This is a great article that explains markets (not just the stock market really) in an easy to understand way.
The one thing I believe people should know about the stock market is: There are people with more capital, time, and knowledge than you who will consistently beat you. Picking individual investments is mostly a sucker's game.
Buying tech stocks and/or crypto in the last couple of years has been a consistent exception to this, but I worry that many of the people who made good money from those investments will now believe that they have some superior understanding that lets them consistently beat the market. But sooner or later they will find themselves in a similar situation as those who thought investing in Japanese Tech companies was a surefire way to beat the market 20-25 years ago.
So my advice to anyone who already got rich from their investments in the last couple of years: Congratulations! Now take that money, invest it in the most boring thing possible, and enjoy life.
To everyone who is trying to get rich quick now: Do your thing I guess, but be aware that you're gambling.
People keep telling me this, but I keep beating the market. It's been 20 years or so of applying very basic reasoning and getting ahead.
1. Commodities are bad long term bets because technology gets better. I remember people talking my ear off about peak oil and then the US turned into a net-exporter. Short term inelasticity, yes can sky rocket prices; but long term prices go down.
2. Physics based thinking. I knew electric cars were going to work because the math checked out.
3. Economics of scale works. Find companies that understand this and focus on it. When I saw Telsa focussing on a single car for a year I knew they would be a winner.
4. Software scales. People like to make money. Combine the two and its a real winner.
5. Sell when forward price to earnings after cash starts to look wonky. Which was 2007 and I think 2019. Covid and the direct stimulus kinda messed up the timing, but the market is still completely screwed. Either way, sell early and buy the crash.
Telsa, Apple, Shopify, Amazon, Google. Only really lost on Etsy (I can't believe how much they missed the opportunity to become a real platform).
Why bother investing in GM through a broad index fund if I know for sure Tesla will eat their lunch?
This isn't really get-rich-quick. This is looking at companies rationally and projecting where they will be in a year or two. And rationally speaking this market is out of wack and I wouldn't advise investing in even my favourite tech companies right now. I don't think this is Japanese Tech level of readjustment. I think there will be a -%50 S&P500 crash, maybe more, and then in 10 years Apple will be worth more than double what it is worth today. They have fundamentally better technology. Their software competency is below average, but their hardware, fit and finish, design, and cultural cache is world class and it is hard for me to imagine any scenario where they lose other than a US war with China.
> Software scales. People like to make money. Combine the two and its a real winner.
There were plenty of tech losers. You still had to pick the winners.
> Physics based thinking. I knew electric cars were going to work because the math checked out.
Electric cars were obvious, but Tesla was not an obvious play. In hindsight, it might seem so, but in the beginning it was far from clear that Tesla would dominate the space. Additionally, time will tell if Tesla's stock stays 8x higher than its pre-pandemic price.
> Sell when forward price to earnings after cash starts to look wonky. Which was 2007 and I think 2019.
This happened many more times than the two massive crashes. If you actually followed this advice, you'd probably be worse off than investing in the s&p - even if you did pick good stocks.
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As others have mentioned, beating the market with $1M invested is much easier than beating the market with $10B invested. Especially when your appetite for potentially losing money is much higher.
Let's naively assume that you actually can pick stocks. At $10Bn - you need to pick more stocks - otherwise you would drive up the price too much in buying that much of the stock - unless you only picked Apple and Google and MSFT and Amazon.
I've invested in GM and avoided investing in Tesla. Mostly just because I understand GM, their business and financials and stock price history makes sense to me. I do not understand the valuations on Tesla, and hadn't even long before COVID and the most recent run-up in value. Clearly I've missed out on massive earnings if I had invested in Tesla instead of GM (although GM's done decently lately).
To me looking at the stock pricing, Tesla looks like a software company where tremendous growth has been occurring and is expected to continue for some time. To some extent they are a software company, but that software so far has seemed to me to require quite an expensive set of hardware to be sold with it in order to get the software and continuing monthly/yearly/feature revenues sales. This has worked for Apple, so it's not unprecedented, but it'll be interesting to watch how long it can last.
