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Are You Trading or Gambling? (investinglessons.substack.com)
372 points by christopherjgan on Feb 27, 2021 | hide | past | favorite | 400 comments



Around 20 years ago, I had the opportunity to listen to a member of Nasdaq top management talk about the stock market. It's all a _tiny_ bit blurry, being a long time ago, but I remember how he talked about three different perspectives for investing in stock:

First, the "company perspective". An investor would buy stock in a company they believed in. Maybe they had good products, or good management, or something else. The idea was looking at the how well the company would perform.

Second, the "stock perspective". An investor would ignore the underlying company, but look at the stock itself. It didn't really matter if the company was doing good, but only if the stock itself had good potential. The idea was looking at how well the stock would perform.

Finally, the "game perspective". An investor would not really care about the stock, but only about the behavior of other investors. Day trading would be the example here, profiting mainly on marketplace dynamics, no matter the stock. The idea was looking at how to be a better player than the others.

Then he talked about how the game perspective was the only model that really matched the marketplace, and how the stock market had evolved from being place where people would invest in companies, to a place where they would play a game with other peopl.


> An investor would not really care about the stock, but only about the behavior of other investors.

This sounds like the idea of a Keynesian Beauty Contest (https://en.wikipedia.org/wiki/Keynesian_beauty_contest)

"It is not a case of choosing those [faces] that, to the best of one's judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees."


And thus, bitcoin. A stock that's guaranteed to provide no dividends, do no buy-backs, or deliver any value - aside from the ability to sell it to the next fool for an even greater value.


Yes, 11 years after its debut and nearly a trillion in valuation, still ridiculously ignorant statements like "delivers no value". It delivers no value you care about. Many people care about money that can't be inflated, can't be stopped from being traded, and can't be controlled across international borders. Those are hugely valuable to some people, whether you find it valuable or not.


> money

With built in and inevitable deflation. Bitcoin could never replace a national currency.

With transaction times in the tens of minutes and with a maximal global transaction rate of 5-10 per second. The Blockchain couldn't replace the banking system of single mid-sized town.

It's not money. It's at best "digital gold", but more realistically it's just a ponzi scheme.


> Bitcoin could never replace a national currency.

That is the most grandiose goal a new monetary technology could possibly have. It doesn't need to replace a national currency to be useful/valuable to users.


Religion is just a ponzi scheme that still underpins most of the world's networks and hierarchies.


Care to elaborate? Or you mean christianity? There are quite a few other religions that are quite nice. Buddhism as practiced in Bhutan comes to mind...


Not sure about the lack of freedom of religion in Bhutan.


Has nothing to do with being bad or good, just value creation through coordination/cooperation, fueled by some hype.


Stop trying to incite a religious flame war.

FYI, Buddhist extremism has resulted in two (ongoing) genocides.


It needs to have demand to be worth anything at all. At that demand in aggregate assigns value to bitcoin.

The fixed emission schedule of BTC means that there is no issuer that can capture increased demand in the good, but the holders of BTC get that benefit. So the only thing you need to bet on is if there will be more aggregate demand for the 21 million btc in the future than there is today.

With fiat currencies, when there is a crisis like COVID and the demand for money skyrockets, the fiat issuer can print out the money and do whatever it wants with that surplus demand.

If BTC makes it so the aggregate demand in currencies is split partially from fiat into BTC itself, then it will be a great transfer of wealth from governments into BTC owners.

There's your value.


> If BTC makes it so the aggregate demand in currencies is split partially from fiat into BTC itself, then it will be a great transfer of wealth from governments into BTC owners.

And will quickly be banned by said country.


If this scenario happens, BTC will have demonstrated enormous power and value, and it is supposedly designed precisely to resist such attacks.

I also doubt on the feasibility of a global crackdown on miners in the entire world.


The enormous value being money laundering? Also the miners ultimately have to swap for some fiat, so they can’t stay in BTC “heaven” forever. Further buyers set the price, not miners. Especially given that using BTC is a luxury except for the underbanked, who also don’t have money and are selling their BTC to get some.


If money laundering is the only use case btc has, and it is the best way to do money laundering, it's going to make a lot of people rich.


«could never replace a national currency»

There are plenty of scenarios for Bitcoin to succeed and be useful without necessarily replacing national currencies.

«transaction times in the tens of minutes»

Wires take hours/days. Credit card transactions take 1-2 days before the seller's bank account is actually credited. Obviously speed isn't an issue for adoption given that people tolerate systems much slower than Bitcoin.

«maximal global transaction rate of 5-10 per second»

Bitcoin Lightning Network supports thousands/millions of transactions per seconds.

«Blockchain couldn't replace»

IMHO it shouldn't replace, but complement.


> Wires take hours/days. Credit card transactions take 1-2 days before the seller's bank account is actually credited. Obviously speed isn't an issue for adoption given that people tolerate systems much slower than Bitcoin.

Wires take hours, rarely, if ever days, and in my experience the money is in the receiving account before I hang up from sending it.

Also people tolerate this system because there is nothing else available, and much of it is not a result of lack of desire but anti money laundering. Countries are already moving to digital currency tokens.


Advice: only write sentences that are true.

> Bitcoin could never replace a national currency.

You can't predict the future.

> With transaction times in the tens of minutes and with a maximal global transaction rate of 5-10 per second. The Blockchain couldn't replace the banking system of single mid-sized town.

With millions of transactions per second, the Lightning network could.

> It's not money.

It's money. Here's an explanation of money https://powreach.com/crypto


To the people who downvoted: learn to distinguish expressing a fact from expressing an opinion. Don't be gratuitously negative.

To HN moderators: make it possible to understand why someone downvoted. This is an example of what makes HN off-putting.


> With built in and inevitable deflation. Why is everyone thinking deflation is a bad thing? "Oh no, how horrible, my money isn't loosing value over time so I dont't have to buy things I don't need and can start to save money without loosing value"


Lots of reasons, see e.g. [0] for a brief explanation of a few of them.

[0] https://krugman.blogs.nytimes.com/2010/08/02/why-is-deflatio...


They are not really distinguishing between deflation in a national currency that people's wages and debts are denominated in which is a problem, and bitcoin going up which isn't really.

No one's taking out a bitcoin mortgage to buy their house with.


Because it leads to catastrophic economic crisis and starvation of millions. Anyone with half a mind has known this since the 1930s at least.


> money that can't be inflated

The supply of Bitcoin has been inflated, on average, every 10 minutes for the past ~11 years.


It's known exactly how many Bitcoin will be produced and at what rate. There will never be more than 21 million BTC. This was known and agreed upon by all participants in the system.

How much USD will exist in 10 years?


I understand and appreciate the point you're making (I want to add this as my response is slightly flippant).

How many BTC will it take to buy a Toyota Corolla in Feb 2022?


Hopefully less than in Feb 2021.

I think a better question would be, how many BTC will it take to buy a house in 2050? I think the three things that have experienced the most drastic inflation are: housing, healthcare and education. It would be interesting to measure Bitcoin's long term value next to those highly inflating costs. Say a house now costs 10 BTC/$500,000 and in 2050 10 BTC/$2,000,000.


> Hopefully less than in Feb 2021.

Financial planning -> window, cause my base currency keeps moving around and won’t hold still long enough for me to even finish the equation.


How many USD will it take to buy a Toyota Corolla in Feb 2022?


I'm planning on continued massive USD inflation.


How does Bitcoin continue to have transactions once that limit is met? Arent the miners executing transactions in exchange for Bitcoin?

When there's no more coins to mine, there's no reason for anyone to be running their bitcoin operations. It'll fall to governments? At that point, can't they introduce more Bitcoin?


Each transactions has a fee value set by the sender, that goes to the miner. Miners select the top N transactions by fee, so miners will still have an incentive.


The fees are already exorbitant and make no sense if you wanted to use Bitcoin for everyday transactions. You still see merchants that have something like a 2$ minimum for credit card transactions, which charge a percentage fee usually.

Looking at https://ycharts.com/indicators/bitcoin_average_transaction_f... the average Bitcoin fee seems to be somewhere around $22 right now. Just think of the dialog occurring once miners have to make all their money from fees only:

"Yes sir, I would like to buy this chewing gum for my son. Yes I know it costs $0.50. Yes I know it will cost me the equivalent fee of $50 to buy it using Bitcoin. Now sell it to me already!".


True. Bitcoin as currently designed doesn't support the transaction throughput or latency anyways for folks to buy gum, only larger money transfers. (I'm a skeptic, FWIW)

Without the presence of transaction fees though, things would fall apart once the block reward ran out, as asked in the original question.


And will continue to.

Event-based, surprise inflation is the only negative inflation, for the end user.


You forgot no share dilution in this offtopic tangent. Every stock out there can double their issuance if they want to.


As can bitcoin, and it would only take a soft fork.


There's a soft fork coming up for taproot requiring a super-consensus of 90% miners. It will likely go through and still be bitcoin afterwards. Thinking you might not understand the difference between the various types of forks the protocol can undergo.

https://taprootactivation.com/


It wouldn't be Bitcoin then; a change in rules creates a new coin. There would have to be incredibly strong incentives for people to accept a fork that would debase their assets.

Nit: it would also require a hard, not a soft fork.


> and it would only take a soft fork.

No, it would be a hard-fork and be rejected by all nodes that weren't explicitly updated to accept it.


Yeah, but you have to have people switch to that chain.

Miners won't because it would devalue their coin.

New buyers might because they can "buy cheap"


Yeah, but if they did this, they would be raising cash to deploy. Presumably in an attempt to grow their business and create actual value.


> Presumably in an attempt to grow their business and create actual value.

Or not, you don't know. Maybe a friend of the board wants to have a controlling stake in the company and that's the reason.


A share offering doesn't make existing stockholdings worth less. Usually, they benefit, because it gives the company increased working capital to invest in projects.


It (in theory) doesn't reduce the _market cap_, but it reduces the voting power of existing stockholdings and that is certainly bad for those shareholders.


A 'stock' that has no regulatory environment, either. But that's part of the draw.


Digital tulips, only tulip farming didn't consume the same amount of electricity as a small, South American country every year.


Argentina has 45 million people, making it the 31st largest country in the world. It's not small by any measure.


Things only have value because we agree they do. The US Dollar is backed by the full faith and trust in the government. "Faith and trust" is as much a digital tulip.


The dollar is also backed by the legal system (which gives the general populace a mechanism to redefine who owns which dollars, e.g. in case of fraud), and the Federal Reserve (which manipulates interest rates and dollar supply levels to try to keep the value relatively stable over time).

If bitcoin could solve those problems, and the energy usage problem, I’d use it. As is, it’s solved the double-spend problem - admirable and impressive, but it’s not a substitute for a stable currency yet.


DOT, ADA, etc.


Americans have to pay taxes with them, even if we get paid in gold coins or cryptocurrencies. If you don't pay you can go to prison. Therefore, owners of dollars can know there will be at least some minimal demand for dollars in the near future.


Sure, but its also backed by a few aircraft carriers, ICBMs, ~ 1.3 million warfighters, and a few other things ;)


I find that to be a somewhat reductionist view. First, some things have a fundamental energy cost. Food is one example. You can’t value food for free even if we agree to, because it takes kWhs to produce it and they have to come from somewhere. I guess you could say your life isn’t worth the cost of the food to sustain it and stop eating it, but not many will do that.

Second, you have natural scarcity: truffles are not commonly available. How much you want to eat them may put a ceiling on the price, but again there is also a floor below which no amount of energy would bring you more truffles.


The difference being one is the laws of physics and the other is artificially man made, doing nothing.


How about Helium? It is scarce and very useful for scientific research. He-3 is exceptionally rare and is not renewable at any kind of reasonable price. Is that still an artificial price?


He-3 being natural, and therefor required to follow the various laws that allowed it to come into existence. Energy going into creating something useful. BTC on the other hand is just difficult to control supply artificially.


Argentina is not small. It's the second largest country (in pop and area?) after Brazil


I know this whole "bitcoin is pointles" meme gets upchuckles on hacker news all day long, but at this point it's pretty embarrassing that this level of ignorance continues to persist.

As it turns out "sending money over the internet" is kind of an important utility for the modern world, and nothing does it as well as Bitcoin. This is why it's now a trillion dollar global economy.

That's great for you that you're in a position where you never need to send money over the internet, and you have people who you trust that can manage all your money for you without robbing you, but that's a privilege not everyone in this world has.

Please stop denigrating shit that you don't understand. Bring proud of ignorance is not a good look, and it really is embarrassing that a community that's supposed to be somewhat technologically sophisticated has bought in so hard to this ignorant-ass take.


I think I agree with your sentiment, but saying that nothing is as good as Bitcoin for sending money over the internet, and that’s why it has value, is just really not a compelling argument.


Yup. And that key feature of "sending money over the internet" thing hasn't worked out very well so far

I've been in it, found the entire system wanting, and got out. May get in again to enjoy gamble in speculative bubbles, but as a technology, it is still in the early and massively-sucking and increasingly-sucking days.

Like railroads in the 18th century, they utterly changed society, but most investors lost their shirts along the way.

Scalability, inconvenience, insecurity, and transaction fees all suck to varying degrees at varying times.

It used to be that transactions would take 5-10 minutes to confirm, and that seemed mildly inconvenient but acceptable due to low costs. Now, it varies wildly, e.g., between 61 and 426 minutes in the last week [1]. I just bought software last night and the transaction cleared in fewer seconds than I could notice, and that network handles orders of magnitude more transactions than does BTC.

Costs. BTC transaction costs used to be astonishingly trivial. Now, they fluctuate wildly depending on network congestion, and average well over $20/transaction. [2] This is nuts. A BTC transaction has to be over $750 to be better than break-even compared to a 3% credit card transaction fee. The days of buying a pizza with BTC are long gone, unless you want to pay more in fees than for the pizza. But it might make sense for buying a Tesla, if your fiat-exchange costs on the input side are not too high.

Inconvenience and insecurity. You can either keep your BTC with someone else, which means you don't control it ("Not your keys, not your coin", see also multiple exchange hacks and/or exit scams), or you must roll your own. This involves first, extensive research to avoid selecting a wallet that has either been deliberately designed to steal your bitcoin, or just has unknown vulnerabilities. Then, you need to have absolutely solid key management to avoid both having your BTC stolen bay targeted malware attacks, or losing it because you lost your key, crashed your drive, etc. I find this daunting with a solid tech background, getting individual users to successfully and conveniently do it is not going to happen.

Paul Graham made an excellent point about this yesterday [3]

In short, without MASSIVE improvements, BTC and many other cryptos are nothing more than gambling on vaporware.

