIAL", INVEST IN INDEX FUNDS

Index investing has become a sexy mantra in the era of EMH and passive
investing. If you can't beat the market - why not just follow it? At first
glance it does seem like a great option as it cuts out middlemen fund managers
who seem to invest on chance. However, it's a mantra that is self defeating as
more investors adopt it. Although indexing is predicated on efficient markets,
the higher the percentage of all investors who index, the more inefficient the
markets become as fewer and fewer investors would be performing research and
fundamental analysis of equities. At the very extreme, if everyone practiced
index investing, stock prices would actually never change relative to each
other since everyone would be "all in" [I've loosely paraphrased Seth
Klarman's arguments from _Margin of Safety_ but for a much more exhaustive
treatise please dive into the novel]

I think a golden rule of investing is you should reject any absolute
assessment of a investment vehicles ("gold always goes up", "invest in index
funds", "junk bond funds have lower risk at higher return"). Wall Street loves
to peddle their latest, shiny investment creations; don't rely on their faith
- no matter what you invest in, you better do some damn research on it (even
an index fund).

2) STOCK PRICES REFLECT THE CONSENSUS AND GOING AGAINST THE CONSENSUS IS BAD
(worded as aggressive in the article)

This is in it's heart is the essence of the efficient market hypothesis -
prices are rational and reflect underlying public information. I'm not going
to into a huge essay against pricing being rational but history has shown time
and again that prices reach irrational exuberance; tulip mania and trading
sardines are not merely historical phenomenon. _Intelligent Investor_ by Ben
Graham details out some clear cases where stock prices did not reflect
anything remotely close to underlying public information. Off the top of my
head, there are many examples where passively managed closed end mutual funds
traded significantly from their NAV value (which makes little sense).
Historical records shows that supply and demand factors (rather than
underlying information and rational actors) drive stock market prices.

As a nice hypothetical example, let's think of a change in the S&P 500 where
the new stock AWSM pushed out OLDFTHFUL from the S&P 500. Let's assume the
changing of the index happened during a lull period in both companies where no
material information about the companies was given out (i.e. their economic
forecasts were stable during the S&P shuffling). Since everyone was following
the "invest in index funds" argument of the author, this triggers billions of
purchase orders for AWSM and lots of sell orders for OLDFTHFUL. Naturally one
stock rises while the other stock falls even though there has been absolutely
no change in the forecast for either company.

3) YOU ARE COMPLETELY BEHIND THE CURVE WHEN INVESTING - DON'T BOTHER UNLESS
YOU KNOW INSIDE INFORMATION

Nothing could be the further from the truth. Frankly, it's probably one of the
best times to do rigorous stock analysis since 1) we are in a time when most
investors embrace the EMT and thus don't bother doing even basic fundamental
analysis 2) financial info and SEC filings can be easily acquired through the
internet & hacking and financial modeling can be easily done with Excel &
programming 3) many of the institutional actors that drive the market are not
incentivized to conduct fundamental analysis. Specifically, mutual funds have
specific characteristics that prevent them from acting rationally
(requirements on diversification, inability to short equities, large fund
size, low cash reserves, etc.). Hedge funds have similar issues (20% fee
structures which incentivize short term thinking).

Things might not be as rosy as during Ben Graham's time, but don't fool
yourself into thinking that doing research into your investments is a waste of
time. Any natural scientist will never accept that further research will yield
nothing, but for some reason we accept this in the investing world.

4) YOU ARE TRADING AGAINST GOLDMAN SACHS. DO YOU REALLY WANT TO BET AGAINST
GOLDMAN?

I hate this perception; Wall Street's business model is largely driven by
volume rather than investment acumen. I.e. they make money as long as the
market moves, regardless of the direction. Goldman is a giant because they
manage the machinery of markets, not because they are expert stock pickers.

Overall, I think the world would do a lot better with this advice: "A stock is
a small percentage share of a company. Treat investing your money in an equity
exactly as you would treat investing in a business." I think most of the
investing mistakes alluded to this article would be prevented by heeding this
advice.

~~~
tempestn
It's worth noting that that Warren Buffet quote was from an annual letter
written in 1988. The retail investing landscape was _very_ different then than
now. For quite some time, Buffet has been a strong proponent of index
investing. Here's one from that same annual letter, in 1996:

 _Most investors, both institutional and individual, will find that the best
way to own common stocks is through an index fund that charges minimal fees.
Those following this path are sure to beat the net results (after fees and
expense) delivered by the great majority of investment professionals.
Seriously, costs matter._

True, he doesn't say you _can 't_ beat the market. But he does say, then and
now, that you probably shouldn't bother trying.

Plus, say through in-depth research and know-how, you do manage to beat the
market. At best, you've created a part-time job for yourself. Unless you're
managing other people's money, or have a 7-figure+ portfolio, I expect the
time taken to do the due diligence necessary to consistently beat the market -
if indeed such a thing is possible - would end up paying a lower hourly rate
than you could earn doing other, more reliable, less zero-sum things.

