How to Win at the Stock Market by Being Lazy
nytimes.com
nytimes.com
I've tried trading before. I studied all the technical analysis, the fundamental analysis, etc. I know my candle sticks, trend lines, chart patterns etc. I've done it with stock markets, FOREX, and BTC.
Maybe I sucked. Or maybe I deluded myself thinking I can beat the market. But buying shares and forgetting about them got the best results. This is the strategy most advisors advise. It saves time, stress, and it works.
I also tried options. Great way to lose money fast!
Also, even with my passive strategy, I still have fun talks of my investments with friends. It's more talks about general trends and what companies I'm looking to hold for a long time.
Globally, the unsexyness of passive index investing is the best thing about it. A huge percentage of the angel / seed / FFF capital in the world comes from bored people who don't want to talk about their Vanguard Target Retirement 2050 investment and so put 10% of their portfolio into crazy startups that will sound impressive to their friends.
Consequently, for the posters on this site, the boringness of passive investing is a huge creator of jobs and opportunities for us!
Now though as ARK is doing a great job in fundamental analysis, it became much harder to find undervalued stocks.
We’ve done it, we’ve entirely democratized information ;) Now wealth is transferring to those who make best use of it.
I'm in Bitcoin, but I'm happy for anybody who invests in growing companies instead of just being passive.
Yes, but, the number of opportunities to trade based on a deep understanding of a certain industry are limited. I've picked individual stocks a few times when I was certain they were undervalued and poised to do well. These few times I turned out right. But years go by without these opportunities presenting themselves.
Technical analysis is, for a lack of better words, utter bullshit. There are so many patterns that fit a given chart that you have free choice between any conclusion you want. That property makes technical analysis very similar to astrology, in that any horoscope more or less fits anyone in some way or another.
Basically, any analysis – technical or fundamental – which can be automated and which works reliably, has already been automated by Quant funds with a lot more resources than a single person could ever muster. This is doubly true after the advances in machine learning in recent years.
Since anyone can reach any conclusion depending on which indicators and which parameters they use, technical analysis can't and won't tell you how "people that can move the markets" will decide.
I chose my very boring and traditional local bank to trade stocks. Their online trading platform is sluggish, dated and ugly. This basically encourages a buy + forget strategy. I follow it just to avoid the horrible user experience of that site.
I wonder if a basket of ETFs based on "trendy" things outperforms SPY.
over the long term or the short term? eg. during the dot-com bubble an etf of internet companies would have performed better returns than SPY, but you'd get slaughtered once the bubble poped.
Vanguard owes it's success as much to John Neff, who ran the Vanguard Windsor Fund and consistently out performed the S&P500 by ~3% a year for almost thirty years, as it does to John Bogle, who founded Vanguard and popularized index investing.
However, there are very few people who can do this over a long period of time, which (fees and taxes aside) is one of the main reasons for going with index funds.
Someone WILL always beat the market. A small set of people WILL beat the market consistently - until they don't. That set gets smaller every year, until over a long enough timeframe it goes to zero.
History has shown predicting who will be able to win over a specific timeframe is essentially impossible, and more random chance than skill - with temporary counter examples that always revert to the mean over time.
For illustration: assume any given fund has returns which simply approximate a normal distribution; i.e. their returns are theoretically just noise. Then the chance of the fund achieving a 2 sigma return in any given year is about 2%. We can model the odds of such a firm consistently exhibiting a 2 sigma return for 20 years in a row using a binomial distribution with n = 20 trials, k = 20 successes and success probability p = 0.02. Then we have
binom(20, 20) * 0.02^20 * 0.8^0 = 1x10^-34
There are firms which have consistently beaten the market by a significant margin for that long. Even if you relax the constraint to 10 years, you still get "only" 1x10^-17. At a certain point this becomes similar to saying that Steph Curry isn't actually good at basketball, all of his 3 point throws are just the expected outcome of lots of mediocre players existing who didn't make it to the NBA.
I do agree that retail investors should just invest in index funds though. And I agree it's extremely difficult to determine who has the genuine skill to beat the market before they've beaten it for so long that they're no longer accepting money.
You're also talking about rearward looking data, not forward looking predictability, often only including hedge funds for instance that still exist today. For any given hedgefund who outperformed in the past, how likely is it that, if you made a judgement today on their ability to perform, and then waited 1, 5, 10 years in the future, it would match that judgement? What are the odds they'll exist then, or be merged or renamed or whatever?
If you today made a bet for 10 years from now as to Steph Curry's 3 point average then, how likely would it be to win?
There is a reason anything to do with the markets is almost always followed with 'past performance is no guarantee of future results'.
There are also confounding effects like the Bernie Madoff's and Enron's of the world, and major issues with visibility into most hedge funds that make it difficult to actually compared performance on a level playing field. If someone is 'loading the die' using insider trading, tips from the CIA or whatever, it would be really difficult to call them anything but incredibly skilled/lucky - and you couldn't tell the difference unless it blew up publicly.
