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Are You Trading or Gambling?

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Re: Are You Trading or Gambling?

#271

Post by spiralx »

catmanjan wrote: post #34
midasuni wrote: post #28

Earlier quoted context omitted.

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?

Financial transaction taxes have been introduced in any number of countries, the majority of which have ended up repealing them: the tax raised on transactions is outweighed by the loss of capital gains caused by a reduced number of transactions occurring. And in today's global financial system you could end up like Sweden, where introducing an FTT saw 80% of trading move to London within a year...

Re: Are You Trading or Gambling?

#272

Post by tshaddox »

paulgb wrote: post #173
olalonde wrote: post #171

Earlier quoted context omitted.

Wait until you hear about US dollars.

There are many differences between the two, but one of the more obvious ones is that nobody is running around claiming that US dollars are a good investment.

My bank offers savings accounts.

Re: Are You Trading or Gambling?

#273

Post by tshaddox »

rtheunissen wrote: post #188
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…

This is also how I've experienced primary elections in the US: people voting for who they think other people will vote for.

General elections too.

Re: Are You Trading or Gambling?

#274

Post by opportune »

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…

This is, IMO, the hardest part about the stock market to explain to new people.

I work with a guy who otherwise seems smart but who just can't wrap his head around information being priced in. His ideas are things like buy retailers right before Christmas and sell soon after, or to buy stocks in cyclical industries because they have low P/Es (at the peak of their cycle). And he is quite confused when market movements fail to match official earnings results.

The people with all the money hire the most knowledgeable/experienced people and invest in the best technology, which end up making a retail investor's ideas of why to invest in stocks look pea-brained. That doesn't mean (IMO) investing in the stock market is entirely a fool's errand for those without that info, but it does mean you should probably educate yourself (not necessarily with books - would a book enumerate all the different ways information can be "priced in"?) as much as possible and, most importantly, stay away from things you don't understand.

There is also a considerable amount of stock market results which you can ascribe to things that an AI-based trading systems, or purely fundamentals-based trading system, couldn't capture. For example if your thesis was that the Internet would grow to encompass a large part of the economy, you would have made a killing investing in promising Internet companies (post dot-com bubble :)) with a long term view and completely ignoring anything like fundamentals. But I suppose that is the difference between investing and trading.

Re: Are You Trading or Gambling?

#275

Post by Galanwe »

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…

This all looks like some kind of simple analogy to explain the factor model.

The overall idea is that the price of a stock is explained by information (price, earnings, estimates, whatever...).

If you then try to reduce the dimensions of this information, you could find various underlying drivers of the stock price.

One could do that with a PCA, but the sheer amount of data, potential high collinearity between them, and difficulty of then making sense of the resulting coefficients is not practical. So traditionally the drivers are explained by carefully crafted factors defined by economists, and it works rather well.

Some of these factors exist since a long time, and have proven to be persistent across decades.

Interestingly, most of these factors are not tied to companies themselves (idiosyncratic) but rather on whole groups of stocks.

Beta, country, sector, explain the vast majority of stock price movements.

Your first quote seems to sort of describe fundamental factors (quality, value). The underlying idea being that fundamental indicators of the company (price of the stock versus amount of assets, versus earnings, etc), while compared one against each other, should tell you which stocks will perform better than others. These factors have proven to be less and less predictive in the last 20 years, with "value" even being notoriously a "bad bet". It's cyclic though, and we could expect (and it starts to be the case since some month now) a come back.

Your second quote seems to describe more technical factors, such as momentum/reversal. The main idea being that there is inertia and correction in the way stock returns fluctuate. If a stock performs well, it will continue to do so, until some correction happens and it will revert to its short term mean, then it will restart, etc. Funds focused on these strategies are often labeled "CTAs" or "trend followers".

The last part of the quote seems to describe well more modern factors, such as those found in "behavioral finance". The underlying idea being that actors of the stock market are humans, and as such are not fully rational and exhibit bias. If you understand these biases, you can benefit from them.

Re: Are You Trading or Gambling?

#276

Post by SuoDuanDao »

kortilla wrote: post #204
olalonde wrote: post #197

Earlier quoted context omitted.

