Investing

Starting in Stocks

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  • Jul 10th, 2012 10:44 am
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Deal Addict
Aug 28, 2010
3521 posts
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Halifax
Rhinox87 wrote:
Jul 4th, 2012 3:31 pm
Trick then would be to try and be at the highest std. dev. on the positive side.
And that would be a great trick, however plenty of studies and books such as A Random Walk Down Wall Street show that over the long term only an exceptionally small number of active traders can consistently remain on the positive side.

Reversion to the mean is an extremely powerful phenomenon. And the problem for active traders is that the mean minus their costs is so much less than they could have achieved by passively indexing.
Newbie
Jun 23, 2012
87 posts
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Calgary
FunSave22 wrote:
Jul 4th, 2012 4:13 pm
And that would be a great trick, however plenty of studies and books such as A Random Walk Down Wall Street show that over the long term only an exceptionally small number of active traders can consistently remain on the positive side.

Reversion to the mean is an extremely powerful phenomenon. And the problem for active traders is that the mean is so much less than they could have achieved by passively indexing.
Completely agree with you. Math also says that the tails thin out as we go away from the mean. But at the same time, why not aim for being on the +ve end of the tail, being the very best. (of course a whole another story whether you get there or not)
Secondly, at least in my case, this is the best time that I could aim to be the very best and try and actively invest for myself even though it might inherently be a bit more risky. Once I have real responsibilities, I could always go back to boring index funds/mutual funds if active investing didn't work out or I have no time for it.
Deal Addict
Aug 28, 2010
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Halifax
Rhinox87 wrote:
Jul 4th, 2012 4:25 pm
But at the same time, why not aim for being on the +ve end of the tail, being the very best. (of course a whole another story whether you get there or not)
Because you are likely to underperform. And the amount you underperform by will compound for the rest of your life.

It's a negative expectation bet (in comparison to indexing). I see no reason to take the bet.
Deal Fanatic
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Jun 19, 2009
5717 posts
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Scarborough
FunSave22 wrote:
Jul 4th, 2012 4:57 pm
Because you are likely to underperform. And the amount you underperform by will compound for the rest of your life.

It's a negative expectation bet (in comparison to indexing). I see no reason to take the bet.
That's the entire philosophy towards indexing, and it's one I believe in highly. Sort of pessimistic but I'd rather have a higher chance of stable returns than gamble it in active investing.
Deal Addict
Nov 26, 2005
3085 posts
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Vancouver
SkimGuy wrote:
Jul 4th, 2012 7:53 pm
That's the entire philosophy towards indexing, and it's one I believe in highly. Sort of pessimistic but I'd rather have a higher chance of stable returns than gamble it in active investing.
problem of this is that index itself is moving down for a long long time. (ie Japan)
passive = loss
be active = have chance to gain
Deal Addict
Nov 26, 2005
3085 posts
249 upvotes
Vancouver
Rhinox87 wrote:
Jul 4th, 2012 4:25 pm
Completely agree with you. Math also says that the tails thin out as we go away from the mean. But at the same time, why not aim for being on the +ve end of the tail, being the very best. (of course a whole another story whether you get there or not)
Secondly, at least in my case, this is the best time that I could aim to be the very best and try and actively invest for myself even though it might inherently be a bit more risky. Once I have real responsibilities, I could always go back to boring index funds/mutual funds if active investing didn't work out or I have no time for it.
butter stay in bond market if one want to take less risk. for past 10 years it outperform equity by a great margin and with less risks.

see how the elites rig LI(E)BOR? being passive in stock market has no chance to gain.
Newbie
Jun 23, 2012
87 posts
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Calgary
FunSave22 wrote:
Jul 4th, 2012 4:57 pm
Because you are likely to underperform. And the amount you underperform by will compound for the rest of your life.

It's a negative expectation bet (in comparison to indexing). I see no reason to take the bet.
It's a negative expectation bet if you don't think you can outperform other 50% of traders/investors involved (Doesn't matter if your approach is technical or fundamental). What is the premise in indexing? stock markets always go up in the long run? since you're so fond of this model, does that also mean that you do time averaging rather than price averaging?
Newbie
Jun 23, 2012
87 posts
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Calgary
ccyk wrote:
Jul 4th, 2012 8:04 pm
butter stay in bond market if one want to take less risk. for past 10 years it outperform equity by a great margin and with less risks.

see how the elites rig LI(E)BOR? being passive in stock market has no chance to gain.
actually, bond markets might be near the end of their run, they follow a 30-ish year cycle.
Deal Addict
Oct 4, 2009
2494 posts
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Montreal
Rhinox87 wrote:
Jul 4th, 2012 11:27 pm
It's a negative expectation bet if you don't think you can outperform other 50% of traders/investors involved (Doesn't matter if your approach is technical or fundamental).
It's a negative expectation bet irrespective of the investor's confidence in his own ability.