And that is ignoring the deliberately engineered-in catastrophic energy consumption, which is literally more than the energy consumption of entire countries, when we need desperately to be cutting energy usage to minimize anthropometric global warning

Sure IFF [4] the system could be scaled to handle billions of transactions per day at a cost of pennies per transaction (compare with ACH network costs), and with a usable and secure UI/UX, sure it WOULD be fantastic.

But over a decade since those promises, all of the metrics: scalability, security, transaction time, costs, are tracking in the wrong direction.

I really wish someone could point me to some cruptocurrency that has these solved. I'd genuinely like to see it and would use and advocate for it.

But until then, I can only hope they enjoy their gambling.

[1] https://www.blockchain.com/charts/avg-confirmation-time

[2] https://ycharts.com/indicators/bitcoin_average_transaction_f...

[3] https://twitter.com/paulg/status/1364986808900202513

[4] If and Only If


I know I'm just a single point of data, but I routinely buy things on the Internet with Bitcoin that cost $200-300 USD. I always set the fee to just under a dollar and have never had any issues with the transaction being confirmed within 20-30 minutes, including in the last few weeks.

Of course, paying with Bitcoin saves the seller about 3% of the final cost, and they need not worry about chargebacks, which saves them more money in the long run, so they offer a discount when crypto is used. It's a win-win for me and the seller.


It's only a win for you if they weren't a scammer, or they didnt send you a broken item. Otherwise you've lost the chargeback feature


> Of course, paying with Bitcoin saves the seller about 3% of the final cost, and they need not worry about chargebacks, which saves them more money in the long run, so they offer a discount when crypto is used. It's a win-win for me and the seller.

But where are the benefits for the buyer? I have to go out of my way to buy BTC, when I’m paid in USD, and the value changes so quick that if I don’t want to hold BTC the buying the exact amount will be difficult, get to deal with fun taxes at the end of the year, and all of this because “fiat is bad” and to give up my rights to a chargeback. And then one day SHA256 will be broken, as all hashing functions eventually are, and then what?


Interesting, I was several years ago seeing the transaction delays climb into the hours, but not the fees (ya, maybe I should have set my fees higher, just went for average). I wonder how much variance there is in the network and if you are just lucky, or somehow frequently get picked up in maybe a less busy part of the network, or if there's some attribute you unconsciously use that gives your transactions so much better than average performance? Either way, enjoy your advantage while it lasts!


I've done multiple txs in the last few weeks - all with "normal fees," 2 took 3 days to get a single confirmation. 1 took ~24 hours, although these were the outliers, several other txs happened in normal time frames.

It's possible the app I use is just bad at calculating fees, but I'm thinking yeah that guy got lucky.


Ah yes, the optimal way to send money over the internet must surely involve burning up an amount of electricity which could’ve powered my house last week


Also you have to have absolutely perfect OpSec at all times. Otherwise you run the risk of someone on the other side of the world stealing all your money and there is absolutely zero recourse.


I’m undecided on Bitcoin. Happy to be called ignorant, but only if you can explain why. There are many ways of transferring money across the internet. Why is Bitcoin special if that’s the reason for its value? Genuinely want to be won over.


You can buy drugs or a hitman online without being traced.

Also ransomware can demand payment in Bitcoin without being traced.


By design all movements of bitcoins are in the open, so I don't know about not being traced.


Because when you create a new BTC wallet you give the network your SSN and other identifying credentials yes?


Also, I can buy a pizza for a coworker in a different country without worrying about exchange rates or anything else.

FYI, everything you said can be done with cold hard cash.


You can buy your coworker a pizza with your credit card today. At most the fee would be 3%. From start to end the whole process would take no more than 5 mins. Plus, pretty much every decent pizzeria on the planet already accepts it as payment.

The BTC transfer fee is something like $20 now, more than the cost of a pizza, and the transaction might take like an hour to clear? Maybe it's fine if you don't mind overpaying, aren't too hungry, or you enjoy cold pizza.


> BTC transfer fee is something like $20 now, more than the cost of a pizza, and the transaction might take like an hour to clear? Maybe it's fine if you don't mind overpaying, aren't too hungry, or you enjoy cold pizza.

Segwit transfer is currently at $0.003, and a transaction with enough fee processes instantly. It takes 6 confirmations for a guarantee (but that will settle over the next hour). Pizza deliveries get paid in cash through many extensions that provide BTC2CASH purchase.

I can bet you buying a pizza in Spain with Spanish currency using a US card will charge you a foreign exchange fee.


> I can bet you buying a pizza in Spain with Spanish currency using a US card will charge you a foreign exchange fee.

That sounds like a personal choice. There are plenty of banks that don't charge fees for purchasing in foreign currencies. Monzo and Revolut both spring to mind here in the UK, and I believe both are now available in the US.


Is there no exchange rate from your country's currency into Bitcoin?


Yes, but there are usually no exchange fees.


Most of the other ways require a trusted third party. The position of the trusted third party is attractive to rent-seekers and often generates conflicts of interest. Automating the position of trusted third party with an algorithm has value, not because the algorithm works better than a reliable third party, but because it doesn't have any interests of its own that could come into conflict.

Bitcoin itself is not at all the best tool for this job, its value comes from the fact that it happened to be first. It's valuable for the same reason antiques are valuable.


> There are many ways of transferring money across the internet.

Only through a centralized intermediary (e.g. PayPal), which may block the transfer, freeze funds, deny access, go bankrupt, etc. Bitcoin allows direct peer-to-peer money transfers (a bit like cash but digital).

> Why is Bitcoin special if that’s the reason for its value?

Personally, I feel that the censorship resistant and pseudonymous p2p money transfer is a nice feature but the killer feature is that it's a money that can't be manipulated by any one entity. Its rules are pretty much set in stone. Since it is politically neutral, it is well suited for becoming an internationally accepted store of value / currency.


> Its rules are pretty much set in stone.

Not quite. The miners collectively decide what rules to follow. A majority of them forming a cartel to collectively skip certifying certain transactions is completely in the realm of what’s allowed by the network.


> Not quite. The miners collectively decide what rules to follow.

I don't mind being nitpicked but what you wrote is more incorrect. Miners can't unilaterally decide what rules to follow even if a majority of the hash power formed a cartel. Non-mining nodes also validate the rules and would reject mined blocks that violate consensus rules. The worse that a majority cartel of miners could do is perform a double spend attack or bring the network to a halt but that's hardly surprising.


Yes. But if the minority gets wind of that, it could create its own hard fork and keep out known members of the cartel in the future. Something like the opposite happened with Ethereum in response to the DAO hack, when the majority rolled back a transfer of ethereum by a minority of wallets that followed the rules as written but were against the intent of the rules.

Crypto is often sold as 'anarchy with rules' but it's not really that. Nor is it oligarchy as is the case with fiat and central banks. Crypto is in fact democratic. I wonder whether that's why it's unpopular in certain circles.


...at 4 transactions per second and $20 / transaction. Assuming nothing interferes to drop the hash rate; in China, transactions have been banned although mining is still legal.


Transaction costs for sending bitcoin are massively larger than sending paypal.


You're thinking is limited to your experience only.

PayPal charges a big percentage to send money to friends overseas. 3.9% + $0.3 in my experience, some countries may be higher, how is that lower than Bitcoin's fees?


This is also how I've experienced primary elections in the US: people voting for who they think other people will vote for.


Very true, and this is in large part a function of the voting system in the US. Suppose you are choosing between primary candidates A and B, who will run against C. You'd prefer A over B, but B has wider appeal in the general election.

A better system would be a voting system that doesn't split the vote, because then you could forgo the primaries altogether. Have A, B, and C all run against each other directly. This is impossible with today's first past the post system, because that would immediately hand the election to C.


General elections too.


Exemplified in a competition in -- I think -- The New York Times: readers were instructed to guess a number between 1 and 100, and were told the winning guess would be the one closest to 2/3 of the average guess.


No mention of a NYT version of the game ever happening on the wikipedia article - https://en.wikipedia.org/wiki/Guess_2/3_of_the_average - but that wiki page is a good write up of the basic idea and its relationship to the Keynesian Beauty Contest


What was the result?


If I remember correctly, somewhere in the range 17--23.

The way one should have thought of it, with hindsight, is that there are going to be several groups of people:

- those who don't understand the problem and just guess a number between 1 and 100,

- those who only reason to one degree, and guess 33,

- those who only reason to two degrees (ah but if everyone else guesses 33 I should aim for two thirds of that!)

- those who reason to initiate degree and guess 0

The real competition is guessing the proportions of these groups.


The way you originally stated the problem was to pick a number between 1 and 100, so 0 wouldn't even be an option, and 1 is probably the pareto optimal strategy (proof left as an exercise for the reader, etc.).

But then you probably still have to account in your strategy for estimating the proportion of people who will reason to infinite degree and estimate 1, as well as the proportion who will reason to an infinite degree and misread the rules, and guess 0...


And I believe they orbit around the set of self fulfilling prophecies described in books. Fibonacci or similar simple arithmetic range estimates, deviation from the mean, etc.


Isn't this the reverse of a self-fulfilling prophecy? A self-fulfilling prophecy attracts reality to the state it describes. The stock market, being anti-inductive, attracts reality away from whatever predictions being made - that is, for example, if I found a pattern that proves $GME reaches the Moon on Tuesday, enough other people would find that pattern too and start buying early, and $GME would reach the Moon on Monday, and probably crash on Tuesday.


I think it does both but oscillates. At first people think it's an edge so it emerges as truth, then agents realize it's know and tweak around it.. but it's still the basis of their action.

All in all, I had the idea that pure chaos cannot be used so there will always have weak superstitious held as reference points for a game to emerge. The one who can play it right (or have enough resources to endure errors) or not when it shouldn't will benefit from the others.


That’s an artifact of including a specific time in your prediction. If you made that same statement time-invariant “GME will moon” it becomes a self-fulfilling prophecy.


It's true, but making the statement time-invariant is also an oversimplification. Time does not end with the fulfillment of the prophecy and everybody knows that. Where does $GME go after reaching the moon? It can only stay there or go down, and in both cases people would start selling it.


Bubbles are inductive. Arbitrage is anti-inductive.


Interesting, given he is such a prominent Economist I'm a little surprised by the simplicity of the analogy though.

It seems strange that he has reduced it to one where there is no objective value at all. As an equity at the first level is still about how the company will perform in the future, no? And thus has an objective value.


This is a really important puzzle. In other terms, basically the efficient markets hypothesis vs, well, a week of GameStop prices.

At certain extremes, a stock price is clearly objective.

If the company is bankrupt and wiping all stock, that's objective. If the company does so well the shareholders demand an immense dividend or buyback, that's objective. Those are the fixed points where stock price is set to money in hand.

Are the swings in the market just irrational participants between those extremes?

We could imagine purely objective superintelligent AI dominating a market, investing only to those "true" values. Such AIs might determine p(bankruptcy) and p(payout), knowing those are the "true" outcomes of the prop bet, and set expected price as the ratio of those two probabilities.

But both those p()s are vanishingly small for most companies, and infinite precision will be impossible. Even if you were nearly omniscient about all current factors within a company, the slightest possible change in either probability could swing the ratio in dramatic ways.

(Add on to that the graveyard of companies that performed well, got fat, and failed to adapt... current performance is somewhat but not fully predictive of longevity.)

So basically, what if EMH is true, but stock pricing is a debate at an arbitrary level of precision, to make it close to meaningless in short time windows?

I'm not an expert so I'm sure professionals or academics would roll their eyes and offer something even more explanatory, but that's my best hunch at resolving this tension so far.

(The upshot of this theory is that it seems to validate strategies that help you zoom way out: low fees, broad diversified indexes, long time windows... those are the real value trades.)


Everything is worth what it's purchaser will pay for it; every transaction is subjective


Beauty has objective value as defined as such but I leave it to you to figure out.


Everything subjective is objective. I leave it to you to figure out how.


I 100% agree with that breakdown. But I disagree that the game perspective "matches the market".

The beauty of the marketplace is that there are all types of people in the sandbox: fundamentals, macro, hedgers, short-sellers, punters, high-frequency traders, mean-reverters, money managers, pension plan managers. And all of these people have slightly different time horizons ranging from microseconds to years.

The market concept is this beautiful thing that supports all these people: aided by strong regulation, strong oversight, and better technology.


One could say marketplace is a category of game field where the rules and objectives are different for many participants. I want to sell my apples for the maximum possible profit today; she wants to sell both her apples at max profit and lettuce at max speed within its shelf life; the customer wants a decent lunch. Different measures for success, different time limits, different strategies in the common marketplace.


I'd say this precisely mirrors my journey through day trading.

You start out with the naive mindset, thinking you can make money by finding strong undervalued companies and investing in them with stocks/LEAPS.

Then when you've lost enough money trying that, you move on to technical analysis, thinking you can time the momentum and price action of "predictable" securities. Still thinking it's the "market" you're trying to figure out.

Then once you've lost enough money trying that, it finally hits you. I've been the sucker all along! The way you make money at this is by realizing it's all a game that you're playing against other individual people, not some abstract "market". You buy lots of the underlying stock of something that's trending and start selling OTM "lottery ticket" contracts to the hapless fools (of which you used to be), and you finally start winning.


> You buy lots of the underlying stock of something that's trending and start selling OTM "lottery ticket" contracts to the hapless fools (of which you used to be), and you finally start winning.

I'm relatively new to the stock market and still learning, can you confirm I understand?

You buy (say) n * 100 of the underlying, then you just sell OTM options. There's no link between the the underlying and the option, it's just collateral for the options in case the purchaser decides to exercise?

Your upside is that you make the premium + the strike price. You lose out if the share goes up past the strike + premium, but you win if it goes down, or not up enough?

So for example with ABNB, last trade 203.25. You buy 100, sell one option bundle for Mar'19 '21 202.5 strike for $15.60 per share.

If the share price goes above $218.85, you lose out on the difference, but you still get to keep the premium + strike, so you didn't really "lose" anything, you just didn't make as much.

If the share never goes above $218.85, you keep the shares, and are up by the premium price (in simple terms).

Is that the gist? Are there any other mechanics of this I've missed out? It seems Interactive Brokers will let me sell a call option without owning the underlying (edit: it seems there's a separate "write option" tool), so I guess if the option owner decides to exercise your broker somehow either just take the shares out of your account or makes you buy some?

How far out do you sell OTM options for?


>"Your upside is that you make the premium + the strike price. You lose out if the share goes up past the strike + premium, but you win if it goes down, or not up enough?"

