I can't say I disagree with that, not that I would categorically lump all financial managers into the 'useless' category either.
But it is important to note that he uses 'trading' in the sense of actively taking and releasing positions in different stocks in order to capture their short term change in value. Not 'investing' which is buying and holding equity (stocks) in company that are growing or otherwise generating wealth (and ideally paying a dividend).
Another hypothesis: the difference is whether you view it as a means or an end. I do not believe that stock trading will ever make me rich. But I believe it is a means to teach me things. Thus it is less addictive.
So, good luck with ML, but make sure you reality test against the "set and forget" solution of indexes.
This attitude of
“Those people are too stupid to do what they want. We should stop them.” Is awful.
From the article:
> “People are trying to teach you to come in and trade actively in stocks,” he told his audience. “Well, I regard that as roughly equivalent to trying to induce a bunch of young people to start off on heroin.”
It's actually a pretty accurate description of the most sensational part of his speech.
The key phrase in the sentence, which I think people are glossing over here
Oddly, when I entered the passive index world I got absorbed into checking in on my index ETF purchases every day, multiple times per day, and resisting the urge to sell and buy (more index ETFs, lol). I knew in my head this made no sense - the prices will follow the market by design - yet this urge went on for like 2 weeks before I forced myself to stop.
Following this invest in only two funds. A total index fund for the companies in the country you want to live in (and hopefully the one you already do live in :) ) and a global total index fund of some type. I would choose a global fund that invests only in places that had a decent rule-of-law culture, but that's just me.
Or just a lucky few beat the index funds with it today ?
Active value is not outperforming either:
If you think those are closeted indexers we could look at hedge funds and I don’t think value stars have shined in the last years (but maybe my perception is not fair and it’s the result of over-reporting of the misfortunes of value investors: https://www.google.ch/amp/s/www.bloomberg.com/amp/news/artic...).
But the fact is that even Warren Buffet is doing just “ok” in relative terms. (Yes, he has a lot of money to manage. But he also has access to investment opportunities that nobody else has.)
Like anything you do you have to be committed and determined to be successful. It's not a dark secret that there are no short cuts in life. This article assumes we are all much dumber than I prefer to believe we are. We being people who have money to trade stocks and suffer from big losses.
I learned how to trade stocks by reading books about value investing and accounting practices. Very simple stuff that like anything worth learning takes a bit of time and effort. I don't get the upvotes on this article.
How'd that work out for you? Do you beat the S&P 500 YOY with less volatility? If you account for your hours and trading fees? How many years in a row?
If your answer is yes, you should start a fund! Because statistically, whether a mutual fund or exclusive hedge fund, you're a miracle.
> Like anything you do you have to be committed and determined to be successful.
His argument, seemingly based off the Random Walk Down Wall Street data; which basically shows that no matter how committed and determined you are, the broad based index is going to beat you, if not 1 year, year over year.
is not year over year
> doing ok
You can be doing okay, you can even be beating the S&P 500 in the short term; but if you're beating the S&P 500 over the long term you are beating almost every professional team of fund managers.
I've seen people mentioning that HFT can totally and consistently beat indexes , but then a) can I even get in on the action with less than $1000 and b) is the automated system in place any good?
My grandfather taught me about how industrials are cyclical and easy to make money on. Gas prices go up in the summer etc. etc.
Reading news means nothing. Understanding the overall picture of the economy, jobs, housing, commodities, macroeconomics (a fundamental understanding which few take time to learn) are key. Interpreting the "news" is important and learning to filter. Most news is (as the article kind of says) telling you what trends are happening. Never buy a trend. The news mostly tells the past. You have to focus on the present and future.
The news is actually talking about recession. The economy is strong at the moment. The news told us oil would never go below $150 a barrel. If you take time to learn the larger picture you would know these things are fear and not true. See the forest for the trees.
I find it extremely hard to believe that one dude can consistently beat Vanguard and Fidelity in the midst of their fee war when it comes to public equity (private equity, however, is a whole different ball game, but that's beyond the scope of this discussion).
