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Trading Is Hazardous to Your Wealth [pdf] (2000)

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Re: Trading Is Hazardous to Your Wealth [pdf] (2000)

#51

Post by grafs50 »

jaredtn wrote: post #31
lend000 wrote: post #26

If markets were truly random, you might expect 50% of day traders to lose money, not 90%. Of course, markets are not random and most untrained humans have emotional biases that actively optimize for losing money in markets. This is likely a controversial opinion: 90% of the time, someone who wants to break out of the "rat race" or achieve wealth for some future vision should go the startup route, or if the wealth par…

Two counterarguments: 1) Trading fees. If the house takes a cut of 0.1% on every transaction, then on average those who trade more lose more money. 2) Risk/reward tradeoff. If you buy deep out-of-the-money options, you might have a 5% chance of profitability, but expected return of $0 (neither positive nor negative). 95% of the time you lose $X, and 5% of the time you make $19X. If traders are pursuing riskier strate…

Also, the average at-home trader probably doesn't sell at a random point in time. They are probably more likely to sell after a loss.

Re: Trading Is Hazardous to Your Wealth [pdf] (2000)

#52

Post by tripletao »

alexandercrohde wrote: post #14

It's my understanding that, if commissions are free (e.g. Robinhood) then on average, any trading strategy is going to perform comparable to the market average. If you can find any reliably bad strategy (in a fee-less market), then you have necessarily found an outperforming strategy that is the opposite.

First, that's true-ish in an expected value sense, not a Sharpe ratio sense. Even then, it's true only neglecting bid-ask spread (if you take liquidity) or adverse selection (otherwise). But the big effect is behavioral, that for the average person, if you can stomach actually implementing a strategy with your own money then that increases the chance it's a loser.

Re: Trading Is Hazardous to Your Wealth [pdf] (2000)

#53

Post by esotericn »

Can someone explain to me why people keep referring to average return as some sort of magical answer to the question? The median person makes the median income, that doesn't mean that trying to get a good job is pointless.

By definition in order for you to make more than the market, someone else has to make less than the market.

Assuming that knowledge has superlinear returns (I consider this to be obvious without proof required), of course less than 50% of participants will 'win' - those at the bottom are totally useless and burning money, whilst those at the top are quite skilled indeed.

It's fair to say that one should not expect to be in that upper echelon, but I don't think it's reasonable to state 'most people lose' and just leave it at that, it's blindingly obvious that most people lose, it would be impossible for them to not.

(Adjusted for balances - a guy with 20 billion quid can lose 1 pound each to 7 billion market participants and in that case 'almost everyone wins more than the market')

Re: Trading Is Hazardous to Your Wealth [pdf] (2000)

#54

Post by TuringNYC »

WalterBright wrote: post #8
encoderer wrote: post #5

> Trading costs are high. The average round-trip trade in excess of $1,000 costs three percent in commissions and one percent in bid-ask spread. A lot has changed in 20 years. The conclusion may still be the same, but spreads are much tighter (thanks in part to HFT) and trade commissions no longer exist.

Trading also subjects you to short term capital gains tax rates, as well as losing the effects of compounding.

>> Trading also subjects you to short term capital gains tax rates, as well as losing the effects of compounding.

And judging from the rest of the comments, sounds like there will be lots of short term capital losses also to offset the gains. Also sounds like having lots of taxable gains might be a pretty good scenario here!

Re: Trading Is Hazardous to Your Wealth [pdf] (2000)

#55

Post by chrischattin »

lend000 wrote: post #26

If markets were truly random, you might expect 50% of day traders to lose money, not 90%. Of course, markets are not random and most untrained humans have emotional biases that actively optimize for losing money in markets. This is likely a controversial opinion: 90% of the time, someone who wants to break out of the "rat race" or achieve wealth for some future vision should go the startup route, or if the wealth par…

This is absolutely right. I'm handily beating the market with an automated strategy I designed to the point I've all but shut down my startup/programming consulting business. What the system trades, and what I understand intellectually is the right thing to do, is often very hard to stomach emotionally.

