It Feels Like the Game Is Rigged | Hacker News Reader

It Feels Like the Game Is Rigged

theirrelevantinvestor.com

161 pointsaloukissas246 comments

The quote from that caller is pretty amazing. There are just so many things wrong his statement that it's hard to even know where to start.

1. A 7% weekly loss isn't really anything that a buy and hold investor should be worried out. Yes losing money sucks, but are you really so afraid of volatility you would rather earn practically nothing from 3 month T-bills?

2. It's super easy to call shorting GME risky after the fact.It's incredible what people call "obvious" and "risky" once a particular situation has blown up. Captain Hindsight strikes again.

3. He claims he is worried about "market manipulation", but I doubt he would be complaining or have his faith shaken in the markets if he just realized a 7% gain this week.

This guy is looking to blame someone and hedge funds are a convenient populist target.

On an aside, it seems the market can't ever get a break. If it crashes and unemployment skyrockets, it was due to some fat cats gambling. If the market skyrockets and unemployment is high, now the fat cats are making money off the backs of everyone else. If the market skyrockets and unemployment is low, well, everyone isn't sharing in the gains equally.

Give me a break.

Also if someone "came into money" and the market is at an all-time-high (during a pandemic, no less!) why not roll it into the stock market over a one- or two-year period? Same dollar amount each month for two years.

Research generally shows that if you have a lump sum of cash, it's better to invest it all at once rather than average it out.

https://investor.vanguard.com/investing/online-trading/inves...

Time in the market > Timing the market, and all that jazz.

yeah but cost averaging is often a psychological technique. It's easier to commit yourself to cost average than it is to commit yourself to a lump sum investment.

The page you link to does admit, though, that dollar cost averaging minimizes possible downside risk.

Agreed that you shouldn't try to time the market, but it is of course possible that you invest that lump sump at a high, and then see a significant drop soon after. Sure, over time that drop will almost certainly rectify itself, but psychologically you might feel better about buying in over a longer period of time.

Living with slightly lower long-term returns in exchange for peace of mind is a perfectly valid trade off that people can choose to make.

You should choose your asset allocation to fit your risk-reward preferences. Once you've done that it's suboptimal to further reduce risk at the expense of reward by holding more cash for longer.

So what has the better expected return between a) invest lump sum all at once into a low-volatility portfolio b) invest the lump sum progressively into a slightly higher-volatility portfolio, such that the expected regret remains the same?

It's (a).

The optimal strategy can't possibly be (b), because it would have the bizarre implication that two investors who have exactly the same preferences and who currently have the same amount of wealth would want to allocate their investments differently depending on how far in the past they started investing.

Edit: I'm quite sleepy right now, but I think the way the mathematics works out is that the risk arising from an asset is a convex function of the amount allocated to it. So by Jensen's inequality it's less risky to invest 50/50 in cash and stocks for two years than to invest for one year in cash and one year in stocks, for the same reward.

That page is inaccurate, according to historical data the downside risk is always greater with dollar cost averaging: https://ofdollarsanddata.com/lump-sum-investing/

This is because there are always two downsides, the risk of investing just before a huge crash, but also the risk of holding out while a boom passes you by. People always psychologically overweight the former due to loss aversion, but the latter is more pernicious.

That's what the chart says but what does human behavior say? Does everyone truly ride the crash down and back up or will some of them panic and leave the market before it recovers?

One of those risks a 70% loss the other one merely risks unrealized gains.

> Does everyone truly ride the crash down and back up or will some of them panic and leave the market before it recovers?

This is an orthogonal issue. If you DCA for 12 months and then a crash immediately occurs, you suffer the exact same fate (you are worse off than someone who had 12 months of investment returns prior to the crash). Does this mean you should increase DCA horizon to 24 months? The only way your framing makes sense is if you have prior knowledge that a crash will occur during the DCA period.

Notice how it says "Expected Return". The problem is that it is better "on average" to invest it all at once (and doesn't even talk about variance). But an individual is not an average. They will lie somewhere on that spectrum. I'd rather take a small hit to the expected value of my returns in order to reduce risk of being on the wrong side of that average.

> I'd rather take a small hit to the expected value of my returns in order to reduce risk of being on the wrong side of that average.

This is a common fallacy. That is not actually the tradeoff you are making, in fact you are taking a hit to the mean value, and also greatly increasing the chances of being on the wrong side of the average[1]. Dollar cost averaging increases variance and decreases the expected return in proportion to your averaging period. You earn less and have a much lower floor for almost no increase in the ceiling.

There are nice visualizations here: https://ofdollarsanddata.com/lump-sum-investing/

[1] at least according to history. Who knows what the future holds.

Good post thanks for sharing. It's true, the market grows more often than it shrinks and I could see how that skews the distribution in favor of lump sum.

You’re still an individual either way. So it’s still better to use expected return.

Maybe you could compare and choose an option with less variability or standard deviation even though the mean return is worse. But these studies don’t compare the size of average losses and gains. I expect that the variance is also better for lump sum.

This stops being generally true if you assign a non-linear utility to future dollars.

Above some point more dollars are less valuable to you, below some point they are much more valuable to you.

If your investment objectives will be very likely satisfied from the returns of the DCA and the lump sump has a higher probability of failure -- why wouldn't you DCA even though it has lower expected returns?

> the lump sump has a higher probability of failure

For this to be true, you must be a successful market timer. Whatever your DCA period is, at the end of the period, you are fully invested -- a crash at that point in time would hurt you just as much as a crash would hurt a 100% equities from day 1 investor. DCA'ing is a bet that a crash will occur sometime before you are fully in. In every other scenario, the DCA is strictly worse. If you don't happen to know the timing of future crashes, it's better to put your money to work now than later, come what may.

To account for non-linearly increasing dollar utility, it's better to choose a less volatile asset allocation, not to delay your investment period.

And yet, back tested it shows significantly lower variance. (of course, that isn't a guarantee... but it's the same kind of analysis that says lumpsumming is better, in terms of expected return)

> In every other scenario, the DCA is strictly worse.

Yes. And so what? It will always be the case that a lower variance approach will be better in the cases where the higher variance approach did poorly and worse otherwise.

> it's better to choose a less volatile asset allocation

These are not mutually exclusive. One can lump sum all into the lowest risk allocation and then risk on over time.

It doesn't help that right now there is not much freedom in asset allocation at all. Your choices are pretty limited to higher risk things and things with a negative real yield.

> back tested it shows significantly lower variance

Not sure what you're using as the measure of variance, but Morningstar found DCA has higher variance in IRR: https://www.morningstar.com.au/learn/article/the-dollar-cost...

> These are not mutually exclusive. One can lump sum all into the lowest risk allocation and then risk on over time

I never said they were mutually exclusive, just that it is suboptimal.

I'm not a big fan of Dollar Cost Averaging. If you have a lump sum amount you were going to invest, do it fully at once and let all of the money work. If you divide it and invest over a period of time, you are (1) letting the un-invested money be idle. (2) chasing a market downturn to invest the rest in hopes of "averaging down". Remember, market goes up more often than it goes down, so you will likely end up increasing your cost basis than if you had invested at once.

Bitcoin is highly volatile. If you do a lump sum payment you might end up joining the market at the top of a bubble where the value of Bitcoin is 12x times its long term value. Sure it will not crash 12x down but going 70% down after the bubble could be enough to cause a panic sale and thus lose your money.

>If you divide it and invest over a period of time, you are (1) letting the un-invested money be idle

No, that's not always true. For example. When you earn $5000 in excess income per year you can decide to invest it monthly. That's dollar cost averaging and you didn't let your uninvested money sit idle.

You can save up $5000 until the end of the year and then invest it. That's a lumpsum and you did let your uninvested money sit idle.

Investing your excess income as you get it isn't really Dollar Cost Averaging the way firms talk about it. It's called DCA on forums and such, but it's really just investing your excess lump sum each time as soon as you get it.

Lump Sum vs DCA comparisons are usually made in the context that you have your lump sum now. Not that you're accumulating a lump sum and trying to time the market for when to invest it. The page is titled "How to invest a lump sum of money" after all.

> Suppose you received a windfall. Someone gave you a gift or you inherited a lot of money. Maybe you hit the lottery jackpot or got a huge bonus.

> Here's the question you face: Should you invest it all right away or in smaller increments over time, a strategy known as dollar-cost averaging?

Thanks for the correction, I didn’t know DCA was meant for lump sums. That makes it really dumb, I think, as it assumes down market. This whole time I thought DCA was a reflection of constantly investing chunks over time as money comes available, a good idea I think.

The Wikipedia article [0] has quite a few links to studies showing this is worse than lump sum.

I’m trying to think of any scenarios where this would be smart, but they all seem to assume market knowledge and just adjusting a lump sum payment. Even if you “knew” it was a down market and didn’t know when it would pick up it is bad because you would miss the biggest upswings at the bottom of the bear.

I think this is just one of those platitudes that retail advisors give people because it sounds good, but actually isn’t.

[0] https://en.wikipedia.org/wiki/Dollar_cost_averaging

> Bitcoin is highly volatile. If you do a lump sum payment you might end up joining the market at the top of a bubble where the value of Bitcoin is 12x times its long term value.

I should have been clear, I'm not talking about Bitcoin at all. Just traditional index investing.

historical performance in equities shows that lump sum investing has beaten dollar cost averaging over almost any time period

I’m aware of the macroeconomic policies that coincide with that observation, but people will lean on those papers

In higher volatile assets or periods, dollar cost averaging is the better move, so people that come from more volatile markets are correct to lean on that

>On an aside, it seems the market can't ever get a break. If it crashes and unemployment skyrockets, it was due to some fat cats gambling. If the market skyrockets and unemployment is high, now the fat cats are making money off the backs of everyone else. If the market skyrockets and unemployment is low, well, everyone isn't sharing in the gains equally.

I mean...this was due to fat cats gambling. Illegal gambling in fact. What else do you call shorting 140% of a company's stock?

Also, this might just be me, but it feels disingenuous for you to not mention a disclaimer while posting this that you're a quant trader at a market maker.

EDIT: As others have pointed out I seem to be misinformed about the legality of it, but my original point does stand. This IS happening due to fat cats gambling, and retail investors catching wind of it and blowing it up on social media (to be clear I'm aware that the majority of GME holders are still institutional)

I mean this as a genuine question:

What law would shorting 140% of a company’s stock break?

Disclaimer: I've been trading for ~8 years but only heavily researching trading strategies ~1 year, so I'm no expert in these things.

But, unless I'm misinformed (which I'm hopefully not considering how much I've been reading into this lately), there's ~72.4m shares of GME floating around right now, but only 69.5m were issued; which would mean that ~3m are counterfeit or naked shorts, which are illegal

Hate to break it to you, but I can borrow a share and sell it to you and then I can borrow it back over and over again.

Perhaps the issue there is that in this scenario (I have a share; you borrow it from me and sell it to me; then you boroow it from me once more and sell it to me again) currently it's treated as if I own three shares (though two of them have marks on them that they can't be lent).

Perhaps it should be explicitly treated as if I have one share, and two "claims on shares" which are likely to materialize, but are not guaranteed to do so - to make that distinction clear, to ensure that the lending for a short actually involves the lender temporarily giving up that share instead of just marking it as "used".