It would be fun to really really look into this. Run some controlled experiments (alas no multi universe engine to do that correctly), deep dive into what each fund actually does to find positive or negative correlations, etc.
It would be interesting for instance to do back testing on many of these things - if someone is declared a ‘winner’, vs not declared a winner (but doing the same things), is the likelyhood the winning streak holds up greater or lesser?
Does a large amount under investment change odds of success? (Big pockets make it easier to win?) Does a change in amount under investment change odds of success? (People flock to perceived winners, both investors and opportunities, increasing their odds of success)
[0] https://www.vintagevalueinvesting.com/the-complete-list-of-q...
[1] https://old.reddit.com/r/investing/comments/i40wi3/seth_klar... (wayback link in the comments)
It's no secret or controversy that higher risk means higher returns, that's generally accepted as a given.
The stock market is an information market. If you want to generate above market risk-adjusted returns as an active investor then you need more accurate and current information than other investors. In other words you have to do proprietary research and keep the results secret until you've executed your trade. This takes time and effort; you're not going to do it just by reading the same public information on the Internet as everyone else. For example you could spend a few days visiting GameStop stores in person to estimate their current revenue trend.
Let's say you have $1000 and there's a 1% chance you can 100X your money in a year by buying $AMAZING. Someone will look at this and say, well, if I 100X my money then I'll have 100,000 and I can buy a house. If it goes to zero I'll be broke, but I was already broke anyway so nothing changed.
A rational person will say, yeah but if you took your $1000 and invested at a regular rate of return of 10% and waited 50 years I'd have $17,000! An excellent return on investment, except now your entire life has gone by.
edit: I actually meant to say 30 years instead of 50 but will leave the error up for transparency's sake! At 50 years it's more like $120K or so.
generally they're logarithmic.
that's why billionaires are still basically people, instead of just writhing around in orgasmic ecstasy all of the time.
[1] eg. buying a 4-pack of toilet paper rolls every week rather than buying 2x 48 packs when it's on discount.
How about $117,000 though
And that is all based on the premise of living to age 70.
Anyway, assuming a 3% inflation rate, the original $1K still turns into $30K after fifty years.
It's also worth pointing out that most people in the states qualify for Medicare Part A after they turn 65. Even if they don't, the average monthly health insurance premium for someone who is 70 is around $550.
So going off of your example, the original $1K purchases around four-five years of health insurance after inflation. This is a good deal.
>if _you_ took _your_ $1000 and invested at a regular rate of return of 10% and waited 50 years _I'd_ have $17,000! An excellent return on your investment except your entire life has gone by
If we took this at face value, it means the 17k must have been some sort of consulting fee or something. I guess he's saying don't wait 50 years for a 17k consulting fee which you can't really argue with. Either that or OP should check his math
For the defense of passive investing, I liked "A Random Walk Down Wall Street"[1]. There are like 7 editions of this book because it was true when it was published nearly 50 years ago and still true today. Maybe someday it won't be true, but that hasn't come.
But why not also put money into hot stocks that you like? Did $Company change your life? Buy their stock. Or have fun speculating with a little money.
[1] - https://www.amazon.com/Random-Walk-Down-Wall-Street-ebook/dp...
Your math is wrong by almost an order of magnitude.
The rule of 72 is handy for thinking about growth rates. Divide 72 by the rate to get the doubling time.
At 10%, it will double approximately every 72/10 = 7.2 years. So about 7 doublings in 50 years = 2^7 = 128. So you can estimate in your head that the answer is roughly $128,000 and $17,000 is completely wrong.
For example, suppose you model this as a game with the following rules:
- you start with $1,000,000
- each turn you may bet $10,000
- if you bet, you roll a d100
- if you roll a 1, you earn 1000x your bet, if you roll anything else you lose your entire bet
- the game ends after 1000 turns or you lose all your money, whichever happens first
If you bet every turn, on average you'll end the game with approximately $60,000,000.
EDIT: Did you edit your comment to be 100x or did I misread? Oh well, leaving this here for posterity. If the win outcome is 100x, the EV is still 1.
Put another way, if a currency is debased by 20%, businesses will raise prices or reduce costs to maintain the same margins over the long run.
Worse, you're behind if you have to pay taxes on the gains.
it also paints "passive investors" with a rather broad brush, as though every one is out buying exactly ^SPTMI in lock step. when really folks are buying all sorts of subtly different blends of the market, and usually topping it off with a couple of small personal choices.
Who says there are no free lunches?
People who bought and held the Dow between ~1966 and ~1982?
FTSE 100 has been also flat since the 2000 bubble peak but I think there is some gain if you count the dividends.
Anyway, one should diversify between geographies as well.
Is that actually true? I just tried to find out what would have happened if you invested in the German DAX 30 years ago and apparently you would have had an 800% return on investment, approximately 7.5% annualized. Seems pretty good to me.
