. Big shot fund managers can't consistently beat the market, and they do this 40+ hours a week -- why should you do better?
. Stocks should be a long term investment; the market has always had a positive return over any 20 year period. Index fund and don't worry about it.
. You'll do a lot better applying energy to your start-up or whatever you're working on than dwelling on ticker prices.
. You're probably not playing with enough money to make it worth worrying about
Ramit Sethi's "I Will Teach You To Be Rich" book is a great overview of personal finance. He convinced me to automate my investments and not worry about following the market day to day.
(UPDATE: fixed formatting, thanks davidw)
>.Big shot fund managers can't consistently beat the market...
1. My understanding is that literature regarding this generally refers to the mutual funds. I've also heard it voiced that the mutual fund community on average doesn't beat the market. That's not the same thing.
2. Renaissance. Quantum Fund. DE Shaw.
I generally thing that HN types are the types who are smarter and likely competitive with the best and the brightest in finance.
>. Stocks should be a long term investment;
> the market has always had a positive return over any 20 year period.
1. Some people want returns in timespans of shorter than 20 years.
2. Not all markets have had positive returns over all 20 year periods. Even US equity markets have had losing 10 year periods, and inflation adjusted returns make the picture bleaker as well. I'd say the SPX has a good shot at not beating inflation adjusted returns for the 20 year period beginning in 2000.
3. "Positive" isn't good enough for everyone.
>.You're probably not paying with enough money to make it worth worrying about
Gotta start somewhere. My first program was "hello world."
Investing time in learning about financial markets isn't for everyone, just like software startups isn't for everyone.
Facebook:Renaissance :: <insert YC startup here>:Jane Street Capital :: "hello world":making your first trade
Learning to trade or invest or code or build startups is just another skill.
Thinking you're smart enough to compete with people who are not only very smart, but also experienced and dedicated sounds like a good way to get royally screwed if you're not careful.
Absolutely. I started with $2000 and doubled it many times over to pay for tuition. But I read everything I could and watched my stocks religiously.
I would buy and sell every few days or weeks to make use out of every 5% gain or loss in the stock's value.
Yes, the fees (etrade at $20 a trade) were ridiculous. They might have cost me 25% of my gains but at the end of the day my gains were still up there. It's much cheaper to trade now.
If you have the time to invest then I would learn foreign exchange instead. You can have much more leverage there without much initial capital. I would love to spend more time on trading my money but as you move on from school life just gets busier. So go read and make some money.
PS: I should say I lost my fair share initially as well.
They're cheap. For US stocks its $.005 to $.01 per share (with a $1 min per order) or something. I think most people here are interested in trading stocks (if interested at all).
You can write as many Hello World programs as you want for no incremental fee — but every trade costs money, so you need to trade enough to offset the feeds.
Regarding 20-30% returns on fake money, but 0-5% on real money, trading fees should be an assumption you make when you trade with fake money. I'm guessing you did, but if there's such a wide disparity, it just means you have to re-evaluate. Writing strategies is just like a software startup. Be agile, course correct often, when expectations differ from actual results, find out why.
If trading costs is really your primary issue, I guess I'm plugging http://www.algodeal.com since I just discovered them over the weekend and it sounds sort of cool and like a good platform to learn to do it with no cost (except the cost of many Hello World programs).
[I am in no way affiliated with Algo Deal. I haven't even really looked into it that much. But their splash page sounds cool and I'm frankly envious that its their startup and not mine]
What i haven't understood yet is why index funds are supposed to be so great. At least if everybody would just buy undex funds, it wouldn't work. Also, who picks the stocks in the index? Why would index funds be better than just buying some random stocks?
It is noble that you prefer to fix it. I consider that "fixing" broken things is a task that adds value to the world. I think that value creation generally is something that is rewarded (not necessarily monetarily), and that "fixing" inefficiencies or loopholes in the markets is rewarded with money.
