The pandemic turned my parents into day traders
wsj.com
wsj.com
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> One afternoon my mom and I found an envelope in the mail with the Nielsen consumer confidence survey and two dollar bills enclosed. The cash was enough incentive for my mom to start filling it out, ticking a box that indicated the business environment in our Iowa town was as good as it was before the pandemic.
> “Really?” I asked. “You think so?”
> Her rationale was simple—more optimistic answers would help bolster the market. “I want stocks to go up,” she responded.
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NB. markets are not faith-based. They are evidence-based.
The trader believes, eg., IF P(stock-increases | evidence) > risk THEN buy
You create bubbles by believing, as all propagandists do, that reality doesn't exist. That belief is evidence.
That works only until people re-evaluate their evidence. As soon as you look at, eg., actual productivity, the whole thing collapses.
Which is why we are seeing close to record highs in the middle of the worst pandemic in 100 years? Markets are irrational as far as I can see.
That expectation, however, is being exaggerated by other people who likewise expect it. Sure.
But we shouldn't characterise the market as irrationally faith-based, if it were, it would never go bust. It doesn't go bust because, for some random reason, people loose faith.
Rather, their beliefs are revised with updated evidence, which propagates thru the market. This "correction towards reality" is always at work, but people attend to the evidence at different rates: when the whole market looks, then you go bust.
There is a deeply tyrannical and propagandistic undercurrent to the view that human action is simply a matter of our "faith about the world", and not evidence. It encourages people to act as-if false things were true; and requires others to do so; to cause great catastrophes precisely because the false things arent true.
> encourages people to act as-if false things were true
Your last paragraph, which I broadly agree with, is at odds with the rest of it, which is classic naive efficient-market-hypothesis stuff.
It's complicated to discuss what "evidence" means for events in the future, because it rapidly heads into deep waters of philosophy, but like the 538 election prediction the best we can do about the future is have a probability distribution of outcomes. And as a result there are three big effects: one is low-probability events turning out to actually happen sometimes ("black swan"), another is events you wanted to be uncorrelated turn out to be correlated (which blew up mortgage "tranches"), and the third is that other people's action is market-driving information even if it's irrational; panic selling causes more panic selling, bank runs are real, etc.
Markets make point estimates. Derivatives markets make distributional estimates. The information is all there, and if you disagree with it, you can make bets to that effect. But most people won't do that, because they don't actually believe that the market is inefficient. There's very good justification for the present stock market rally, especially if you pay attention to the market's internal structure. The pandemic is driving consolidation, and changing habits. Changes that primarily benefit high scale businesses. The disconnect between the state of the economy and the state of the S&P 500 is driven primarily by this distinction. The market is correct to price in a boom. You are also correct to fear a recession. These things are only mutually exclusive if you mistake the stock market for the broader economy.
It's also true that there are major tail risks present. The market is not ignoring them. The market is saying that the expected value, inclusive of those tail risks, is positive. You can see the market pricing those tail risks in if you look at the implied volatility surface of options right now. It's there. It's really important to understand that the fact that a price turns out to be wrong does not make markets inefficient, or even incorrect. Gamblers making statistically correct bets are wrong all the time. That's just the way uncertainty works in the world. There are people arbitraging uncertainty at all points of the distribution, from the tail on up. It's true that markets are less efficient around low probability events. But it's also true that they quickly learn from their mistakes
the sense of "based" relevant to market behaviour, though, is whether buy/sell/etc. activity (ie., trader actions) is based on faith or not -- and it is largely, not
each action is the result of an evidenced-belief, and as the quality of the evidence improves, and spreads, the market changes. It is (inefficiently) responsive to evidence, rather than based in faith.
faith and “evidence based belief” are perhaps more entangled in my head than yours, though. my only point is that at some point each actor comes to the conclusion that they have enough information, that this information is predictive, and that the future is comprehensible. it is impossible to know future outcomes, so on some level every best-judgment action people take in a market demonstrates this baseline “faith”.
That is only true on the surface. The “evidence” that guides the majority of trades is made up of signals created by all kinds of irrational behaviour.
Something that is appraised by its future value, by definition won’t ever be purely evidence based.
Stock market like many other assets are driven mostly by credit cycles. Bubbles are created by natural credit cycles. The vast majority of money in the USA isn't hard cash, its credit. And low interest rates and other things can rapidly expand the amount of credit. We are in a period of extremely low interest rates and quantitative easing as well as deficit spending by the government.