SpaceX makes more sense to me with having high valuations relative to revenues, it's a services company. The service is getting things to space and now also providing internet access. Tesla doesn't look like a software or services company to me, at least not yet. But maybe I'm looking at it wrong?
> Physics based thinking. I knew electric cars were going to work because the math checked out
Does it mean that the price is going to go up? Suppose everybody thinks like you (I assume everybody does), the market price may reflect anticipated profits already and doesn't necessarily have to go up.
Also success of Tesla isn't the same thing as success of electric cars.
When I was completely new to investing I put my money into AAPL, TSLA, AMD and TSM based on my experiences with them. That portfolio would have done extremely well had I stuck with it.
I think the dogmatic "nobody can beat the markets" is hurting people who then think they may as well give up, and patently not true when you look at traders who beat the market year in and year out, and minimize their losses when they do lose.
> I think there will be a -%50 S&P500 crash, maybe more, and then in 10 years Apple will be worth more than double what it is worth today.
An important point here is that since nobody knows when this crash will happen or how long it will last or where the bottom will be, you should still keep investing in the companies you think are fundamentally strong and avoid trying to time the downturn.
In 1997 a friend who worked at Cisco told me to go all out on Iomega. He also advised me to invest in some 3D storage startup which well went nowhere. No matter how smart you are you just have to play percentages.
Even better consider the case of Cisco itself. It reached market cap of 500B around 2000 and despite being a solid company has not performed too well.
Thus it is quite conceivable that the inevitable market correction will bring the high flyers down.
That is Apple will still be extremely strong, Google might suffer a bit because of dropping ad spend.
Companies such as Shopify, Tesla will actually need to reach reasonable P/E ratios, not the insane ones now.
I would never argue with your success. And I do think you can pick solid companies and beat the market in the long run (mostly by avoiding the big losses).
But it’s not enough to pick winning industries. In every industry there are winners and losers. You have to pick winning industries and winning companies. And sometimes winners become losers. So there’s a timing aspect also.
EVs are going to succeed but I don’t think Tesla was ever a guaranteed success. And Tesla is not guaranteed to keep winning (though they have a great head start and very strong moat).
So how do you know if all of your reasoning hasn't been calculated into the price yet?
Maybe everybody knows Tesla is going to win out, therefore everybody wants it, and the price rises like crazy. And then the stock is way overpriced for what you get, and people like you still keep buying it.
There is a reason why Buffet needs to look into the numbers before deciding if something is a good buy or not. You buy underpriced, and sell overpriced. And you just cannot make that judgement without looking at the numbers.
There is another simple theory about your single stocks outperforming the index: smaller cap stocks generally outperform the index. As shown in this video, a monkey can pick stocks and outperform the index just because of this simple reason: https://www.youtube.com/watch?v=5_3Ra-Q6vK4.
> People keep telling me this, but I keep beating the market.
"Humans keep telling me it's hard to predict football games, but if you just squeeze your tentacles up and down enough you will get it right as I did"
-- Paul the Octopus, who predicted all world game results
There are millions of people trying to predict the market. Of course there will be people that did good, and these people (such as yourself) will all be convinced that they got it right for a reason.
But individual experiences mean nothing against the law of large numbers. You yourself have no way to know whether you're good or lucky, unless you show us an algorithm that consistently achieves the results you claim to enjoy.
Remember these simple facts:
- the less you trade, the further away you are from your real average predictive power. If the game is a coin toss and you play 2 times, there is a 25% chance that you get a 100% success rate, and go to HN to boast about how guessing a coin flip is easy. Try to keep that performance after 5000 games and it's an other story.
- Are you able to compute your idiosyncratic returns correctly? Can you show us that your portfolio returns, once residualized on sector, country and beta, are actually any better than a random pick?
