Hacker News Reader

Your profits on AAPL are nothing to do with you being smarter than the market. You've just presented a strategy of gambling as better than a long term tracker. I absolutely do not believe you can out perform a tracker long term.

How is that gambling?

A company has a product, which is sold to consumers. A company has a structure, which includes employee counts, capital expenses, and so forth. A company has a roadmap. And dividends.

It's not "zero risk" but to suggest that it's no different than tossing chips on a roulette number or a blackjack dealer is completely absurd.

The question isn't whether you like ipods 10 years ago or not. It's what information you had, that you incorporated into a model that you then traded on that gave you a real, statistically valid edge to the market price when making that trade.

When you buy a stock, you pay two main fees: the basic broker fee and the market spread to the mid price. The moment you make a trade, you're down.

When you toss chips on a roulette number, you pay one fee. You know there's 36-1 chance of your number being chosen but there's also the zeros that give the house the edge, which give you a 36-1 payout on a 38-1 event (depending how many zeros). The fee is 2-3% percent (on a european roulette table). Moreover, you actually KNOW the real probability in the casino and you KNOW the house edge.

In the market, you have absolutely no idea what the real price is. Maybe Steve Jobs dies earlier in an alternate universe and the company implodes before the iPhone money press gets going. Maybe in another universe, he lives longer and tanks the company because he starts believing the hype about himself. Who knows? In this universe your AAPL bet paid off wonderfully. Liking a product and buying shares in the company is a completely reasonable thing to do, but unless you genuinely know something others don't it's gambling and convincing yourself otherwise is a really really dangerous thing to do.

Liking a product and buying shares in the company is a completely reasonable thing to do, but unless you genuinely know something others don't it's gambling and convincing yourself otherwise is a really really dangerous thing to do.

That's an incredibly broad definition of gambling you're offering: if I purchase an asset (from another entity) with the expectation that it will go up, but information I have is at or below what the other players in this 'bet' then it's no different than betting on Black #26 on a roulette wheel? And all this, you suggest, because I can calculate the odds in the latter case, but I'm too unsophisticated to calculate the odds in the stock purchase case? Stock value is based on an underlying asset, which as a whole, is at least expected to go up, as the economy produces more wealth. And anything CAN happen (eg., a company blows up, a product fails, etc.) But a casino, the house is ALWAYS expected to come out ahead. That's why the odds are so long.

Moreover, you actually KNOW the real probability in the casino and you KNOW the house edge.

By your definition, the house I purchased for investment could fall into this category as there was no way I had all the information the others had (seller, for certain, brokers, and other players).

What's your conclusion about gambling, then? That since the odds are known, and they aren't (by myself), in a stock purchase, then __?

Buying a house is gambling. It's a gamble most people take and is usually a good one to make. You're trading one asset (cash) for another (house) hoping that the combination of the house value and your derived utility from that house retain higher value than the cash. This does not always work out in the house owners favour. It's a gamble. It's not a stupid gamble, usually, though.

Buying insurance is gambling, as is not buying it. Both courses are sensible in different situations.

The trader who buys aapl after massive amounts of research and maybe a new, key insight is STILL gambling. They probably have an edge to the market, though.

Let me put it this way: if you only ever buy a couple of stocks in your life then there's really no good way of picking them. The expected variance in the rate of return on those stocks is so high that any edge you may have is effectively lost. If you win, you win. Great. But if you buy and sell 10 stocks a day for years, you have absolutely no chance of making money without a real edge, as your skill (or lack thereof) becomes the main signal, not variance.

Your strategy will fail longterm. Buying stocks is the very definition of gambling: buying something hoping it will go up in value. Buying a house is probably a decent bet most of the time. Buying house insurance against fire is a loss making bet when analysed in aggregate (insurers make profit) but so useful to you that it becomes a good bet. Buying mobile phone insurance, if you're not young, drunk and clumsy, is a bad bet. Buying aapl on a hunch is a bad bet, but it paid out. Congratulations.

Great. So that boils down to "skills." Which is essentially what this very active thread is implicitly all about.

But here's the problem. While everyone is arguing back and forth about competing against Wall St., game theory, probability and the quibbling over "gambling" which turns out to be nothing more than a convention in conversation (others below admit that index funds and housing are also betting, but to a lesser degree), what no one is addressing is what specific trading strategies we're competing against here.