You still "lose" in the short term if the underlying goes down more than your premium covers. That's the risk you take on writing calls; the underlying can technically go to zero. But so long as it's a decent company with real earnings or growth potential, over time stocks always go back up.

>"If the share price goes above $218.85, you lose out on the difference, but you still get to keep the premium + strike, so you didn't really "lose" anything, you just didn't make as much."

Exactly. Although you technically still "lost", even if you didn't lose money, because you took on the risk of holding the underlying for longer than you collected in premiums (theta value of the option). But this, along with "cash secured puts"[0] is the basis of the "wheel" strategy. It goes like this:

Pick a strong stock you're generally bullish on long term and would be fine with owning -> Sell cash secured puts -> When the underlying drops to the point of your CSP hitting the money, get assigned at a price you wanted to buy it at anyways, keep the premium, and now you own the underlying -> Sell covered calls on the underlying until it rises to the point of being exercised -> Get exercised, keep the profit + premium -> Start over from step one.

>"It seems Interactive Brokers will let me sell a call option without owning the underlying (edit: it seems there's a separate "write option" tool), so I guess if the option owner decides to exercise your broker somehow either just take the shares out of your account or makes you buy some?"

That's a "naked call"; the black tar heroin of options. You can do it, but it's incredibly risky. Stocks can technically go up infinitely, meaning you're taking on infinite risk for a finite return. The GME debacle is a great example of how dangerous that can be for an individual. One huge overnight price movement can completely bankrupt you.

>"How far out do you sell OTM options for?"

It really depends on the underlying. That's why it's so important to follow a stock, and get to know how it trades over a few months before playing options on it. A general rule of thumb is ~%20 OTM on monthlies puts you in the sweet spot of premium/risk though.

[0] https://www.optionsplaybook.com/option-strategies/cash-secur...


This is super helpful, thanks!


There is an old saying, two kind of people enter the market in the morning, one with money and the other with experience. They switch postions by day end.


The value investor type (buffet etc) would call this speculation, not investing.

Speculators control all of the short term movements (everything on a time scale of <1 year). Sometimes when new financial instruments (what value investors would call fads) are created, they can control it for years (securitized junk bonds, in the 80s, sub prime mortgages in the 2000s).

But the pricing of securities in the market has always regressed to fundamentals in the long arc of history.

The value investor types agree with the nasdaq guy, though. All institutional investors (even the pension fund managers!) behave like speculators, since at least the 80s. It’s just how the incentives are structured.

It’s important to understand how they think, because you don’t want to be trampled by them. But playing their game is not the way to win in the long term.


> But the pricing of securities in the market has always regressed to fundamentals in the long arc of history.

I don't doubt this but got any good references?


Whenever markets have "crashed", it's usually been a reversion to fundamentals. See the bond market crash of the 80s, the sub-prime mortgage crisis of the 00s.

The reality is that the cash flow and assets underlying these securities were overpriced. In spite of it, institutional investors speculated the price up for years. People thought they had found a way to "cheat" risk, turning fundamentally risky (and therefore, low-value) assets into something more valuable. They were wrong!

Other times, the market is simply too optimistic (dot-com bubble), and attaches large valuations to companies with non-existent cash flows (i.e. little fundamental value). We're arguably in a similar current today, although it's not nearly as bad, imo. The companies that get overblown valuations today at least have revenue, albeit some more legitimately than others (TSLA vs UBER).


I believe "Market Wizards - Jack D. Schwager" highlights this. When speaking with some of the best and most successful traders in the markets, he found that the one common thing between them was "Game Perspective". They understood human emotion and had this desire to be the best at the game. The money/wealth was not the focus but the reward. If I remember correctly (read the book a couple of decades ago), most did not even have much of a Financial background if any.

I recently read a blog post by Martin Shkreli who wrote that he was really bad at trading and doesn't participate. It takes very unique individual to be successful at trading and he is not one of them. He used the analogy where you can think of trading like a professional sport. Could you get into the Octagon with a UFC Fighter and expect to win because that is what you're doing when you try to trade.

My take away is if a person like Shkreli doesn't stand a chance, then how would I....


I’m a terrible trader, and had no shame in admitting it. The moment I saw red, I panicked and sold. If I had open orders on the market, I couldn’t concentrate on anything else. I found trading to be all-consuming, exhausting, and completely demoralising.

But I also couldn’t bear to just let my hard-earned savings sit there, wasting away. A cup of coffee cost more than I was earning in annual interest!

About 3 months ago, it suddenly dawned on me... If I know I’m too emotionally volatile to trade effectively, why not get an algorithm to do it for me? I don’t know much about the stock market, but I’m good with statistics and can write code. Why should the hedge funds have all the fun?

I spent a month researching technical indicators and quantitative analysis, then another few weeks building my automated trading system from scratch. I put it on a server last week, and it’s been chugging along quietly, 24/7, ever since.

I don’t have to get involved in any way — it picks stocks automatically, A/B tests different algorithms against one another, and manages its own budgets. I just set it and forget it.

The only time I hear from it is when it sends me a Slack notification — with moneybags emoji, of course — whenever it makes a profitable trade.

Honestly, it’s been the most fun I’ve had on a personal project for years. It’s taught me lots, kept me busy during lockdown, and might one day provide a little extra cash. We’ll see!


Active investing is a negative sum game. Even if your broker is not directly charging you comms, they exist. So, the average trade is a loss.

However, I don't even think that is the main insight here. No single trade is really profitable. There is one conceptual entity, your portfolio. There is a benchmark (An index representing your investing universe).

As a straw man: Making 20% on every trade when you always have half your portfolio in cash feels good but is not a useful perspective.

Don't focus on the micro, analyse overall performance dispassionately vs an equivalent level of risk and discover whether you actually have an edge.

Good luck!


I assume you've heard of index funds; out of curiosity, what makes that investing choice unappealing to you?


Oh yeah, I'm well aware there are probably far more sensible ways to invest my money. This sort of thing just really suits my personality type — it was an exciting idea, and I just ran with it.

I have my own business too, which needs investment every so often, so that'll always be the first priority for me.


Cliche but the best investment is in yourself. The parents project was a form of this. Doesn't mean they don't also have a percent of portfolio in other asset classes like indexes.


I recently made a bot to find profitable cryptocurrency pairs loops and while most exchanges already have dozens of users doing exactly the same thing (if the exchange itself is not doing it), I really liked the motivation it gave me to start a new coding project in a language I did not touch for some time (C#) instead of my traditional python approach.

You post just inspired me to make something similar (whether stocks or crypto) and I wanted to thank you for that. I too see trading as pretty stressful and demoralising (even for trivial amounts) and implementing my own stocks/crypto manager could transform those failed trades into "that's interesting" moments.


Are you having much success with it? What platform are you using? I've wanted to do something similar in Rust.

Or if your bot is just _finding_ the pairs now but not trading, is there a platform you plan to use?


So far the only exchanges where I found some opportunities are the ones that do have a public API, probably because there is less competition on those.

For example, I have yet to find a single profitable pair loop on Binance, despite parsing their WebSocket feed.

But on exchanges that implement anti-scripts, it is not uncommon to have pair loops with a ±1% profit after fees. The hassle is to implement trading with tools like Selenium to proceed with the trade.


Sounds like a fun project. How much rope does your bot have? What did you write it in / what’s the deployed stack?


I was really hoping nobody would ask me about the stack... because... it's PHP! Hahahaha!

Most hobbyists write these things in Python, which I did give some serious consideration to learning... But I know what I'm like — my interest in anything is very short-lived (ADHD!), so I wanted to get a prototype built with a language I'm already proficient in.

It's built with Laravel 8, and hosted on DigitalOcean. It stores and analyses market data in PostgreSQL, and uses Redis for queue management with Laravel Horizon.

Would you believe PHP has its own TA-Lib implementation? https://www.php.net/manual/en/intro.trader.php — that was a nice surprise to discover. This gave me a good head-start on running actual analysis, although my algorithms are pretty simple and only use a few basic indicators to filter out any potential mistakes.

There's no web UI (maybe one day), but it has some simple controls and and reports available through an SSH console. Ideally I won't need to interact with it at all, so Slack notifications keep me informed when anything interesting happens.

I wrote a custom backtester, which runs through the console. There's no pretty graphs or anything, it's basic but makes it extremely easy to experiment with strategy variations on historical data.

I ran it for a week making the smallest trades possible (~$10) whilst I ironed out some kinks and made sure things were working smoothly. It's now week 3, and I'm trusting it with $1500. I'll keep increasing that over time as I make improvements. Individual trades vary from ~$50 to ~$250, depending on algorithmic confidence and profit/loss from the previous day's trading (those margins are pretty meaningless at this level, but it's built to scale nicely in future).


I've done something similar but the actual moves are still entered manually. What API do you use that lets you do algorithmic trades?


Also curious about the platform you're using, because I was kind of dissuaded from using Alpaca when I learned about the good old pattern day trading rule. Are you trading with > 25k in whatever platform you use, or do you have a limited number of trades you execute to stay away from PDT?


Are you going to make it open-source?

I need something like that. I started trading this month, and the first thing I did was putting $1000 on AMC shares which then lost half their value :/


If a lot of people will start running it, it will lose profitability (assuming it is profitable now). The same software acting on the same set of signals means the signals will be cleared pretty quickly.


This guy said TA has no meaning, it only works because other people think it works: https://news.ycombinator.com/item?id=26286655

In that sense, the more people would use the software, the more profitable it becomes.

The software thinks the price of some stock will increase, so it buys the stock. If more people use the software, more will buy the stock, so the price rise even faster


Yep, I almost wanted to add that as well. TA doesn't work and I think this has been (kind of) proven. Though if you look into it just superficially, you'll see that it's a total sham/self deception.

However, it does not mean that the system we're talking about would create a positive feedback loop. (And, if it would, that would probably also be bad and just waiting to be exploited by some other players.) Because even if TA is fake, IF their system works they somehow have an algorithm that works that may to some extent be based on some indicators. (BTW, looking at the comment it's not clear that they simply use TA. The guy just said "spent a month researching technical indicators and quantitative analysis,".)

The thing is that, based on what they said is that it's some tunable algorithm that tries to extract some information. And even if TA worked (which I don't think it does) acting on those formations would still erase the signal or the usefullness of the signal, because when someone uses TA looking for these random shapes, they still try to predict the future and act ahead of the others.


Being amoral loses its advantage when every other player is similarly feckless.


Your point is that everyone who buys or sells assets is implicitly amoral? That seems a bit extreme though you are not the first to say it. One wonders how you can escape such condemnation yourself. Everything is a marketplace in some sense.


No I was simply saying that I can see why Martin's success with pharmaceuticals wasn't as easily replicated playing the stock market.


The reason I will never touch day trading is, that it is basically the same thing HF traders do. Only 1000 times slower. So I will loose against these guys every single time. And even HF traders loose money.

The only single stock investments I have came from employment, either through RSUs or employer sponsored stock buying programs. RSUs are just coming to you, and why would I not take stock at 50% discount?

The only exception would be money I don't need. So gambling, as I don't care if I loose it or not. But usually I do other stuff with that money.


That's really not true. Most HFT firms are running strategies which are completely unrelated to anything a day trader would do, and most of the time they're helping you by being market makers rather than competing with you.

If what you said was true, no bank or hedge fund would run a trading desk. HFT captures just a slice of overall trading profits.


I'd argue that the reason why HFTs don't do day trading strategies, is because it's not profitable in the long run (ie, negative expected value).

Which backs GPs point.


Hedge funds engage in day trading, and there's many successful hedge funds. So the expected value can be positive if you're sufficiently skilled.


I always find these kinds of thought processes interesting "day trading always leads to losses". As with poker, anything which is predictable can lead to meta strategy which can be gamed: this is why GTO players can be outplayed by player-focused players, at least on occasion.

But occasion matters! Life isn't a nice continuous stream, it's lumpy. Circumstantial performance makes a difference - and that's why Greece could win the Euros despite probably not being a good football team.

Day trading is probably quite a hard discipline to follow, but that doesn't mean that everyone who does it is destined to fail.

Anecdotally 50% of marriages end in divorce but that apparently doesn't stop most people getting married...


Another way that I like to think about this is that if you think of a stock price as following brownian motion (e.g. follows a random, well defined process), then it follows that the stock price has a scaling-invariance property. In other words, the stock prices follows the same process regardless of the time window.. e.g. a day for day traders, milliseconds for HF, or years for long term value holders.

Now, brownian motion is just a model for a stock price so YMMV, but still an interesting idea. An investor can pick whatever time horizon interests them and that they're most suitable to take advantage of; e.g. HF traders take advantage of low latencies, technical analysis for day traders, and macro / micro economic analysis for value.

As the OP said, there are these three ways to look at this and at the end of the day, all are gambling with different time-horizons and this is possible because of this scale-invariance property.


I'm only correcting you because I'd want to be corrected.

Loose = Not firmly fixed into place.

Lose = Cease to retain.

Lose is the verb you want to use here.


Day trading is difficult and requires a lot of practice, knowledge, and patience, but saying you’ll lose every time isn’t always true. There are many many profitable retail day traders. HFT don’t really compete too much because they look to scalp differently.


A three to five percent success rate applied to a large population will produce "many many" winners. This is true.


You can apply the same logic to suggest no one should start a business.


That would be appropriate advice for a large slice of the population, so I don't see the problem there.


Business is a field where we know for sure that being better at it increases your chances to the point where your expected profit is positive.

Individual day trading is less clear. Sure, you can get better at it to increase your odds but it seems like that isn’t enough to make those skilled people in aggregate make money.

The analogy in a casino is that perfect play means you’ll do better but there’s still house advantage and so on average perfect players will still lose money.


Yes, if it's business is day trading. The success rates of other kinds of businesses vary.


And you have to be able to correlate their success rate with some measure of skill or else you’re basically saying that not everyone loses the lottery.

The claim to prove is that having some level of knowledge or skill makes the expected gains of day trading positive.


The people who make money tend to put in more money.


There are a number of different "day trading" strategies, some are easier and more reliable than others. Different strategies will work for different stocks, so it's really just a matter of getting to know the stock.

Big institutional traders are limited by risk, the fact that they are market makers for stocks in many cases, and the returns required need to be high, since their salaries are pretty ridiculous. Because of this, the fact that you're generally worse than them isn't a dealbreaker, just find a mid volume niche and learn it really well, then trade around general market volatility.


> I will lose against these guys every single time

It's true that you will not outperform HFTs consistently. But that's fine, you don't have to outperform them to make money. That's because the stock market is not just you and the HFTs, there are hundreds of thousands of other traders.