~~~
icefox
>Plus, say through in-depth research and know-how, you do manage to beat the
market. At best, you've created a part-time job for yourself. Unless you're
managing other people's money, or have a 7-figure+ portfolio, I expect the
time taken to do the due diligence necessary to consistently beat the market -
if indeed such a thing is possible - would end up paying a lower hourly rate
than you could earn doing other, more reliable, less zero-sum things.

Of course most people wont suddenly have a 7+ figure portfolio, but will first
have a 5+ and then 6+ figure portfolio. Yes I researched something for days
when I was only investing $30K and that could be called a low hourly rate job,
but I was learning an immense amount and now can do the same research in only
a few hours all while dealing with a significantly larger amount so my "hourly
rate" keeps going up.

And for what it is worth I am really enjoying the process.

~~~
tempestn
Fair enough - if you enjoy doing it, then it's a hobby and it doesn't matter
how much you make. But I certainly wouldn't want to put an entire 7+ (or even
6) figure portfolio in a single stock, or even a handful of them. Say that
your analysis is dead-on, but some completely unforeseen event strikes the
couple of companies you've invested in. There goes a good chunk of your life
savings.

I certainly don't think there's a problem with devoting a small percentage of
your portfolio (say 5%) to stock picks, or even a larger percentage split over
multiple stocks, if you enjoy doing it. I occasionally do it with 5% too. But
with retirement savings, I like to have as many guarantees as possible. By
investing globally in index funds, I have as much confidence as possible that
unless the world implodes, my savings will grow over the coming decades. If I
pick individual stocks, even a decent number of them - holding say 10-15 at a
time - and even if I actually AM really good at it, it is entirely feasible
that I could lose money in the long term through bad luck alone. So even if I
can increase my expected value through stock picking, I also significantly
increase my risk.

I find personal finance fascinating too, but I prefer to spend my hobby time
studying multifactor investing (regression analysis, etc.) and researching the
optimal funds to achieve a moderate small and value tilt, while maintaining
low costs and broad diversification.

~~~
icefox
Rather than a short comment a few different books I could recommend that you
might like on this hobby/topic are:

-Your life or your money (personal finance more than investing) -The Warren Buffett Way -The Five Rules for Successful Stock Investing: Morningstar's Guide to Building Wealth and Winning in the Market...

~~~
tempestn
Thanks, I'll take a look. I did read the Intelligent Investor years ago and
enjoyed it, but honestly between searchtempest, family, and relaxation time,
I'm also pretty happy to have a portfolio that can run on autopilot. :)

My top book recommendation BTW would be the 4 Pillars of Investing by Bill
Bernstein.

~~~
icefox
Ah if you read Intelligent Investor you are ahead of most and The Warren
Buffett Way would then just be a light fun rehash read (usually the book I
recommend before Intelligent Investor). The Five Rules for Successful Stock
Investing at least for me was a good book that explained reading financial
reports. I'll check out 4 Pillars of Investing, thanks

------
c2
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
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
>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)

~~~
danteembermage
Sorry, maybe I wasn't being clear. When I said "Doesn't pay more than you
would have" what I meant was "Doesn't pay more [transactions costs e.g. fees
and bid / ask spread] than you would have [had you just pursued an indexing
strategy" In that light the current price of Berkshire Hathaway isn't
particularly relevant because even if I just bought Berkshire stock I would
still pay the spread. In fact the current B/A spread on BRK.A is
183218.7-174644 = 8574.7 which is considerably higher in percentage terms than
a stock with more volume. Of course that's probably exactly how Uncle Warren
wants it given he's let the price go so high with out a split.

------
lkrubner
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.

