Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

Are You Trading or Gambling?

investinglessons.substack.com

Post reply on HN
Print view View original

371–380 of 419 posts

Re: Are You Trading or Gambling?

#371

Post by kqr »

RhodoGSA wrote: post #269
gen220 wrote: post #105

Earlier quoted context omitted.

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…

I've seen this sentiment alot and i believe it's mostly right but it depends on who you are. There is no 'Best investment Strategy' for everyone. Should a 20-something invest all his savings into crypto? Sure. Should a 45 year old with kids? hell no. If the 20-something losses all their savings, that sucks. If a 45 year old losses all their savings they have people to provide for. Which doesn't just suck, it's detrim…

But there is a best investment strategy: the one that maximises growth.

A constant-fraction rebalanced portfolio has nothing to do with avoiding loss. It's purely about maximising growth. Such a portfolio, in the long run, outperforms all individual assets it is constructed from.

I agree with your general sentiment. My reasoning to get there is different:

I don't, for example, think anyone should invest all their capital into a risky asset. Not because it might crash, but because it performs poorly compared to the best investment (which is a balance weighted toward safe assets.)

Re: Are You Trading or Gambling?

#372

Post by kqr »

un-devmox wrote: post #350
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…

Insurance isn't a bet. It's a hedge. The bet is, you're not gonna wreck your car, or burn down your house. The gamble, in your scenario is not getting insurance.

Insurance is precisely a bet that you will burn down your house. It is also a hedge specifically because it is a bet against a desirable outcome. (Either you lose the bet but get the desirable outcome, or you don't get the desirable outcome but at least you win the bet.)

Re: Are You Trading or Gambling?

#373

Post by ubercow13 »

DSingularity wrote: post #223
BasedInfra wrote: post #59

Earlier quoted context omitted.

Front running is illegal. Its payment for order flow which is earning off the spread while also keep it tight and liquidity in the market.

So... basically front running ?? That’s what it seems like you are describing. They make money when they manage to get ahead and provide the liquidity needed to fill the orders. What am I missing?

So you would rather your liquidity was provided by someone slower and more expensive?

Re: Are You Trading or Gambling?

#374

Post by kqr »

xenocyon wrote: post #307
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…

I agree that expected value (EV) is not necessarily a good metric for personal financial decisions. In fact, this applies both to EVs greater than and less than 1. As you point out, insurance is a good example of a Another example: lottery tickets in the occasional case where the EV>1. This is supposed to, for instance, lead a rational economist to buy a lottery ticket (or many lottery tickets!) when the Powerball ja…

However, if you compute EV as the geometric mean of outcomes, instead of the arithmetic mean, it works again. (This is mathematically equivalent to the log utility you allude to.)

This is the right way to think of repeated bets (rather than in isolation) and Bernoulli's 1734 paper on it is a very readable intro to thinking in terms of the Kelly criterion.

Re: Are You Trading or Gambling?

#375

Post by kqr »

ak39 wrote: post #363
kqr wrote: post #132

Earlier quoted context omitted.

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.

What was the result?

If I remember correctly, somewhere in the range 17--23.

The way one should have thought of it, with hindsight, is that there are going to be several groups of people:

- those who don't understand the problem and just guess a number between 1 and 100,

- those who only reason to one degree, and guess 33,

- those who only reason to two degrees (ah but if everyone else guesses 33 I should aim for two thirds of that!)

- those who reason to initiate degree and guess 0

The real competition is guessing the proportions of these groups.

Re: Are You Trading or Gambling?

#376

Post by fakedang »

jandrewrogers wrote: post #310
fakedang wrote: post #284

Earlier quoted context omitted.