- You pretty much only talk about good old common sense fundamental quality / value, which is far from being a major part of equity returns. You reasoning will work for one stock, and not for an other one. A sime value based strategy as you describe is vastly negative on a 20 year period - in absolute terms (not even compared to the market).
- You seem to have no understanding of diversification, and idiosyncratic risk. Companies can fail for an infinite amount of reasons. The less positions you have, the more sensible to "single company failure risk" you are exposed to. Very good companies, with solid earning and projections, did fail on the past, for reasons such as "top management scandal", "defective line of product", "banned from operations in a country", etc etc.
To anyone reading this comment, just remember that 90% of stocks returns do NOT come from the company itself. It comes from the drive of the market or sector as a whole. By investing in broad index funds you lower your specific risk, and get overall exposure to what drives the vast majority of the stock returns.
> Why bother investing in GM through a broad index fund if I know for sure Tesla will eat their lunch?
Because even bad stocks are an essential component of a balanced portfolio if they reduce overall portfolio beta (volatility).
The name of the game isn't pure gains, because the gains are not guaranteed. You want to make gains and hold onto them.
And no, you don't know for sure that Tesla will eat their lunch. You have a very high level of confidence that they will. So does the rest of the market, that's why Tesla is trading at a huge premium relative to its financial fundamentals. But this wasn't always the case, and there were more than a few times when Elon Musk brought Tesla to the brink of bankruptcy. If you were confident that Tesla was going to pull through, even back then, you either a) knew something the market didn't, b) were mistaken/wrong (but luck pulled through for you in the end), or c) you were reckless / irrational.
> 1. Commodities are bad long term bets because technology gets better. I remember people talking my ear off about peak oil and then the US turned into a net-exporter. Short term inelasticity, yes can sky rocket prices; but long term prices go down.
You can make money on things that go down as long as they are not too strongly correlated with other things, and you maintain a constant fraction portfolio. One of the search terms here is "volatility pumping", I believe.
Commodities are a stabilizer for portfolios… they let you take more risk in other parts of your portfolio because they are easily marketable, non-productive assets.
Equities on the other hand have unknown amounts and timing for cash flows. Hence people bid the value of stocks up, down, and all around.
> I think there will be a -%50 S&P500 crash, maybe more
And this is why I am going against the advice of the majority(?) and trying to time buying into the S&P 500. I am looking for another crash like the one around when COVID started. Am I wrong and should I also not try to time the market?
I bought GOOG in 2005 and TSLA in 2014. Similarly, I don't see why I would buy Facebook or GM as part of an index fund when their growth potential looks terrible when compared to TSLA and GOOG.
If I was 70 and couldn't afford a 5 year correction, things would be different
What's your thesis for why rules such as these haven't been discovered and automated out of existence by the legions of smart well capitalized investors?
> People keep telling me this, but I keep beating the market. It's been 20 years or so of applying very basic reasoning and getting ahead.
Remember, you don't have to beat those super smart well resourced AAA-grade investors. You just have to beat the average schmuck with some skin in the game.
> Buy S&P ETFs, most preferably by Vanguard, because they are a non-profit and thus have very low fees
Vanguard is certainly a for-profit organization [0]. What, I think you wanted to say, that many of the Vanguard funds are index funds that do not have exuberant management fees.
> Now, just wait, ideally 10+ years, before looking into your account again
That might not be the best idea because of escheat. Here's a story about someone who didn't check on their stocks for years and the state claimed them. https://www.npr.org/transcripts/799345159
- ETFs, Vanguard is a good choice for most. If you're older and might need a large percentage of the money fairly soon, consider getting some bonds as well.
- Don't try to time the market
- Don't think you're smart
The only personal difference is I prefer FTSE All World as it is diversified into over 4000 global stocks, while the S&P 500 is (obviously) 500 American stocks. That being said the S&P 500 has been outperforming the FTSE All World for a long time, and I certainly don't want to give anyone specific investment advice.