If there's enough liquidity, you and the HFT can make the exact same trade and have the exact same profit (percentage). The HFT is not necessarily against you. You might buy low and sell high to an HFT, and the HFT might sell even higher and make additional profit. Again, you both made money and weren't against each other.


I guess you mean High Frequency Trading, but I don't understand your reasoning. I'm an old school day trader as I execute my trades by hand.


HF traders DO NOT lose money. They see the trading world a few milliseconds into the future. The whole game is rigged in a way where they cannot lose. They only lose if someone screws up, human error, all that.


How do you explain all of the HFT firms that have gone out of business over the years? They're competing with each other, it's a very competitive space that doesn't even capture that much value compared to the people they replaced.


To win at HFT you have to have lower latency than your competitors. The NYSE rents server space in their building for this very purpose and makes alot of money doing so. If you don't have hardware there you will go out of business trying to compete with those who do. From a broad perspective it kind of looks like companies being allowed to skim freely from the market so long as the right people get their cut.


Getting early views of an order book and trades does not allow you to skim. No matter how close you are to the servers, you’re still seeing the data after the order has gone in and has either been matched or entered into the order book. There is no way for them to beat the order.


This is 100% not true. As mentioned below, HFT competes against itself, and there are measures to protect against latency manipulation.


I go from the account of Flash Boys where an HFT firm manager claimed they lose only once in four years - due to a human error.


You are wrong. HF traders front run to profit off individual trades by beating them to better prices. Day traders try to get an edge and exploit it to profit intraday by simply selling higher than they bought.


Front running is illegal.

Its payment for order flow which is earning off the spread while also keep it tight and liquidity in the market.


So... basically front running ?? That’s what it seems like you are describing. They make money when they manage to get ahead and provide the liquidity needed to fill the orders. What am I missing?


It is not front running, and can only be conflated with it if you don't know what front running actually is, don't know what PFOF actually is, or both. Firms that pay for order flow are paying to be the counterparty to transactions that have razor-thin arbitrage opportunities. They are not placing orders with advance knowledge of upcoming orders; they are reacting extremely quickly to fraction-of-a-cent spreads in the price of a security and pocketing the difference.


a market maker by law has to provide prices better than offered by the current market. frontrunning does not do that.


So you would rather your liquidity was provided by someone slower and more expensive?


Nothing. I can’t believe it’s legal. And yes, I know about the free trading it has supposedly provided. Maybe free trades are dangerous to to most retail traders?


And why would that be sustainably possible?


HF firms? Or pattern traders?

I’m not sure if my answer is good enough but the volatility is always there to exploit.


That makes a lot of sense. I think the GME debacle is a good demonstration of that. Shorting stocks is a part of the game. Some people exploited it, others found a counter move. I don’t believe GME is worth what the market currently values it at. But I also don’t see that fundamental value ever matching the market value anytime soon because the market has fully embraced its non-rationality regarding this stock. We aren’t trading shares in a specific company here. We are trading Melvin’a profits and/or losses.


> But I also don’t see that fundamental value ever matching the market value(...). We aren’t trading shares in a specific company here. We are trading Melvin’a profits and/or losses.

I think you're still doing L1/L2 thinking.

The way I understand L3, there's no such thing as "fundamental value". There's only market value, that's determined by what people think the market value is. The extent to which it's correlated with real-world performance of a company is limited to how likely other people are to take that performance into account. Ordinarily, enough investors look at the state of the company to give rise to a correlation (if only because otherwise there's nothing external to look at!). Meme stocks are kind of extreme here, in that everyone knows that everyone else knows the stock is being traded on its market value. But that feels to me like a difference of a degree, not of a kind.

And at this point I ask myself, how any of that is even useful to the society? Could we decouple the parts that let companies loan money and be accountable to the shareholders, separate them from the part where investors just play their spreadsheet MMOFPS? Or is the former always inherently going to turn into the latter, as people will always game it?


But it is obviously bullshit, as the real companies behind some stocks have a real value. Like for example they might own a building that is worth one billion dollars (simple example). If you take away all the stock market shenanigans, you still own part of that building via your stocks.

As for the usefulness question: providing liquidity is useful. If an investor considers investing in some project, it helps his decision making if they can be reasonably sure that they will be able to sell their shares later on.

And even if it wasn't useful, why would you care what other people do with their money?


As a shareholder how do you access that value without stock market shenanigans coming into play? The only two that come to mind are companies about to go bankrupt, or a careful focus on dividend value (but dividends may not pay out the value of their static assets without having to sell them.)


If you've got a company which is worth a billion dollars in assets but is in too unfashionable an industry to be trading at more than half that in stock (and there isn't a more obvious problem you've missed like unsustainable debt), someone will eventually buy it to liquidate those assets, and earn the holders a nice little profit on the way. And value investing is all about the other side of the beauty contest - looking for the companies investors don't think are handsome which are strong enough to end up generating the sort of profits that will eventually lead investors to conclude they're not that ugly after all.

The irrationality is more on the upside: tech stocks whose fundamentals make little sense you suspect will go up in value in the short term anyway because of FOMO. A lot of people have made fortunes on those kind of bets, and there are definitely people day trading WSB hyped stocks who don't forget to sell.


By forming an interest group with other shareholders, so that you have enough votes to determine what happens with the companies assets (in an extreme case).

You also have some legal rights as a shareholder. I don't know about the US, but for example in my country there is a LEGAL requirement for companies to maximize shareholder value. Few people seem to know when they blame capitalist greed, when really it is a government law. So you can sue the company if you think they mismanage their assets.

Of course there are ways for companies to rip off shareholders. I think there is an old Philip Greenspun article about it, iirc he mentions buying expensive furniture and artwork for the offices.

I suppose it is part of the due dilligence before investing in a company, to check how they spend their money.


I believe that is the case in the US also and it results in extremely poor company behavior. I would rather invest in companies that prioritized doing the right thing to maximize long term profits than companies just try to maximize the next quarter’s returns.


>But it is obviously bullshit, as the real companies behind some stocks have a real value. Like for example they might own a building that is worth one billion dollars (simple example). If you take away all the stock market shenanigans, you still own part of that building via your stocks.

But as a stock holder even of a public company, your shares can get diluted to smithereens when they issue new shares to raise money.

For a laugh check out the chart of Helios and Matheson, the MoviePass company that had a fly by night stock spotlight experience a couple of years ago. It's so diluted, the historical price looks like the stock was worth bazillions in the past chart numbers.


I'm not an expert on that, but how can companies simply issue new stock? Why wouldn't they simply issue billions of shares and dilute everybody else to nothing? (Except for the loss of trust, meaning they would only be able to do that once)? Can they simply issue new stock in any way and amount they want?


Companies issue stock all the time. Ideally, if a company issues, say, $1B in stock, its so they can use that money on projects that will return >$1B in value. In that case, everyone's happy because the dilution in shares in more than counteracted by the increase in revenue.

There are limits - I would assume the SEC has the ability to approve or deny new issuance of shares. If you have 1 million outstanding shares, they would probably frown upon a filing to issue 1 billion more shares.


I don't know the legal specifics but they absolutely can, and do, all the time. It makes the stock sink so it's not something you do uncalculated, but struggling or new companies do this all the time. It's a way to raise capital in the public markets. If people believe in your growth, they'll go along and you might not crash too badly after dilution. And yes, some dilute and pay their executive team handsomely year over year.


I care a lot what other people do with their money. I care if they use it to harm people. I care if they use it to buy legislation to replace pensions with 401ks. I care if they “earned” it through fraudulent means. Some ways to use money are beneficial or neutral, but some are harmful.


> I care if they use it to buy legislation to replace pensions with 401ks.

Pensions are terrible (at least based on performance so far). Not only do they provide worse returns, many are incentivized to lock you into a specific company for many years.

An friend of mine retired in 2013 and had pensions from the first 3/4 of his career and a 401k from the last 1/4. The 401k grew so much it paid out more than all of the pensions together when annuitized (even with garbage interest rates).


You have to compare the amount of money your buddy paid into the pension plan vs 401k to even begin to do an alalysis. (With or without the 401k/ employer pension match)

I have a pension and if I maxed out a 401k it would grow "bigger" but that means I'd be saving more than the pension plan payments that come from my salary require me to save.


I do know those numbers, he showed me. The contributions to the pensions were higher and the pension growth was just garbage for two reasons:

- there was no individual selection in pension investment. They are risk averse so you end up with bullshit total market stuff that gets tepid gains compared to US stocks.

- it’s impacted by the performance of the company. Many pensions invested part of the money into their own stock/industry so a downturn would impact both job prospects and the pension performance

Pensions are “I know better than thee” bullshit run by a company with some kind of elected moron deciding what happens with your retirement. No thanks


But do you care if they gamble away their money? Surely, with the "fraudulent means" example, you care about the fraudulent means, not the money. Can't comment on the 401k thing, but I suspect a conspiracy theory. If you have proof of people buying legislation, maybe tell CNN?


> The way I understand L3, there's no such thing as "fundamental value". There's only market value

I think control theory works better at describing these factors, as L1-L2-L3 suggest some derivative relations that its's not really there.

you have your set point, which is the hard company value. you have n proportional forces, each proportional to the distance from the company current value and that of every put and call on the market. you have a damping effect in the form of HFT, and you have an integrative term, which acts weird because it's applied inversely proportional to the short positions, and it's the lending cost on the short positions.


Except the whole thing with market being anti-inductive is that you have a non-linear term that's a function of the state of the control system itself!

(I didn't want to suggest some derivative relation - just refer to the "perspectives" mentioned in the topmost comment.)


Another way of describing the "game perspective" is simply: "a stock is worth what someone else will pay for it". This sounds obvious, but the implication is that the stock price has no direct connection to how a company performs.


and not just that, it is literally an information game. You hear that the company's latest car model failed after seeing the quarterly figures.

Obviously, the stock price will go down?

Wrong, the market already knew that the car model failed, and the current price is already adjusted for that.

Stock market trading is only worth it if you have an information advantage. And obviously it is the one with the most capital that has the highest information advantage.

Anyone debating on the internet that "one could make money in the stock market by studying books" is such a joke. Who is going to have more information, the average joe with a book he read; or the guy with a billion dollars with information streaming into his AI.


Yes but what information is important enough to move the stock price? I agree it’s foolish for individuals to try to compete with professionals, especially on a short-term window. For longer-term investing I believe the playing field is more level because once you go 5+ years out no one really has an information advantage and a huge proportion of traders aren’t even thinking on that horizon.


The information flows are also incredibly complex and self-reinforcing with all sorts of impenetrable feedback loops.

Low wheat yield one year can cause reverberations throughout the world for many years to come. These can affect strategic decisions by businesses, which then affect strategic decisions among their suppliers, and so on.

Eventually the effects of weather patterns die out, but not before they have (perhaps almost imperceptibly) affected every business around the world, perhaps many decades after the initial event.

This, anyway, is how Mandelbrot speculated the autoregression, correlation, and long-term dependence of the markets might arise.

Trying to figure out the effects of an event in that world beyond the simplest, first-order ones is futile, no matter your resources.


This is, IMO, the hardest part about the stock market to explain to new people.

I work with a guy who otherwise seems smart but who just can't wrap his head around information being priced in. His ideas are things like buy retailers right before Christmas and sell soon after, or to buy stocks in cyclical industries because they have low P/Es (at the peak of their cycle). And he is quite confused when market movements fail to match official earnings results.

The people with all the money hire the most knowledgeable/experienced people and invest in the best technology, which end up making a retail investor's ideas of why to invest in stocks look pea-brained. That doesn't mean (IMO) investing in the stock market is entirely a fool's errand for those without that info, but it does mean you should probably educate yourself (not necessarily with books - would a book enumerate all the different ways information can be "priced in"?) as much as possible and, most importantly, stay away from things you don't understand.

There is also a considerable amount of stock market results which you can ascribe to things that an AI-based trading systems, or purely fundamentals-based trading system, couldn't capture. For example if your thesis was that the Internet would grow to encompass a large part of the economy, you would have made a killing investing in promising Internet companies (post dot-com bubble :)) with a long term view and completely ignoring anything like fundamentals. But I suppose that is the difference between investing and trading.


It's even simpler, you need to invest in things which all of us agree too.


Billionaire dosent even need the AI. The CEO of any company will spill out everything.


The problem with stock market trading is that the need for liquidity grows with the size of the market, not with the number of traders. So if traders keep joining the market over and over again at some point there will be an excess of liquidity and there will be no positive sum money left to earn. It's like a real business. Once everyone has a car the only way to grow market share is by displacing other manufacturers.

If you want to make a living as a trader you are supposed to look for very volatile and iliquid stocks. Traders make money off the difference of the current price and the actual value of the underlying company and in volatile markets that difference is very high.


I think a better distinction would simply be whether you are aiming to profit from speculative movements (gambling) or risk premiums (investing).

Any kind of technical analysis, fundamental analysis, day trading, etc falls into the first category. Passive investing, factor investing, investing in ETFs, etc falls into the second.


Technical analysis is definitely part of long-term investing (e.g. at the most basic, work out how much profit the company is making compared to the market cap and what dividends will be paid over the investment period)


Technical analysis refers to only looking at the price history of a stock. You are referring to fundamental analysis.

https://en.m.wikipedia.org/wiki/Technical_analysis

Fundamental analysis still requires you have an edge over other investors. Passive does not.


Doh.


Following that model, the variety of crypto currencies is the next evolution. The game can now be played as a pure game, without the economic uncertainties that come with underlying companies. All that matters are the actions of the other gamers. The gamestop fiasco would be an incidence of that crypto market mentality bkeeding back into a market not designed to handle such games.


GameStop price spiked because of a short squeeze. Short squeeze happened because hedgefunds over extended in their short positions.

Do you think GameStop was shorted more than float because of games learned by cryptocurrency traders? That’s a stretch.


It’s really interesting seeing how HN can be so uninformed when the topic changes to their area of expertise, this thread is insightful and I’ll use the search button to get an understanding of how many morons are on this forum, this is great for me as I’m not a coder and thought this crowd was ‘smart’.


Eh, in general it's a common fallacy that just because somebody is especially good at one thing, they're good at everything. This is a hard pill for many to swallow, especially if they excel in their field. You'd take basketball advice from LeBron James, but probably should be skeptical about anything else he says. Best to learn that lesson sooner rather than later.


I don't know why Hacker News has a reputation for particularly high intelligence or technical expertise relative to other forums with similar interests. It's not as if anyone had to submit their CV and reverse a linked list on a whiteboard to join.

