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Are You Trading or Gambling?

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Re: Are You Trading or Gambling?

#131

Post by brownbat »

ramblerman wrote: post #66
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…

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.

This is a really important puzzle. In other terms, basically the efficient markets hypothesis vs, well, a week of GameStop prices.

At certain extremes, a stock price is clearly objective.

If the company is bankrupt and wiping all stock, that's objective. If the company does so well the shareholders demand an immense dividend or buyback, that's objective. Those are the fixed points where stock price is set to money in hand.

Are the swings in the market just irrational participants between those extremes?

We could imagine purely objective superintelligent AI dominating a market, investing only to those "true" values. Such AIs might determine p(bankruptcy) and p(payout), knowing those are the "true" outcomes of the prop bet, and set expected price as the ratio of those two probabilities.

But both those p()s are vanishingly small for most companies, and infinite precision will be impossible. Even if you were nearly omniscient about all current factors within a company, the slightest possible change in either probability could swing the ratio in dramatic ways.

(Add on to that the graveyard of companies that performed well, got fat, and failed to adapt... current performance is somewhat but not fully predictive of longevity.)

So basically, what if EMH is true, but stock pricing is a debate at an arbitrary level of precision, to make it close to meaningless in short time windows?

I'm not an expert so I'm sure professionals or academics would roll their eyes and offer something even more explanatory, but that's my best hunch at resolving this tension so far.

(The upshot of this theory is that it seems to validate strategies that help you zoom way out: low fees, broad diversified indexes, long time windows... those are the real value trades.)

Re: Are You Trading or Gambling?

#132

Post by kqr »

YokoZar wrote: post #26
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…

> 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…

Exemplified in a competition in -- I think -- The New York Times: readers were instructed to guess a number between 1 and 100, and were told the winning guess would be the one closest to 2/3 of the average guess.

Re: Are You Trading or Gambling?

#133

Post by Raidion »

ab111111111 wrote: post #104

"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…

I (and I think a lot of poker players) would disagree.

Everything in life involves some sort of risk, but doesn't mean it's gambling. Gambling is defined exactly by those two properties. You could die driving to the store, but the odds are tiny and the benefits are huge. Driving to the store isn't gambling. Are casinos gambling when they let you play blackjack? No, the bets are +EV, even those they are only a few % different than the player odds.

You say poker players are gambling and then say gambling is taking a high risk bet. Good poker players make positive expected value bets, and have correct bet sizing (via Kelly Criterion) that means they will be able to survive variance and win.

Re: Are You Trading or Gambling?

#135

Post by WJW »

sandworm101 wrote: post #125
DSingularity wrote: post #50

Earlier quoted context omitted.

GameStop price spiked because of a short squeeze. Short squeeze happened because hedgefunds over extended in their short positions. Do you think GameStop was shorted more than float because of games learned by cryptocurrency traders? That’s a stretch.

No. I think making decisions only on the basis of other players has driven gamestop. That is what a squeeze is. That play style, action only ever taken in relation to other players, is how cryptocurrency markets work.

Actions taken based on the actions of other players in the market without (much) regard to the underlying companies has been a factor in the wider markets for decades, if not centuries. See the entire field of technical analysis for example. It's hard to argue that the wider stock market is "not designed" for such speculation. GME had a bit of a wobble, but the wider stock market is absolutely fine. (Actually, GME itself is also still fine. The stock trades just fine and the company is still around)

Re: Are You Trading or Gambling?

#136

Post by Anon1096 »

auxym wrote: post #123
bidirectional wrote: post #87

Earlier quoted context omitted.

That's really not true. Most HFT firms are running strategies which are completely unrelated to anything a day trader would do, and most of the time they're helping you by being market makers rather than competing with you. If what you said was true, no bank or hedge fund would run a trading desk. HFT captures just a slice of overall trading profits.

I'd argue that the reason why HFTs don't do day trading strategies, is because it's not profitable in the long run (ie, negative expected value). Which backs GPs point.

Hedge funds engage in day trading, and there's many successful hedge funds. So the expected value can be positive if you're sufficiently skilled.

Re: Are You Trading or Gambling?

#137

Post by rjbwork »

criticaljudge wrote: post #52
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…

I think you can still buy some stock with the intention of collecting the dividends or hoping for the stock's value to grow over time. There are simple calculations like Price/Earnings ratio that are usually published with every stock, that can help to see if it is a "gambling stock". You will of course hear all sorts of opinions about the stock market, including hardcore socialists who believe it is the root of all…

From a socialist (especially labor theory of value) perspective, you're buying and selling people's future labor. Socialists tend to think that the workers should get all of their labor. Obviously "root of all evil" is somewhat hyperbolic, but based on even passing knowledge of socialism, it is easy to see why a socialist might consider it to be an evil game.

Per your previous sentences though, a common refrain on /r/WSB is "Sir, this is a casino".

Re: Are You Trading or Gambling?

#138

Post by hgjnhikn »

Raidion wrote: post #133
ab111111111 wrote: post #104

"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…

I (and I think a lot of poker players) would disagree. Everything in life involves some sort of risk, but doesn't mean it's gambling. Gambling is defined exactly by those two properties. You could die driving to the store, but the odds are tiny and the benefits are huge. Driving to the store isn't gambling. Are casinos gambling when they let you play blackjack? No, the bets are +EV, even those they are only a few % d…

Bet sizing in poker is not determined by the Kelly criterion, it's determined by maximum expected value with at most a tiny penalty for high risk.

Where you could in theory apply the Kelly criterion is in selecting which stakes to play at. But in practice it seems more chosen through rules of thumb / common sense / feeling than an actual application of the Kelly criterion.

Re: Are You Trading or Gambling?

#139

Post by dasil003 »

imutemyteam wrote: post #96
dfgdghdf wrote: post #69

Earlier quoted context omitted.

Another way of describing the "game perspective" is simply: "a stock is worth what someone else will pay for it". This sounds obvious, but the implication is that the stock price has no direct connection to how a company performs.

and not just that, it is literally an information game. You hear that the company's latest car model failed after seeing the quarterly figures. Obviously, the stock price will go down? Wrong, the market already knew that the car model failed, and the current price is already adjusted for that. Stock market trading is only worth it if you have an information advantage. And obviously it is the one with the most capital…

Yes but what information is important enough to move the stock price? I agree it’s foolish for individuals to try to compete with professionals, especially on a short-term window. For longer-term investing I believe the playing field is more level because once you go 5+ years out no one really has an information advantage and a huge proportion of traders aren’t even thinking on that horizon.

Re: Are You Trading or Gambling?

#140

Post by greggyb »

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

Sure it does. Any investment with an expected return of <1% immediately flips from positive value to negative value for an investor.
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