I'm not sure what "exploit" means or why you seem to use "make money" as a bad thing. Society uses "automation" in a wide range of tasks that was not previously possible. In finance, like in other cases where we automate previously rote tasks, I think its important to check it, because bad code running on tight loops can have disastrous consequences.
Over the last 25 years, including the recent meltdown, the best investment was long US treasuries.
My advice is to do your own research buy a small group of stocks you know very well, preferably that pay a dividend, and hold them. When they go down, if you are still a believer buy more.
Stay away from mutual funds, they are loaded with hidden fees, their managers are like cattle, and they typically do well only in bull markets when everyone does well.
"The Investor's Manifesto: Preparing for Prosperity, Armageddon, and Everything in Between" - William J. Bernstein
"The Random Walk Guide To Investing" - Burton Malkiel
Do I believe that the market is completely efficient, and that it's impossible to beat it over the long term? Absolutely not. But I do believe that there are very few people in this world that can, and I'm darn sure I'm not one of them.
Take 80% or 90% of your portfolio, whatever suits you, and follow an index-based approach to investing. Have as much fun as you want with the other 10% or 20%. Best of both worlds.
It's a zero sum game, but one might be smarter than others. Some companies doing algorithmic trading consistently skim off their share of the market's inefficiencies.
What I'm wondering is how much of an investment it would be to get into high-frequency trading for yourself. Any idea?
Someone sent me this gem a few days ago.
I love the idea (for the guys who run it AND the guys who it opens up opportunities for).
Might be something you could play with.
Depending on what sort of HF strategy you want to run, I imagine this can be done relatively cheaply. (300K-800k? Pretty wide range I know... that's all I got though).
Obviously your strategies are limited, you're not competing with some of the super low latency firms for the fastest of opportunities because of hardware limitations or price prohibitive vendors/deals with exchanges or whatnot.
I was just reminded of this:
If I recall correctly, he got started with under 100k and has a pretty inexpensive setup.
"High Frequency" trading means a lot of different things to a lot of different people.
I'm a bit skeptical of algodeal. If they are seriously doing this (actually licensing strategies and following them), wouldn't they be setting themselves up to get ripped off? It seems that if you know what strategy someone is going to use, you can use it against them (effectively changing the market between historical tests and a live run).
I haven't really looked into it, but what it sounds like to me is they provide you a platform to build strategies and test them, play with fake money. They may optionally take your strategy and run it in the market. If it is successful, they split returns with you.
When you say they're setting themselves up to get ripped off, I think you're suggesting that Evil Person X may come up with a strategy A that does well enough in backtests, but is paired with a strategy B designed to rip off that strategy A. Then after AlgoDeal applies strategy A, I put my secret millions to work and make better returns for myself.
They don't HAVE to run your strategy. I'm assuming they're smart guys and have some selection criteria other than "performed well in backtests", so they'd try to choose strategies that were less likely to get ripped off by the evil person's counter-strategy. Also, I think of this as being the VC who seems massive dealflow. Half of it is the fun of seeing all the good ideas and picking the top ones. Some will still fail, but choosing from a much larger base of ideas is great. Plus they utilize their own expertise to tweak strategies for themselves.
Its basically YC for algo strategies, except they don't have to pay you, they can steal your startup and change it a bit, and they take a much bigger percentage (i'd guess 50-80%, based on what I think are something like industry standards).
Its quite common place in finance to have people give you strategies and give them a cut of the profits. This takes it to the next level: crowdsources strategies and removes the barrier to entry for a lot of smart people (trading costs) in exchange for the right to tap those ideas.
It most certainly is not.
When you buy shares they represent a share in a company. This company may rise in value due to good management, successful products, expanding into new markets, etc. If you sell your share at a higher price, no-one is going to lose the money you will earn, the company is just worth more than when you bought it.
Other securities may make you money in other ways, e.g. if you buy T-bills the FED is paying you interest on the money you effectively loan them.
This however is not zero sum game or has anything to do with markets or investments, it is just how averages work. You could apply the same logic to grades in a school class.