> Any schlub on the street can put money to work harvesting a small share of the earnings of hundreds of leading companies, led by some of the sharpest corporate executives on earth and their millions of employees.
This is leaving out a very important detail, which is that you first have to be living comfortably and holding excess savings (that you're willing to risk, or at least leave alone!) to be able to even take the safe road in the market. That's not something "any schlub" can do; it excludes something like half of Americans. The "40% don't have $400 for an emergency" statistic is tired at this point, but it's telling here. You shouldn't be investing, even in an index fund, if you don't have enough cash to cover an unexpected emergency. It's not a question of patience.
The really predatory thing about Robinhood and the like isn't that they prey on "impatience", it's that they prey on desperation. A person who can't afford to put $1000 in an index fund and leave it alone for ten years can maybe scrape together $100 to bet on the small chance of striking it rich and pulling themselves out of borderline-poverty. It may still be bad advice, but when people don't have other options, the calculus starts to make sense from their perspective. Robinhood's commercials even emphasize this specific angle.
This article is great advice for the shrinking middle-class, but it comes off as tone-deaf for a growing majority of Americans.
The survey didn't indicate that 40% didn't have $400 for an emergency, it indicated that if they had a $400 emergency, 61% of people would use short term cash to pay for it. 27% would use some other means to pay for it - for example put it on a credit card and worry about it later. That didn't necessarily mean they didn't have $400 in cash, it just meant they would use some other way to deal with the emergency.
12% said they wouldn't be able to come up with the money.
>> This article is great advice for the shrinking middle-class, but it comes off as tone-deaf for a growing majority of Americans.
The majority of people leaving the shrinking middle-class are leaving it to join the upper class. Not that the lower class isn't growing also, it is, the middle class is indeed hollowing out, but more middle class people are getting richer than getting poorer.
From a personal perspective, I invested money in a 401K when I was working class, with the goal of letting it compound for many decades. I'm guessing that people with that mindset are less likely to stay working class, and I have no idea where I got that mindset. Certainly not from my parents or siblings, they were all the normal get the paycheck, spend the whole paycheck type.
"Bianco further notes that, for an investor who bought the S&P 500 in 1966, it would not have been until 1993 — 27 years later — that the holding would have delivered real, inflation-adjusted gains."
You will still have to fade the risk though. If your portfolio is large and consists of 100% stocks, you need to diversify out. The mostly common alternative asset classes are real estate, commodities, and cash.
Anytime someone invests in "the stock market" they're doing this: creating growth without underlying value. And it might work out -- and it has for decades so far -- but that doesn't mean it makes sense or will continue that way forever.
Currently the entire stock market doesn't reflect value, it reflects growth. Shiller P/E (CAPE) is normally between 10 and 15 depending on that efficiency that you're talking about. It's at 35 right now. (https://www.multpl.com/shiller-pe) That's higher than Black Tuesday and any other time in this market's history outside of the 2000 crash.
Kidding, but there’s a real value in letting other people explain their mistakes to you in a way that helps you skip those mistakes, and I see a lot of that here.
The first and last lesson in investing is DON'T LOSE MONEY.
Sadly, many have to learn firsthand that markets don't grow to the sky forever.
But the numbers clearly show the long hold strategy as in the article is the smart, reliable play, one that can be done simply by contributing small amounts each month.
The numbers in the bank account work out, but I’m less convinced that it remains as simple when you add the existential variable into the question.
[0] Spending money
[1] Things like focusing on your kids and inheritance help subvert this a bit.
Why can't we all try to play with money the same way these people do?
You absolutely can. You can also try to play chess against Stockfish after reading a few Reddit forums about chess and practicing in your spare time a few days a week.
Adjust your expectations accordingly.
I will not buy a house at 65, I’m sorry I won’t. You don’t have a plan for me. So I will look to other strategies.
Option wheeling strategies with modest amounts of capital (50-100k) to generate 1-4K a month.
Wheeling is considered the most primitive strategy. There are others, along with your standard buying of leaps or general growth minded investments. There seems to be more to this than dumping it all in a 401k until you die.
This week: Yeah, just buy index funds
...
I feel this cycle is common, but speeding up?
And now that the bubble has popped, they're searching for new avenues of investment... and until the next bubble arrives, a decent ETF is a good way to park money.
(for disclosure: holding a couple dozen AMC, NOK and DAX/MSCI World ETFs)
Are index funds that focus entirely on socially and environmentally responsible companies something that’s on your radar? Why/why not?
I think there's a place for all of them. I've been okay dumping money into index funds, but my best "play" ever was buying 5 shares of AAPL a few years ago. That ~$500 is now up over $2k. If you have the capital, there's room for all 3. Boomer investing to stay safe and have an EF and build your retirement nest egg. Buying individual stocks that you like with a smaller percentage. Maybe a small amount of "fun money" for day trading/YOLO.
Everything in moderation, including moderation and all that.