Re: Trading Is Hazardous to Your Wealth [pdf] (2000)

#57

Post by TuringNYC »

hash872 wrote: post #46

Not in any way defending day trading, but I think it's interesting that it's become such accepted wisdom about how bad it is- here on a website dedicated to startups. 90% of day traders lose money, what are the odds for startup founders? Probably more than 90% fail, yeah? Imagine if, within the next 20 years, it becomes normal & accepted wisdom that joining a startup and taking their basically worthless 'equity' is m…

Not really a fair comparison.

Stock Market: you have access to the cap table, debt, overhang, etc.

Startup Equity: Unknown denominator. Unknown multipliers.

Stock Market: you can sell almost any time (unless you're trading penny stocks, etc.)

Startup Equity: you wait for a liquidity event, or hope your company is large enough to have an active secondary market.

Stock Market: you can buy/sell at any time

Startup Equity: you have the privilege of exercising an option into IL-liquid holding that you pay for now (sometimes forced to if you leave the company) but have little idea of the future value of.

To be fair, i'm working at a startup, I left a public company to do so. I'm here because I have huge impact on my product, I'm learning more, have more impact at the company level, low BS, low regulatory strangle, dynamic team, etc. I think it is rare to have positive expected value on startup equity unless 1. You are the founder or 2. It is a pre-IPO company. Your odds are probably better buying out-of-money NASDAQ Compsite options.

Re: Trading Is Hazardous to Your Wealth [pdf] (2000)

#58

Post by starpilot »

lend000 wrote: post #26

If markets were truly random, you might expect 50% of day traders to lose money, not 90%. Of course, markets are not random and most untrained humans have emotional biases that actively optimize for losing money in markets. This is likely a controversial opinion: 90% of the time, someone who wants to break out of the "rat race" or achieve wealth for some future vision should go the startup route, or if the wealth par…

If markets were truly random, I'd expect (approaching) 100% of day traders to lose money (or gain 0), because the expected value is 0. It's like betting on a coin flip. Since we're at 90%, it's pretty close.

Re: Trading Is Hazardous to Your Wealth [pdf] (2000)

#59

Post by Enginerrrd »

ashtonkem wrote: post #18
WalterBright wrote: post #10

I read an article a few years ago that compared the trading performance of various strategies. The number one performer was the "dead people" strategy, which happens when a person dies and his portfolio cannot be traded while the inheritance issues are sorted out. Next best is the broad index fund, and dead last was the average investor. Edit: Found the article! https://www.businessinsider.com/forgetful-investors-per…

What’s the difference between the dead person strategy and an index fund? The dead strategy involves whatever stocks they had selected at the time?

Even index funds have management fees. They're very low now, to the point of not mattering a lot, but it would still explain the ranking.

There's some other interesting effects with index funds too. Sometimes the price of ETF index funds gets out of whack with the actual holdings. When that happens, there are corrections that get brokered with well bank-rolled partners. This probably accounts for a bit of performance loss as well.

Re: Trading Is Hazardous to Your Wealth [pdf] (2000)

#60

Post by im3w1l »

H8crilA wrote: post #32
lend000 wrote: post #26

If markets were truly random, you might expect 50% of day traders to lose money, not 90%. Of course, markets are not random and most untrained humans have emotional biases that actively optimize for losing money in markets. This is likely a controversial opinion: 90% of the time, someone who wants to break out of the "rat race" or achieve wealth for some future vision should go the startup route, or if the wealth par…

This is not why the 90/50 contrast exists. It exist due to "absorption barriers", due to the ergodicity of the process - betting too big and hitting "uncle points". It's a bias present in most people, especially otherwise intelligent people: not understanding that there is a huge difference between expected value and ergodic properties. Between expected returns and risk. Just look up what VaR is, the concept is ridic…

Don't underestimate how many people are on the brink of suicide anyway, and where a 1/6 chance of the good life seems like a good deal. Oh wait 5/6. Well that just makes it even better.
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