¹ There are lots of market indexes and they only cover a fraction of the investment possibilities and are often trade specific.
P.S. Traders often say how their work is useful to everyone, because it makes the markets more efficient. I wonder if it's true. The analogy I'm thinking about is frequent lane swervers on the freeway ("lane arbitrage"). Are they making the freeway more efficient for everyone? I don't think so.
As for invested very intelligently I don’t think you can define that, nor what it means for everyone [to] be better off and more trading of a stock does not mean more money go into the company the stock represent (assuming the stock is not sold directly by the company).
This is all very long-winded to get into here, but as a quick example of how this “intelligently” and “better off” is ambiguous I think we would be better off with more alternative energy, so people should invest in that. But a lot of these investments will likely turn out to be non-profitable (even cause a loss) but on the bright side, a lot of R&D in alternative energy will be done, which is good, and those companies with good projects may end out making a difference in the world, etc.
And how does someone lose money if the prices stagnate? The prices have to actually drop for someone to lose money.
Fundamentally this stuff is pretty simple:
I have an idea for a business, I need $1,000,000 in startup capital. I sell 1,000 shares costing $1,000 each.
After a year my business is profitable and valued at $2,000,000. The stock is now worth $2,000. That means everyone who bought my stock now earned $1,000.
Who lost on this? you can say that the consumers who paid my company (to make it worth more) lost, but a) these are not part of the stock market, and b) my product may actually have saved them more than they spent.
It is not a psychological game, i.e. if someone somehow managed to make the Microsoft stock drop to zero then I would effectively be able to get all of Microsoft for nothing, that’s a pretty sweet deal, and why that stock won’t drop to zero as long as they are profitable.
The “psychology” that affects the stock prices are in speculation about the future worth of a company, and that is why you see a disconnect between a company’s net worth and market cap — generally the market cap should be above its net worth, otherwise someone should buy all the shares and liquefy the company :)
Market players who didn't invest in your idea (you could call it "opportunity cost").
If the baseline strategy is "invest randomly", or "invest a little bit in everything", then those who deviated from it by way of not investing in your idea, lost.
It only makes sense to evaluate a market player's performance relative to some baseline strategy. I was trying to make this point elsewhere in this thread.
zero-sum describes a situation in which a participant's gain or loss is exactly balanced by the losses or gains of the other participant(s)
PS: Your definition appears to be "you lost iff you left with less money than when you came in". OTOH, my definition is "you lost iff you made less money than if you would have if you'd invested it in an index fund".
Through their efforts there are now thriving mining colonies living permanently in space, and a whole industry was created around their operations. Without the initial funds they received from their IPO, none of this would have been possible. As the years pass, they expand further and further into space, with no limits in sight. Another 10 years later you decide to cash in your 1% share and find yourself the proud owner of your own small moon.
I don't do HFT, but with what our company does, I've spoken to a few people who do. So take all of this with a pinch of salt, but as I understand it, your execution and autonomous trading systems live in the same rack as your exchange/dark-pool endpoints. Your slower strategies can be offsite, as is the Big Red Button to close down your positions. Still, faster's invariably going to be better, all else being equal...
In the same way taxes are a reason to not get into money making ventures.
Short term trading encompasses a lot of ideas. Some are good some aren't. Many "short term" trading strategies have significantly higher sharpe ratio's than Fool style investing. Fool investing is great. I learned a LOT from that site. But I also want returns in shorter time spans, so I'm willing to pay that capital gains tax.
Motley fool is a GREAT source for long term investing knowledge for anyone interested in that. A lot of other great classic investment texts are getting thrown around in this comment thread (Intelligent Investor, for one).
Recommended book for those interested in "Motley Fool"/Benjamin Graham/Warren Buffet type investing, I'd also recommend
Its sort of in the same vein, but slightly shorter term, backed up by a lot of statistics. Basic principle: Choose the best 20 companies every year. Define "best" as top PE or some other really simple metric. You can tweak it a little as well based on your personal risk profile, desired industry exposure. Consistently outperforms the market.