The number of shares reported is the number of shares existence -- not because of naked shorting or not.

Naked shorting would not increase the number of share available to be bought. But not the total number of shares in existence.

This is the same way banks use deposits to make loans. The dollar is the same dollar, but can be spent multiple times. Hence the money multiplier effect. The number of dollars in circulation is a constant. The number of times a dollar can be spent can be more than one.

At some point the loan still has to be paid off, which requires me, eg, to acquire a dollar somehow, then pay it back to the bank -- with interest.

Imagine a world where an individual did all this shorting. A different individual then sees it and buys all outstanding shares of the company, and decides they are long on the company and only want to hold their shares.

How does the shorter now settle up their positions in this scenario? With 140% of the company’s stock shorter it becomes easier to get into this state.

What law would that break? It isn't fraud, the individual could still reasonably expect to to be able to fulfil the contracts. Taking big risks with their own money is not illegal.

Matt Levine talks about something along these lines happening here: https://dealbreaker.com/2012/06/phil-falcones-alleged-piggis...

The TLDR (also written by him): Falcone owned some bonds of a company called MAAX Holdings Inc. “After hearing rumors that a Wall Street financial services firm was shorting the MAAX bonds and also encouraging its customers to do the same, Falcone decided to seek revenge.” So he bought all the MAAX bonds. Then he bought more: Short sellers would borrow MAAX bonds (presumably from him), and then sell them to him, so that he ended up with “22 million more bonds than MAAX had ever issued.” Then he stopped lending them out, forcing the short sellers to buy bonds to cover their shorts. But there were no bonds to be bought, since he owned them all (and more). At some point an executive from the “Wall Street firm” called up Falcone to talk about the situation, and even in the SEC’s dry language you can tell that it was one of the greatest conversations in all of Wall Street history:

> At some point, the conversation turned to the trading in the MAAX bonds. The senior officer asked Falcone how the Wall Street firm might satisfy its obligation to Harbinger. Falcone stated that the Wall Street firm should just keep bidding for the bonds. Falcone acknowledged that the Wall Street firm would suffer some losses doing so, but told the senior officer and the others that sometimes you are just on the wrong side of a trade.

> In the course of this discussion, Falcone stated that he knew that the short position in the MAAX zips had created a “long” position in excess of the issue size. When the senior officer asked how he could possibly know this, Falcone stated that he was working the position himself and that he (i.e., Harbinger) had acquired approximately 190 million bonds. The senior officer and the other the Wall Street firm personnel were stunned.

Well, in that case the shorter can't settle up their positions, so they don't - that's not a crime, that's not illegal, they simply can't fulfil a part of their contract so they owe some amount of money as compensations to whomever they borrowed that stock from.

> What else do you call shorting 140% of a company's stock?

Unusual, but a thing that can happen, and not at all illegal.

There's nothing illegal about 140%, because the same share can be loaned out multiple times.

Anna lends Bob a book, Bob lends Charlie the book, now the book is 200% lent out. It's arguably risky and stupid to be Bob, because now he's in trouble if Anna wants the book back and Charlie doesn't want to return it, but there's nothing illegal about this.

Not currently illegal but I'd bet good money that it will be after this fiasco

How would you make it illegal?

Isn't the book example broken, because only one person can have the book? In shorting, it sounds like you can sell the same share to 2 different people.

At the end of the day, after the stack of promises has been popped, only one person can have the share as well.

It’s not broken, it’s just simplified because nobody’s selling the book, just lending it out.

> In shorting, it sounds like you can sell the same share to 2 different people.

You have to obtain (buy or borrow) the share twice in order to sell it twice.

This isn't how short selling works.

If I short a stock, I borrow the share and the sell it on the market. If I loan the share to someone else and they sell it then it is still only sold once.

In my opinion it's more likely that people were either selling naked calls (which would convert into an IOU for stock) or that people were selling shares that didn't actually exist on the open market.

I don't know enough about settlement to verify the latter claim, but there are some reports of shares taking an excessively long time to settle. Those kind of irregularities should probably be more closely investigated.

> If I short a stock, I borrow the share and the sell it on the market. If I loan the share to someone else and they sell it then it is still only sold once.

The share can then, afterwards, be loaned out and sold again. This causes it to be “double sold” and you’ll see something like the 140%.

Alice loans share to Bob, Bob sells to Carol, Carol loans to David, David sells to Eve.

Bob and David are both short sellers. There is only one stock. It has been sold twice.

>The share can then, afterwards, be loaned out and sold again.

I've seen the same argument more than once this weekend but this flood [1] (also linked from the TFA) says otherwise:

In order to meet legal requirements, the broker has to find un-lent shares (so the same shares aren’t lent twice). The PB will “tag” those shares, indicate to the client the prevailing cost to borrow, and provide the client a “locate ID” that guarantees that client those shares.

[1] https://twitter.com/compound248/status/1355276755980980225

That’s interesting… people in that thread have the same questions, but they are not answered. Perhaps we will eventually find out after the SEC investigation… or perhaps someone will just stop by and explain it.

I think you’re misinterpreting the linked statement - they’re saying A can’t lend the same share to both B and C at the same time. If B borrows the share and then sells to C, C has a share with a clean title and can then lend to D. Otherwise there would be two different prices for lent and unlent shares, since you can make interest off one but not the other.

I’m not 100% sure this is correct though, someone please let me know if I’m wrong.

This is what I've been reading and lead me (I guess incorrectly?) to believe that there was naked shorting happening

You’re missing the point. The same share can be repeatedly loaned and sold by different people: A lends to B who sells to C who lends to D who sells to E, etc. No one in the chain did any naked short selling.

> but there's nothing illegal about this.

Is there a reason why it isn't, other than the obvious one that Wall St corrupted the US govt a long time ago through bribery (lobbying)? Eg. Biden's treasury secretary has already been bribed (colloquially called "speaking fees") to the tune of $7.2M.

Is there a reason why it should be illegal?

Go far enough back in the past and everything was legal. The history of the stock market is the history of new rules being added, new laws being passed, all to restrict how you can buy and sell stocks.

Back in the 1920s I could make a company, issue a bunch of stock, and then go around telling people how amazing and profitable my company is, selling stock door to door.

The basic principle is that when something is made illegal, the law has to be enforced. This is done by taxpayers and/or participants in the economy spending money to hire police officers and various other agents. Therefore, laws should be deployed sparingly and only when positively justified, to keep the burden of enforcement as low as practical.

There is no reason to make this illegal and put effort towards banning it. Eg, I'm not losing any money and it is entertaining. If I think the price after the shorts get involved is too low I can buy the asset in question. Why should I, in my capacity as a taxpayer, be getting involved and spending money through my government?

140% short interest is illegal? Are you sure?

The answer is no, it is not illegal.

It feels disingenuous for you to not mention a disclaimer that you're invested in GME.

and you believe I am because...? I'm watching this along with everyone else

As other comments have said, this is not illegal. Matt Levine explains better than I could here [1].

1 - https://www.bloomberg.com/opinion/articles/2021-01-29/reddit...

there have already been so many explainers for how this shorting > 100% of float thing already happened i don't understand why it is still bandied about like it's some proof of naked shorting; it isn't.

> Yes losing money sucks, but are you really so afraid of volatility you would rather earn practically nothing from 3 month T-bills?

Isn't the market's current valuation actually not that expensive given the fact that it isn't only 3 month T-bills that earn practically nothing? 1, 5, and 10 year bonds are equally bad in terms of ROI at the moment, right?

Jeremy Grantham: "We've got an artificial rate structure ... And we're going to use that as a yardstick? We're going to say 'Stocks are cheap because they are less utterly ludicrous than a 30 year bond, or cash which is deeply negative?'"

https://www.bloomberg.com/news/videos/2021-01-22/why-grantha...

@14:51

Last year when the Dow dropped from 28K to 18K all my friends were selling off their holdings. I was going to do the same but spoke to my father, he told me selling off at 18K does nothing but guarantee my losses. I decided to take his advice and am up 115K on the year.

I don't think the gamestop story is over and just because these hedge funds are showing a loss right now, they still have the opportunity to milk that stock all the way down to zero, and they will.

What is really unfair (but good for me) is from my investments and house value increase, I have made more in one year doing nothing than I did the 1st 15 years of my post school employment.

I don't know how a young person can make it in these late stages of capatlism let alone support a family, maybe that's why there are so many riots.

From my point of view, this is exactly the point. Among all of the physical and mental pain and misery this virus inflicted, it also deepened the chasm between people who were already doing pretty well...and everyone else.

Several people in this thread are commenting that "well of course staying in the market is the smart thing to do since stable savings instruments don't pay for shit!"

Yeah, and that's the problem. In just thirty short years, we've gone from pension plans and savings rates that might actually leave you with more purchasing power than you started (when considering inflation) to...better gamble it all in the stonkz. So much money has been put into stock market-based retirement funds (401k, IRA, 403b, and so on) that the stock market, which used to be for large institutions doing large institution things, cannot fail because it will sink everyone with it.

And yet, the stock market has become so detached from the economy at large precisely because of that yawning gap getting even larger. For those of us who can stay home yet still earn our massive salaries of which we are now spending a fraction, we have huge stacks of cash just looking for somewhere to sit. For the first time in a decade, the average American's savings rate has increased, because consumerism ground to a halt.

Yet for those who lost their jobs--because that consumerism failed--or who go out and risk infection because that's the only way to draw a paycheck, they are even more screwed. We've left our society with no stable way to save and no mechanism to provide for ourselves except ever-increasing spending relying on the wages and efforts of an ever-gigified economy.

That sucks.

> In just thirty short years, we've gone from pension plans and savings rates that might actually leave you with more purchasing power than you started (when considering inflation) to...better gamble it all in the stonkz

Pensions and savings rates were always a gamble. These just provide an obfuscated the risk. Countless cities and companies are overburdened with pension obligations. Moreover, your retirement is always going to depend on the strength of the economy at the point time, so you might as well invest in broad indices.

Great reply - agree 100%

> I decided to take his advice and am up 115K on the year.

This is what is so wrong with the system. When it fails to work for so many people (last 12 months the worst year for the average person for decades), but the wealthy are making record profits, a correction is long overdue. Whether that’s a correction with Guiletines or fascism or just a stock market crash doesn’t matter.

When you have 200m you’re sitting pretty. When 200m have nothing you’re screwed.

I’m glad you recognise it, most on HN are immensely wealthy high income champagne guzzlers first up against the wall when the revolution comes.

I am hoping that I will be on the right side of the pitch forks when it happens. I am building a farm, so when I said that I did nothing for a year that wasn't quite true, I should have said I didn't get a pay cheque for a year.

I do think You are right about the unfairness and expect the Occupy Wall Street and BLM protests will seem quaint if things keep going the way they are. I don't want to get political but am scared of what is comming now that everyone isn't distracted by the Orange man and are seeing how much wealth is being stolen from the masses.

There are things that could be done. Aregentina recently put in a tiny tax on the very wealthiest. That could be done by western governemts.

