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Did anybody stop to notice the date of the article? I'm confused by the conversation herein. I thought this was posted as a sort of mockery of the author. After-all, if you put your money into an index right when this guy told you to, you would have lost your shirt. If you had a while until retirement, that wouldn't be a big deal, since it would now be back along with more, but what about the folks moving their IRA o…
Regarding "Don't beat the market", Warren Buffet says "The game is really easy when your opponent decides not to play". Unfortunately, giving up has a lot of appeal: It means it's not your fault you didn't beat the market. It lets people say the game is rigged and take comfort. How many times have you seen buying company stock compared to gambling? Even though, on its face this comparison is ludicrous. (Especially he…
The reality is that the professionals have better tools. It's not just gambling, it's gambling against someone that can see the cards. If there is some method to turn $1 into $2 then there is a whole sea of people who are better and smarter than me who will keep doing it till that method no longer works.
Even for non-index managed funds there are often objectives or restrictions like cap size, geographical location, industry, time horizon, etc.
So while they might have better tools, they're not necessarily competing with you directly.
Regarding "Don't beat the market", Warren Buffet says "The game is really easy when your opponent decides not to play". Unfortunately, giving up has a lot of appeal: It means it's not your fault you didn't beat the market. It lets people say the game is rigged and take comfort. How many times have you seen buying company stock compared to gambling? Even though, on its face this comparison is ludicrous. (Especially he…
It's risk-reward thing, akin to 90% of disaster insurance policyholders won't make claims, but when the hurricane happens, you're gonna be screwed because the premium of the insurance is not calculated by an actuary but by the market where if you're an overzealous option seller, will have underpriced such that you may not have enough capital to cover the cost.
If you want to read more about option selling, I highly recommend Malcom Gladwell's New Yorker piece http://gladwell.com/blowing-up/ or you can also learn the way I did, by trading and being humbled by the market.
P.S. Options came into fashion in the 60's, so I don't think Lincoln ever got into financial engineering with financing the Civil War...
Earlier quoted context omitted.
The whole point of the article is that retail investors investing in index funds almost always beat the professionals. Options have several characteristics that make them substantially riskier. Even selling covered calls is much trickier and riskier than investing in an index fund and likely to have poorer results.
They're not mutually exclusive. For best results, you should invest in an index fund and sell covered calls on it every month. Also, there's no "risk" created from a covered call. That's the 'covered' part. There is the possibility that you could "miss out" on an up move, but the trade off is the certainty that you will collect premium every month. This is something that can be tested, and has been studied, and I enc…
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>> Buying stock is a 50/50 bet. The price can either go up or down. Just because there are two possibilities does not mean they are equally distributed.
Go argue with Random Walk and Efficient Market theory. It's not a notion I just made up.
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There's ton of criticism on MPT. Would like to hear you on that ! Are they valid ? Should we use PMPT ?
The primary question is this: do we truly have models that can predict future asset correlations. In other words, are our assumptions about distribution of returns valid. Behavioral economics suggests that individuals react differently than mathematically predicted. Personally, I think the biggest problem with any ideal portfolio allocation tool are black swan events (Taleb).
Regarding "Don't beat the market", Warren Buffet says "The game is really easy when your opponent decides not to play". Unfortunately, giving up has a lot of appeal: It means it's not your fault you didn't beat the market. It lets people say the game is rigged and take comfort. How many times have you seen buying company stock compared to gambling? Even though, on its face this comparison is ludicrous. (Especially he…
The reality is that the professionals have better tools. It's not just gambling, it's gambling against someone that can see the cards. If there is some method to turn $1 into $2 then there is a whole sea of people who are better and smarter than me who will keep doing it till that method no longer works.
They may have better tools, but small investors have the advantage of being nimble.
If you're trading say, 10K per trade on large-cap stocks, you can have your entire trade executed within 10 seconds without moving the stock price (thanks to HFT, but that's another story). This makes trading on swings much easier for the small investor.
And there are plenty of tools available for the small investor, most brokers will give you access to them when you sign up for an account. Sure, you may not get streaming L2 quotes on a basic account, but you'll get all the company information you need and access to basic real-time quotes. If you want to get a little more sophisticated, you can use something like R to automate some of the information-gathering process, run models against historic data, or simply use it for very fancy charts (with every technical indicator known to mankind).
And, as has been mentioned, hedge funds, mutual funds, etc..., have different motives for trading. Sometimes they are hedging, sometimes diversifying, often they're very long term, etc... They're not always trading. Even HFT is mostly arbitrage. There's still plenty of room for small to medium traders to make money.
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>>Regarding "Don't beat the market", Warren Buffet says "The game is really easy when your opponent decides not to play". Except Warren Buffet himself is a huge proponent of low-cost index funds, and recommends them for the average person. You really can't use him as an example because he's at the extreme end of the spectrum: wealthy to the point where managing his wealth is his full-time job. He has decades of exper…
Or you could, uh, buy Berkshire Hathaway...
Even Warren Buffett has said multiple times that if one has the skill to evaluate companies than they should pick individual companies and not choose an index fund because they will do far better with picking individual stocks. The problem is the vast majority of people are not skilled in evaluating companies and that's why Warren Buffett suggests them to choose a low-cost index fund.
I've chosen the path of picking individual stocks and I've done very well with it. But I have a deep background in the many skills required to analyze companies. And also it takes a great deal of time to keep updated on the companies I follow.
I think the key to picking individual stocks is the ability to evaluate companies in both a financial/quantitative and qualitative manner. This is easier said than done. But by no means impossible. Even Warren Buffett has said multiple times that if one has the skill to evaluate companies than they should pick individual companies and not choose an index fund because they will do far better with picking individual st…
He spends most of his waking life analyzing about six medtech companies. That's right, only six. One might assume that he knows a few things about each company.
And yet, whenever he recommends buying or selling one of their stocks, he's wrong almost exactly 50% of the time. (I actually track his predictions.)
You might be good at picking individual stocks, but I don't think he is. And if he isn't, I don't think most people would be either--myself included. I'll stick to the index funds.