I don't think anyone is going to beat the market doing their due diligence. It's more about making sound investments instead of treating investing like gambling at a casino or rooting for a particular sports team.
Good fortune to you!
It's not a matter of being dumb or not: it's a matter of whether the average investor is willing to carefully research companies or not. You seem to do it as a hobby, and it's great that you're getting 12% to 20% returns. But I'd wager that the average retail investor doesn't have the same drive as you do in figuring out which company's stock might rise.
I said, “Just sell everything and put it in an index fund.”
I don’t think he did. He’s probably down more now.
Stock picking is fun, but for me it’s just gambling. If I lost that much, I’d quit.
Robinhood disgusts me. 99% of their users should not be trading individual stocks (or worse)
It would be better for people to learn early about trading and experience a few business cycles before they transfer $1 million out of their employees plan into their own E-Trade IRA account at age 55. A lot of older people lost much of their retirement fund in both the dot com and 2008 crashes. Buy high, sell low is the natural behavior of the human animal.
You can always lose money while investing, it's just Robinhood makes it feel like you're losing at Candy Crush while you're doing it. Certain financial transactions shouldn't be as frictionless as Robinhood makes them, and I can't help but feel that their platform is irresponsibly built. Their "Checking and Savings" debacle show how fast and loose they play with regulations and educating consumers.
Epsilon Theory has a couple of notes regarding Berkshire => e.g.
- [thread] https://twitter.com/EpsilonTheory/status/1096360266416209920
How do ignorant investors making senseless trades and learning "hard lessons" improve market efficiency?
I always laugh when people say Robinhood is a good thing for society. Their zero fees, cool app, and gamification of trading is simply ushering fools into a casino
For the majority of people, I would recommend just buying Vanguard funds
If you really want to trade anything else, IB is the way to go
The wisdom of driving people away from trading does make sense however
Selling shovels, so to speak.
I'm not exactly sure why the general sentiment here on HN discourages index funds. It's pretty jarring coming from /r/personalfinance and Bogleheads.
However, for those people who feel the obsessive need to game the system, and make money faster, I would suggest not trading, but rather developing tools and gathering data to sell to Wall Street.
Think it's the combination of money, a bit of math and some cool algos that make it so fun
Is it? I'm pretty sure that I don't personally know a single programmer who has done this.
Good life advice, especially for dealing with people who have a tendency to boast of their accomplishments.
The boastful are high variance, even taking your own judgement into account. And where there are power-law outcomes, exposing yourself to the wrong kind of tail risk can be fatal.
Stocks are kind of the "beginner's" asset. They're fairly easy to understand conceptually. "Trading" them is even easier. However, trading them in isolation for a profit _consistently_ is very difficult or just a product of luck. I don't know anyone who does it and wasn't burned eventually.
The thing to remember is, people doing funds or "trading" professionally aren't just buying and selling FANG stocks all day. They're balancing these trades with futures and options or options on futures and other alternative assets. They're hedging their positions and setting themselves up so that their probability of coming out ahead is much greater than you're standard "it either goes up or down" stock movement.
A simple example is the "wheel" strategy in options. A short put at a .30 delta on the underlying, assuming 1 stddev movements gives about a 70% chance of collecting the premium without assignment (of course this isn't perfectly true, it's an approximation). This is already better than buying the stock, which under the same methodology, would have a 50% chance of profit (either going up or down from the purchase price). When assigned, turn around and open a short call against the assigned shares at a similar delta and repeat. In the flat market we've seen the last year or so, this is reasonably profitable and very low effort.
Edit: The reason the "buy and hold an index forever" strategy is recommended is because it's the lowest effort, highest probability of profit strategy one can probably take. I agree with it entirely for 99.9% of people. But that's not to say there isn't other opportunity out there if you're willing to learn about it.
Source: spent a few years at the Chicago Mercantile Exchange working on these sorts of things exchange side and now trade regularly on my own.
Edit: I posted in my history a way to automate something like this.
That is not what I'm advocating at all.