Unless you can independently verify someone's credentials and area of expertise, it's safe to assume they don't know what they're talking about. I've seen it happen too often that someone will make a claim in absolute confidence only to be corrected by an actual expert in the field, usually the person who invented the technology/language/algorithm being discussed. If that happens with technical discussion, imagine how wrong HN can be about everything else.

Sturgeon's Law always applies. The people most worth reading and talking to here also tend to who post the least, the more confident someone is, the more likely it is they simply can't fathom the depths of their own ignorance.


What would motivate someone to go on a forum and tell everyone they're "morons"? You wish to express your feelings anonymously? Is this some indicator of mental state in the moment you wrote that?


You are pretty limited if you don’t think that a short squeeze occurred when an activist investor brute forced his way onto a board by buying shares. Not to mention tens of thousands of teenagers taking the opposite end of the trade whether they knew it or not. The percent of shares sold short is verifiable. If you know know how the basic arithmetic necessary to realize how the short squeeze conditions were there then... who is unintelligent again?

Also who makes a throwaway to call HN stupid?


HN is not a smart crowd, but there are smart people on it.


Can you define “smart crowd”? It seems like all large gatherings are by definition “dumb” due to group dynamics that add friction to challenge existing norms. The “smartest crowd” may be the America due to the freedoms to create as many crowds—within reason—as one wants. A crowd of crowds as it were.


No. I think making decisions only on the basis of other players has driven gamestop. That is what a squeeze is. That play style, action only ever taken in relation to other players, is how cryptocurrency markets work.


Actions taken based on the actions of other players in the market without (much) regard to the underlying companies has been a factor in the wider markets for decades, if not centuries. See the entire field of technical analysis for example. It's hard to argue that the wider stock market is "not designed" for such speculation. GME had a bit of a wobble, but the wider stock market is absolutely fine. (Actually, GME itself is also still fine. The stock trades just fine and the company is still around)


> Second, the "stock perspective". An investor would ignore the underlying company, but look at the stock itself. It didn't really matter if the company was doing good, but only if the stock itself had good potential. […]

> Finally, the "game perspective". An investor would not really care about the stock, but only about the behavior of other investors.

Well, momentum investing does give good returns over the market average:

> Momentum investing is a system of buying stocks or other securities that have had high returns over the past three to twelve months, and selling those that have had poor returns over the same period.[1][2]

* https://en.wikipedia.org/wiki/Momentum_investing

* https://en.wikipedia.org/wiki/Momentum_(finance)

Basically:

> Every January 1st you look at the newspaper and find the best performing stocks of the prior year. You invest your money among those stocks and then go about your life for 12 months.

> On January 1st of the next year you check the newspaper again to find the best performing stocks over the past year. Any of your current holdings that are no longer on the list are sold and any newcomers are added to your portfolio.

> Repeat every year until rich.

* https://ofdollarsanddata.com/let-them-vote/

Excess returns are respectable:

> From 1927 to 2011, momentum had a monthly excess return of 1.75%, controlling for the Fama and French factors. Moreover, momentum is not just a US stock market anomaly. Momentum has been shown in European equities, emerging markets, country stock indices, industry portfolios, currency markets, commodities, and across asset classes.

* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2041429


It seems like these excess returns are a special case of the general principle that taking on more risk yields higher average rewards at the cost of more volatility. (Compare stocks vs. bonds, for example [0].)

Quoting from the third link above:

> So it has high excess returns and has worked basically everywhere it has been tested, what’s not to like? As the authors go on to say, this incredible performance is also accompanied by periodic, soul-crushing declines:

> "In 1932, the winners-minus-losers (WML) strategy [momentum] delivered a -91.59% return in just two months. In 2009, momentum experienced a crash of -73.42% in three months. Even the large returns of momentum do not compensate an investor with reasonable risk aversion for these sudden crashes that take decades to recover from."

> This is why momentum investing can be so deadly. When things are going right, they can go very right, but when they go wrong, it can get ugly fast.

[0] See https://www.investopedia.com/terms/e/equityriskpremium.asp or the corresponding Wikipedia article.


> It seems like these excess returns are a special case of the general principle that taking on more risk yields higher average rewards at the cost of more volatility.

Yes, but there are times when one takes on extra risks that offer no added reward:

> [Mladina's] findings[0] were surprising. The factor exposure of real estate roughly resembles that of a portfolio consisting of 60% small-cap value stocks and 40% high-yield bonds. This tells us that REITs are not necessarily going to give us something we could not already get by investing in stocks and bonds.

> But there’s more to know. One of the study’s most important findings also suggested that real estate risk is primarily driven by the idiosyncratic risk of the real estate sector. This point is crucial to understanding why REITs might not fit into a portfolio as perfectly as presumed. Put another way, Mladina found that REIT returns were explained by priced risk factors, but real estate risk was primarily driven by the idiosyncratic risk of the real estate sector, which is not a priced risk. That is, it is not a risk that you expect a positive return for taking.

* https://rationalreminder.ca/blog/2019/8/23/reconsidering-rei...

* [0] https://joi.pm-research.com/content/27/1/109

So momentum does have added risk, but one is rewarded for it. Similarly for small-cap: smaller companies are riskier than larger ones, and so a (rational) investor would demand more reward (returns) for investing in such a company.


I think you can do even better if you reduce the intervals


Piggy backing on OP, if you're new to these topics and are interested in a more in-depth explanation about these stages as well as a number of other really interesting history check out https://en.wikipedia.org/wiki/How_Markets_Fail


The correct perspective, aka reality, is that market value gravitates towards the intrinsic value in the long-term.

And if you're a very long-term investor, you can ignore the market price and just collect the dividends.

By intrinsic value I mean the sum of all expected future cash-flows where each cash flow is adjusted for time and variance (risk).


> The correct perspective, aka reality, is that market value gravitates towards the intrinsic value in the long-term.

What makes that the "correct perspective"? If you started doing value investing in 1990 and stopped 30Y later today, you would have perform less than the benchmark, so your definition of "long term" could very well be longer than the whole investment horizon of some people.

> And if you're a very long-term investor, you can ignore the market price and just collect the dividends.

Except few companies pay dividends that would even beat inflation nowadays. The trend is more towards share buybacks. In that world, your intrinsic value does not exist, your only way to make a profit is to sell.


I never mentioned value investing (not sure what it means), only intrinsic value.

Dividend growth of S&P easily beats inflation. Share buybacks are similar to dividends. If you have 100 shares, you can sell few shares to the company and treat it as a dividend.


This is the conventional retail investor perspective. But also, its a tautology. gravitates toward intrinsic value? The current price is the intrinsic value, the market prices in all durations, short or long run.

What you're trying to say long term market value correlates with technical analysis, but is this true? You can't prove/ disprove this, because its "intrinsic value" can just be replaced with "price".

So IMHO, your words are equivalent to: "The correct perspective, aka reality, is that price gravitates towards the price in the long-term."


I would say that what you're saying is the typical retail perspective, this view is common.

Market price and intrinsic value are different concepts. Google Aswath Damodaran's writing on this topic. When GameStop was $400, the price was well above intrinsic value for example so I knew it would gravitate down.


That’s fundamentally true because all stock values tend to go to zero over a long enough period of time. Not a lot of companies survive 100 years for example


If a company goes bankrupt, you can get a good estimate of the true intrinsic value at a previous point in time by summing all cash flows paid to shareholders adjusted for time and estimated risk.


The idea of "game" is emergent from "competition" which is the bottom principle of markets. Further, markets discover "price" which is a measurement of "balance of power" or simply "power" which is a base principle of "people"


I'd say that the second and third perspectives are really the same. You'd be left with the actual in-world company vs. the in-market stock. The duality stems from a stock having two values that can be at odds with each other: real-world value and market value. In some circles the two perspectives are called fundamental trading and technical trading. One extreme of technical analysis is looking only at price and volume charts, sometimes even vertically flipping the chart to more completely detach from any real-world notions you might have about the instrument.


This all looks like some kind of simple analogy to explain the factor model.

The overall idea is that the price of a stock is explained by information (price, earnings, estimates, whatever...).

If you then try to reduce the dimensions of this information, you could find various underlying drivers of the stock price.

One could do that with a PCA, but the sheer amount of data, potential high collinearity between them, and difficulty of then making sense of the resulting coefficients is not practical. So traditionally the drivers are explained by carefully crafted factors defined by economists, and it works rather well.

Some of these factors exist since a long time, and have proven to be persistent across decades.

Interestingly, most of these factors are not tied to companies themselves (idiosyncratic) but rather on whole groups of stocks.

Beta, country, sector, explain the vast majority of stock price movements.

Your first quote seems to sort of describe fundamental factors (quality, value). The underlying idea being that fundamental indicators of the company (price of the stock versus amount of assets, versus earnings, etc), while compared one against each other, should tell you which stocks will perform better than others. These factors have proven to be less and less predictive in the last 20 years, with "value" even being notoriously a "bad bet". It's cyclic though, and we could expect (and it starts to be the case since some month now) a come back.

Your second quote seems to describe more technical factors, such as momentum/reversal. The main idea being that there is inertia and correction in the way stock returns fluctuate. If a stock performs well, it will continue to do so, until some correction happens and it will revert to its short term mean, then it will restart, etc. Funds focused on these strategies are often labeled "CTAs" or "trend followers".

The last part of the quote seems to describe well more modern factors, such as those found in "behavioral finance". The underlying idea being that actors of the stock market are humans, and as such are not fully rational and exhibit bias. If you understand these biases, you can benefit from them.


It's odd to read this, since so much of my money is parked in index funds, probably for decades, simply because stocks are more likely to perform well over the long term than other asset classes.

I guess this can be read as an outgrowth of the "company perspective" in the sense that I think the American economy is fundamentally sound, but it's odd to call it that, since I couldn't care less about individual companies for the most part.


Well put.

I am picturing as a triangle of three perspectives. That also gives you three (or 6) possible cross-perspective stories.

The dynamics between these perspectives are where things start to get squirrely. 2021 memestocks like gme are good examples. Game perspective (no. 3) was the main story. Short squeezes. Retail investors getting cut off, etc. The stock perspective (no. 2) is now all about game investors. Can the stock attract or sustain all this interest from day traders and such.

Company performance (perspective 1) is affected more by the company's stock than the other way around.


The most important concept to understand about today's market is not short squeeze - it's gamma squeeze (which can lead to shorts being squeezed). It's about how traders got their hands on an unusual amounts of leverage (when you buy a call option, the market maker that sells it to you has to buy 5-10x the amount of stock in $$ value that it cost you to buy the option in order to hedge, and the closer the stock gets to your option price, the more hedging stock they have to buy)

GME, Tesla, all of the high-flyers and all the craziness of the last few months were driven by gamma squeezes and the YOLO call option buying of /wsb (with some hedge funds obviously jumping on board)


Through technology—global connectivity, mobile accessibility, and apps like Robinhood and their global counterparts—there’s no reason to expect the demand to wane.

https://amp.scmp.com/business/article/3119779/futu-restore-t...


> the game perspective was the only model that really matched the marketplace

I agree, but I suspect the "company" and "stock" investors implicitly do, too. They invest with their strategy knowing that if they're right, they'll be rewarded by other investors demanding more of the stock, driving up the price. The main exception is dividend investors who just want their utility stock to keep paying the same dividend every quarter--that's a true "company perspective."


I think the problem with this is it works great in a bull market but when the recession man comes the stock values get pared down to what the companies are really worth.


It is the same thing with a bear market, that's the reason why shorts exist.

It I think people will think a company is overvalued, then I can short a very good company and make money.


It's called: Value investing, technical investing, speculating.

'RobinHood' style 'investing' means that people have access to 'data' which makes them feel 'informed' but for the most part they are making totally random guesses, which implies a kind of distortion of self awareness.

In other words - they are RobinHood fish handed to the sharks who have more information, knowledge, and leverage via tech, other services and especially access to capital.

But - with the underling caveat that as stocks go up overall, even random trading can yield what is perceived to be a slight win over time as stocks overall go up in value.

This has the effect of actually making a lot of small winners and having retail investors believe they are actually making 'smart bets' when really they are just riding the market trend.

Compound this with the fact there is a lot of noise in every direction, and that random bets sometimes do turn out relatively well - and a 'single win' will be interpreted by winners as due to 'intelligence' when really it was just random (this happens to everyone, even institutional investors who always over-attribute their wins) - making people feel they are 'smart'. Of course, the 'bad bets' are attributed due to 'bad luck' and not 'bad investing'.

With slack in the economy and enough of the proles playing games on the market, it can really do things to stocks (Tesla, Nikola, Game Stop obviously).

In the end this means that it's hard to fathom if it's actually good or bad for companies, and that the analogy is a little bit like playing poker with better players but the pot just magically grows a bit without anyone noticing (i.e. market rising).

It also creates a little bit of Ponzi-ish mania reminiscent of 2000 where the saying used to be 'when your cab driver is giving you stock tips it's time to get out' with the major caveat that the Fed is creating so much liquidity that is getting dumped into stocks ... that it actually just might be rational to pick stocks randomly and even trade them, because the 'harm' of playing against sharks is less worse than not playing at all, and that being 'in' the market, even on roughshod terms, is better than holding cash.

It's a whole pile of weird dynamics playing out at the same time, and I hope it ends well.

Edit: I was corrected by a commenter below, I may have misappropriated 'Value Investing' which can be a form of technical investing, but subject to interpretation i.e. Warren Buffet doesn't make a pure technical analysis of 'under valuation', he's definitely looking at the management team, the viability of the company etc. but of course looking at that in the context of pricing itself. No investment strategy can avoid deferring the price of the stock as many 'great companies' are clearly overvalued at any given time.


> It's called: Value investing

I wouldn't call that Value investing. Value investing is really about buying undervalued stocks, which really has nothing to do whether you think the underlying company is doing great. The stock might still be overpriced, and a value investor will not buy into that.


> the game perspective was the only model that really matched the marketplace

I don't buy that. If a company consistently grows and makes money, its stock is going up. The stock value is always going to revert to what the company is doing.


What about “ethical” investing?

A company can perform good long term without regards to the negative externalities of its business


I think you can still buy some stock with the intention of collecting the dividends or hoping for the stock's value to grow over time.

There are simple calculations like Price/Earnings ratio that are usually published with every stock, that can help to see if it is a "gambling stock".

You will of course hear all sorts of opinions about the stock market, including hardcore socialists who believe it is the root of all evil and so on. So take everything with a grain of salt.