The problem is the coming crash will knock shares back down to 2017 levels, the biggest gamblers will be bailed out again, and media attempting to blame it on u/Diamond_6969 will either work (leading to backlash against technology) or fail (leading to backlash against big finance)

Unless the average person with no investments is bailed out it would be pretty. 2008 is till fresh in people’s minds.

Wiping out student debt might help, but I think at this stage people want to see the wealthy suffer, and don’t care if it causes pain for normal people either. It’s the situation that leads to revolutions - if you have nothing to lose, why not risk it all to force some empathy.

Off topic sort of but I'm pretty sure Silver is about to make the news. I have been hearing rumblings this weekend and it just moved up $2 in a few hours. If it breaks through 30 theres a good chance it could go on a ride. (Until it gets high enough for granny to sell off the heirlooms like silverware and tea sets etc. for rent)

General news has articles about how Reddit is saying silver is the next GME

I can’t find anything on wsb about silver, and the billboards are all about GME

Now sure silver may well be a better bet, GME is massively overvalued, silver may be a good bet, but “Reddit” isn’t talking about anything other than GME and maybe AMC, so where do these headlines come from?

https://www.bbc.co.uk/news/business-55882758

https://www.ft.com/content/d46e8623-09af-4a1f-b7e5-207616388...

The bbc seem to be quoting this post fro 3 days ago

https://www.reddit.com/r/wallstreetbets/comments/l71rdv/silv...

I had the same thought, it very well could be the corporate media trying to influence retail investors not redit at all.

I bought my silver last spring (very little, just enough to buy a ride or bribe me and mine through a check point if TEOTWAWKI actually comes to be)

Edit

It doesn't really matter why it's happening, it's happening and it just broke 30 so I'm guessing were in for a show.

Silver was already in the news before your comment.

https://youtu.be/DCkrf4ieAUE

Yes it was. It momentarily showed a spot price of 30USD but then dropped below again. It has been in the news, that is what I was refering to as "rumblings".

I will predict though that if the US retailers selling physical bars and coins come into work this morning in about 3 hours and try to replenish their stocks that they sold online over this weekend they will drive prices past the $30 mental barrier and then the sky's the limit for how high it could be pumped. Then it will be all over the news just like GME.

Redit might not even be the cause, it could be Bidens plan to increase solar production, the Myanmar coup or a plethora of other things going on.

I was wrong, I feel it is important to admit that as a decent human. I still feel my reasons for the prediction are valid but nevertheless, I was wrong :(

A simpler solution would be to just get inflation back on track through government investments in infrastructure.

Should have been doing that over the last decade instead of printing money into the stock market

I fear too little too late now.

>What is really unfair (but good for me) is from my investments and house value increase, I have made more in one year doing nothing than I did the 1st 15 years of my post school employment.

That's basically what happens when you do supply side economics. It's a tool to increase deflation by giving companies money and thus invest into expanding their production capacity to the maximum. But companies aren't stupid. They know when they produced exactly as much as they can sell so they don't borrow more money than they really need. The end result is that prices don't change or they drop very slowly because the supply of goods is always high enough. The end result is slow and creeping deflation that is difficult to see. Once companies are well capitalized the excess money is then spent on random crap like stocks or housing without providing any additional value and it massively increases inequality because most people don't own any assets. A lot of basically dead zombie companies can easily coast on the value of their stock without doing anything productive.

Inflation is good for workers because it makes business owners sweat. When demand for consumer goods grows beyond supply the price of consumer goods increases and that increases the profit margin for productive businesses who then start doing economically valuable work by employing people. Unemployment keeps dropping until companies have to compete for workers by offering higher salaries. Interest rates catch up with inflation and make it harder and harder to capitalize your business, meaning only the most productive companies with the most productive investments actually get to borrow money instead of throwing it into random nonsense like stocks because they ran out of ideas.

The market is so complicated, there are many things like currency values and interest rates, GDP, exports and so on that also have an effect on inflation/deflation. I might have made it seem like I was some kind of a trading expert but I'm not, I use an investment advisor that handles my portfolio.

Shorting is riskier than going long by definition of what an equity is. Equity in a company means in a worst case scenario you go to 0 when you are long. If you flip that, when you are short, your loss potential is infinite.

It's not that simple you have to consider the total portfolio. To give a simple example, longing AMD and shorting Intel is less risky than just longing AMD.

Yes and no. You are referring to calculating the variance of a portfolio which takes into the consideration the covariance of components. You can assume your normal or lognorm distribution of returns. All fine and good.

But if INTC becomes the ire of r/wsb, you can throw any sort of historical covariance out the window. There is NO hedge for this.

>You can assume your normal or lognorm distribution of returns.

I think we're seeing how that all comes unstuck on a grand scale right about now. The assumption doesn't hold at the times you really need it and boom!

If you're talking about GME its not really a grand scale. The US Stock market cap is $50 trillion. GME is $22bn as of Friday afternoon or 5 basis points of the rest of the market.

Yes, big SD moves happen frequently enough that we have to revisit our normal distribution models. But GME isn't really the reason to do this.

Have you tried that advice at Melvin?

Size of the market doesn't change the risk you carry of wrong assumptions. Have LTCM if you want another spectacular failure of risk management with wrong assumptions like these. There's plenty more when you're done with that one.

That isn't true.

1) Longing AMD your maximum loss is the amount you've invested in AMD.

2) Add an Intel short your maximum loss on the Intel position is without limit. Intel can go for a massive run for unforseen reasons completely separated from AMD and others in the industry, which is stunningly obvious right now.

is (1) + (2) can be a load more risk than just going long one stock.

"I have seen more stocks go to zero than infinity"

Question is, will Chanos's five-year short bet against Tesla end up paying out?

Maybe not, but I'm willing to bet he won't lose ∞$ either.

> 3. He claims he is worried about "market manipulation", but I doubt he would be complaining or have his faith shaken in the markets if he just realized a 7% gain this week.

That's Bernie Madoff in a nutshell. As long as people kept putting money in, it was fine. It was when people pulled their money out during a financial crisis when Madoff was exposed.

It's also a favorite scheme of con-men, that is, to make you feel like you are winning, when in fact, you're losing. You'd only know that until after it's too late.

he's diagnosing the issue wrong but he's not wrong to feel like the game is rigged. very few people own stocks and the "people" that do own a disproportionately larger amount that everyone else.

Don't you think this straw-manning is just a little bit excessive?

Also, point #2 seems flat out wrong. Short interest accounting for 140% of all outstanding stock is extremely reckless. It's like the Beirut port authority storing tons upon tons of explosive fertilizer in a warehouse so they could shake down a ship owner for some port fees. Sure, it didn't seem so bad for years when nothing happened, but the giant crater (not to mention human carnage) says they've got a much bigger problem than port fees.

> On an aside, it seems the market can't ever get a break. If it crashes and unemployment skyrockets, it was due to some fat cats gambling. If the market skyrockets and unemployment is high, now the fat cats are making money off the backs of everyone else. If the market skyrockets and unemployment is low, well, everyone isn't sharing in the gains equally.

Guess what: people complain about all sorts of things. It's a human thing.

Financial markets would appeal to more people if they didn't appear biased, particularly biased in favor of the wealthy. I think if the players in the '08 crisis had at least gone into disgrace running gas stations in Middle America (I'm not even asking for jail time, unlike some), some of these populists might think there's some form of justice. But that didn't happen. The big banks got bailouts, and millions of people lost homes and jobs.

The just, ethical thing to do would be to end too big to fail. If a bank makes too many promises it can't keep, it should go under. The most the government should do is supervise a swift and orderly bankruptcy. If I were a lawmaker today, I'd be doing that exact thing: make these "too big to fail" companies keep meticulous records of exactly which assets they have, which liabilities, and let the thousands of smaller banks bid on them like vultures in the event of a failure (which is inevitable, given a decade plus moral hazard).

Here's another thing (more related to the GME situation): when the repo market started showing weird signs in 2019, the Fed stepped in and added massive liquidity. Fair enough, a financial crisis is something the Fed is supposed to prevent (ancillary to its somewhat silly dual - actually triple - mandate for high economic growth, low unemployment and steady long-run interest rates). However, when we were supposedly minutes from a financial crisis on Thursday, the Fed was nowhere to be found to inject cash into these brokerages and clearinghouses to secure retail trades. Are people on Robinhood trading repos or commercial paper or something? Of course not. That's for the big boys, the ones who get bailed out because they're "too big to fail." (Please spare me in advance with comments about how this violates X, Y or Z rule or something. Rules and norms have clearly not constrained the Fed much since September 2008, so why should the GME situation stop them now? The Fed has been creative - ingenious, even - at figuring out how to expand its balance sheet and take other policy actions - interest on reserves, anyone? - that were have novel effects.)

It's easy to make straw-man arguments against populist comments from an Internet blog, especially ones that were somewhat ignorant (I happen to agree with you about the comment betraying some ignorance about buy-and-hold). But that does not mean such a comment is representative. Does there exist a version of the story of what happened with GME that is much tighter in terms of facts but has the same "I don't trust the system!" sentiment? If there is, shouldn't the defenders of the market take it seriously, particularly those who do HFT for market makers?

Thanks for the voice of reason. It appears that, as always, people are interested in free money and not in learning how to invest. There's good advice worth millions out there for free, but people would rather pay YouTube 'gurus' to fluff their egos and then claim to be poor because of 'the establishment'.

At least Thanksgiving forces Americans to be thankful once a year.

Good advice would have told you (and still does today) to short $GME ... as it's currently at the very least 500% of anything remotely resembling a reasonable valuation. It's value is completely artificial.

And the same is true. A DCF of, say, Google, Facebook, Intel or (working from revenue) Amazon does not yield anything remotely close to their market cap, and of course market cap should be quite a bit below that (because if you actually start buying those shares it will go up).

So feel free to point me to this advice worth millions ...

Sorry, I don't owe you anything, especially with that nasty attitude.

The problem is a perception that the stock market continues to go up, yet the lot of the average person is either stagnant or getting worse. It isn’t an impossible double standard. The frustration is with the ever increasing wealth inequality.

return on assets over the last 2 decades has far outpaced wage growth. Read: The rich get richer.

In addition, with inflation at or above 2%, the average person needs to see a substantial hike in their wages to keep pace with their current standard of living.

Return to capital > growth of economy. This is the central dogma of Piketty's Capital.

> Return to capital > growth of economy. This is the central dogma of Piketty's Capital.

The problem with this is taking it as a law of nature rather than an observed behavior over a specific period of history. And notably one with a stark lack of antitrust enforcement.

Suppose you bust up monopolies and require companies to compete with each other. Then prices go down, which increases growth (lower price, higher demand), but decreases return on capital (lower margins). Is r > g still true then? Maybe not. I say we try it and find out.

I mean, it is kind of a law of nature, like gravity wells accumulating, that power and wealth beget power and wealth at a greater rate than the global mean.

But yes, I agree, the whole idea of pointing out r > g is to advocate for policy changes that would counteract this. The question is which policies? It's easy to say "break up monopolies", much harder to devise elegant countermeasures that align interests across the whole spectrum and are robust to defection.

> much harder to devise elegant countermeasures

Here's a simple and elegant countermeasure. Don't allow people to inherit more than say $50M with an extremely progressive estate tax.