The motleyfool is a site that looks amazingly like spam and reminds you of all the "earn 50 bazillion percent every hour using options!" emails you get, but is actually chock full of great information.
Greenblatt's book sounds shady as hell, but its a quick, easy read and quite informative, backed by just enough logic to make you want to try it.
On the exercise date the payoff for the buyer of an option that's in the money will exactly match the loss of the seller. Vice versa if it's out of the money. Kind of neat.
BTW, your formatting is messed up, don't indent the points.
People who write better code (and faster), know more VC's, first to market.
Finance, like startups, is a big world with room for many of players of different flavors.
My POV = trading is zero sum (or worse, because transactions take money, and brokers are a guaranteed to win 3rd party in every transaction)
However, I don't think thats the right analogy.
Every trade in trading is like the credit card transaction you make towards Dropbox every month. That transaction is zero sum (with Amex skimming 1.7% and Spreedly taking some too, just like brokers). I buy a stock, for an agreed upon price.
Dropbox gets nothing if they don't provide value to the marketplace. You don't get customers in trading if you don't provide value to the marketplace. Every dropbox competitor takes dollars out of dropbox's pocket (so in that sense is zero sum across strategies). Every trade I take from Citadel is a trade they don't make.
There's lots of money flying around, its a big pie, I just want some crumbs.
Basically, startups get paid because they fill a market need.
Traders get paid because they fill a market need. If I create a strategy that nobody wants to trade against, I'll have no customers, make no trades, and will never get paid.
I'm not saying there aren't sketchy strategies (true in finance and web startups). I'm not on top of the whole flash orders story, and I think some people take advantage of weaknesses in the system. Thats true in every industry though.
I don't know much about investing but I did dabble in trading, especially penny stocks. No, I am not talking about those scam emails where they claim that their stock pick is going to go up 100% in a month. I am talking about realizing those penny stock scams and 'shorting' them to your advantage. I learned about shorting penny stocks from Timothy Sykes (http://www.timothysykes.com/) and have made some money. There are quite a few other traders who share their knowledge through blogs. Few blogs which I follow:
And most important tip: Trading is very risky. The saying '90% of the traders lose money' is spot on. Realize that trading is an extremely difficult profession and be very careful if you do decide to take the red pill.
If you get an account with a company like Interactive Brokers, they offer an API. They also only charge $0.005 per share.
You can study a trading method called momentum trading, which is the idea of riding the curve for a very short period of time. For example, right after a financial statement is released, the company's stock is going to go up or down, depending on the statements results. You can write a program that immediately determines the direction the share price is going at the time in which the statement is public, then buy long or short depending on its direction. Then do the opposite when the program determines the up or down curve is leveling off.
Pretty interesting stuff, and it'll get you engaged.
As far as books, google momentum trading.
And this talk by Charlie Munger on stockpicking and the art of worldly wisdom:
The two major mental models which I've found helpful in understanding the market are the Efficient Market Hypothesis (EMH; http://en.wikipedia.org/wiki/Efficient_market_hypothesis) which explains how the market acts under idealized conditions of rationality. Temper this with learning about Behavioral Economics (http://en.wikipedia.org/wiki/Behavioral_economics) which covers issues of human perception and how us semi-rational beings actually act, such as perceiving a loss of $100 as twice as painful as a gain of $100.
The Intelligent Investor by Benjamin Graham is a wonderful book, but reads densely. In more recent editions contains thoughtful side commentary by Jason Zweig which help break up the text and give a more modern perspective. A key idea is the separation between investing and speculation: set aside some percentage of your portfolio for speculating, and experiment with it, but investing for the long-term is the way to go in the absence of something which allows you to escape the financial gravity of the efficient market.
A Random Walk on Wall Street by Burton Malkiel covers efficient market theory thoroughly. The Intelligent Asset Allocator by William Bernstein for approaches to constructing long-term portfolios.