P/E has become a rubbish metric now, because there's so much money in the market thanks to QE. Most of the money in stocks now is money that would have gone into commodity trading and bonds, etc. The former's prices have stabilized or declined, leading to really poor opportunities, while zero interest rates and neg rates battered the market of the latter. Hence all that money has entered the stock market, which is why past P/E behavior, or any metric's past behavior really, cannot be correlated to future behavior.


It isn't so much that P/E is rubbish but that its utility as a proxy metric assumes approximately flat revenue growth. This assumption is no longer true for a significant percentage of the largest companies, many of which are demonstrating large non-zero revenue growth rates, both positive and negative. If you are looking at companies with high revenue growth, there are other metrics used to determine if they are "cheap" or "expensive". Amazon is a great example of a company that is "expensive" by value metrics like P/E but actually pretty cheap by metrics with more applicability to revenue growth companies.

The problem is that many investors apply metrics, like P/E or book value, blindly without understanding the assumptions that must be true for the metric to be a meaningful measure of value. It is even more complicated inasmuch as some companies fall into an ambiguous gray area when it comes to appropriate valuation metrics (I'd argue Apple is one such company).

Like with any analysis, there is some work to make sure the statistical model actually captures what you intend to measure.


> The problem is that many investors apply metrics, like P/E or book value, blindly without understanding the assumptions that must be true for the metric to be a meaningful measure of value. It is even more complicated inasmuch as some companies fall into an ambiguous gray area when it comes to appropriate valuation metrics (I'd argue Apple is one such company).

This is obviously the core of the issue. But you'd be surprised at how often it is that these concepts surrounding P/E are parrotted constantly at many leading financial firms and schools.


But I think the opposite case still kind of holds, that with P/E you can at least see if a company is most likely not overvalued. And that was the issue in question ("everything is just gambling").


P/E doesn't even tell you that. Companies with negative revenue growth rates often have low P/E ratios but these are often overvalued and poor investments even then. Sophisticated investors, and therefore market pricing, take all of this into account when valuing companies. All trivial nominal measures of stock value were completely arbitraged out of the market many years ago.

There are still measures that correlate well with low risk and strong returns for some subset of companies, but identifying a subset and building valuation models for them is non-trivial (e.g. I typically use risk models for revenue growth in comparative valuation which don't even apply to most of the market). If it was as simple as looking at a trivial ratio of public numbers, everyone would already be doing it.

I've been investing a long time and the markets have changed a lot over the decades. At this point, I think most of the investing advice from several decades ago is obsolete because it is based on assumptions that aren't actually true today. Investment advice and heuristics have a shelf-life. Most people aren't going to build a portfolio strategy from first principles, it is a lot of work, hence the popularity of index funds.


I certainly didn't want to suggest that P/E is a reliable or sufficient indicator for good investments. It was just about this claim that everything is just gambling at this point.


Granted it was then perhaps a bad example, as it doesn't take into account the value of the companies possessions.

I just wanted to give an example to say that you can check things about a company beyond the stock price, which may be inflated by gambling. If a stock is "gambled" to the moon, it assume would have a very high P/E. I'm not actually an expert on those indicators, haven't looked into them much.


From a socialist (especially labor theory of value) perspective, you're buying and selling people's future labor. Socialists tend to think that the workers should get all of their labor. Obviously "root of all evil" is somewhat hyperbolic, but based on even passing knowledge of socialism, it is easy to see why a socialist might consider it to be an evil game.

Per your previous sentences though, a common refrain on /r/WSB is "Sir, this is a casino".


It doesn't make much sense, as owning a stock does not give you any entitlement to the future labor of employees. Also employees can buy stock themselves, which arguably is superior to forcing them to be stakeholders in the company they work for, as it is voluntary. But the labor theory of value also doesn't make sense to begin with (if you disagree, I'd like you to pay me 10000$ to dig a hole in front of your front door, which would be hard work and therefore definitely worth 10000$), it's probably moot to discuss.

I don't think /r/WSB is representative of the stock market as a whole.

The stock market is just people trading. Some do stupid trades, some do smart trades. To cherry pick some stupid trades and claim it is all a casino is crazy, imo.

Personally, I am a freedom guy - I think people's freedoms should be maximized.

The alternative to "letting the people trade" is to regulate what people invest in. In my country, it gets harder and harder to invest in anything but the government pension, as every other asset class is being destroyed with taxes and risk of socialist pawning. There are also rules. It is just another tentacle of the "nanny state", preventing people from making potentially harmful decisions. But it limits freedom. Especially people on Hacker News (formerly Startup News) should understand. Should people be allowed to do Startups? It's a very risky undertaking which might lose you money.


I don't really want to get into it here, but your first example is pretty disingenuous. AFAIK the assertion is not that "all labor creates value" but that "all value derives from labor". There is a difference in those assertions and you should at least be willing to steelman the position of someone you disagree with.


Which one do you mean? It is true that owning stock does not entitle you to labor of a company of employees. Paying wages does.

And the "value theory of labor" states that the value of labor is determined by how hard the work is. So why should I not be paid for digging a hole in front of your door?

If you say you didn't want that hole to begin with, we are veering into "people should only pay for what they want", and I think the "value theory of labor" already gets in trouble. You have to admit that how much people want something, or how useful it is to them, should factor into how much they should have to pay somebody else. So the theory that only labor should determine the price is debunked.

"All value derives from labor" is not even true (what about trading rare items, for example - or lets take a house. Is a house by the lake the same value as a house on a garbage dump, because they both take the same amount of labor to build?), and it seems a very vague statement. How do you derive the value of something from that statement?


Like I said I really don't want to get into this here, but I really would suggest reading more into this stuff, as you do seem to me to have a number of misconceptions about LTV.


Any pointers? I was under the impression that nobody besides socialists takes LTV serious anymore. And I gave some reasons why it doesn't make sense. I haven't heard any counterpoints that make me think investing more time into it would be worthwhile.

Edit: from Wikipedia ( https://en.wikipedia.org/wiki/Labor_theory_of_value ) it seems quite a mess, perhaps a bit like planning economy where they add yet another equation to account for yet another problem, but they can never really capture it all. But at the end of the day, what is it useful for, other than making "worker demands"? Can you use it to compute anything useful? I highly doubt it. In another way it might just be saying "energy determines the price of everything", in archaic terms when energy was mostly "labor".

It seems much more practical and sensible to simply go with market prices.


Value != price, nor does LTV make said assertion. Things like markets and preferences (time, kind, etc.) help determine price. The assertion of LTV is that all value created is created by labor, as it is the transformative aspect provided by humans of the "Labor + Raw Goods + Means Of Production = Final Product" view of production.


Then as I suspected, it is just mumbo jumpo to allow people to make demands (I created the "value", so I deserve that thing).

Again my question, what is the actual use for the concept? If you can not use it to determine price, what is it for?

And there are still examples that show how useless it is, like an apple has no value because it grows by itself? But apple juice (or sugar extracted from apples) has more value than an apple, because labor is used to extract it from apples? What possible use could be for that metric (and what is the unit of "value" - a vague feeling that stuff is owed to you?)? Even though the nutritious value of an apple is higher than apple juice or sugar?


"Gambling occurs when you have a poor understanding of risk, resulting in either (1) negative expected value bets, or (2) poor bet sizing that leads to ruin." Not so. Top poker players are still gambling, but have an excellent understanding of the risks. Their skill doesn't turn them into investors. Gambling is taking a high risk bet. Whether the expected pay off is high enough to justify the risk and whether you can afford to lose the bet is a separate issue.


I (and I think a lot of poker players) would disagree.

Everything in life involves some sort of risk, but doesn't mean it's gambling. Gambling is defined exactly by those two properties. You could die driving to the store, but the odds are tiny and the benefits are huge. Driving to the store isn't gambling. Are casinos gambling when they let you play blackjack? No, the bets are +EV, even those they are only a few % different than the player odds.

You say poker players are gambling and then say gambling is taking a high risk bet. Good poker players make positive expected value bets, and have correct bet sizing (via Kelly Criterion) that means they will be able to survive variance and win.


I used to play full-time and I currently work in trading.

Poker is definitely gambling. Casinos are gambling, they’re just doing so with massive volume and tiny risk (afaik). Trading is gambling. Gambling well is a subset of gambling.


I think I would be OK if we wanted to define all endeavors with an unsure outcome gambling, but I believe that makes most things in life gambling which means we need another word for especially risky endeavors with an unsure outcome.

I think we have the same concept, but I'd be happy to call trading gambling if playing poker table games was called gambooooling.


I think if we have to make a distinction, then categorizing games of chance where you're wagering money or direct money equivalent seems like a fair one. And in that sense, I wouldn't consider every trip I make to a hole in the wall eatery gambling.


> You could die driving to the store, but the odds are tiny and the benefits are huge. Driving to the store isn't gambling.

This statement seems uncontroversial, but I am not sure it is true.

Driving to the store is one of the riskiest activities I (used to) regularly engage in. Now that I do it (much) less, I do indeed perform a risk/reward analysis of getting into a car (when before it was automatic, with an assumed zero risk due to normalcy bias).

It is possible that under a strict definition we are indeed gambling with our lives each time we get in an automobile.


Bet sizing in poker is not determined by the Kelly criterion, it's determined by maximum expected value with at most a tiny penalty for high risk.

Where you could in theory apply the Kelly criterion is in selecting which stakes to play at. But in practice it seems more chosen through rules of thumb / common sense / feeling than an actual application of the Kelly criterion.


Yes, exactly. Bets in the game are determined if they are plus EV, but what game you sit at is determined by Kelly Criterion (or usually a 20-25 buyin roll depending on the game, your life roll, etc)


Anecdotally, a lot of the new stock and crypto investors on the internet this year hold no illusions that they’re investing. The pop-culture mindset is that the stock market is just gambling, so they might as well bet big with long shot companies and options.

The common sentiments are “I’m only investing what I can afford to lose” and “but what if this is the next GameStop/Bitcoin?” They’re entering with a mindset that betting it all is fine because they’ve mentally written off the money.

I’ve been using this as an opportunity to introduce friends and family to more passive, long-term investment strategies but the skepticism is strong.


Would one expect any different from the instant gratification generation? It seems like safer, long term investments that require lots of patience are the opposite of what we've been trained for by the internet.

Lots of generalizations there, but if it's true that millennials have more difficulty embracing delayed gratification, which I think is likely, then a riskier more speculative investment strategy seems to naturally follow from that.

It might also be additionally influenced by record poor returns from safer types of investments.

To be clear, I'm allowed to pick on millennials because I am one, and I've been burned bad this last week on my speculative "investments". So it applies to me as well.


Good poker players are good at taking money from not good poker players. 2 good poker players going head to head is like Yoda dueling Palpatine. 1 good player at a table of not good players is like Anakin with a lightsaber in a room full of younglings.


understanding the expected value of your financial game is important

understanding that the distinction between “gambling” and “this other respected thing” is purely cultural is even more important

you are facing people, around the world, who do not need to rationalize a difference for any cultural, personal, religious, legal or future legal reason. even their community does not care

yet you do, you are already disadvantaged by spending any cycles on this


"Top poker players are still gambling."

This all hinges on how we define "gambling". A lot of top poker pros do not subscribe to the definition that includes them as gamblers, since colloquially "gambling" isn't always synonymous with the game itself but instead connotes reckless abandon and negative EV decision making.


Everyone has a different definition of gambling. I don't think it has to do with EV. Poker players can definitely achieve long-term, sustainable +EV, especially in rake-free games, because they are playing against other players and not a house. I still think it's gambling (along with the stock market), which to me simply means wagering something of value on a future event whose outcome is unknown.


With a wide interpretation of "wager", your definition includes lots of human behavior that no one would traditionally call gambling, because all future events have unknown outcomes, and most future events have appreciably unknown ones.


I'm not who you responded to, but I'm fine with that broad definition. It is practical to find those mathematical equivalences that are easy to find when you apply the analysis of gambling on most endeavours.


I thought the exact same thing.

I suspect a better definition would be a wager based on random chance. Markets aren't "random", they are just suitibly complex enough to seem like it. Some people apply algorithms and emotional analysis to predict behavior. This might sound like poker, but I would argue all of the influences in a market are clearly visible. In a game of chance like poker, card ordering is still random (yes you have probability of predicting next card, but you can't see it until it happens).


Very few (if any) things in life on a non-quantum scale are actually random. Roulette results, dice throws, shuffled cards, etc, are all the results of complex and hard-to-predict processes, but they are no more random than the markets.

What people mean when they say that something is random on a non-quantum scale is this: the process is so complicated and hard to predict that our best models of the process incorporate a significant amount of randomness.

This is the case for markets too, where a multifractal random walk is about the best model we have.


Don't have to be a top player, to be gambling?


This is only scratching the surface of the question.

For interest, there's a very common negative expected value bet that almost everyone is required to make: insurance.

We don't consider that gambling, in fact we often tell our parents to buy some when they fly on holiday.

Why? The answer touches on the lottery.

We care about not just the average case, we care about what might happen.

Regarding Kelly criterion, there's a good reason why people don't used exactly the amount it says. If you look at the risk, ie the chance your probability is wrong, there's a chance you are overbetting.


Value investors use the insurance example as a plank in their argument that “loss avoidance” is the most important value investing principle.

Buffet famously said loss avoidance is rule number one, and rule two is to remember rule one.

You buy flood insurance every year, even if it only floods once every 15 years on average, and even when it hasn’t flooded in 25 years.

If you make 10% for 9 years and then lose 20% on year 10 (1,886.36 from 1,000), you’d be better off making 8% for ten years (2,158.92 from 1,000).


I've seen this sentiment alot and i believe it's mostly right but it depends on who you are. There is no 'Best investment Strategy' for everyone. Should a 20-something invest all his savings into crypto? Sure. Should a 45 year old with kids? hell no.

If the 20-something losses all their savings, that sucks. If a 45 year old losses all their savings they have people to provide for. Which doesn't just suck, it's detrimental to his life and hapiness.

A 20 something has 40 years to bounce back, a 45 year old has 15. Time horizions dictate risks that can be taken.


But there is a best investment strategy: the one that maximises growth.

A constant-fraction rebalanced portfolio has nothing to do with avoiding loss. It's purely about maximising growth. Such a portfolio, in the long run, outperforms all individual assets it is constructed from.

I agree with your general sentiment. My reasoning to get there is different:

I don't, for example, think anyone should invest all their capital into a risky asset. Not because it might crash, but because it performs poorly compared to the best investment (which is a balance weighted toward safe assets.)


Insurance is negative EV only in dollars, not necessary in utility. Since most have a risk averse utility function, it's often positive EV in utility.


The argument gets even better than that.

Logarithmic utility corresponds to maximum growth of wealth (Kelly criterion), so insurance is actually often compatible with maximum growth of wealth.