That may be simple but it is neither elegant nor effective.

The estate tax is a joke because it can be avoided through tax planning.

The theory is that Richard Rich dies and then little Richie inherits the money but would lose 90% of it to the tax.

What happens in practice is that when Richie is 18 years old he launches a company with a loan from his parents in the same line of business where they have expertise and contacts so that 20 years later he's a billionaire in his own right.

Meanwhile all the usual tax avoidance strategies are happening with jurisdictional arbitrage and transfer pricing and self-dealing so that by the time the parents retire they still have all they need for a lavish retirement but the bulk of their assets have already been transferred to their children at a low tax rate.

The problem isn't inheritance. It isn't taxes at all. It's market consolidation and regulatory capture which yields regulations that favor big businesses over small ones and incumbents over upstarts.

Because small business and competition are the ways growth flows to the little guy.

> What happens in practice is that when Richie is 18 years old he launches a company with a loan from his parents in the same line of business where they have expertise and contacts so that 20 years later he's a billionaire in his own right.

It's not as simple as you make it sound. In every sane tax system, donations (even loans with lower than usual interest rates) are taxed just like inheritance. Of course, getting a million dollar loan at all makes a huge difference. But it's still no guarantee to build a successful business. The point is to make it a lot harder to bequeath obscene amounts of wealth.

> In every sane tax system, donations (even loans with lower than usual interest rates) are taxed just like inheritance.

But it's not donations at all. It's, you vouch for this person with a customer who trusts you and correspondingly awards them a billion dollar contract. You take them on as a customer or supplier in a business with 4% margins, so that a 4% difference here and there on what prices you negotiate with them can shift ~100% of your profits to them. You teach them trade secrets that only successful companies in that line of business are privy to.

There are a thousand ways to do it that don't show up on any tax form, and trying to exclude some only causes people to invent new ones.

The real way to fix it is to make it easier for newcomers to compete with the incumbents so the incumbent companies fail or maintain thin margins and new ones are created at a fast enough rate that it's rare for them to exist at a large scale for generations on end to enable the long-term accumulation of capital.

>In addition, with inflation at or above 2%, the average person needs to see a substantial hike in their wages to keep pace with their current standard of living.

Inflation is what happens when there is a shortage of labor and thus inflation is generally associated with increased incomes. This stupid myth that CPI inflation is bad for workers should die. Your comment is also wrong that inflation is above 2%. If that were the case nobody would have gotten angry that assets have outpaced wage growth. Assets outpacing wage growth is deflation except it is not denominated in dollars but rather in housing or stocks.

No, the fantasy economy (read the stock or housing market being pumped by easy money) should not be part of the CPI inflation rate because it's not real. The entire point of CPI inflation is to measure the real economy.

Supply side economics are generally done to combat inflation, demand side economics are generally done to increase inflation and what we need is a stimulus on the demand side because there is already an oversupply of labor.

In what reality isn’t the housing market part of the real economy? The fact that it’s a scarce asset sensitive to easy money policies does not make it fantasy economy. More importantly, the housing market outpacing income increases is one of the major pains for a large percent of people.

The term inflation here is getting mixed up... I'm talking about CPI inflation. Real estate is what you would call a risk asset. Wage inflation is yet another type of inflation. They're all interconnected

To put it mildly, this hasn't been my experience.

Inflation is only 2% because CPI is bullshit. CPI keeps getting changed so it would be 2%. There are no realistic housing options in there anymore, nor education, nor healthcare, nor ... and if you reinsert those inflation has never been below 4% per year.

While I've gotten above inflation pay rises, they have been exceptions (and due to exceptional performance, ie. usually more than 8h/day for quite a while).

Besides, it is very obvious that modern states and central banks are using inflation to minimize/eliminate the effect of debts on the actual economy. Given what has been going on, how can you realistically defend any other position?

Btw: given what has happened to these debts, you can safely bet your right arm that real inflation is going up to at least 5.3%. And that was before COVID-19 measures.

The inflation is real.

Fruit at the grocery store has increased 30% in just the past few months.

Apples used to be $0.99/pound. Now it’s $1.29/pound.

I’ve seen other basic food commodities also increase 50%. This is the fastest rate increase that I’ve seen in quite a while, if ever.

The only saving grace is that I’m not commuting to work. But the savings from gasoline, just went straight into groceries. Hence, practically no savings at all.

I’m not looking forward to when we must go back into the office, and then everything still remains at the higher prices.

I would need to demand a raise or a promotion to match up with the inflation.

> [anecdotes]

That's not how inflation works or is determined. Instead go to your country's office for statistics Web site.

FWIW, here that's 0.3% inflation on food and non-alcoholic beverages, 1.3% in total from 2020-06 to 2020-12. Both numbers are ordinary/close to expected.

To see an inflation of 30%, I have to take the difference to 2007.

You misread my comment.

I didn’t say it was 30% across the board. I just claimed I was seeing a 30% price increase, for one product item.

Now, you can choose to not buy that item, in which case, the price increase doesn’t impact you.

But it is one product. Isn’t it far more likely that seasonal variation in apples is what triggered the price change, not a devaluation of the dollar?

Actually it is how inflation works. The BLS actually goes out and buys a basket of household items and groceries at regular intervals across the USA

The key to remember is it's not the same basket of household items - they provide for substitution. Apples are too expensive? Maybe they'll be replaced with grapes. Beef is too expensive? Maybe it'll get replaced by chicken. They substitute items in such a manner to keep the inflation index as low as possible. That's important because social security checks are adjusted based off that inflation index so they're motivated to keep it as low as possible.

As you can imagine people claim this doesn't reflect true inflation as we're not necessarily comparing apples-to-apples (ha!) and it also excludes energy costs.

I don't see anything wrong with accounting for substitutions. If beef is too expensive this month, then people do switch to chicken. They haven't lost anything.

It would be false if somehow this became an infinite treadmill where the basket went from beef to chicken to lentils to sawdust, but that's not what happens. The substition smooths out short term changes in price the same way people actually do.

The economy acquires robustness through this redundancy, and the CPI measure reflects that. It's far from a perfect measure, but its failures aren't caused by the perfectly commonplace action of buying the cheapest goods today. Insisting that it has to be precisely the same goods would indeed be a distorted measure of the economy.

Fruit at the grocery store has increased 30% in just the past few months.

How does that fluctuation match seasonal fluctuations from other years (weighted by weather conditions)?

Price inflation in foodstuffs is often pretty subtle - the nominal price doesn't change, but ingredients are replaced with lower-quality (often less healthy), cheaper equivalents and sizes are reduced. Or, sometimes, the product itself retains its volume, but not its mass.

A great example of this is the mass replacement of butter and olive oil with the much cheaper soybean oil or canola oil. Just try to find bread (on the bread aisle) or mayonnaise that doesn't contain soybean oil. Even the mayonnaise specifically branded as OLIVE OIL! simply has olive oil blended with soybean oil.

What's funny is you don't even need to take the ethical viewpoint that wealth and inequality are bad to worry. Even if you're a total sociopath, the growth in asset values relative to CPI and wages should make you worried about how the system is working, and whether or not there is a bomb ticking somewhere just out of earshot.

If you think things are working as intended right now, you haven't been paying attention.

The average person buying stocks has been told to just buy and hold. Yes, as the market rises over the long term, you'll make some money. It seems pretty obvious that when you hand your money to someone else to play with, they're going to make more ... if they're good at it, a LOT more ... than you. (Also true of long-term mortgages.)

Glad to see people have a chance to play the game and discover some of the angles. A lot of people could learnn to do way better than just 'let it ride'.

"Now, here, you see, it takes all the running you can do, to keep in the same place" - https://en.wikipedia.org/wiki/Red_Queen_hypothesis

Maybe the "the fat cats" can just go away. They sound bad either way.

> Give me a break.

I can hear the remaining 99% of the world that doesn't invest financially, but whose lives are often very negatively affected by the financial market, ask the same: "Give me a break".

Like many, I'm tired of being told the economy is broken and we will all have to "sacrifice" something to make it better, when we have no responsibility in a financial crisis.

We are asked to pay for someone else's gambling gone bad, but when their gambling is successful we don't get any of the rewards.

Collectivized risk, individual rewards AKA "Socialism for the rich and Capitalism for the poor". Sounds like a great incentive to keep an economy healthy.

Who are the 99% who don't invest but are regularly very negatively effected?

Everyone seems to dislike big finance, but as far as I can tell, they dislike it because it's big and they don't understand what it does. Not because of anything it's done.

It's like the mysterious "elites" trump railed against: they're numerous enough to decide elections, but no one has ever met one. They include all the city dwellers, but are less than 1% of the population etc.

> Who are the 99% who don't invest but are regularly very negatively effected?

Literally anyone that never interacted with the financial markets voluntarily, with a speculative intent. I include for example, people with IRAs.

> It's like the mysterious "elites"

There's nothing misterious here. It's banks, hedge funds, financial institutions. It's all the actors that caused the 2008 crisis, among the others.

We have names, patterns and everything needed to analyze the issue, but I don't certainly require the average person to have to understand the financial markets in order to be able to be aware that something is deeply wrong in the way our economy is structured.

Hedge funds themselves don't seem to fully grasp how the market works!

The problem is, the is basically no one left who doesn't fit your definition of elite.

Who do you know who's never used a credit card, a car/student loan, a mortgage? Do they also not have a pension or a job at a publicly traded company? Have they never bought insurance or opened a bank account.

What most people don't get is that they rely on financial markets 100 times a day. That's why when markets wobble there is a shit storm. That's why they get bailed out.

I'd like a more equal distribution of wealth. I'd prefer that doctors and teachers got paid more rather than traders. But ultimately there are very good reasons things are the way they are.

You can say Fuck them all, but then we'll have to go back to living like people in the second world.

This is WHY ordinary people need to understand things like finance (or trade or geopolitics). They watch the TV, they see something they don't like, and instead of understanding its a least bad outcome (eg 2008) or that their behaviour in part caused it (eg 2008) they just write it off as a conspiracy.

If they're lucky it ends there. If not, some liar comes along and capitalises on their belief (eg trump) promising to "bring back out jobs" "drain the swamp" "make the elite pay" etc. Since he's a liar only peddling convient but untrue stories, he won't deliver. Which is disappointing but actually better than if he did.

> The problem is, the is basically no one left who doesn't fit your definition of elite.

No, banks, hedge funds, billionaires, financial institutions are all still there.

> What most people don't get is that they rely on financial markets 100 times a day. That's why when markets wobble there is a shit storm. That's why they get bailed out.

I strongly disagree with what you're trying to say.

I can't accept in any way a view of the world that leaves us with no one taking responsiblity. If someone is earning billions on the markets, someone also need to be responsible when the market crashes due to speculation.

Otherwise it's just a broken system where there's no incentive to act responsibly.

> You can say Fuck them all, but then we'll have to go back to living like people in the second world.

I'm not convinced about this in the slightest. Finance has grown way out of its league and has become a god of its own. We can say fuck them all, reorganize our economy and still live in a prosperous country.

If you're that convinced that we don't need these organisations, stop using them. Defer buying a house or a car until you can pay cash, leave your pension and invest in gold, become self employed and refuse any loan or insurance.