Lots more to say on this issue, but hopefully some of these starting points will get you thinking.
personally I didn't find the games etc to be all that useful, you act completely different when it's real money on the line.
luckily I started out around the time the market started picking back up, so even when I made stupid bets they paid off.
I went out to NY last week and met with the guys from http://stocktwits.com. They're trying to revamp trading through social media. They have a really active twitter channel,and I follow a number of their twitter feeds.
They've also started streaming live video while the US market is open. They have a number of traders broadcast live while they are trading. It's a pretty cool concept. I wish them well.
If you looking for reviews of trading news, and companies, etc... there's http://www.investimonials.com/.
are both very good general resources.
Investments is a very broad approach that covers a lot of markets and basics and how things work. Very accessible to complete beginners.
The Hull is an introductory text and a great reference source to keep handy. You'll need to be slightly mathy to get it, but I suspect most HN readers will feel at home.
Katsenelson argues that one should have a sell strategy in mind before purchasing a stock, instead of buying a stock and then holding forever, what he calls "buy and forget to sell".
His book is not about day trading, but he does advocate timing, what he calls pricing, a trade so that a stock purchase is made when it's a good value proposition and sold when it becomes more fully valued.
I hadn't heard the term Range-Bound markets before reading his book. He defines the term and uses it to help him make the argument that taking a more active approach to investing (i.e. buying and selling as opposed to buying and forgetting to sell) is a good strategy in bear markets and range-bound markets, and isn't a bad strategy in bull markets.
It's a very readable book. I'd suggest it to anyone.
Also, Katsenelson has his own suggested reading: http://contrarianedge.com/2009/10/28/books-that-will-help-ga...
I had just gotten my hands on a few thousand dollars that I knew would otherwise be wasted on an unnecessary purchase, so I signed up with Ameritrade (back in 2004 when it was much less user-friendly) and had to read the book before I felt confident enough to actually place an order.
The book advised me to buy what I knew, and to only buy something I planned on holding for a long time. Luckily I had just tried out a Powerbook for the first time and was blown away, so I bought a bunch of Apple stock.
Probably the best resource I have found online; the forums are great, the folks are really helpful with a lot of useful information.
In this thread I've seen 'day trade', 'don't day trade', 'index funds' , 'don't do index funds'. Realise that all this advice is contrary, and only applicable to the specific people providing it. What matters is finding something compatible with your belief system, not twisting your mind to try and accept somebody else's belief system. Because when the pain and stress arrive, if you're not fully aligned with your strategy, then you're going to make the wrong choice.
Once you've decided you're going to put some effort in, then you need to work out a strategy that aligns with your personality. This needs to evaluate things like:
- your risk tolerance
- your expectations of returns
- your starting capital
- your analytical skills
Everyone is different, and the only people who succeed are ones who find an approach that works for their personality, and then take the time to get rid of their mistakes.
As for books, here's what I recommend:
- Intelligent Investor by Ben Graham - the take away in this book is the 'margin of safety' concept
- Trade your way to Financial Freedom by Dr Van Tharp - the take away in this book is that active management by position sizing and risk setting dictates more of your return than your actual strategy.
- Market Wizards, The New Market Wizards and the Stock Market Wizards, all by Jack Schwager. These books are all a series of interviews with top traders in commodities, currencies, funds, stocks and probably something I've forgotten. By understanding how an incredibly diverse set of traders have made astounding returns in the same markets should make you realise that there is no one approach that works, there are only approaches that work for specific people.
Good luck, and pray your first trade is a failure, not a success. Because you need to learn the pain of loss and how to minimise it before you taste the sweetness of profit.
I'm slowly starting to pull out of stocks and reinvesting that money into MF's - stocks take up too much time for it to be worth the effort.
just like most things in life, practice makes perfect. start practicing your trade/investment hunches. start with small wagers and increase them as you learn more and start to understand what works and what doesn't.
I would rather buy an index fund or go long on certain stocks with excellent fundamentals.