IF you are a day trader and you compete against other retail day traders and Wall Street trading floors, automated trading systems, high frequency and such, that's one thing. IF you stock pick but pick your stocks for multi-quarter or yearly outlooks, and you absorb information about -- not the stocks -- the companies, following news and understanding what their risks are, then that is a totally different strategy.

Much of Wall St. cares across quarters and short-term. Many retail investors too. I would only advocate medium and long-term stock picking.

Everyone brings up Buffett and his advocating of index funds. What no one here has mentioned is that he's a value investor, buying up stocks when companies are, in his estimation, undervalued.

You folks are guilty of sweeping the individual under the rug in favor of the overall statistics. As if the individual who wishes to buck the trend is, at best, lucky, and at worst, an imbecile.

If you're not interested in the area of stock picking, then that's understandable. But if you're pre-emptively convinced that you can never win, because your knowledge is average, well I suggest that if you're an intelligent person that you reconsider. Again, no one here is advocating day trading or beating Wall St at their own game.

You are missing out by not taking a chance on companies that you think might expand in the coming years. Nothing is guaranteed, and I think many folks on here seem to miss that part of the equation.

It's not that Apple is unsound. It's that you picked ONE company. If you had said 100 years ago that you would trust not the long term viability of stock in the Pennsylvania Railroad Company (it paid out annual dividends for over 100 years unbroken), people at that time would have called you certifiably insane. Then history unfolded. Will Apple be around in 50 years? 10 years? It's an unfolding probability. Will you correctly get out and find the next such company in a manner that beats low cost passive diversified indexing? Doubtful.

http://www.efficientfrontier.com/ef/900/15st.htm

Most index return comes from a few stocks that generate extreme returns. By picking a single or a few companies, you're likely to miss out on those outsized returns. Buy the whole market and you can't miss.

(Sidenote: clearly, VCs have done the same or very similar calculus with startups.)

By that theory, you should diversify away from those that are not going to be "superstocks" (in the post, Dell grew 550x and pushed up the entire index). For example, HP or Exxon or UPS will probably do okay, but will not outperform the rest of S&P by a huge margin. Therefore, they will only weigh down your big earners.

It's that it's stacked against you, like this article explains, just like a casino is stacked against you.

Also, for you to have made money on AAPL you would have had to gamble on something. You had to have bought at a lower stock price. If you bought recently, it would be that Tim Cook doesn't suck and they don't botch the new iPhone. If you bought 6 years ago, it would be something else. If you bought 10 years ago it's that the iPhone would remain dominant, etc. etc.

> How is that gambling?

When you buy the shares of company A instead of company B, because you want to gain more, you are betting that the price of company A is undervalued on the market compared to company B. This is perfectly fine IMHO, but it's still a bet.

So then, it logically follows that buying an index fund per your definition is also gambling, because you're betting that the stock market index as a whole will continue to go up. It may be a bet with better odds or worse odds, but it's still a bet.

We're entering sorites paradox(1) terrain here. I would say that what differentiates "gambling" from "investing" is the amount of risk you're choosing to take. The lowest risk you can take is distributing your savings between money, stocks, bonds and real estate. For the stocks part, the lowest risk strategy is buying index funds.

So, if you distribute your investment and use index funds for stocks, I would definitely say you're not gambling by any reasonable definition of the word. In between, I'll leave it to everybody to decide for themselves where they want to put the threshold.

1) https://en.wikipedia.org/wiki/Sorites_paradox

So I have considered taking a more active approach to investing, but every time I think about I am dissuaded by the findings that actively managed funds get beat over the long run by index funds. For example, the Buffet bet of S&P500 beating mutual funds, the lack of correlation between fund performance from year to year, the darts thrown at NYTimes fund, etc. All these things suggest to me that actively managing can beat the indices in some years, but will be balanced out in others.

I would be interested to hear more of your thoughts about this.

Buffett structured his bet in a very specific manner to maximize management fees of the other side. His bet was the S&P 500 vs any five funds of funds hedge funds. This is like betting the S&P 500 vs the average return of 20 hedge funds. Of course Buffett is going to be a favorite when the investments are diluted so much and you take into account all the fees on top of fees. I think he would be a dog vs a single hedge fund or five hedge funds.