P/E has become a rubbish metric now, because there's so much money in the market thanks to QE. Most of the money in stocks now is money that would have gone into commodity trading and bonds, etc. The former's prices have stabilized or declined, leading to really poor opportunities, while zero interest rates and neg rates battered the market of the latter. Hence all that money has entered the stock market, which is wh…

It isn't so much that P/E is rubbish but that its utility as a proxy metric assumes approximately flat revenue growth. This assumption is no longer true for a significant percentage of the largest companies, many of which are demonstrating large non-zero revenue growth rates, both positive and negative. If you are looking at companies with high revenue growth, there are other metrics used to determine if they are "ch…

> The problem is that many investors apply metrics, like P/E or book value, blindly without understanding the assumptions that must be true for the metric to be a meaningful measure of value. It is even more complicated inasmuch as some companies fall into an ambiguous gray area when it comes to appropriate valuation metrics (I'd argue Apple is one such company).

This is obviously the core of the issue. But you'd be surprised at how often it is that these concepts surrounding P/E are parrotted constantly at many leading financial firms and schools.

Re: Are You Trading or Gambling?

#377

Post by kqr »

dasil003 wrote: post #139
imutemyteam wrote: post #96

Earlier quoted context omitted.

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.

The information flows are also incredibly complex and self-reinforcing with all sorts of impenetrable feedback loops.

Low wheat yield one year can cause reverberations throughout the world for many years to come. These can affect strategic decisions by businesses, which then affect strategic decisions among their suppliers, and so on.

Eventually the effects of weather patterns die out, but not before they have (perhaps almost imperceptibly) affected every business around the world, perhaps many decades after the initial event.

This, anyway, is how Mandelbrot speculated the autoregression, correlation, and long-term dependence of the markets might arise.

Trying to figure out the effects of an event in that world beyond the simplest, first-order ones is futile, no matter your resources.

Re: Are You Trading or Gambling?

#378

Post by tim333 »

dosenbrot wrote: post #329
orangeoxidation wrote: post #309

Earlier quoted context omitted.

> money With built in and inevitable deflation. Bitcoin could never replace a national currency. With transaction times in the tens of minutes and with a maximal global transaction rate of 5-10 per second. The Blockchain couldn't replace the banking system of single mid-sized town. It's not money. It's at best "digital gold", but more realistically it's just a ponzi scheme.

> With built in and inevitable deflation. Why is everyone thinking deflation is a bad thing? "Oh no, how horrible, my money isn't loosing value over time so I dont't have to buy things I don't need and can start to save money without loosing value"

They are not really distinguishing between deflation in a national currency that people's wages and debts are denominated in which is a problem, and bitcoin going up which isn't really.

No one's taking out a bitcoin mortgage to buy their house with.

Re: Are You Trading or Gambling?

#379

Post by atleta »

benibela wrote: post #332
jw1224 wrote: post #211

Earlier quoted context omitted.

I’m a terrible trader, and had no shame in admitting it. The moment I saw red, I panicked and sold. If I had open orders on the market, I couldn’t concentrate on anything else. I found trading to be all-consuming, exhausting, and completely demoralising. But I also couldn’t bear to just let my hard-earned savings sit there, wasting away. A cup of coffee cost more than I was earning in annual interest! About 3 months…

Are you going to make it open-source? I need something like that. I started trading this month, and the first thing I did was putting $1000 on AMC shares which then lost half their value :/

If a lot of people will start running it, it will lose profitability (assuming it is profitable now). The same software acting on the same set of signals means the signals will be cleared pretty quickly.

Re: Are You Trading or Gambling?

#380

Post by benibela »

atleta wrote: post #379
benibela wrote: post #332

Earlier quoted context omitted.

Are you going to make it open-source? I need something like that. I started trading this month, and the first thing I did was putting $1000 on AMC shares which then lost half their value :/

If a lot of people will start running it, it will lose profitability (assuming it is profitable now). The same software acting on the same set of signals means the signals will be cleared pretty quickly.

This guy said TA has no meaning, it only works because other people think it works: https://news.ycombinator.com/item?id=26286655

In that sense, the more people would use the software, the more profitable it becomes.

The software thinks the price of some stock will increase, so it buys the stock. If more people use the software, more will buy the stock, so the price rise even faster

Post reply on HN