That's my point here: the way you and I and 99% of people live day to day relies on billionaires to fund things and speculators to keep markets liquid.

This is the core cause of a lot of our issues and the ultimate reason for things like bailouts. If we didn't need speculative finance to fund house building, we wouldn't have had to bail them out. So all we have to do is start buying houses in cash and that need disappears an we can stop bailing things out.

But the dirty truth is that as much as people hate bailouts, they hate paying for things and saving and being responsible far more.

This is why (for instance) Germany, with a high savings rate and minimal consumerism has so few billionaires and didn't need to spent much bailing out banks.

> but as far as I can tell, they dislike it because it's big and they don't understand what it does.

Please step out of your bubble and talk to more people. I have a decent understanding of what the big finance does and I still dislike it for the way it was treated after 2008. "Masters of the Universe" made the bank in the run up to 2008 and when the bill came due, hardly anyone was punished.

Some specific examples of the "rigged game" - USA jails someone for possessing marijuana a few times or gaslights someone all the way to his suicide for downloading and distributing copyrighted articles. But credit rating agencies are let go easily even if they give AAA rating to MBS tranches deserving a junk rating.

Same with investment banks who knew the mortgage bubble was about to collapse but nonetheless sold those securities to their clients. Individuals at such firms made millions from 2003-2007, but when they were caught, not a single one of them went to jail and instead, the companies had to cough up a few billions.

Same with Wall Street getting billions in bailout and trillions in implicit guarantees from Fed ("bazooka", ZIRP, QEs), but Main Street getting measly aid in a weak-sauce 2009 stimulus.

So yes, the game is indeed rigged and Big Finance deserves all the pitchforks coming its way.

That's fine, just let me know when you have an alternative.

We could have stood on principle and refused to bailout banks in 2008. Interest rates would have spiked, investment would have ground to a halt as companies collapsed. House prices would plummet as no one could get a mortgage, leading to people defaulting on their mortgages leading to falling prices etc.

But we'd have don't the right thing. What's 30m unemployed and a decade of economic stagnation?

I'm not saying there is nothing wrong. I agree about rating agencies, they should at least have been killed off.

I'm just saying, 98% of the things people call conspiracies are actually just good practical decisions that they don't like. The bank bailouts are a perfect example of that. Even your own line contains one such glaring misconception:

>Same with investment banks who knew the mortgage bubble was about to collapse but nonetheless sold those securities to their clients.

The clients are hedge funds so whose the bad guy here? Plus if the bank is selling and you're buying, you're not their client, you're their counterparty: they want to sneak as much shit into the portfolio as possible and you have to catch them and refuse the deal. If you don't do your job, you can't complain your opponent didn't do it for you!? And where did all these toxic loans come from? From requirements put in place by people we elected who decided that just because a customer has on income or assets they should still get a 110% mortgage on a house they don't actually need. Banks had to sell that to someone...

My worry here is that we're doomed to repeat these mistakes:

* politicians will deregulate finance because doing so spurs the economy (like it or not)

* finance will do its thing and spur the economy and get nice fat bonus cheques (like it or not)

* some other product will be all the rage

* that product will balloon in size, the assets underlying it will turn to shit as regulators push more of it and customers decline to check the contents before they buy

* the whole thing will crash and people will blame bankers who will say "we're turds, but so is everyone else, we just don't bother acting like we're not a part of the problem.".

* ill come back here and make this comment again.

> That's fine, just let me know when you have an alternative.

Here are the alternatives: 1. prosecute the bankers and send those to jail who broke law, instead of just fining those banks a few millions.

2. severely curtail risk taking abilities and bonuses if a bank depends on any explicit or implicit govt guarantees. Implicit benefits include access to cheap fed loans (ZIRPs), QEs, counterparty risks (eg. beneficiaries of AIG bailout) etc.

I pretty much agree completely.

My question is, how long can we have hedge funds AND loads of people who blindly hate hedge funds?

The same question applies to pretty much anything that's a bit opaque, complex and useful (most of finance, recently international trade, alliances like nato, even elections recently).

I worry that we have a real issue here. If we can't maintain complex social and economic structures, we're at a massive disadvantage to less democratic countries that can.

This is the amazing part about retail investors. There are all sorts of diverse ideas out there and most aren’t rational.

This is one of my main reasons for not trying to consciously invest as my urges are pretty dumb and shouldn’t be followed.

This caller’s message is so bizarre as to make me wonder what their long term plan is.

Institutional traders (hedge fund, i-banks, prop traders, hft) have the advantage of deep pockets and the financial literacy to be able to execute strategies which create easy returns. Many of these strategies are easily scalable to turn a small edge into a big one, using leverage. Oftentimes these strategies have an asymmetric risk profile, with low probability of losing a lot of money (sometimes with unlimited downside potential), for example:

- writing out of the money options for the premiums

- shorting stocks with leverage

- '08s frenzy of selling credit default swaps

- forex trading with spreads so low that they take 100x+ leverage

Usually, when these strategies work, it's easy money and they get addicted to the easy returns. They scale the strategies up to a level of risk they can't handle. Like having 140% short interest relative to GME's float. When these strategies blow up in their faces, it wipes them out completely, to the level of requiring bailouts.

Main street (retail investors, taxpayers) have had enough of this, and a lot of anger is directed at institutional investors for always getting the easy money and the bailouts at their expense. They want to see the game applied fairly, such that when the bets go sour, they go bankrupt and don't get bailed out like in 2008. In the 2015 CHF forex crisis, many brokers went bankrupt overnight. That's what should happen to Melvin, and to anyone who takes the stupid risky bets that don't work out.

Bailouts go to banks because the government is on the hook for insuring cash deposits anyway. Do you have any examples of hedge funds being bailed out?

I think Bear Stearns might count for some people.

(tho was more about buying the good assets to avoid adding even more fire to the crisis, I think investors were mostly wiped out)

The 98 bailout of Long Term Capital Management was pretty legendary - there were books about it: https://en.wikipedia.org/wiki/Long-Term_Capital_Management#1...

Now, granted, public funds weren't used for the bailout, in this case it was more the Fed organizing private banks for the bailout. Also, the investors in LTCM still lost a ton of money.

But LTCM is still a great prototypical example of "vacuuming up nickels in front of a steamroller", i.e. these traders can take these positions (LTCM was focused on merger arbitrage IIRC) that seem like a license to print money, except they invariably can lead to some giant risk blowup. And when they fail, they have a knack for taking down the whole financial system with them so the government has to get involved (even if it is just cajoling other bankers in a room) to bail them out.

The point is though there's never been another LTCM in nearly a quarter of a century. LTCM was one of the first major fixed income arbitrage funds, a strategy that's uniquely sensitive to cheap leverage.

They were able to exploit their prime brokers to give them tons of leverage at essentially zero costs. Since LTCM was one of the first, the banks didn't really know how to model their counterparty risk and they were dazzled by the prestige. Since that occurred there's been a ton more hedge funds, and banks have way better systems for managing that level of counterparty exposure. Plus the post-GFC regulations severely limit bank leverage anyway, so they couldn't give cheap leverage to their hedge fund clients even if they wanted to.

Again that's why we've never seen another LTCM in nearly a quarter of a century. Pointing to LTCM as an example of risk in the financial system of 2021 would be like pointing to Chernobyl as an example of risks in modern nuclear reactors.

> The point is though there's never been another LTCM in nearly a quarter of a century.

cough Lehman Brothers went down in 2008.

Lehman was a bank, not a hedge fund.

A difference with no distinction

Poorly written Wikipedia page, but I fo see LTCM was co-founded by a Nobel prize winner in economics. Their overly risky strategy seems at odd with someone earning a Nobel prize.

The thing was that non of the 'genius' Nobel prize winners saw the strategy as "overly risky" since they had worked out very clever and very complex mathematical models describing exactly how safe their strategy was.

> institutional investors for always getting the easy money and the bailouts at their expense

When was a hedge fund last bailed out with public funds? They typically don't. Like them or not, they have historically been left to fail, or be bought out by their competition.

While a cursory search appears to prove your point (given the constraint of "public funds"), the fed has bailed out hedge funds [1], I don't remember reading that all.

Probably the quietest "bailout" comes from Long Term Capital Management in 1998 was basically bailed out by banks at the urging of the feds[2].

It seems that most funds are left to die [3] (or, more alarmingly, dissolved at the hands at the SEC for insider trading (I'm sensing a trend...))

Perhaps, as "an exercise left to the user", I'll look more deeply at this matter; as it's quite interesting.

[1] https://www.nytimes.com/2020/07/23/business/economy/hedge-fu... [2] https://en.wikipedia.org/wiki/Long-Term_Capital_Management [3] https://www.investopedia.com/articles/investing/101515/3-big...

I get what you're saying but I don't think I've ever heard professional investors describe generating returns as "easy."

Making money at a trading or investment firm is serious work, and no one takes it lightly. Using your example of writing options, market makers who do this are very cognizant and paranoid about the risks involved.

However, excess kurtosis and skew (left side tail risk) has definitely wiped out a number of firms, so your point is somewhat valid. I just wanted to point out that when every trader at a firm has their life savings in the company fund, they don't go around slinging YOLO trades. This is serious business, and the vast majority of participants act accordingly (I have met some idiots tho, but most of them went or are going out of business).

But it doesn't take that many idiots to cause a lot of mess, so that's another factor to consider.

> I don't think I've ever heard professional investors describe generating returns as "easy."

Well here ya go:

https://youtu.be/VMuEis3byY4

Jim Cramer openly bragging about how easy it was to manipulate the market when he was a hedge fund manager.

Jim Cramer is a character on TV. I would take his opinion on finance about as seriously as I'd take Saul Goodman's opinion on the practice of law.

Jim Cramer ran a hedge fund from 1987-2001.

Interesting write-up of the performance of Cramer's investments https://en.wikipedia.org/wiki/Jim_Cramer#Performance_of_Cram...

A bygone era, my friend. Cramer would get eaten by the sharks today. He knows this, which is why he stays out of the water.

Hedge funds are playing at an advantage because of all the money they have to work with and the additional information and connections that they have compared to retail investors. Slight advantages can scale up to massive gains. It might not be "easy" to generate returns but it's definitely "easier" when it shouldn't be.

It shouldn't be easier to generate better returns if you are better informed? How should people generate superior returns then?

If information could not generate returns the market would not exist. The purpose of all markets is to aggregate information in price and provide compensation to those who contribute such information.

> It shouldn't be easier to generate better returns if you are better informed? How should people generate superior returns then?

By using your connections with the media to lie and misinform people. You don't have to be smart if you can make everyone else dumb.

> when every trader at a firm has their life savings in the company fund, they don't go around slinging YOLO trades

LTCM

I really wouldn't consider LTCM an example of YOLO trades.

>Main street (retail investors, taxpayers) have had enough of this, and a lot of anger is directed at institutional investors for always getting the easy money and the bailouts at their expense. They want to see the game applied fairly, such that when the bets go sour, they go bankrupt and don't get bailed out like in 2008. In the 2015 CHF forex crisis, many brokers went bankrupt overnight. That's what should happen to Melvin, and to anyone who takes the stupid risky bets that don't work out.