~~~
hsitz
"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_.

~~~
brc
There are plenty of professional investors who have beaten the market year
after year, and by a lot more than single digit percentages. Multi-decade
returns of 20% and above are well documented. I personally invested in a fund
12 years ago which has returned a compound 21% pa return over that period, so
I know that they definitely exist. The chance of this happening due to luck is
impossibly low.

Some professionals have an edge by developing a model of the market that suits
their particular risk levels/cognitive model. As long as that edge continues
to work, they continue to outperform by large amounts. The edge might be
extraordinary discipline, it might be a allocation size model, it might be a
risk-management model. The edge has to exist, and most importantly, it has to
match the psychological profile of the individual.

The mistake is not that the EMT is particularly true, it is that amateurs
approach the markets with the hope of replicating the results of the
professionals, and that amateurs think they have an edge, but they in reality
do not.

If the Efficient Markets Theory is to hold true, then in no case should people
have multi-year returns well in excess of average. Since this is true, then
most people will say that the theory is false. I don't really have a dog in
the fight- I don't care either way. But I don't think you can say that it is
chance that causes people outperform the market, because there is far too much
evidence to the contrary.

As for the 'people studied for years' bit - I don't think that strengthens any
argument. The research world is littered with theories that have failed, and
length of time spent researching has little correlation with factual
correctness. Ultimately, more theories have to fail than succeed in order for
knowledge to be gained.

~~~
fist
"There are plenty of professional investors who have beaten the market year
after year"

"Multi-decade returns of 20% and above"

Do you have any proof of these over the top claims?

~~~
grosskur
Peter Lynch. He managed the Fidelity Magellan Fund from 1977 to 1990 and
averaged a 29% annual return over that period.

[http://en.wikipedia.org/wiki/Peter_Lynch#Fidelity](http://en.wikipedia.org/wiki/Peter_Lynch#Fidelity)

~~~
skorgu
13 years is not multi-decade.

------
oofabz
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
> 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.

------
minimax
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.

~~~
nostromo
Are you joking? I honestly can't tell.

~~~
minimax
Yes I thought it was obvious from the last sentence (i.e. selling on to the
greater fool).

~~~
IvyMike
Bitcoin discussions on Hacker News are subject to Poe's Law.

~~~
simplemath
>discussions

------
drinkzima
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-...](http://kiddynamitesworld.com/norilsk-nickel-russian-odd-lot-
arbitrage-anatomy-of-a-trade/)).

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
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#Cri...](http://en.wikipedia.org/wiki/Efficient-
market_hypothesis#Criticism_and_behavioral_finance)

~~~
nickff
No one has ever explained the cyclical recessions which we all observe; the
efficient markets hypothesis does not directly address it.

------
math
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.

------
girvo
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
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.

------
CurtMonash
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.

------
tehwalrus
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
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
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
> _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.

~~~
tehwalrus
> _Receiving dividends isn 't buying part of a debt; it's receiving your share
> of the profits of the company due to ownership._

Apologies, I'm applying my own meta-interpretation of company funding - for a
non-profit, ownership consists only of the assets since there will never be
profit, by definition, so the market goodwill is defined to be 0. In such a
situation, you can still get exactly the same money to change hands as an
investment in a for-profit - by calling it debt. The non-profit could pay
interest on the debt in the same way as dividends are paid, and so on. These
work like non-voting/Preference shares.

I automatically convert "real" terminology into this framework in my head, as
I don't really believe groups of people (companies) can be valued
philosophically. Apologies for letting it slip out!

> _What do you suppose happens when you "save" money?_

I am well aware of all this, a savings account is a less risky way of doing
the same thing (although you're supposed to be investing in mortgages rather
than companies). When savings rates are good, there isn't any need to risk
your capital (let the bank do it for you). When rates are bad, you need to
take on some of the risk yourself in order to get a good return. My analysis
doesn't change.

> _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._

But you aren't. If you're buying a _new share issue_ , then sure you are. But
if you're buying from someone else in the market, you _are not_ funding the
company in any way - they don't get any money out of the transaction - what
you are doing is much closer to buying a debt in terms of what money actually
changes hands.

~~~
onebaddude
> _My analysis doesn 't change._

My point is that these transactions (putting money in a savings account) are
"trades" themselves, and all you're doing is shifting risk around. It isn't a
better/worse alternative, it just reallocates the capital, the same way that
trading stocks does.

------
Gustomaximus
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.

~~~
crntaylor
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
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!

------
lincolnq
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
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
You only have to know more than half of the market.

------
wehadfun
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

------
qznc
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=3i6cUsb...](https://www.google.com/finance?q=NASDAQ:ARMH&sa=X&ei=3i6cUsbXMYbOygPH64HACQ&ved=0CC4Q2AEwAA)

------
morgante
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
> _" 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
> \- 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
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).

------
plam
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.

------
gregrata
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.

~~~
gjmulhol
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.