What Munger is really encouraging in his talks is intelligent allocation of money, knowing the boundaries of your knowledge, educating yourself, and recognizing basic human psychological shortcomings (like mistaking speculating for investing).
Speculative trading is not investing.
Professional trading, esp with leverage, is extraordinarily difficult to gain the required mentality, discipline, knowledge, and skills be consistently profitable. The common saying is that 90% fail, I believe it's higher, perhaps much higher. Learning trading was the most difficult thing I've done in my life. It's hard in a way most people don't grasp.
Lets think about what happens when you buy the S&P 500 index. This is usually the most recommended index, and the one I recommend too. You basically give your money to own stocks of the 500 biggest publicly listed companies in the US. If a company is big enough and it gets their stock listed on the major markets it usually gets included in the S&P 500. (There are some exceptions but generally this is the way it works). Does that make these companies good investments? Not necessarily. There is a way to get big without being especially good at what you do (through mergers). It is possible that certain companies were very good investments before, had their stock appreciate, got into the S&P 500, had a change of management or experienced a change of end markets, and became bad investments. This is what happened to GE, for example.
The theory of indexing says that, yes there will be some companies in the S&P 500 that are not very good, but others will be excellent and it will all even itself out and you will make money in general as the economy grows. But that will only work if there are no secondary effects. If putting all money in indexes becomes the usual course of action for institutions as well as individuals then it would be very easy to exploit this. A company just needs to get large enough to get send to the S&P 500 (again this can be done with mergers and without necessarily being very successful or profitable) and then they get a bunch free money send their way by way of indexing. And if you get a bunch of badly run companies merging together to get into the index, indexing will certainly become a rather money losing proposition.
The reason why indexing tends to work and it has worked so far, is that indexers are kind of free riding on active investors. Active investors buy and sell stocks and they thus cause the price to move up and down. The price of the most wanted companies moves up and they get put into the top indexes, where the free riding index investors buy their shares. The active investors do not mind because they were first into the shares, and the free riders just increase the value of their holdings. The free riders do not mind because the active investors in a way pick stocks for them.
This all works fine but the whole system relies on there being enough active investors to free ride upon. And if this whole buying indexes trend goes out of hand there might not be.
Buffet and Munger have some good cause to criticize active managers. Many of them have not been very good at all. Money management is one of those professions where it is not easy to determine ahead of time where someone is good or bad at it. Even excellent money managers can have a couple of bad years and terrible money managers can get lucky once or twice. Thus, you have to wait several years to see whether someone is actually good at managing money and during that time they actually have to have money to manage. So to even test whether someone is a good money manager requires taking on a lot of risk. And because being a money manager can be so very lucrative and glamorous and because it is so hard to distinguish the good ones from the bad ones the whole field attracts a lot of smooth operators that know how to ape the look and talk of a person the public would expect to be a successful money manager but they do not know how to do it.
This is a problem with many other professions that are glamorous but where it is hard to initially tell the good from the bad. These include TV/Movie director, TV/Movie writer, politician, newspaper column writer, artist etc.
That being said there are money managers that are undoubtedly very good. Buffet and Munger are themselves a couple of examples. There are many others. Perhaps there aren't enough of them. Perhaps we as an economy are having a problem of not being able to train and recognize able money managers. That may be the case, but that does not mean we should abandon the concept of an active investor. The world actually needs active investors, money managers and asset alocators in general. The dream of simple, cheap and easy passive investing cannot work without them.
These guys have won the game, they are trying to teach others how to do it. We have much to gain, just by listening.
I guess I answered myself (the second)
I am not sure if this is sarcasm, and I don't think it is, but just want to mention that I can't always tell on the Internet.
In-hospital opiate use can be important. But, there is good reason to believe that people using opiates appropriately for pain can still ultimately develop dependence and may develop addiction. Opiates have an important role right now, but the "fifth vital sign" is one of the things that presumably got us into big trouble with the current opiate crisis. We should tread lightly.
I know this is slightly off-topic, but if since the whole topic is reasoning by analogy, it seems worth a brief mention.