Hedge funds mostly invest client money, not their own. Yes they take pretty hefty fees but they're trying to make money for their clients, who typically are main street.

Are they? Do many people invest in Hedge Funds with their 401ks? Aren't the vast majority of regular people's 401ks tied up in Index Funds?

My understanding was that hedge funds started mostly as a way to be more protective of wealth - i.e. you were sacrificing some potential gains to be more certain you wouldn't lose more than x%. Hedge funds have a lot more focus than that now - but (my understanding at least) is that hedge funds still are mostly for people with high net worths.

My understanding is that most hedge funds get the bulk of capital from institutional investors, e.g. pension funds.

> GME's float. When these strategies blow up in their faces, it wipes them out completely, to the level of requiring bailouts.

Not a single hedge fund has gone bankrupt from GME, much less gotten a bailout. I can virtually guarantee you that none will. Melvin was down 53%, but still has more assets than they did in the beginning of 2020. They got an external investment from another hedge fund, but that's hardly going bankrupt, and certainly not a bailout.

Besides Melvin, not a single other major hedge fund lost more than 20% on Gamestop, let alone went bankrupt.

As far as I know this information isn't public and is based on speculation, no? If not, care to provide some sources and/or data that aren't based on the funds' PR department?

>Everyone from Ted Cruz to AOC to Aaron Rodgers sided with Main Street against Wall Street.

Apart from the media, of course. For example, Newsweek is calling GME investors "far-right extremists"[1] while The Washington Post is comparing the situation to the Capitol riots[2].

[1] - https://www.newsweek.com/far-right-extremists-use-gamestop-c...

[2] - https://www.washingtonpost.com/opinions/2021/01/30/good-guys...

The Post article is an op-ed, not something written by the editorial board. I’d prefer that newspapers feel free to publish a wide range of views without readers ascribing those views to the paper (I.e., the newsroom or editorial board).

>free to publish a wide range of views...

Sure. But it's under their banner. They edit the op ed and can demand unsubstantiated claims be substantiated or removed. Otherwise it really is no better than done racist blog.

A case that can't be made without facts that can't be stood up shouldn't be made in any newspaper that values it's reputation.

Your summary of the Newsweek article is pretty misleading. They're not accusing r/WSB or GME investors as a whole of being far-right extremists (which would be false), they're referring to actual alt-righters talking about GME.

Correct, they're opting for a guilt by association approach, if you can even call it that. Nefarious "journalism" nonetheless.

Why "sticking to the man" resonates with me, and why I took pleasure in this incident is because students from the mid-2000s realize that hedge fund managers for the most part are not as smart as they think they are. Their bungling significantly set back the dreams of several students of my generation. I am not far right by any means, just was far gone and sad for 2010-2015.

I suspect that the truth is closer to "Wall Street" than we care to admit. Insider information is still the key, not stochastic differential equations, Ito's formula and portfolio balance theories. Melvin putting all their leveraged eggs in one basket is considered above board, and is not being questioned.

If insider information really is key you should able to easily provide evidence for that claim. The market moving before news is announced is something that the SEC monitors and has consequences when it happens.

Everyone’s seen the “consequences” like the ones Elon Musk faced after tweeting “funding secured”

"Easily" is a subjective claim. You can read the congressional testimony of Harry Markopolos from the Madoff scandal, where he explicitly says that SEC is hobbled because regulators do not have the werewithal to attend these hob-nobbing conferences. I am not in the finance industry, so my sources can only be public documents.

https://www.fraud-magazine.com/article.aspx?id=313

Yeah I think a lot of hedge funds are run by idiots. Market making firms however, they are the true stars. There are also some really good hedge funds: RenTec, Millennium, 2 Sigma, etc.

A lot of hedge funds are dinosaurs and are slowly going extinct. Even in the last 5 years there has been a big shift: investors really prefer systematic firms and raising money for a discretionary fund gets harder and harder every day.

I do not believe insider information is key. If it was, hedge fund risk adjusted returns would probably be less abysmal. It's not that straightforward to evaluate hf performance, but trust me when I say, there a lot of funds out there providing very dubious value to investors.

People really don't seem to understand the concept of the op-ed. Maybe publications need to do a better job of making the distinction clear.

For reference, this is from an article from the newsroom:

But of course, what the Reddit cabal did to inflate the stock of bygone-era companies like GameStop, AMC Entertainment and Bed Bath & Beyond simply mirrored what the hedge fund sharpies had done in conspiring to “short” those same stocks and drive down the prices

https://www.washingtonpost.com/business/2021/01/30/financial...

People really don't seem to understand the concept of the op-ed. Maybe publications need to do a better job of making the distinction clear.

The concept is for the editor or owner to be able publish something with plausible deniability.

The media’s behavior is why I became cynical about the system: moralize everything for no particular facts. You don’t like someone, label that person far-right. This is how transparency is lost. With transparency gone, so is trust.

And we stopped the trade for your own good. Yeah, right.

Jimmy Kimmel said "and maybe even some Russian Disruptors," for no apparent reason in his opening monologue talking about the people buying $GME last week.

I think unfortunately the reason is apparent, filling out a monologue.

I think the problem is that anyone who likes money is now in on GME. Probably some Russian Disrupters too, but not sure why that would be joke worthy unless there’s some other detail (eg, disrupters are realizing 90% of gains or something).

Personally, I think this is a smokescreen for a pretty smart invested group. I hope we eventually learn who did it just to satisfy my curiosity. If they are dumb, we will. If they are successful, we never will as the technique is too useful to use again.

All the focus on racism and divisiveness within the media (all the woke sjw BS) really started around after occupy Wall Street. Now why would they want that to happen? So maybe we fight with each other instead of with them and their profits?

Ted Cruz is literally married to a Managing Director at Goldman Sachs - if people think his sanctimonious Tweets were a principled stance “against Wall St” then we’re in worse shape than I thought.

Of course politicians will rally behind the populist narrative. They don't care that regular people are throwing away their money buying into conspiracy theories.

One of the things I really appreciate about HN is its ability to get beyond "sound-bite arguments" to really get to a deeper understanding of what can be complicated arguments. Which is why I really disliked your comment, because your primary sentence includes two lies where you take some words out of context, but hey it must be true because you provided links.

1. Going to your own link, Newsweek did not call "GME investors "far-right extremists"". The article clearly states that far-right extremists were instead using the "stick-it-to-the-man" ethos driving a lot of the GME investor chatter to recruit. There is a huge difference.

2. As other's have pointed out, WaPo published an Op Ed, this was not something under their Editorial Board or a news article. Saying "The Washington Post is comparing the situation to the Capitol riots" is deliberately misleading.

>1. Going to your own link, Newsweek did not call "GME investors "far-right extremists"". The article clearly states that far-right extremists were instead using the "stick-it-to-the-man" ethos driving a lot of the GME investor chatter to recruit. There is a huge difference.

The point of the article is to associate WSB with far-right extremists. It's a common manipulation tactic, they're making them seem guilty by association.

>As other's have pointed out, WaPo published an Op Ed, this was not something under their Editorial Board or a news article. Saying "The Washington Post is comparing the situation to the Capitol riots" is deliberately misleading.

People often say that "op-eds don't represent the official opinion of the paper", but it's provably false.

There's no shortage of people who are willing to write pro-Trump op-eds, after all, almost half of the country voted for him. How come they aren't getting published in NYT, WaPo etc.? Because publishing an op-ed is a soft endorsement. It doesn't necessarily mean that they 100% agree with it, but it definitely means that they consider the opinion "acceptable".

> 1. Going to your own link, Newsweek did not call "GME investors "far-right extremists"". The article clearly states that far-right extremists were instead using the "stick-it-to-the-man" ethos driving a lot of the GME investor chatter to recruit. There is a huge difference.

Yes, but no. It’s called throwing shade and while it is very different from actually showing evidence on a subject and making a claim, it is intended to link the ideas in the readers mind.

In middle school it would go like “I’m not saying hn_throwaway is a slut, but I did see her watching Harry Potter and also saw three other boys who say they like her at the theater that weekend.”

Both statements are true, but without some other fact they don’t matter so the only reason to mention them is to make a claim without evidence. Especially since I explicitly said I’m not calling you a slut.

The article linked does not act responsibly by mentioning these facts in the same article without some link. I think it’s mostly last journalism coupled with trying to click-bait get eyeballs for ads.

I too like HN for our attempted critical thinking, and I like that people keep busting through different theories and trying to get to the source of truth.

> In middle school it would go like “I’m not saying hn_throwaway is a slut, but I did see her watching Harry Potter and also saw three other boys who say they like her at the theater that weekend.”

> Both statements are true, but without some other fact they don’t matter so the only reason to mention them is to make a claim without evidence. Especially since I explicitly said I’m not calling you a slut.

Except that's not even remotely like what the Newsweek article said. Sticking with the middle school comparison, what the article said is that hn_throwaway threw a large graduation party that was open to the public, and some religious cultists came to try to recruit from among the partygoers.

There is no attempt to imply that hn_throwaway is a one of the cultists, or approves of the cultists. It is just reporting that the cultists tried to use hn_throwaway's party to find recruits.

Thanks for trying to map to analogy.

I think the newsworthy piece would be if the religious cultists were going to every party trying to recruit, or there was something special about hn_throwaway that the cultists targeted.

The school newspaper writes an article about the party. The article doesn’t answer this question or even indicate whether they tried. So there’s no real reason to report on this other than to link the cultists and hn_throwaway. Actually, the reason is that more students will read the article trying to learn about this cultist thing and hn_throwaway’s recent activity that made them popular among kids.

Where is the evidence that “nontraditional investors beat the crap out of hedge fund speculators at their own game” or that “hedge funds pressured the brokerages to disallow new stock purchases of GameStop”?

This is the narrative, for sure, but how is this anything more than conjecture? Have the hedge funds publicly said “you got us!”, and even then why should we believe them?

The story is fuelled by a subreddit and celebrity hot takes on Twitter. The news coverage I might actually trust also happens to be extremely weak — it’s all on the periphery rather than at the center of the story and I’m deeply skeptical anyone knows what’s actually going on. Why should they? Without a leak from an institution that’s how it should be when private entities trade on a public market.

I have seen the mansplaining of what a short position is or what a short squeeze is or how someone can be 150% over shorted — originally 138%, then inflated to 140% for impact, then inflated again. The explanations aren’t wrong but knowing the mechanics of a theory doesn’t differentiate between an internet fantasy and the real world. That kind of self-fulfilling logic is one step away from the world of conspiracy theories.

As I’ve said before, on the face of it this just looks a lot like some folks pumping a cheap stock. Potentially the first round of these had good reason to — the actual squeeze — but now the second, third, fourth and upcoming fifth daily cycles are pumping it for the sole reason because the last one did and we need an exit. It could well by pyramid shaped — I’d put money on it if I were you.

They are deep into conspiracy theories over on /r/wsb

> It could well by pyramid shaped — I’d put money on it.

A 01/21 300P on GME is roughly 25,000 right now, for a single contract. If you’ve got the cash, it’s almost certainly free money. Right?

Hah. My original already quite ironic final words were “I’d put money on it”. I have edited to further emphasise my point.

