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Are You Trading or Gambling?

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Re: Are You Trading or Gambling?

#31

Post by lordnacho »

This is only scratching the surface of the question.

For interest, there's a very common negative expected value bet that almost everyone is required to make: insurance.

We don't consider that gambling, in fact we often tell our parents to buy some when they fly on holiday.

Why? The answer touches on the lottery.

We care about not just the average case, we care about what might happen.

Regarding Kelly criterion, there's a good reason why people don't used exactly the amount it says. If you look at the risk, ie the chance your probability is wrong, there's a chance you are overbetting.

Re: Are You Trading or Gambling?

#32

Post by imtringued »

elygre wrote: post #13

Around 20 years ago, I had the opportunity to listen to a member of Nasdaq top management talk about the stock market. It's all a _tiny_ bit blurry, being a long time ago, but I remember how he talked about three different perspectives for investing in stock: First, the "company perspective". An investor would buy stock in a company they believed in. Maybe they had good products, or good management, or something else…

The problem with stock market trading is that the need for liquidity grows with the size of the market, not with the number of traders. So if traders keep joining the market over and over again at some point there will be an excess of liquidity and there will be no positive sum money left to earn. It's like a real business. Once everyone has a car the only way to grow market share is by displacing other manufacturers.

If you want to make a living as a trader you are supposed to look for very volatile and iliquid stocks. Traders make money off the difference of the current price and the actual value of the underlying company and in volatile markets that difference is very high.

Re: Are You Trading or Gambling?

#33

Post by hef19898 »

elygre wrote: post #13

Around 20 years ago, I had the opportunity to listen to a member of Nasdaq top management talk about the stock market. It's all a _tiny_ bit blurry, being a long time ago, but I remember how he talked about three different perspectives for investing in stock: First, the "company perspective". An investor would buy stock in a company they believed in. Maybe they had good products, or good management, or something else…

The reason I will never touch day trading is, that it is basically the same thing HF traders do. Only 1000 times slower. So I will loose against these guys every single time. And even HF traders loose money.

The only single stock investments I have came from employment, either through RSUs or employer sponsored stock buying programs. RSUs are just coming to you, and why would I not take stock at 50% discount?

The only exception would be money I don't need. So gambling, as I don't care if I loose it or not. But usually I do other stuff with that money.

Re: Are You Trading or Gambling?

#34

Post by catmanjan »

midasuni wrote: post #28
IgorPartola wrote: post #14

Earlier quoted context omitted.

I tend to agree. Trading stocks is essentially gambling but almost worse. The odds are rigged but you don’t know by whom abs how much. It’s a game of skill, except not entirely. The house always wins except there are multiple houses and you can lose to all of them. I think investing is a different beast: that is going long on a company, industry, or the market in general. You reasonably know that the market will over…

Stick a 1% tax on all share buys and use to reduce income tax for working people, or just issue it as a cheque at the end of the year that people can invest. That doesn’t harm investing

Uh, that's a great idea, has this ever been proposed formally?

Re: Are You Trading or Gambling?

#35

Post by dmurray »

chillydawg wrote: post #22
uyt wrote: post #18

> A not so obvious result that follows from making successive negative expected value bets, is that in the long run you are guaranteed to lose all your money (or ruin). Intuitively this makes sense as with each bet, you are losing money on average. Expected value doesn't tell you much about the outcome of successive bets. Someone else can probably explain this better since it comes up on HN a lot (something about erg…

Kelly staking criteria tells you how much to bet in such situations. in this case: nothing since it's a pointless bet, economically speaking. you may derive utility from the lols, though, in which case probably don't bet the whole bank in one go!

The Kelly criterion doesn't apply in this scenario. Imagine the same game, but it's triple or nothing (so, the odds are massively in your favour) and you can walk away at any time after resolving a bet, after which you go back to investing in Treasuries or low-cost index funds.