Hedge funds like Ray Dalio's track credit and do it to a precision that is widely regard as even better than the federal reserve.
Since he was a modern-day Chief he'd never actually been taught the old indian ways or their secrets, so when he looked at the sky, he just couldn't tell what the winter weather was going to be like. Nevertheless, in order not to disappoint the tribe and to be on the safe side, he told them that the winter was indeed going to be cold and that they should collect firewood and be prepared.
However, being a practical leader, after several days, he got an idea. He went to the phone booth, called the National Weather Service and asked, “Is the coming winter going to be cold?”
“It looks like this winter is going to be quite cold" they responded. So the Chief went back to his people and told them to collect even more firewood in order to be better prepared. A week later, he called the National Weather Service again, “Does it still look like it is going to be a very cold winter?”
“Yes”, replied the man at National Weather Service this time, even more certain,“it's going to be a very, very cold winter.”
So the Chief went back to his people once again and ordered them to collect every scrap of firewood they could lay their hands on.
Two weeks later, worried about the mountains of wood and the hard work the tribe was putting in collecting it, the chief called the National Weather Service just to be absolutely sure."Are you definitely sure that the winter is going to be very cold?”
“Absolutely”, the weatherman said, “It's looking more and more like it's going to be one of the coldest winters on record.”
“But how can you be so certain?” the chief asked. "Well, for a start" the weatherman replied, “the Indians are collecting a shedload of firewood.”
ie., day trading is a rigged game: it is a transfer of wealth from those who won't wait to those who will
Obviously with gambling, it's more stochastic in nature by design but often large complex processes have a lot of stochastic elements to their successes and failures as well.
another key difference is that the expected value of a bet in gambling is less than or equal to zero (depending on house cut). the expected value of a single stock is unknown (at least to a retail investor), but the expected value of a broad portfolio is positive in a growing economy. you can "lose" relative to others and still be better off than if you had not participated.
it's certainly possible to gamble with stocks and derivatives, but in general, investing and even speculating are not necessarily gambling. imo the difference is in the strategy behind the trades. though wildly risky, speculation can be rational when backed by an advantage in information and/or analysis. a retail investor watching daily prices and backfitting a narrative from news stories is not an example of a rational trading strategy.
Gambling is taking on a risk to get a reward - the risk isn't offloaded by somebody else. It's set by the house.
For example, horse race betting, roulette, or blackjack, is gambling, not speculating. Betting on commodities futures is speculating, not gambling - commodities futures is one way a producer can offload future price fluctuations/risk to somebody else (who "wins"/"loses" if the prices rise/falls).
"Oh, well, no. Neddy doesn't believe in insurance. He considers it a form of gambling."
For the love of God nobody show them WSB
I think English itself is lacking a bit here—ie: it’s very common to say “you guys”, semi-regardless of gender of the subjects, because we don’t have a 2nd person plural tense.
The original line was a joke-ish, so here are some options given that context.
“Ma,am” - very formal, often read as exaggeratedly polite. You’d be most likely to see this in a customer service context, hence the meme: “Ma’am, this is a Wendy’s” when people rant inappropriately.
“My dear” - gent(/i)le, but can be read as misogynistic or belittling if you’re a man, especially one of higher “status”. From a female and/or peer, reads more as motherly advice. Use with caution.
“Lady” - sort of splitting the difference. Formal, but more what you’d hear from a grumpy bus driver. Probably funniest option here.
“Girl”/“gurl” - slangy and youthful, more a loan word from the drag community. You’d probably get downvoted on HN for it and upvoted on Reddit.
“My dude” - more current jokey response, it’s been churned through Twitter and youth culture to the point where it’s meaningless enough that “dude” almost works for either gender. Probably don’t use this one, might even get downvoted on Reddit.
Edit: god, sorry this turned out long, but it’s a pretty fun exercise.
Case, not tense, technically. "Tense" is for verbs.
English does have a variety of ways of indicating second person plural: "ya'll", "y'ins", "you all", and "you guys" are the most common. It's a shame English discarded "ye".
I like your alternate suggestions. In my family, we started using "bro" as gender neutral, at first ironically and now it's just stuck. I call my daughters "bro" all the time.