> Have the hedge funds publicly said “you got us!”, and even then why should we believe them?

Well, Melvin Capital, the most prominent hedgefund in this event, has openly admitted to losing 53% of its capital and based on my opinion they probably haven't covered all of their shorts yet so bankruptcy is still on the table.

https://www.wsj.com/articles/melvin-capital-lost-53-in-janua...

The advice just falls flat for me.

Honestly, if the only winning move is to invest for the long term then why even bother with capital markets at all? Sounds like a waste of time when what we really want is for people to own the means of production.

Dump 100% of federal tax revenue into index funds and let it grow faster than the interest on T-bills issued for expenditures. Churn for ~50 years and start paying UBI from the massive profits. Would the government even need to pay interest on the T-bills in USD? Why not just issue more T-bills as interest because after all the long term pretty much guarantees the government would be swimming in cash in 50 years and have no trouble repaying it all. Incidentally the federal government would also become the majority shareholder of every company in the world.

If the market can magically let everyone with enough money invested in their youth retire happily then it follows that letting the government own all the stocks and issue UBI would result in roughly the same outcome.

> Dump 100% of federal tax revenue into index funds and let it grow faster than the interest on T-bills issued for expenditures.

I don't come to HN for comic relief, but there it is.

Few things to unpack here.

>Honestly, if the only winning move is to invest for the long term then why even bother with capital markets at all

Because they are gamblers, that's why. Most (reasonable) people only invest long-term.

>Sounds like a waste of time when what we really want is for people to own the means of production.

Yup.

>Dump 100% of federal tax revenue into index funds and let it grow faster than the interest on T-bills issued for expenditures. Churn for ~50 years and start paying UBI from the massive profits.

Tax revenue is not 'profit' by the state. That's not how tax nor money issuing works. But to the topic at hand: There are countries that put money into investment funds that will invest into infrastructure and safe long-term assets. But usually not for UBI, but for retirements (e.g. Denmark).

>If the market can magically let everyone with enough money invested in their youth retire happily then it follows that letting the government own all the stocks and issue UBI would result in roughly the same outcome.

Generally the idea of not having to work at all is still heavily controversial within science. Some believe in UBI, some in job-guarantees and others just in relatively high minimum wage and very strong retirement plans.

> Tax revenue is not 'profit' by the state. That's not how tax nor money issuing works. But to the topic at hand: There are countries that put money into investment funds that will invest into infrastructure and safe long-term assets. But usually not for UBI, but for retirements (e.g. Denmark).

Then ignore taxes and make the ultimate trade on margin; issue T-bills to directly invest the cash. Same effect. Does the imagined collateral backing T-bills even change? It's just based on the assumption that the fed keeps money working properly and has some source of income, right? The threat of inflation rises but only for the same causes as general inflation; recessions and depressions. The ability to directly dump treasury proceeds into index funds would probably have more of a stabilizing effect on inflation than anything.

> Generally the idea of not having to work at all is still heavily controversial within science. Some believe in UBI, some in job-guarantees and others just in relatively high minimum wage and very strong retirement plans.

10% growth long term with an inflation target of 2% is exactly the promise of not having to work at some point in the future. The aim is obstensibly retirement but it's pretty clear that if you keep working a little longer the return on investment keeps growing and will be enough to cover not only ones-self but any kids and their kids, etc.

Basically I'm calling bullshit on the advice that long term investments are a good use for most individuals' money by contradiction.

An assumption of long-term growth is not realistic because either: * The economy needs a working class that can never invest enough money to live off interest and will enforce this with rent seeking, glass ceilings, rampant consumerism, outsourcing, inflation, etc. * The economy will periodically crash and wipe out enough wealth that people have to work again.

Full automation is a possibility in my lifetime, but unlikely. It certainly wasn't expected anytime before ~1950 when the advice was still "invest long term".

> Then ignore taxes and make the ultimate trade on margin; issue T-bills to directly invest the cash. Same effect. [...] The ability to directly dump treasury proceeds into index funds would probably have more of a stabilizing effect on inflation than anything.

I vehemently disagree. Cash is issued by the central bank. If you put it directly into "assets", then the working class would have no money. It needs to flow through all participants of the economy. At each stage some of it is "saved" by the participant and "lost" by the state until eventually the remainder is supposed to flow back to the state via tax (The reason inequality rises so much nowadays is that most money just stops at Jeff Bezos).

> 10% growth long term with an inflation target of 2% is exactly the promise of not having to work at some point in the future.

Not sure who promises 10% growth long-term, but 4-6% is possible. First of all, let's take retirement funds out of the equation. Basically, guaranteed payments in your retired stage of life, but in most countries quite low. Now if we assume a long-term growth of ~5% hitting a retirement point is basically a break even of savings+interest versus spend. If you save 50% of the money you make (after taxes), the break even is around 17 years of working [0]. Keep in mind this is very simplified, but at the same time very doable. In fact the whole FIRE movement is behind this and they built a calculator for it [1].

So why don't more people do it? Because you'd have to save a significant amount of your after taxes money (and discipline/frugality) to do so. Most people don't have that. Here in Germany the median after taxes income is 23515€ [2]. If you live in the city, almost half of that is already eaten by rent alone. Then comes food, cloths, transportation, and so on.

Which brings me to one of the main drivers for inflation: Rent. At least in the last 20 or so years, inflation has slowed down strongly. The fed and ECB are trying to hit a 2% and 1,8% inflation goal, respectively, and although they print tons of money, they usually undershoot. The only thing really driving inflation is increased rent cost (and other luxury goods which normal consumers don't care about). Everything else pretty much stays the same or goes down nowadays. In essence inflation only occurs when you have too little goods and services for the amount of money in the economy. But since most money, although not flowing back to the state, is stuck with the rich people, the amount of money in average Joe's household doesn't change too much and the buying power stays apprx. the same. That means when investing you have to worry about inflation, but not as much if you consider it for retirement and plan on owning our own house. Especially since inflation is also one of the main drivers for market growth (in monetary value) since the market consists of companies that own infrastructure and assets, thus being valued higher.

> The economy will periodically crash and wipe out enough wealth that people have to work again.

This only becomes a problem if you need large sums of cash during your withdraw phase or if the crash is sustained over a longer period. Bear markets recover fast (historically).

> Full automation is a possibility in my lifetime, but unlikely. It certainly wasn't expected anytime before ~1950 when the advice was still "invest long term".

I totally agree with you. But as a Marxist, I feel his most important teaching was that even though we know the goal and we know it's possible, and we know the current state can't continue, we can't just declare an utopia now and tell everybody to suck it and live by it. We need to get there step-by-step.

I'm trying to find a nice note to end on, because I agree with your sentiment, I just don't think "we are ready yet", as stupid as that sounds. Let me just say this: I'm not entirely sure if I want a society that does not work at all, it would be nice to know you don't have to work. But I'd already be a million times happier if I only had to work 3 days of the week and be done with it, or have much higher wages, because I'd focus much more on what I really love. But that's just me.

[0] - https://www.mrmoneymustache.com/wp-content/uploads/2012/01/m... [1] - https://networthify.com/calculator/earlyretirement?income=70... [2] - https://www.destatis.de/DE/Themen/Gesellschaft-Umwelt/Einkom...

Because problems don’t change at scale?

> Churn for ~50 years and start paying UBI from the massive profits.

So after 50 years... you basically end up with a corporate tax?

You could just give them jobs. It would be far more realistic and the government can derive value from the work so everyone wins.

> I understand that it feels like the odds are stacked against you. But I’m asking you to please reconsider... [ followed by table of great S&P outcomes ]

I think the author misunderstands the threat here, and it's much graver than they think. Remember the U2 album Apple pushed to everybody's iphones?

Same thing here. What happened last week is the cracks showing, people being forcibly reminded that they are not in control. In Apple's case it was iphone owners being jolted out of the pleasant fantasy that their phone is a little piece of territory they alone control. In GME's case, it's people thinking of the stock market as something that exists for them to use, like a supermarket. And the jolting reality is that the stock market has become a vast and incomprehensible playground for billionaires to gamble with derivatives, in which the retail investor is incidentally allowed to participate only insofar as their money is helping to push up prices.

So the threat to the market is not what the author seems to be speaking to (a hypothetical investor who will buy in late, lose money, and get sore about it). The threat is people getting the general feeling that the stock market is shady, and deciding to buy a rental property, start a small business, etc.

Ding ding ding.

That this isn't the top comment probably has J.P. Morgan spinning in his grave.

>A man I do not trust could not get money from me on all the bonds in Christendom.

http://memory.loc.gov/service/gdc/scd0001/2006/20060517001te...

The fact is, it all runs on public trust. Just like governance, just like civil liberties, just like policing, just like everything else that provides a giant's shoulder to start from.

It is why honor, integrity, honesty, and transparency are considered virtues in good business. It is also why deception, secrecy, obfuscation, and equivocation are such powerful tools fpr shaping the business landscape. In a world of honest people, the liar unchecked is King (or at least one hell of a catalyst).

If you start getting widespread loss of faith in the system, or merely the operators thereof, there will be a destruucturing and re-evolution of a system people can feel more implicit trust in. What that process looks like I don't know, but I'm certain it will be slow and stymied in it's coming, but sweeping in it's non-resemblance to what we have now.

At least one can only hope.

From the letter quoted in the article:

> Seeing my wife lose money as a result of the hedge funds foolish shorts and inability to adapt to a new wave of social media – as well as the frightening thought the trading can be halted at any time as the brokerages see fit – has caused me to become extremely disheartened toward investing in the future.

Just checked, and after all these shenanigans, S&P 500 was set back to... where it was one month ago. This actually sounds like a strong evidence in favor of index funds plus long-term investing.

Exactly - if you're concerned about long term investing because of the relatively small recent drawdown in the S&P, you really need to re-educate yourself about what long term investing means.

Know what bugged me the entire time through all of this?

The big money guys on the big money shows kept referring to themselves as "the investor class."

As if by the very nature of their jobs, they were set aside above and apart from those of us who have to earn our livings by doing useful things. I'd love to know how much of the brainpower in the US is set aside for the purpose of doing nothing more than extracting wealth from the markets.

Additionally, I've long held the opinion that if your primary method of earning a living is by extracting wealth from the market, then your "capital gains" are just a fancy way of earning a living and you should be taxed at the exact same rate that everyone else is. You don't deserve to pay half the taxes just because your earnings are derived from stocks.

And maybe it's time to have a tax on financial transactions. The EU is looking at that again. It's called a "Tobin tax". Not much, a fraction of a percent, but on every trade.

A fraction of a percent is yuuuge. Entire categories of liquidity providers can be wiped out with taxes on trades as "low" as 0.05%

Not sure what people have against trading or why I should be taxed on buying or selling shares, but the government likes to capture money and spend it on weapons, so I suppose it isn't surprising the idea is being floated.

The possibility of getting wealthy this way is only available because there is a stable society to skim off of, and that is in turn the result of the collective work of millions. Trading does not create wealth but shifts it around, so why shouldn't it be taxed?

