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Comment by speedplane | Hacker News Reader

I don't day trade, I mostly keep my money in ETFs and other dumb securities. But every now and again, I see the market move in such a completely unreasonable way, most often hammering a stock on some bad, but not awful news. In these cases, I've made small gambles and bought the stock when it's low to see it recover every time. My sample size is small and I'm too conservative to bet the bank, but I haven't been wrong yet.

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> I'm too conservative to bet the bank, but I haven't been wrong yet.

You are being cocky because you are dabbling with small money, when you play with big money, your emotions will immediate change and that is when you will make mistakes.

> when you play with big money, your emotions will immediate change and that is when you will make mistakes

That's precisely why I don't play with big money, not that I have so much anyway. I wonder though, if I was playing with someone else's "big money", if you could keep those emotions in check.

That’s the real trick - convince others to give you a lot of money and when you win you get a big cut and when you lose it’s not your money and you just do something else.

Seems to be the way all hedge funds operate, maybe can even charge membership fees too.

Right... most traders get big bonuses when they win, but if they lose, at worst they get fired. If you can win for a while and then get fired eventually, you'll still end up on top.

Trader A makes $10m in year 1 and gets a $1m bonus. She loses $10m in year 2, and gets no bonus so the firm is down her $1m bonus.

Trader B makes $1m in years 1 and 2. That’s too low to trigger a bonus, but his firm is up $2m.

The system doesn’t reward trader B so he has to choose: do what’s right for the firm, or take big risks in the hope of a bonus

(Simplifying dramatically)

Many firms implement clawbacks for this instance

Part of the trick to convincing people to invest with you is having a significant amount of your own money in the fund. So that's one hurdle here. It's possible to raise enough that your management fee renders irrelevant whatever you might lose trading your own money, but at that point you're in big league hedge fund scale anyway and will be very tightly scrutinized.

Also, losing client money is just as emotionally difficult and stressful and guilt inducing--maybe more so--than losing your own for anyone with a half normal sense of responsibility and fiduciary duty.

True enough. I've realized that my investment strategy would be completely different if I was using Monopoly money, and I'd probably have made 10x as much money.

>and that is when you will make mistakes.

While some trades using this method may not work out, the idea that he must make mistakes simply because he is risking larger amounts is not at all a given. Some people have no sensitivity to such things.

I know a couple of advantage gamblers that sometimes play $10,000+/hand on blackjack, and it might as well be $5 to them - not because they are super wealthy, but because they know they have an advantage, and understand that the math will work out over the long term. Whether they win or lose on a given hand, or wind up winning or losing on a given day, is meaningless to them and they rarely get emotional about it. The same certainly applies to many stock traders.

That "strategy" only works when markets are behaving irrationally, such as they have been for the last 10 years, where basically everything just goes up. If you tried that in 2000 (like I did) or 2008, you'd be quickly destroyed.

The business cycle is a thing. Passive investing means expecting that, and not selling at the bottom. (For short-term liquidity needs, you shouldn't be in the stock market at all).

If the cycle is long enough, like in Tokyo, where the Nikkei is only at about 60% compared to its 1989 value, then it is of no use at all, unless we think of the “in the long run we are all going to end up dead” as a good investment strategy.

There are also Black Swan-like events of stock exchanges and entire markets disappearing completely, like it happened in Russia after 1917 and in China after WW2.

There was a severe bubble leading up to that, characterized by corruption and negligence. I'm not sure it's a good example.

If something like the Russian revolution comes along then all bets are off, it pretty much doesn't matter what you did with your money as long as you didn't flaunt it.

Are you sure we are not currently in a “severe bubble characterized by corruption and negligence?”

I think I could argue both sides pretty convincingly. It is easy to see in hindsight, not so easy in the thick of it.

You’d need a fundamentals-based argument like “the economy is all based on lies” and “technological innovation has stopped” to proclaim something like that, not just “there’s usually a downturn every 10 years or so.”

The business cycle is a theory, which very well might be self fulfilling. Who makes the most profit from a market decline?

"Observing correctly that the market was frequently efficient, they went on to conclude incorrectly that it was always efficient. The difference between these propositions is night and day."

Buffett in 1988 prior to his net worth increasing a lot.

So you were able to successfully read the future yourself? Can you predict coin flips as well? ;-)

A straw man comparison. OP is saying that they can intuitively pick up (sometimes) on unreasonable downtrends (when they occur). These happen because of historical events and market reaction to those events. The probabilities are based on dependent events in the case of the market, and on independent events in the case of a coin flip, which is a critical distinction (but does not mean that OP can predict results 100% in either case).

My reply has to be read in the context of other comments from speedplane: “You're still trying to read the future, if you could do that well, you could make money betting on coin flips.”

"But every now and again, I see the market move in such a completely unreasonable way, most often hammering a stock on some bad, but not awful news."

These obvious moments do happen sometimes. Not always, but they can give an edge to knowledgable people paying attention (most HNers know tech better than the average stock analyst/trader). I remember the night Trump won, the futures market reacted like the world ended. While the world might end at some point in the future, it certainly was not going to end the next day.

With that said, these moments do not happen frequently enough and turn out correctly for the investor to consistently make money.

if they are 100% obvious trade options on margin and make a killing :)

That's why I said they a) don't happen that frequently and b) do not always turn out positive. Black swan events do happen. I joke with my currency trading friends about 'picking up nickels in front of a steam roller'. It works great, until suddenly it doesn't and you're broke.

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