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Are You Trading or Gambling?

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Re: Are You Trading or Gambling?

#101

Post by gher-shyu3i »

gandalfian wrote: post #77

Gambling is a zero sum game, your win is anothers loss. Investing is not. When it works there is literally more stuff, goods and services, for everyone! With investing you can win without others losing! That is how we all have so much more stuff than a century ago without anyone losing, we didn't liberate it from the aristocrats we invested and created it.

Shorting is also gambling, but it is not a zero sum game. Because there are now three parties bearing the risk of a stock, there are either two "winners" and one "loser", or vice versa.

Re: Are You Trading or Gambling?

#103

Post by imutemyteam »

gandalfian wrote: post #77

Gambling is a zero sum game, your win is anothers loss. Investing is not. When it works there is literally more stuff, goods and services, for everyone! With investing you can win without others losing! That is how we all have so much more stuff than a century ago without anyone losing, we didn't liberate it from the aristocrats we invested and created it.

Investing isnt gambling, trading is.

Atleast buying and selling stock because you think it will go up or go down is gambling. Basically you are betting that you will outperform the market rate.

If you just want to get the market rate of return by passive investing, it is not gambling. This post is talking about trading.

Re: Are You Trading or Gambling?

#104

Post by ab111111111 »

"Gambling occurs when you have a poor understanding of risk, resulting in either (1) negative expected value bets, or (2) poor bet sizing that leads to ruin." Not so. Top poker players are still gambling, but have an excellent understanding of the risks. Their skill doesn't turn them into investors. Gambling is taking a high risk bet. Whether the expected pay off is high enough to justify the risk and whether you can afford to lose the bet is a separate issue.

Re: Are You Trading or Gambling?

#105

Post by gen220 »

lordnacho wrote: post #31

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, ther…

Value investors use the insurance example as a plank in their argument that “loss avoidance” is the most important value investing principle.

Buffet famously said loss avoidance is rule number one, and rule two is to remember rule one.

You buy flood insurance every year, even if it only floods once every 15 years on average, and even when it hasn’t flooded in 25 years.

If you make 10% for 9 years and then lose 20% on year 10 (1,886.36 from 1,000), you’d be better off making 8% for ten years (2,158.92 from 1,000).

Re: Are You Trading or Gambling?

#106

Post by tinco »

If we're investors, and not gamblers, why do we get an explanation about negative value bets with only gambling examples? It feels like negative value bets don't exist in investment.

You can't say a bet is negative value when you don't know the odds, and the whole reason people are making so much money market making is that no one actually knows the odds, so no one knows the "real" value of any instrument.

If you're trying to say we should come up with an expected value of the bet before making it, why not give an example on how you'd try that?

The reminder of the Kelly Criterion is great, and I think the article would have been better with a little more practical example of how to apply it. The first half of the article feels like it could be condensed to "Gambling is when you pick bad investments" which is ridiculous..

Re: Are You Trading or Gambling?

#107

Post by TeMPOraL »

avereveard wrote: post #78
TeMPOraL wrote: post #36

Earlier quoted context omitted.

> 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…

> The way I understand L3, there's no such thing as "fundamental value". There's only market value I think control theory works better at describing these factors, as L1-L2-L3 suggest some derivative relations that its's not really there. you have your set point, which is the hard company value. you have n proportional forces, each proportional to the distance from the company current value and that of every put and…

Except the whole thing with market being anti-inductive is that you have a non-linear term that's a function of the state of the control system itself!

(I didn't want to suggest some derivative relation - just refer to the "perspectives" mentioned in the topmost comment.)

Re: Are You Trading or Gambling?

#108

Post by RivieraKid »

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 correct perspective, aka reality, is that market value gravitates towards the intrinsic value in the long-term.

And if you're a very long-term investor, you can ignore the market price and just collect the dividends.

By intrinsic value I mean the sum of all expected future cash-flows where each cash flow is adjusted for time and variance (risk).

Re: Are You Trading or Gambling?

#109

Post by auntienomen »

The headline looks like an exception to Betteridge's Law, in that the answer is clearly yes.

The crucial thing is that you don't know the true distribution of returns when you invest, trade, or speculate. There's always some probability that you're gambling, in the sense of this article

Re: Are You Trading or Gambling?

#110

Post by hirundo »

machiaweliczny wrote: post #70
ramblerman wrote: post #66

Earlier quoted context omitted.

Interesting, given he is such a prominent Economist I'm a little surprised by the simplicity of the analogy though. It seems strange that he has reduced it to one where there is no objective value at all. As an equity at the first level is still about how the company will perform in the future, no? And thus has an objective value.

Beauty has objective value as defined as such but I leave it to you to figure out.

Everything subjective is objective. I leave it to you to figure out how.
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