I assume it's a turn of phrase that's more common in some other languages?
This is a very popular sentiment. I was interning at Tesla and went to a 'Women in Tech' thing, referred to one of my friends sitting next to me as 'A chick'. She took no offense but the whole panel roasted me brutally.
Edit: Excerpt:
>> My mom assured me that she’s started reading up on stock valuation, and only buys 20 or 30 shares at a time. She gauges that 15% to 20% of her wealth is in day trading, leaving the bulk of it in her tried-and-true index and retirement funds.
>>My dad, having gotten into the game later, has only about 10% of his money in short-term trades. In the unlikely case that he loses it all, which he doubts would happen, it wouldn’t be financially devastating.
Edit 2: And yes, in fairness, since they're just "gauging" it and might not keep rigorous track of the actual values, it could be a huge underestimate. But still, not "goodbye inheritance".
The last two don't apply to playing the stock market, so we're left with it being addictive. A lot of drugs and behaviors are addictive, and in all cases there are users who are, nonetheless, not addicted.
So caution is still indicated, but the situation is not as pessimistic or as inevitable as you paint it to be.
In particular, losses are not inevitable. In a bull market, there will be more gains than losses, by definition, in a bear market, the opposite.
The market is more bull than bear, fairly consistently, due to a combination of inflation and economic growth. Past performance is not indicative of future results...
Huh?
They are currently developing the digital Yuan and it will allow China to track every single transaction, making taxes completely transparent, fraud much hard and a general huge power grab for any government. (No under the table work, no nontaxable work, complete financial history of all citizens). Albeit they'll have to ban paper currency but there's huge value in having power over your populace, and thus is where crypto derives it's value.
1) Spend as much time as you can learning about the markets areas you are interested in trading. Practice paper trading until you understand what you are doing.
2) When you actually put in real currency, do NOT change what you were doing when you were paper trading. Any changes in the habits you built paper trading when you use real currency will ensure that you will fail.
3) If the market is volatile, take the day off and go do something else.
4) Don't be greedy - if you break this rule, you will fail.
5) Expect losses as they WILL happen. The corollary to this is : Don't get emotional.
6) Remember this is always a gamble and there is always risk involved.
7) Market makers are NOT your friend. They can/will disrupt any patterns that you are looking for as they are after their profits at your expense.
The above is the consistent advice I received from many different people who were successful at day trading. I did paper trading for quite a while for the training purposes. I didn't get into full day trading as my own individual circumstances changed. Friends who did get into this and who failed tended to break one of these rules, especially 4.
I think that Yakety Sax is about the perfect name for a song, describes it so perfectly.
Anyways - I think you're right. The US has proven that they don't give two cks about debt. They'll keep borrowing and borrowing and borrowing, with trillions of $$'s going straight back into the economy to prop up equity indefinitely.
I have no problem with what her parents are doing. They're only playing around with 10% to 20% of their wealth. This is what Jim Cramer calls "Mad Money", which originally was the whole premise of his CNBC show of the same name. (That show has since morphed a bit in style).
The idea of mad money is to be allowed to go crazy and speculate with a relatively small portion of your wealth. If you're having fun with that, maybe you'll also keep doing the research to keep up with the relatively boring rest of your portfolio (such as index funds and blue chip stocks).
You need to keep reminding yourself all the time that you could lose most or all of the crazy speculative money. Because there's a reasonable chance that you will. I watched this same thing happen during the dot com boom of the late 1990s. When it was all over, many companies fell by 90%. Many others just simply disappeared.
There's no harm in buying Zoom at the start of a pandemic. Sure you're somewhat dependent on the "greater fool" to take you out of your investment, but at the moment there seems to be no shortage of those.
1. You cannot beat the market (i.e. ETFs) for two reasons: A) The market consists mostly of institutional investors. Institutional investors spend an enormous amount of time and money on making sure that they come out on top. B) The fact that institutional investors spend so much time and money on evaluating stocks means that all possible information about a company, i.e. all future expectations about the company and all risks have already been priced in and the market is efficient (in the economic sense). In particular, the future stock price development is by definition unpredictable and mostly random because it will be based on future information that does not exist yet.
2. As a corollary of 1), you get profits not for knowing a company well and assessing their valuation accurately (all this has already been priced in at the time you buy the shares!), you reap profits for enduring risk. The higher the risk, the higher the potential profits (or the loss).