How much should you wager? Kelly says 25% (edge of 50% / odds of 2). But this is correct only under the assumption that you will have infinitely many opportunities to play the same game at the same odds for whatever stake you choose. If you only have one chance, you should bet more. It also assumes a linear utility value of money: assuming this is actually convex, you should bet less.

Re: Are You Trading or Gambling?

#36

Post by TeMPOraL »

IgorPartola wrote: post #24
elygre wrote: post #13

Around 20 years ago, I had the opportunity to listen to a member of Nasdaq top management talk about the stock market. It's all a _tiny_ bit blurry, being a long time ago, but I remember how he talked about three different perspectives for investing in stock: First, the "company perspective". An investor would buy stock in a company they believed in. Maybe they had good products, or good management, or something else…

That makes a lot of sense. I think the GME debacle is a good demonstration of that. Shorting stocks is a part of the game. Some people exploited it, others found a counter move. I don’t believe GME is worth what the market currently values it at. But I also don’t see that fundamental value ever matching the market value anytime soon because the market has fully embraced its non-rationality regarding this stock. We ar…

> But I also don’t see that fundamental value ever matching the market value(...). We aren’t trading shares in a specific company here. We are trading Melvin’a profits and/or losses.

I think you're still doing L1/L2 thinking.

The way I understand L3, there's no such thing as "fundamental value". There's only market value, that's determined by what people think the market value is. The extent to which it's correlated with real-world performance of a company is limited to how likely other people are to take that performance into account. Ordinarily, enough investors look at the state of the company to give rise to a correlation (if only because otherwise there's nothing external to look at!). Meme stocks are kind of extreme here, in that everyone knows that everyone else knows the stock is being traded on its market value. But that feels to me like a difference of a degree, not of a kind.

And at this point I ask myself, how any of that is even useful to the society? Could we decouple the parts that let companies loan money and be accountable to the shareholders, separate them from the part where investors just play their spreadsheet MMOFPS? Or is the former always inherently going to turn into the latter, as people will always game it?

Re: Are You Trading or Gambling?

#38

Post by TeMPOraL »

agumonkey wrote: post #29
YokoZar wrote: post #26

Earlier quoted context omitted.

> An investor would not really care about the stock, but only about the behavior of other investors. This sounds like the idea of a Keynesian Beauty Contest ( https://en.wikipedia.org/wiki/Keynesian_beauty_contest ) "It is not a case of choosing those [faces] that, to the best of one's judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third deg…

And I believe they orbit around the set of self fulfilling prophecies described in books. Fibonacci or similar simple arithmetic range estimates, deviation from the mean, etc.

Isn't this the reverse of a self-fulfilling prophecy? A self-fulfilling prophecy attracts reality to the state it describes. The stock market, being anti-inductive, attracts reality away from whatever predictions being made - that is, for example, if I found a pattern that proves $GME reaches the Moon on Tuesday, enough other people would find that pattern too and start buying early, and $GME would reach the Moon on Monday, and probably crash on Tuesday.

Re: Are You Trading or Gambling?

#39

Post by mgh2 »

elygre wrote: post #13

Around 20 years ago, I had the opportunity to listen to a member of Nasdaq top management talk about the stock market. It's all a _tiny_ bit blurry, being a long time ago, but I remember how he talked about three different perspectives for investing in stock: First, the "company perspective". An investor would buy stock in a company they believed in. Maybe they had good products, or good management, or something else…

What about “ethical” investing?

A company can perform good long term without regards to the negative externalities of its business

Re: Are You Trading or Gambling?

#40

Post by christopherjgan »

21stio wrote: post #12

Hey Chris, thanks for sharing the article. I think I spotted a minor logical error in it tho. > This is because on average, you will gain $1 with every coinflip. For those interested in the maths, you have a 50% chance of winning $2, and a 50% chance of losing $1. 50% * (+2) + 50% * (-1) = +$1. Isn’t it an average gain of $ 50ct per coin flip? That way the calculation would be correct aswell.

Good pick up!
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