> There are many ways of transferring money across the internet. Only through a centralized intermediary (e.g. PayPal), which may block the transfer, freeze funds, deny access, go bankrupt, etc. Bitcoin allows direct peer-to-peer money transfers (a bit like cash but digital). > Why is Bitcoin special if that’s the reason for its value? Personally, I feel that the censorship resistant and pseudonymous p2p money transf…

> Its rules are pretty much set in stone. Not quite. The miners collectively decide what rules to follow. A majority of them forming a cartel to collectively skip certifying certain transactions is completely in the realm of what’s allowed by the network.

Yes. But if the minority gets wind of that, it could create its own hard fork and keep out known members of the cartel in the future. Something like the opposite happened with Ethereum in response to the DAO hack, when the majority rolled back a transfer of ethereum by a minority of wallets that followed the rules as written but were against the intent of the rules.

Crypto is often sold as 'anarchy with rules' but it's not really that. Nor is it oligarchy as is the case with fiat and central banks. Crypto is in fact democratic. I wonder whether that's why it's unpopular in certain circles.

Re: Are You Trading or Gambling?

#277

Post by mitchdoogle »

toss1 wrote: post #174
minitoar wrote: post #154

Earlier quoted context omitted.

I think I agree with your sentiment, but saying that nothing is as good as Bitcoin for sending money over the internet, and that’s why it has value, is just really not a compelling argument.

Yup. And that key feature of "sending money over the internet" thing hasn't worked out very well so far I've been in it, found the entire system wanting, and got out. May get in again to enjoy gamble in speculative bubbles, but as a technology, it is still in the early and massively-sucking and increasingly-sucking days. Like railroads in the 18th century, they utterly changed society, but most investors lost their s…

I know I'm just a single point of data, but I routinely buy things on the Internet with Bitcoin that cost $200-300 USD. I always set the fee to just under a dollar and have never had any issues with the transaction being confirmed within 20-30 minutes, including in the last few weeks.

Of course, paying with Bitcoin saves the seller about 3% of the final cost, and they need not worry about chargebacks, which saves them more money in the long run, so they offer a discount when crypto is used. It's a win-win for me and the seller.

Re: Are You Trading or Gambling?

#278

Post by dehrmann »

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 game perspective was the only model that really matched the marketplace

I agree, but I suspect the "company" and "stock" investors implicitly do, too. They invest with their strategy knowing that if they're right, they'll be rewarded by other investors demanding more of the stock, driving up the price. The main exception is dividend investors who just want their utility stock to keep paying the same dividend every quarter--that's a true "company perspective."

Re: Are You Trading or Gambling?

#279

Post by eloff »

PragmaticPulp wrote: post #124
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…

Anecdotally, a lot of the new stock and crypto investors on the internet this year hold no illusions that they’re investing. The pop-culture mindset is that the stock market is just gambling, so they might as well bet big with long shot companies and options. The common sentiments are “I’m only investing what I can afford to lose” and “but what if this is the next GameStop/Bitcoin?” They’re entering with a mindset th…

Would one expect any different from the instant gratification generation? It seems like safer, long term investments that require lots of patience are the opposite of what we've been trained for by the internet.

Lots of generalizations there, but if it's true that millennials have more difficulty embracing delayed gratification, which I think is likely, then a riskier more speculative investment strategy seems to naturally follow from that.

It might also be additionally influenced by record poor returns from safer types of investments.

To be clear, I'm allowed to pick on millennials because I am one, and I've been burned bad this last week on my speculative "investments". So it applies to me as well.

Re: Are You Trading or Gambling?

#280

Post by vardaro »

I am not sure why people are viewing gambling in a negative light here. Investing is absolutely gambling but that does not imply investing is a bad thing. The reality is that there is no such thing as reward without any risk, you need to willing to lose something to gain something else.

This is essential to option pricing, it is why low delta options are cheap and high delta options are expensive. A high delta option will have a high probability of success but will demand the investor to risk more on the position.

If there wasn’t a gambling aspect to capital markets, there would be zero liquidity as nobody would deliberately take the negative expected value side of the trade.

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