It gets even worse when factoring in risk. Lots of company specific risks which are uncompensated due to being easily diversifiable(by using broad index products).
Newbie
Jun 23, 2012
87 posts
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Calgary
S5 wrote:
Jul 4th, 2012 11:46 pm
It's a negative expectation bet irrespective of the investor's confidence in his own ability.

It gets even worse when factoring in risk. Lots of company specific risks which are uncompensated due to being easily diversifiable(by using broad index products).
it would be negative expectation bet if you assume chances of winning are less than 50%. What is the reason for such assumption?

Company specific risks are to a stock as downtrend in commodities is to TSX or debt crisis to european indices. So, how is it really that different?
Deal Addict
Aug 28, 2010
3521 posts
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Halifax
Rhinox87 wrote:
Jul 4th, 2012 11:27 pm
It's a negative expectation bet if you don't think you can outperform other 50% of traders/investors involved (Doesn't matter if your approach is technical or fundamental). What is the premise in indexing? stock markets always go up in the long run? since you're so fond of this model, does that also mean that you do time averaging rather than price averaging?
I'm working on the assumption that break even is matching the returns of an passive investor. Active investors have higher costs than passive investors.

This means on a before cost basis, active investors need to do better than the mean in order to break even. Being forced to do better than the mean makes this a negative expectation bet.
Deal Addict
Oct 4, 2009
2494 posts
1286 upvotes
Montreal
Rhinox87 wrote:
Jul 5th, 2012 12:00 am
it would be negative expectation bet if you assume chances of winning are less than 50%. What is the reason for such assumption?
See FS22's reply above.
Company specific risks are to a stock as downtrend in commodities is to TSX or debt crisis to european indices. So, how is it really that different?
Nope. Those macro factors will also affect individual stocks, afterall what is an index but an assortment of individual stocks? Uncompensated company specific risk remains and free variance(before higher trading fees and tax events inherant in active management) is not beneficial to investors.

If you really believe they are the same I suggest you read a good investment primer like A Random Walk Down Wall Street or The Four Pillars of Investing.
Member
May 2, 2012
291 posts
260 upvotes
Ottawa
FunSave22 wrote:
Jul 5th, 2012 5:29 am
I'm working on the assumption that break even is matching the returns of an passive investor. Active investors have higher costs than passive investors.

This means on a before cost basis, active investors need to do better than the mean in order to break even. Being forced to do better than the mean makes this a negative expectation bet.
Bingo.

Active traders I've listened to seemed to focus on absolute return ("I made 12% this year!") instead of return relative to the market.
IOW, "I made 12% this year" isn't impressive when the market returned 15%.
Deal Addict
Dec 11, 2007
1826 posts
375 upvotes
Markham
active trader, active investor, and passive investor mean different things to me
maybe people can elaborate what they really mean by each.

i guess i consider myself somewhere between active investor and passive investor. i probably make no more than 3-4 trades per quarter, so that doesnt seem that active, but i always thought of passive investing as index ETFs and funds, which i'm not doing either.
Newbie
Jun 23, 2012
87 posts
9 upvotes
Calgary
FunSave22 wrote:
Jul 5th, 2012 5:29 am
I'm working on the assumption that break even is matching the returns of an passive investor. Active investors have higher costs than passive investors.

This means on a before cost basis, active investors need to do better than the mean in order to break even. Being forced to do better than the mean makes this a negative expectation bet.
Agreed the math works. But I wonder if there is a more detailed study out there that shows the mean return of all traders/investors vs. a histogram of mean return plotted vs. level of experience that a trader/investors possesses. My inclination is that with some initial experience the returns would indeed get better.

And the math would always work out in case of passive investors, because comparing mean returns is a zero sum game (if one traders wins, another one loses loses to keep the mean return same as the index). So at the end of the day, if you wish to be a +ve statistic, you gotta beat someone to be there.

I'm in the camp that with effort, experience and proper risk management the average return could be beaten. Books such as How to make money in stocks, market wizards and number of others show just that. Its a whole another story if not enough time could be dedicated to pursue this and in that case passive investing makes much more sense. But to generalize and say that market can't be beaten would be wrong in my books as people have done it time and again, for a consistent period of time as well.

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