And maybe it's time to have a tax on financial transactions. The EU is looking at that again. It's called a "Tobin tax"

I don’t mean to sound harsh but you are financially illiterate if you don’t know this already exists. Have a read of https://www.gov.uk/tax-buy-shares

By the way Tobin no longer advocates for a Tobin tax.

No thanks. Let's talk about removing taxes, not adding more.

Just increase capital gains and decrease dividends taxes. If the central bank is flooding the market with money then you want people to make less money off of stock gains and more from actual income. Capital gains can be driven by irrational investors like squeezed short sellers. Short sellers promised to buy even if the current price is stupid.

High capital gains taxes would discourage this type of trading. Long term investments can still make lots of money from dividends.

The big money guys on the big money shows kept referring to themselves as "the investor class." As if by the very nature of their jobs, they were set aside above and apart from those of us who have to earn our livings by doing useful things

Hate to say it but that was literally exactly what Marx was talking about when he referred to “capitalists” as a class.

Hedge funds, as a class, underperform the Dow. Hedge fund managers, as a class, do very, very well.

"Except Japan", the author puts in a footnote. The stock market in Japan peaked in 1990 and never came back. The Nikkei peaked at 19590 and is now at 1740.

Could that happen to the US?

1. dow is irrelevant, you should ignore it

2. it's not so easy to determine whether a fund is providing value, you can't just look at returns. The math is more complex than that.

This is what I too fear when I hear the ever-lasting optimism of long term investing. Could this become a common reality sometime in future? If yes, maybe the other advise about diversifying (real-estate/precious metals etc) isn't so bad.

In Japan, real estate tanked, too.

Once the population starts to decline, real estate drops.

Fortunately Biden's liberal immigration policy and plan to do another $2T of "money printer go brrrr" should prop up both real estate and stocks nicely.

Seems to me that that's a typical Japanese/Singaporean/Scandinavian problem - if it manifests in other places due to rising quality of living and high societal costs associated with offspring, I'll probably have a different set of worries.

Why single out Scandinavians given that Scandinavia has one of the highest fertility rates in the EU? It doesn't really feel like a Scandinavian problem but a Western Europe issue, it's much deeper in places such as Southern Europe than Scandinavia (Sweden + Denmark), Spain, Italy, Portugal are running a much deeper demographical crisis than here in Scandinavia.

I'm looking at a chart of Nikkei and its currently 77% of its peak. Even with the March crash, it's shot back up like the S&P has. Where do you get 1740?

It's not at 1740. It closed at 28K last week. Peak was like 38K. Unless you stopped investing completely after the peak you'd still have done alright in the Nikkei. Not anywhere near as good as US stocks, but it would still be better than sitting in cash... especially after dividends.

It's now above any point through 1991-2020. Yes still down from the absolute peak, but if you consistently invested throughout those years you'd be well up at this point.

But I do think it shows the importance of being diversified. It is recommended to allocate a certain percentage to international stocks. We shouldn't assume the US will continue being the leading market.

You're right. Bing result: [1] "Nikki Co Ltd" on left, history of the Nikkei index on the right. I knew the Nikkei index had gone down for a long time, but not that far.

[1] https://www.bing.com/search?form=MOZSBR&pc=MOZI&q=nikki+inde...

I’m no expert on the Japanese market, and I understand that this did happen, but I think you’re missing a digit in your second number. Googling around seems to support that.

> The Nikkei peaked at 19590 and is now at 1740.

Nikkei 225 is at ~28k right now. The peak was ~39k in Dec 89.

Where did you get your numbers from?

The real numbers are certainly bad, but not nearly as bad as you are representing.

If you are scared out of the market by a little ripple like this, investing in equities may not be a good fit, behaviorially. If you are thinking about taking it out now, are you really sure you'll be able to stay in when the market drops 40%? If not, better to cut your losses now, reduce your equity holdings, and probably find someone to manage your money for you.

I self manage for the most part, but I also have at least some discipline and an awareness that the market could drop at any given time. It's only over the 5 year plus time horizon that I actually expect to make money.

I've said it many many times on HN and elsewhere. It wont be popular to say this again now - but I dont care: Trading stocks on RH is gambling - it is no better than trading in a casino. The SEC should step in and regulate them like a casino, in the name of investor protection (aka NOT day-trader protection)

RH is the social media of trading. Its all about the quick hit of dopamine via a mobile-first experience. Any conceptual inkling of educating their customers around long term investing is out the window. Why? Because thats not their business model. They profit when you trade a lot because they get paid by HFT. So investing is not in their mantra. Only ridiculous day trading as we have now.

This isn't a story about market stability, price formation, RegNMS, margins, collateral. Thats all a distraction.

This story is about the "autists" at r/wsb sticking it to wall street. Which is fine, its all good and entertaining. But random punting isn't going to create wealth.

> And the fact that Janet Yellen, the new Treasury Secretary, got paid hundreds of thousands of dollars in speaking fees from Citadel doesn’t help either.

I think there is an opportunity for a service that allows the logistics of ordering/distributing large quantities of books written by such people that can be used by banks/funds for distribution to their employees and such to avoid the bad-light of direct speaking fees. Order the books, target gets paid (the cut the publisher takes can be considered an acceptable collateral cost of avoiding the exposure) and everyone looks nice - "we were just sharing knowledge - books are good!". Best part is, some people might actually read the books.

All these traders are playing in a casino. Yes, the casino favors the house. Yes, people have figured out how to make big bucks by counting cards. The rules will probably change so the house keeps on winning.

To me, all this indicates that the only way to win is to not play. Passively investing in the market as a whole is the only way to win long term.

Disclosure: I work at a robo-advisor specializing in long term passive investing. My views are my own, and in no way associated with the views of my employer. This is not investment advice.

Which market? What country? What assets?

Are you allocating money to Pokémon cards? Why or why not?

PS: all investing is active management. full stop.

Funny enough, I overheard a comic shop owner today saying he has $180k in 9 pokemon cards he had rated, and some of them are only rated 5/10.

The return on investment there leaves me at a loss for words.

I'm thinking of a globally diversified portfolio of index funds based on modern portfolio theory.

You can read about the investment strategy, but basically it comes down to risk adjusted returns over long periods of time.

It will become abundantly clear why Pokemon cards are not part of that strategy.

We probably have different definitions of active investing. I take my definition from Wikipedia: https://en.wikipedia.org/wiki/Active_management

In my mind, another way to divide the two is about assumptions about efficiency. Passive investors assume that the market is generally efficient, and do not try to exploit inefficiencies to generate returns. Active investors generate returns from perceived inefficiencies (information asymmetry, etc).

That's exactly the opposite of not playing. Your money is still in and propping up the misbehavior in the system.

You must take responsibility for what and who gets empowered by your hard earned wealth. There is no other way around it.and a single datapoint leaving the system won't fix it. It needs to be a collective action.

Sadly, (and I hope I am proven wrong) we aren't so great at that.

What kind of indices tho? Every decision ultimately reduces all investment to active management. Like are you holding crypto indices or real estate indices, etc etc.

Index selection is active management.

Yes, if your definition of active is that you had to make a decision, yes. Pretty much everything we do is active. In the same way that sleeping is exercise because your muscles move.

I think the distinction is artificial. The kind of strategies robo-advisors use aren't really that different from any other investor. For example risk parity, "smart" beta (getting exposure to risk premia factors) are all things robo advisors and traditional fund managers do. What's the difference?

Did people had faith in financial institutions after 2008 crash anyway, if so who are those people?

I feel like huge majority of the people already know that system is rigged but what can they do? Most of them got very limited options against the system.

I feel like the overwhelming majority of people believe that the system is fair and their shot at being a billionaire is just over the next hill.

If the SEC or any government agency steps in to help Wall St hedge funds at the expense of $GME shareholders, I wouldn't be the least bit surprised to see the entire millennial generation revolt against the current financial system. They could easily trigger it by a crowdsourced agreement to liquidate 401k's and all stock holdings.

If we see any govt agency step in, I'd imagine them trying to pity sell us on lost teacher pensions, etc being managed by the hedge funds...but they'll leave out the part that says those teacher pensions have been financially weaponized against average investors for years.

The vast majority of GME shares are held by large financial institutions and mutual funds, so theories about government favoritism toward big money just don’t make a ton of sense here. Whatever the SEC ends up doing here, we can be virtually certain they did not strike a corrupt deal with Melvin Capital against Fidelity and Blackrock.

The hedge funds involved here aren't structurally important. They're not going to get a bailout.

I recently learned the term OPM (other peoples’ money).

As in, it’s preferable to invest OPM. Could that be the definition of a hedge fund?

And in that regard, it’s basically the opposite of the ideals many of us are intimately familiar with - such as having “skin in the game”.

To share in winnings yet be insulated from losses must change one’s incentives and potentially reframe what “risky” means in practice.

I'm not going to lie, the idea of the 401K kinda scares me now. We were always told to keep it safe, invest in index fund, let compound interests do its thing with your pretax money. But during the financial crisis, most "commoners" took a heavy hit that took a very long time to recover and it felt like we were the last on the priority list to recover and the WSB saga really shows how unfair it is. But my big question is what is the alternative? Real estate?

The irony of educating the average Joe about the long term investment mindset when the hedge funds people despise for getting rich while Main St suffers are anything but long term thinkers.

> Hedge funds have idea dinners in private behind closed doors.

I appreciate however the slightly obtuse admission that there's lots of behind the scenes private conversations. Interesting more so in this environment when everyone is a market manipulator depending on who you ask.

A post to consider as to why buy (and not sell) orders were cancelled. This does not address however the face that SEC fined Robinhood for not providing best execution to customers. https://stu2b50.dev/posts/why-robinhood-d3580b

On the most basic level we don't actually know who is buying and selling Gamestop stock. The narrative that the little people have taken down the elites may in fact be mostly false. Matt Levine talks about this in his latest column [1]. The restrictions imposed by RH didn't necessarily stop the buying.

[1] https://www.bloomberg.com/opinion/articles/2021-01-29/reddit...

Thanks for that. It's nice to see a calm perspective on GME.

Of course, he doesn't try to get to the bottom of a lot of the questions that really do need to be answered, but a good perspective on what it means for "the rest of us."

During the 2008 crisis, there was a lot of criticism of HFTs. Their primary defense was that they provide liquidity, which is valuable.

Does HFT help with this issue at all?

So because Citadel made 100m executing the stocks they were happy to lose 3b+?

Am i missing something or is this what the author is saying?

I can't help but notice a parallel with horse races and mafia. They say some mobsters love to bet in horse races. They end up betting on the best horses. Where mafia rules, it becomes an open secret you're not supposed to bet on "their" horses. They don't fancy sharing money with you.

isn’t the “rigging” mostly a function of the Federal Reserve’s money printer? seems odd to argue it isn’t rigged by showing stocks always go up.

The game is not just rigged, it's fundamentally broken. Parasitic practices such as lending money with interest and shorting are the basis of the modern economic system. Practices that we've known for literally over 1400 years to be bad, yet we continue to engage in them, then cry when things go south.

If we want a proper economic system, we should have proper fundamentals. Ban shorting, ban interest, ban packaging debt and selling it in packages, etc. encourage proper investments (not casino gamblings) and things will improve drastically.

Reply on news.ycombinator.com