How can something be negative EV yet maximise growth? Compound returns.

Insurance is only negative EV when considering a single period. The ongoing act of having insurance is positive EV in terms of growth. The way to get to that is to count EV as the geometric mean instead of arithmetic mean.

This is a very common mistake still, even though it was discovered by Bernoulli in 1734. I strongly recommend reading that paper. It is very easy to read.


If you assume a well-functioning insurance market, I think the argument can be made that the negative expected value should however be very small. Then going one step further, I think mitigating downside potential is actually the opposite of gambling. Driving without insurance is gambling.


what does "well functioning" mean in this case? The insurance market's profits literally are the negative expected value. If the negative expected value is very small, there are very small profits for the insurance companies. They would only do that if there was pressure on them re competition, which is the opposite of what is happening nearly everywhere in almost every market.

High competition low profits would be well functioning for a consumer, low competition high profits would be well functioning for an investor


I think that for the serious cases of unexpected misfortunes, an insurance is a compressor where all population events are the whole signal and individuals make the peaks (well sometimes many a person are in the same event):

For the subset of people that would need an insurance without knowledge that could prevent that, the consequences should be distributed among all people. (Sure, there are exceptions if taking too big a risk.)

And personally I feel most medical issues and school should be paid by the state as it would be too unfortunate if an individual should face alone the consequences -- and possibly couldn't afford for an insurance, or is likely not to buy it because has other monetary issues.


Insurance isn't a bet. It's a hedge. The bet is, you're not gonna wreck your car, or burn down your house. The gamble, in your scenario is not getting insurance.


Insurance is precisely a bet that you will burn down your house. It is also a hedge specifically because it is a bet against a desirable outcome. (Either you lose the bet but get the desirable outcome, or you don't get the desirable outcome but at least you win the bet.)


I agree that expected value (EV) is not necessarily a good metric for personal financial decisions. In fact, this applies both to EVs greater than and less than 1.

As you point out, insurance is a good example of a <1 EV; its purpose is to reduce volatility.

Another example: lottery tickets in the occasional case where the EV>1. This is supposed to, for instance, lead a rational economist to buy a lottery ticket (or many lottery tickets!) when the Powerball jackpot hits some particular threshold, say 500 million. However, money isn't linear in terms of value to individuals, and for most people the difference in life impact between winning a billion dollars vs 500 million is not anywhere close to 2x - indeed the two outcomes are more or less effectively identical.

tl;dr: because money is not linear in the value it adds, EV is not a good optimization metric for highly skewed outcomes.


However, if you compute EV as the geometric mean of outcomes, instead of the arithmetic mean, it works again. (This is mathematically equivalent to the log utility you allude to.)

This is the right way to think of repeated bets (rather than in isolation) and Bernoulli's 1734 paper on it is a very readable intro to thinking in terms of the Kelly criterion.


Moreover, insurance is a bet against yourself. When assessing insurance I always go through this exercise. For example, optional auto insurance when renting a car is routinely extremely overpriced. A good way to reason about it is "Would I bet $20/day that I'm going to have an accident in this car for the next 3 days?"


it would be more accurate to say:

Would I bet $20/day that something will happen to this car that would make the rental car company want to be reimbursed for?

Depending on rental car company the limits of scratches, dents etc .. can be very low.


And those scratches, dents, or even more could be entirely not your fault. Heck, they could even happen when you're not in the vehicle.

So effectively it's a bet against you, other people and more generally the world.


Insurance has a positive expected value if you've made a good decision.


Gambling is a zero sum game, your win is anothers loss. Investing is not. When it works there is literally more stuff, goods and services, for everyone! With investing you can win without others losing! That is how we all have so much more stuff than a century ago without anyone losing, we didn't liberate it from the aristocrats we invested and created it.


Investing isnt gambling, trading is.

Atleast buying and selling stock because you think it will go up or go down is gambling. Basically you are betting that you will outperform the market rate.

If you just want to get the market rate of return by passive investing, it is not gambling. This post is talking about trading.


Gambling isn't necessarily zero-sum in utility, which is what matters. There's entertainment value for example.

It'd be like saying the foreign exchange market is zero sum, because one party loses HKD and another gains USD. This is obviously flawed because utility is being gained by both parties despite being zero sum in dollars.


But there is a buyer and seller in the transaction regardless of whether one person is gambling or investing.


You buy a share, it goes up. You sell it to me. Share goes up more. We have both won. How? Because the company created more stuff and injected it into the equation. We can literally get more out than we put in.


Me buying a share from you has no impact on the company. They only benefit if they can sell primary shares. A company’s ability to monetize a rising stock price is time consuming, you can’t decide tomorrow to issue $100m worth of shares and be able to sell them


No, a higher stock price (caused by the demand and transaction volume generated) is valued immediately as compensation.

If your stock goes up, employee morale is high and ppl want to stay the rest of their vesting schedule. If the stock goes down you have to compensate employees with more cash.

Also, acquisitions are made in stock deals


And for early trades of a stock, in the analogy of the poster you replied to, the seller is a creator (inventor, builder, etc.) who needs money to build or expand and a buyer provides money for him to do that for part of future profit. That should be a profitable trade for both sides.

The secondary market (where people just swap ownership) serves (spikes and manias aside) to reallocate money to more productive companies. This, by the way, is the area that is really suffering under current "only invest in indices because EMH" mantra. My 2c.


That doesn't make it a zero sum game. The transaction is zero sum but not the market. If the market were zero sum, the indices would never change.


True, but when a company sells their stock in for example IPO, it is a mutual goal of yours and theirs to see that the company rises in value.


Maybe. Or to buy at 19 and sell the next day at 24


Shorting is also gambling, but it is not a zero sum game. Because there are now three parties bearing the risk of a stock, there are either two "winners" and one "loser", or vice versa.


A couple years back I wrote an explorable explanation on the Kelly Criterion. I thought I'd share it here as it's not often the Kelly Criterion comes up around here :)

https://explore.paulbutler.org/bet/


Working out EV is easy for casino table games, relatively easy for poker and extremely difficult for stocks trading.


The reason is pretty simple - probability of events are an important input to calculation of expected values. If the probabilities are off, expected value calculations will differ. Also, Expected Value works under the “law of large numbers” assumptions. That in turn brings into picture the “sequence of return” risk. Two drastically different sequences can lead to the same Expected Value but can have serious short term implications.

“The market can remain irrational longer than you can remain solvent.”


> Also, Expected Value works under the “law of large numbers” assumptions.

Technically, EV has nothing to do with sample size. But I get your point that in sufficiently small sample sizes and/or sufficiently large bet sizes you might need to think about utility rather than expectation.


"easy for casino table games"

I don't believe EV is easier to estimate in poker than trading. You need to estimate hand range and the consequences of actions later in the hand. It's extremely complicated.


Yes...bet sizing is something I worry about a lot, but it isn't clear to me how to apply the kelly criterion to a game where the risk/reward is mostly unknown and only based on a hunch.


You could make a table where row is guessed probability(input to Kelly criterion) and column it's actual probability and cells contain expected value and expected log value. And pick something which looks reasonable.


One better-than-nothing way is to look at historical data:

Looking at the closing price for each trading day, count how many times the stock ended higher and how many times it ended lower than the previous day.

Then you have your odds.


If we're investors, and not gamblers, why do we get an explanation about negative value bets with only gambling examples? It feels like negative value bets don't exist in investment.

You can't say a bet is negative value when you don't know the odds, and the whole reason people are making so much money market making is that no one actually knows the odds, so no one knows the "real" value of any instrument.

If you're trying to say we should come up with an expected value of the bet before making it, why not give an example on how you'd try that?

The reminder of the Kelly Criterion is great, and I think the article would have been better with a little more practical example of how to apply it. The first half of the article feels like it could be condensed to "Gambling is when you pick bad investments" which is ridiculous..


You move from "gambling" to "investing" by analyzing the target company and coming up with your view of the correct price for the stock. You then compare this price to the market price. If market price is lower, buy. Otherwise don't.

This is basically the same way professional sports betting works. People involved collect information about the teams and try to understand how this information affects the outcome of the match. Once they have established their own view on the probabilities, they check the odds bookmaker if offering and calculate the expected outcome, i.e. how much money will this bet give me. If your calculations are right, then repeating this over and over again will lead to profitable betting in long term.

In a sense the gambling/investing distinction is just in your own head. Maybe you are so bad at evaluation the companies that a coin toss would be better predictor for success than your Excel sheets.


“It feels like negative value bets don't exist in investment.”

Options are deliberately negative EV. They need to be negative EV to be long so that there is an incentive for option sellers to sell premium. Otherwise option seller would just get steamrolled every time.


"You can't say a bet is negative value when you don't know the odds"

You can. The whole idea of E(V) in trading, gambling, etc, is that V is an unknown distribution, and we're trying to estimate the mean of it using a combination of empirical observation and priors given to us by experience and expertise.

Nowhere in this conceptual framework is the idea that we know for sure what the density of V is.


Hey Chris,

thanks for sharing the article. I think I spotted a minor logical error in it tho.

> This is because on average, you will gain $1 with every coinflip. For those interested in the maths, you have a 50% chance of winning $2, and a 50% chance of losing $1. 50% * (+2) + 50% * (-1) = +$1.

Isn’t it an average gain of $ 50ct per coin flip? That way the calculation would be correct aswell.


Yeah, I'm also pretty confident it's an average of +50 cents per flip.

E.g. if you get 50 heads and 50 tails in 100 flips, that's +$50, which maps to 50 cents per flip.


Good pick up!


Trading stocks in America is state sponsored gambling. All of the game is based on the assumption that the stocks will (on average) always go up. They dont. Check the European stock markets that have been stagnant for 20 years.

Selling lottery tickets with the promise of getting a pension. Disgusting.


GPD per capita is significantly stronger in the USA than the EU. Over the past forty years, growth in the USA has been not only been strong, but stable (practically linear.) The EU is a very different story.

My point is, I don’t think it’s fair to justify calling the US equity markets “gambling” by comparing them to the EU which is a totally different horse.


What do you think the pension is doing with your money? At least you're gambling it in low-fee index fund. The pension is paying someone 2 and 20 to underperform.


Why has the S&P 500, Russell 2k, etc all gone up over the past 20 years on average then?


1) 20 years is a small sample size

2) The US has enjoyed the status of the world's reserve currency since 1945, which literally means the gains of the U.S. stock market are partly financed by the whole world (note that we used to have a net surplus with other countries pre-1970, but now run a deep deficit and have off-shored our domestic manufacturing base - as a result of needing to get dollars out into the system)

3) Most stock market analyses on the US stock market are done in this 1945-now period when the US has been dominant on the world stage; it's a long time in an individual's life but a short time historically. If that changes, I expect lots of things that were "always true" to no longer be true anymore.

More reading: https://www.lynalden.com/fraying-petrodollar-system/


> Additionally just because a game involves skill, it doesn’t mean that it is not gambling, otherwise Lehman Brothers would never have collapsed.

Chess involves no random elements and I doubt anyone would call it gambling. Yet you can loose in chess.

I agree with his general point, but I don't think you can use the Lehman Brothers as a stand-alone gambling argument.


It's an artificial distinction. If you are wealthy, you have access to opportunities with good odds, call it trading and tell everyone about it so they know you are a sophisticated and wise investor.

If you are poor, you have few good options and generally wouldn't brag about your gambling. If you do, you are labelled irresponsible.


I tend to agree. Trading stocks is essentially gambling but almost worse. The odds are rigged but you don’t know by whom abs how much. It’s a game of skill, except not entirely. The house always wins except there are multiple houses and you can lose to all of them.

I think investing is a different beast: that is going long on a company, industry, or the market in general. You reasonably know that the market will over time go up. With specific industries or stocks you take a bit more risk but you are still buying ownership of a thing and things tend to become more expensive over time unless a better thing comes along. But short term gains chasing, especially as a retail investor is just gambling.


Stick a 1% tax on all share buys and use to reduce income tax for working people, or just issue it as a cheque at the end of the year that people can invest.

That doesn’t harm investing


Sure it does. Any investment with an expected return of <1% immediately flips from positive value to negative value for an investor.


The Net Investment Tax is a better way and already exists. It taxes actual gains over a threshold so “the little guy” is unlikely to pay.


"That doesn’t harm investing"

Not true. The cost will be largely passed on from market maker to investor through bid offer spread.


Uh, that's a great idea, has this ever been proposed formally?


Financial transaction taxes have been introduced in any number of countries, the majority of which have ended up repealing them: the tax raised on transactions is outweighed by the loss of capital gains caused by a reduced number of transactions occurring. And in today's global financial system you could end up like Sweden, where introducing an FTT saw 80% of trading move to London within a year...


> If you are poor, you have few good options and generally wouldn't brag about your gambling. If you do, you are labelled irresponsible.

And rightly so. For two main reasons

- demonstrably negative expected value of the bets (like in casino floor games or the lottery)

- relatively high proportion of total net worth wagered

I'm very comfortable with labeling this as irresponsible (regardless of levels of wealth). It's not just a case of "everyone does it but only poor people are shamed for it", there's a clear distinction between the two cases.


The more useful interpretation of the argument is that it's another form of justifying the social order through cultural perception of the inherent worth of people in each class

i.e. everything a wealthy person does thanks to wealth is traditionally promoted as a sign of their inherent worth, and everything a poor person does out of the conditions of poverty is interpreted as a sign of their fundamental roughness. This is especially true in a Protestant context of wealth being an indication of divine favor.


I don't think the odds is really part of the distinction. If you find a way to "gamble" with positive expectation, by profiting from sports betting markets for example, you are still labelled irresponsible and reckless compared to real "investors" who buy stocks, even when those bets are clearly unwise.


When you are poor, your discretionary investments are a small fraction of your future income. So you can afford to blow out your brokerage account a few times. In a way, college, marriage, and kids are leveraged bets on your future income so they are more risky than gambling past income.

When you are wealthy you have to be more disciplined and pace yourself. The only thing you thing that you can’t slow down the pace of is time.


People are gambling when the buy assets you don't like and investing when they buy assets you do like.

Pretty cool because it is literally impossible to lose money investing because if you did lose money it turns out you were gambling.


That others don’t see the blatant hypocrisy of the gambling/investing false dichotomy speaks more to their _own_ biases.


> This is because on average, you will gain $1 with every coinflip. For those interested in the maths, you have a 50% chance of winning $2, and a 50% chance of losing $1, 50% * (+2) + 50% * (-1) = +$0.50.