~~~
gregrata
I bought AAPL at that price in May of 2005. I held on to it during the crash,
buying more in 2008 (when it had gone down a fair amount). And you're right...
my total gain (including purchases at the higher price) is 430%. My total for
that initial purchase is higher :)

------
colanderman
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
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
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.

~~~
grmarcil
It seems like you are equating the author's argument with the efficient market
hypothesis. A few others on this thread have made a similar indication. While
conclusions of both the OP and the EMH are similar (you will not/cannot beat
the market), the underlying arguments are really pretty different.

The OP really doesn't invoke an efficient market at all in his arguments. His
argument follows the line of statistical studies (eg
[http://www.umass.edu/preferen/You%20Must%20Read%20This/Barbe...](http://www.umass.edu/preferen/You%20Must%20Read%20This/Barber-
Odean%202011.pdf)) of individual investor performance, which conclude fairly
uniformly that the average individual investor underperforms the market
average, for a variety of emotional, strategic, and competitive (dis)advantage
based reasons.

The bottom line of this sort of study/argument is that individual investors
tend to act on the belief that they have better information than the market.
But, when your opponent is a professional, and you are an amateur, you are
going to get beaten more often than not. See evidence in your own comment the
belief that you could, in certain situations, understand market behavior just
by looking at it: "betting against moves that seem largely caused by "dumb"
capital". How could you possibly know that a market move was caused by "dumb"
capital? Even if you could, how could you expect to know this better than
professionals?

All of this, to be clear, is talking about long term, population-wide
averages. Everyone can get lucky once, and some outliers get lucky more than
average.

------
return0
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
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
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
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.

------
junto
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.

------
dragontamer
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.

------
stkni
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.

------
mcdougle
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
FYI, there are a couple ETFs that focus on high-dividend companies. I hold a
small position in HDV, for instance.

------
lsc
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
> 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
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.

------
yason
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
> 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.

------
chavesn
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
_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.

------
vasilipupkin
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

------
Spooky23
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%.

------
wonnage
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.

------
mojoe
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.

------
pyrrhotech
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
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.

------
ScottBurson
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
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.

~~~
gaius
Buying (investing) and trading are different games.

------
rdtsc
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?

------
mcv
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.

------
ac1294
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
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)

------
hexagonc
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.

------
gfodor
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-
Practition...](http://www.amazon.com/Quantitative-Value-Web-Site-
Practitioners/dp/1118328078)

[http://www.amazon.com/Expected-Returns-Investors-
Harvesting-...](http://www.amazon.com/Expected-Returns-Investors-Harvesting-
Rewards/dp/1119990726)

[http://www.amazon.com/Jackass-Investing-Dont-
Profit/dp/09835...](http://www.amazon.com/Jackass-Investing-Dont-
Profit/dp/0983504016)

------
gws
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

------
Mikeb85
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
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
It's not possible for everyone to beat the market, which is what counts if you
treat it like poker.

------
MarkMc
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)

------
vikas5678
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?

------
k_os
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

------
nicholas73
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.

------
PhantomGremlin
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_c...](http://en.wikipedia.org/wiki/Hillary_Rodham_cattle_futures_controversy)

------
vikas5678
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.

------
mathattack
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.

------
Havoc
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.

------
fragsworth
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
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.

------
walshemj
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

------
salient
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?

------
georgeecollins
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.

------
gjmulhol
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.

------
goshx
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.

------
aaronbrethorst
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
I think the answer is "neither," exactly like the gambler on a hot streak is
neither good at roulette or due for a loss.

------
dmourati
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.

------
rcthompson
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?

------
kerkeslager
This also goes for everyone speculating on cryptocurrencies.

------
nthnclrk
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.

------
tedunangst
Better title would be about not _picking_ stocks. If you're buying index
funds, you're trading stocks by definition.

~~~
sseveran
That is factually inaccurate. There are a wide variety of ETFs which have non-
equity instruments as the underlying assets.

~~~
tedunangst
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
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&...](https://personal.vanguard.com/us/funds/snapshot?FundId=0084&FundIntExt=INT)

------
atmosx
Hm, If the other side is GS and you don't have inside info, you better look
for a carrier in some other field.

------
robomartin
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.

------
spo81rty
I couldn't agree more. Paying retail brokers is a rip off. Low cost ETFs are
the way to go. Buy HDV ETF.

------
rl3
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.

------
kingmanaz
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/Prote...](http://www.softpanorama.org/Skeptics/Financial_skeptic/Protecting_your_401K/Protecting_401K_from_yourself/naive_siegelism.shtml)

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-
portfo...](http://www.crawlingroad.com/blog/2008/12/22/permanent-portfolio-
historical-returns/) ), 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.

------
aaron695
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)

------
a8da6b0c91d
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.

------
digler999
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
actually, at the beginning, he does say that you should invest in low-cost
index funds