If the other side was so obviously weak, why did Protégé Partners (who chose the fund-of-funds approach, actually) take the bet?

http://fortune.com/2015/02/03/berkshires-buffett-adds-to-his...

In aggregate the market is zero sum so if you think 1 or 5 hedge funds would beat the average easily who are the suckers taking the other side of those bets?

The stock market is not zero sum. The people taking the other side of well managed hedge funds are usually poorly managed pension funds/hedge funds, index fund ETFs that blindly buy a bunch of stocks without looking over their financial statements, or dumb public retail investor money.

>The stock market is not zero sum

All securities are held by someone and the total return of the market is the total return of all those securities. For someone to outperform the market he has to hold a mix of securities that outperforms and whoever holds the opposite mix underperforms. Sock market returns are very much zero sum.

>the other side of well managed hedge funds are usually poorly managed pension funds/hedge funds

How do you pick ones from the others?

>index fund ETFs that blindly buy a bunch of stocks without looking over their financial statements

That's the point of those ETFs, replicate the index exactly. If they're replicating the market average then they're doing exactly their jobs.

Why would you expect someone to hold the opposite mix of securities that you hold? That's a curious approach you're taking.

The market is not zero sum.

Thanks.

Well, I think there's "actively managed funds" and there's yourself. Funds are companies with infrastructures, eyes on them, politics in them. And so forth. I think it's a valid point that it's hard to time the markets and such.

But as a simple person looking at companies you believe in, you can buy and hold. An example. If in 2001/2 when you saw an iPod for the first time, you thought to yourself that the company that made it has potential, maybe you bought some shares in it. That's just one of a lot of examples. Also it helps if you're in the industry that you're examining. We're in tech so maybe we've used some of the products that we believe in, and others we don't believe in.

So that's one consideration.

Also, hedge funds and asset managers do a bit more than buy and sell stocks. They do complex, sometimes crazy things that involve leverage, options/contracts, and very complicated instruments.

There's nothing WRONG with buying a stock index fund, but if you see a company you think might have a winning product, and from some quick analysis seems like it's reasonably well managed, then that's something.

Not everything has to be technical analysis of high risk biotech stocks, shorting strategies and so forth.

And for the retail folks like us, we don't have to "trade" actively, as in buy and sell every day.

That's my middle ground between "competing against high frequency traders or golf course CEO conversations" and "buy index fund and close my eyes for 15 years".

Here's the problem with this. Most people won't even change their own oil in the car, they aren't going to research and develop their own trading strategy. You do what works for you, but for everyone else, index funds are a great set it, and forget it strategy.

You should checkout my startups blog post on causality in cryptomarkets:

https://blog.projectpiglet.com/2018/01/causality-in-cryptoma...

Basically, we used it to generate pretty awesome returns, and we bias our "trade potential" advice towards reduced risk: https://projectpiglet.com/

It was easy for us to rack up some nice returns:

https://blog.projectpiglet.com/2018/01/30-weekly-returns-usi...

All that being said, I personally limit my exposure to volatile assets - so I wont put more than I'm willing to lose in cryptocurrencies, and regularly pull out profits.

I upvoted you because your post adds a valid discussion point, but I have to ask:

1. Are you actually getting any alpha using this method? Averaged over multiple years?

2. If you are, are you earning a decent hourly rate for researching companies and following the market?

1 - So far so good, but it hasn't been many years. In a bull market, I'm also (in addition to some other winners) partly 'betting' (as per the conversations above) on some value stocks that underperformed during this time. One of them is based on geopolitical issues in one particular country that I'm expecting to be resolved based on the best knowledge I have while following the politics of this particular country and the industry of the company in question (and the company's legal disputes with the government). Another is a promising technology that was recently trialed successfully commercially. There are a few others like this. My educated guess is that even should the broader index go down when the bull market eventually subsides, these will picks still benefit and climb due to the underlying fundamentals. They're hedges along with a basket of other picks, some of which are very conservative (and include Vanguard funds). In the worst case, I don't think my picks will underperform a bear market.

2 - that's an extreme perspective, since there's value in learning that doesn't have an hourly cost. The TOC of my time may or may not be higher than what a fund manager would cost (or the index fund approach being discussed). Then again, monitoring the portfolio 3-4 times a day for a couple of minutes isn't that bad. Initially finding the stocks of interest and doing some basic research does take time.

[edit: grammar]