Interesting


As as already been pointed out it's not correct. Your EV, although positive, is +$0.50 cents, not +$1.

Another nitpick: in Poker you'd more see the $1 as the price to participate, and $3 as the gain (because in Poker what you put in the pot is considered "not yours" anymore).

So the math is ($3 * 0.5 -$1), which also gives 50 cents and which, arguably, is more logical (but really it's a minor nitpick).

As the problem is presented in the article you wouldn't see it that way but then Poker is mentioned so...


I didn’t start making massive amounts of money in trading until I realized a simple concept: Don’t take risks, make them. Essentially you provide an opportunity for others to take risky gambles and profit when they lose.

So now I sell way OTM option contracts and make great consistent money. Sure a pro day trader might make more, but I make consistent money and with much less skill or accuracy required. And I still benefit from the rise in my underlying stocks as long as they don’t get assigned.

Only reason this isn’t more popular is because you really need high six figures or over a million in assets to start making income you can live off of. The amount of people with that much money in liquid assets is already small, and the portion of them willing to invest actively is even smaller, so very small target audience. Also, perhaps the current market environment lends itself better to selling options than it did in the past. I’m optimistic, but ready to accept this easy money could end someday.


I have started doing that as well this month with CSP

But the disadvantage is the limited upside. If you just buy the stock, you could have unlimited profit if the price goes to the moon, but the option only gives 1%. And you could still lose everything, if the price goes to zero


I wouldn’t advise CSPs over holding stock. Hold stock and sell covered calls.

Only sell CSPS on down days below key support points in price. Back your CSPs using your margin power so your not tying up capital and have 100% equity investment in stocks, so you only go into margin if your CSP is assigned, and then you can just sell it off when the price recovers above cost basis, only costing you the interest of your margin loan amount per day. You could sell covered calls as well while it goes up to cover the margin interest payments.


> I wouldn’t advise CSPs over holding stock. Hold stock and sell covered calls.

I have heard CSP and CC have theoretically the same returns? Except for something called "skew". Although often I am too busy to trade for some several months, and then it would probably better to hav estocks.

Do you do it on individual stocks or ETFs?

Unfortunately I do not have a margin account. I could apply for one


A Positive Expected Valued bet does not mean that it is not gambling. A couple of years ago, the MegaMillions prize was so large that the expected profit from a lottery ticket was higher than the cost of the ticket itself. Buying that ticket was still gambling.

The problem with the stock market is that you gamble on speculations. And you do so without any connection to the balance sheet of the company. Most of the shareholders are not the original shareholders, that means that they never invested a single penny to the company. They only paid speculators. And these speculators paid others etc.

Stock market is mostly* a glorified pump and dump scheme that looks for the greatest fool[1].

[1] https://en.wikipedia.org/wiki/Greater_fool_theory

*exluding the IPOs and issuing of new shares where actual money flows from the investors to the balance sheets of companies.


I've been doing alot of deep dive into 'Technical Analysis', picked up a couple text books on the markets and have been flipping cryto to great success lately.

I've come to realise that 'Technical Analysis' is just insider trading. Us day traders come to this 'Agreement' on which technical analysis to buy and sell at. There are thousands of different 'methods' to coordinate this insider trading but if a boolinger band lines up with the bottom of linear regression chart, it's a pretty safe bet to assume other people 'Agree' to pump and dump up to some other technical analysis.

Whatever you call technical analysis, I call sophisticated insider trading. It's been working out great for me, but i do feel alittle gross sometimes.


A negative expected value bet also does not mean that it is gambling. For example, buying homeowner's or life insurance. This entire article seems to be quite obvious and should be easy intuition even for a beginner, and doesn't even try to explain how one might be able to tell whether their trading profits are due to luck or skill.


> And you do so without any connection to the balance sheet of the company.

This is incorrect for just about every long/short equity hedge fund.


>So why is bet sizing important? This is an often overlooked concept, but it is extremely important to prevent ruin (or losing all your money).

The Kelly optimal bet for many popular investments is over 100% (not that it's a good idea to invest like that). Understanding the KC often leads to less conservative investing, not more.


> A 101 on not gambling: Don’t make negative expected value bets

This advice seems like a good general rule of thumb, but I don’t think it holds up on scrutiny. For example, I consider all purchases I make to be investments.

I am a safe driver, but still decided to pay for comprehensive car insurance (above what is required by law). I understand this investment has a negative expected value, but helps to reduce the variance of my “portfolio”.

Similarly, if there is a large planned withdrawal from a brokerage account in a year, I could imagine someone buying some slightly below the money puts on the assets (with negative expected value). Now you could argue that the bet as a whole has a positive expected value.... maybe the advice could be better phrased as “make sure that in sum your investments have a positive expected value”....


> A not so obvious result that follows from making successive negative expected value bets, is that in the long run you are guaranteed to lose all your money (or ruin). Intuitively this makes sense as with each bet, you are losing money on average.

Expected value doesn't tell you much about the outcome of successive bets. Someone else can probably explain this better since it comes up on HN a lot (something about ergodicity and the difference between ensemble average and time average).

Quick example is if play a game of double or nothing on coin flips. This is a "fair game" because you pay x and get back 2x * 0.5 + 0 * 0.5 = x. But if you play more than one game you will very quickly get a "nothing" and can't continue.


Kelly staking criteria tells you how much to bet in such situations. in this case: nothing since it's a pointless bet, economically speaking. you may derive utility from the lols, though, in which case probably don't bet the whole bank in one go!


The Kelly criterion doesn't apply in this scenario. Imagine the same game, but it's triple or nothing (so, the odds are massively in your favour) and you can walk away at any time after resolving a bet, after which you go back to investing in Treasuries or low-cost index funds.

How much should you wager? Kelly says 25% (edge of 50% / odds of 2). But this is correct only under the assumption that you will have infinitely many opportunities to play the same game at the same odds for whatever stake you choose. If you only have one chance, you should bet more. It also assumes a linear utility value of money: assuming this is actually convex, you should bet less.


Most people making active trades right now are certainly gambling, but has society really left them much choice? They can't leave their house, and boring investments are significantly underperforming because the government has committed to low bond rates and printing enough money to dissolve your mattress savings and prop up equities at all costs. Add that real estate is insanely expensive (also a consequence of artificially low interest rates), and it shouldn't be so difficult to imagine why even intelligent people are playing the short term trading game which is approximately zero sum. It seems like the only way to get ahead, and it kind of is true (even though most will fall further behind).


I am not sure why people are viewing gambling in a negative light here. Investing is absolutely gambling but that does not imply investing is a bad thing. The reality is that there is no such thing as reward without any risk, you need to willing to lose something to gain something else.

This is essential to option pricing, it is why low delta options are cheap and high delta options are expensive. A high delta option will have a high probability of success but will demand the investor to risk more on the position.

If there wasn’t a gambling aspect to capital markets, there would be zero liquidity as nobody would deliberately take the negative expected value side of the trade.


Obviously not really adding much real help to the conversation but I watched a sketch only a few days ago that seems pretty applicable:

https://youtu.be/B_9D5jeby_8


Why is this such an interesting distinction to people? They act like by not trading you are not gambling. But at the end of the day any investment is about realizing opportunity cost. There is an opportunity cost to holding fiat/cash as well. So in a way you could argue that holding cash is gambling that the fiat/cash is going to provide a better opportunity cost than other investments.

What's more interesting to me is focusing on optimizing opportunity cost (which is always a gamble at the end of the day, it's impossible to NOT gamble).


correct. i think it's all just part of a slow narrative shift that is seeking to regulate the market away.


Comparison with sports and horse betting would be more apt. There the line is clearly blurred and there's barely a distinction between the two, yet sports betting is regulated as gambling


I can recommend this video. I read the article and it came to my mind that I have watched it a couple of years ago. The history of trading is actually connected with gambling:

https://ocw.mit.edu/courses/sloan-school-of-management/15-s5...


This article is the net sum of these two concepts,

https://en.wikipedia.org/wiki/Gambler%27s_ruin

How to Avoid Gambler's Ruin ( using Kelly Criterion) ?

https://en.wikipedia.org/wiki/Kelly_criterion


For those not familiar with stock market 101, this article is pretty equivalent to «you can greet the world via echo "Hello, World!" in bash». Not that it’s not worth sharing, but

Teaching everything I learnt about investing and decision making on Wall Street.

Oh, god. Wall Street’s not what it used to be, apparently. Sorry for a bitter tone, but really?


Many are neither trading nor gambling, but spending hundreds on meme stocks for the belonging and cultural value.


Sounds like you’re speaking from personal experience.


If WSB millions holding stocks irrationally for meme status counts as personal experience, then yes, we all do. The evidence is there for anyone to see.


You have made quite a few interesting posts, from valuating bitcoin to trading strategies. So I subscribed.


I feel like here needs to point out the fact that gambling (including making -EV bets) isn’t necessarily bad and can be a lot of fun.

You don’t always have to make smart decisions and maximize EV. YOLO!

Plus like Nick the Greek said, “The next best thing in life to gambling and winning is gambling and losing.”


Gambling. Especially in this environment, but the financial markets are both more available and the games have more depth than any casino near me.

The ability to leverage is a lot less frictionless and doesn't include fingers getting broken when you can't cover.


Humans are creatures of habit and emotion, so there are some patterns one can sort of predict and rely on, but I would argue what most people call investing is actually gambling.

In fact, without insider knowledge, I would argue it's not possible to invest.


The book “What I learned losing a million dollars” talks about the difference between trading and gambling in more detail, and it changed the way I think about investing.

It’s also just a fun read.


Why lecture a subreddit called ‘wallstreet bets’ on gambling?


understanding the expected value of your financial game is important

understanding that the distinction between “gambling” and “this other respected thing” is purely cultural is even more important

you are facing people, around the world, who do not need to rationalize a difference for any cultural, personal, religious, legal or future legal reason. even their community does not care

yet you do, you are already disadvantaged by spending any cycles on this


Doesn’t matter, as long as you are making money.


the point is most gamblers aren't


There is no way to prove that. For every story of someone who lost $50k there are multiple ppl posting that they made $50k


You're wrong. There are numerous studies about that. Retail investors have a losing hand against the big players. It's the same story as going into a casino.

One of the dozens of studies on that topic: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1872211

Over 90%(low end estimation) of retail investors make less than inflation long term. The number fluctuates depending on the study.


You are gambling if you are risk-seeking. You are investing if you are risk-adverse.

Gamblers like the thrill of win-it-all or lose-it-all.

Investors minimize risk while accepting some risk as a cost for higher return.

Trading can be gambling or investing, or a combination of both.


I’m trading, hedging, gambling, gaming and investing.


Everyone is doing both at the same time


Eric Ries's https://ltse.com/ is one alternative.


> Don’t make negative expected value bets - you are guaranteed to lose all your money in the long run.

What are the positive EV values?


I’m gambling. Have fun trading!


trading is gambling. the only difference is the risk and insider info.


It's always funny to read such generalizations. You will (almost) never find a trading desk at a bank that takes a directional position on an asset, i.e. gamble. The entire foundation of quantitative finance rests on hedging and replication. If I sell an option contract for $x then I must use that $x to build a portfolio that would compensate my potential loss on the option that I sold you.


The headline looks like an exception to Betteridge's Law, in that the answer is clearly yes.

The crucial thing is that you don't know the true distribution of returns when you invest, trade, or speculate. There's always some probability that you're gambling, in the sense of this article


Trading is gambling, but slower and more often has positive expected value.


hi


This is totally meta but... this style of writing or rhetoric is prone to "semantic not concept" problems. Gambling, Trading or Investing don't have strict enough meanings to withstand a "socrates is a man" analysis...

The author here is trying to make a point about EV. IE, a player is gambling, but the house is investing because positive or negative EV. I disagree.

IMO, negative or positive EV is not what separates house from punter. What separates house from punter is volatility. The house's risk is spread over many bets, and so EV (positive or negative) is a good predictor of performance. Punters don't spread their risk.

Roulette with positive EV is still gambling... it's just a "good bet." Obviously, the house tries to only offer bad bets. Skill games (both the author and gaming authorities agree) can still be gambling... though skill games can give players/gamblers a positive EV.

I also, kind of, disagree with the overall sentiment. I think ordinary people wanting to get in on r/wallstreebets' action are safer adopting a gambler mentality. Don't bring more than you can afford to lose. Bank enough winnings to ensure that this condition stays true. Then, feel free to make long odds bets.


> The author here is trying to make a point about EV.

This is only the first of their two points (summarised at the top and bottom). The second section "Poor Bet Sizing" covers what you are trying to say.

They make the second point that even if you have positive EV, the size of your bet is relevant - and the Kelly Criterion can help you decide how much to stake.

The larger your bankroll, the more volatility you can stomach [the smaller your bankroll, the more "good bets" are still a personal risk] - you are agreeing with their second point, that you should think like a professional gambler.


Not quite. Appropriate bet sizing is related to volatility, but that doesn't make it the same. This is what I meant by imprecise definitions. Sure, two small bets are technically less volatile than one.

I think this is a tricky road to walk. Whether its a diy version of modern portfolio theory, or a day trader's take on martingale system... EV doesn't matter if you're not trying getting market returns. If you very investment is a speculation, a risk.

IDK what you mean specifically by "professional gambler," but most pro poker players are staked by others. That basically makes a martingale strategy viable... not unlike a "two and twenty" wall street trading firm.

"Professional" in both gambling and finance are positions, not skillsets. A professional investor invests other people's money. Same with pro gamblers, generally


> A not so obvious result that follows from making successive negative expected value bets, is that in the long run you are guaranteed to lose all your money (or ruin). Intuitively this makes sense as with each bet, you are losing money on average.

And this was upvoted all the way to the top. JC this site quality is at all-time low.


Investment is informed gambling on human behavior. Important to note especially for HN crowd, is that Claude Shannon’s information theory is very much applicable to trading (and perhaps this is why he was so interested in trading as well). Highly recommend reading The Mathematical Theory of Communication, with this lens and focus. It’s eye opening.


Gambling and I know it.


What about investing?

The current narrative is more like “robinhood stealing” by whatever means


I think this is an interesting concept for gambling: https://pooltogether.com


Ah, a lottery on a blockchain. Why not!

Except, unlike a national lottery, you can't trust the issuer and the value of your prize fluctuates even after you win.


1. Blockchains actually allow for "provably-fair" (cryptographically determined) lotteries. A lot more fair and trasparent than national ones.

2. This specific lottery uses stablecoins, with a value tied to the US dollar.

So both of your points are invalid here.


I was referring to the concept, not whether it is centralized or decentralized. Most blockchain applications don't need one to function.




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