3. Sure, arbitrage exists. But again, who is going to be more likely to discover opportunities for arbitrage? An institutional investor or a stay-at-home mom?
not recommended if you can't track prices at least hourly, though.
It is unlikely that you will beat the market in the long run and if you do, it may well be down to chance, but it is possible, because the market is not perfect.
Furthermore, you can not "buy the market" in the first place. You can buy ETFs replicating stock indices, but that is not the same. If you bought the S&P you will have performed differently than if you had bought MSCI world. Ultimately, stock picking is just a less diversified version of buying an index.
Sure, I should have phrased my claim more carefully: You cannot beat the market consistently every year. Beating it by chance is irrelevant when what you're looking for are sustainable, continuous profits.
> A lot of institutional investors are long-only. That is their mandate. All the information they may have does not change that fact.
There are also lots of institutional investors that are involved in day trading. My claim merely was that: 1) There are enough of them for new information to get priced in faster than average private individuals could take advantage of them on a consistent basis. 2) Private individuals are not likely to beat institutional day traders.
> Efficient market hypothesis is nonsense.
As with all real-world applications of science, the match between theory and practice is not perfect. IMO it is good enough, though. If it were possible to foresee stock prices on a consistent basis, then we'd see tons of successful investors. I have yet to hear of an investor or a fund manager, though, who consistently beats the market. All instances where an investor has been able to do that over, say, a 10-year period can be explained by statistical outliers. (In the sense that, yes, there will always be outliers but unfortunately, it's impossible to predict who it's going to be and how long their run is going to last. There are countless fund managers who were successful for a number of years, only to be very unsuccessful during the following years.)
> Furthermore, you can not "buy the market" in the first place. You can buy ETFs replicating stock indices, but that is not the same. If you bought the S&P you will have performed differently than if you had bought MSCI world.
That's true, I was being a bit sloppy here. I was referring to MSCI-like indices as, compared to smaller indices, they minimize risk due to additional diversification and still yield higher profits on average. (This is the usual paradox: diversification usually leads to lower risk and higher profits. It's the only free lunch you'll ever get.)
> Ultimately, stock picking is just a less diversified version of buying an index.
Sure, but in contrast to stock picking, there are 140 years of world market history backing the claim that long-term investments (over at least ~15-20 years) in "the" world market (i.e. MSCI-like indices) will, on average, yield profits in the order of 4-8% p.a., depending on what exactly your definition of "world market" is. There is no such data supporting investments in single stocks.
Renaissance Technologies? Funny enough, it's always the people outside the industry with the least amount of information who believe in EMH.
To be clear, there are other great many firms that consistently crush it (including mine), but you probably haven't heard of them, or they are proprietary trading operations vs mutual/hedge funds.
But regardless, the point of a hedge fund manager isn't to beat the market anyways: it's to provide uncorrelated return.
Renaissance's Medallion fund is one such outlier. They have averaged crazy returns over decades now, but they are likely only able to achieve such returns by being a small employee-only fund.
[0] https://en.wikipedia.org/wiki/Renaissance_Technologies#Medal...
Not every possible arbitrage is suitable for every market participant.
But IMO it's more dangerous for the layperson to fall for the "picking up pennies in front of a steamroller" situation. They might be profitable but not assessing the risk involved in their trades and then (for them) all of a sudden they are no longer profitable.
I read this as "please don't mess-up our playground".
It feels the powers of institutional investors is already balanced so that they can decide the way the money flows.
Do these people add any value to the economy?
The added noise and participation of retail investors at least somewhat disrupts their playground as you so succinctly put it, and creates arbitrage and investment opportunities. I guess one could argue that although it's still largely exclusionary, at least it's better than in the 1900s in terms of access, but that's not much comfort.
I'm open to seeing other points of view, but at first glance this looks like it's a good thing, to my eyes.
Hedge funds pay absurd amounts to trade against dumb money. Quants were suffering for years when vol was low. Meanwhile, big guys (pensions, endowments, banks) literally couldn’t care less what noise is in the market.
This is why you can trade for free: because your (very short term)-stupid decisions let someone else make money.
The small uninformed and most often unprofessional (being emotionally involved as private savings are invested) pay the big investors...
One of America's largest institutional investors is the Californian pension fund: https://citywireselector.com/news/cio-quits-largest-us-pensi...