Historically speaking, I think this has been one of the best things an average person could do within the context of a stable, safe, free, and productive society, but I don't think this kind of generic advice is really persuasive in the different and more turbulent world that exists right now.
Additionally, because of many societal conditions, right now many people think they need to hit on a moonshot to have a good life. And given the direction that inflation and many other things seem to be headed, it's harder to argue that they're wrong. Slightly increasing your financial floor matters little if the floor is still dirt.
Why S&P 500 specifically? Is it just because they have the lowest fees you've found? There are many index funds all over the world to choose from. What if I could find a fund with with even lower fees than VTSAX somewhere? I often hear "don't pick stocks, just buy 'the index'" - but you're still picking an index, aren't you?
This is such a bad advice. Buying an index is what they want you to do. They want you to buy and hold until you retire. Do you not see the problem with that logic?
> I worry that many of the people who made good money from those investments will now believe that they have some superior understanding that lets them consistently beat the market
This x1000 I've seen plenty of friends of friends who probably had issues passing HS Algebra thinking they're "Daytraders" because they made some money off BTC or GME in the past few years and I just cringe so hard. My index funds consistently return ~20% a year lately. If you aren't even matching that you aren't a trader you're a sucker.
> Picking individual investments is mostly a sucker's game.
Kind of. What you have to remember is what game you’re playing. While financial firms can outspend and out-research you at an individual level, they can’t take the same risks you can or move as quickly as you can. If I decide I want to go all-in on some company I can just do that. Your friendly neighborhood hedge fund? Not so much.
Most people should buy index funds or similar, no change there, and even those who decide they want to pick stocks should mostly have a broad portfolio, but you can pick stocks if you want and you can be successful.
I agree - most people should buy low cost index funds but that is not enough - they have to space it out as monthly contributions over many years.
If you put all your money in at thr wrong moment, like say the Nasdaq in 99 then you waited 13 years just to break even.
But if you bought monthly you would have done very well because you averaged into the market.
The alternative is if you really understand valuations, diversification, risk and market psychology, like I do, then you can consistently beat the market. Most people cannot and most people you pay fees to do it on your behalf won't.
You could consider buying berkshire hathaway instead of a stock market index.... assuming the lead investors don't die too soon.
> There are people with more capital, time, and knowledge than you who will consistently beat you.
I think it's more than that. There are people with more capital etc. who specifically use that to take advantage of people like you. I don't just mean pump-and-dump kinds of stuff either. HFT exists to take advantage of the arbitrage opportunities created by traditional kinds of trading in aggregate (and sometimes to take advantage of other HFT bots) creating a kind of "friction" that is hard for less capitalized traders to overcome. The market is as much of a fight as a race, and it's really hard to win against the heavyweights unless you're one yourself.
> Picking individual investments is mostly a sucker's game.
Definitely true in the short term, for the reasons mentioned above. Still mostly true in the longer term. At least there's a chance that a sufficiently canny investor can pick a basket of stocks that will grow over time, but statistically it's almost certain that you'll fall behind the S&P index. Even the very best fund managers, with all of the resources at their disposal, rarely beat that more than a couple of years in a row.
>So my advice to anyone who already got rich from their investments in the last couple of years: Congratulations! Now take that money, invest it in the most boring thing possible, and enjoy life.
To everyone who is trying to get rich quick now: Do your thing I guess, but be aware that you're gambling.
That right there is the best advice. If you want to get rich quick, you're going to have to make some calculated bets with higher return and thus higher risk. However, if those bets work out and you do become rich, don't fool yourself into thinking you're some kind of super genius that can consistently beat the market.
This can be a hard lesson for people to learn (it took me a long time), because in most aspects of life success is more skill based. With investing, there is more decoupling between action and outcome due to randomness, and you have to always consider you may have made the right choice and lost, or you may have made the wrong choice and won. In the case of the latter, take your winnings and be happy, but don't delude yourself into thinking you made a good play. This is extremely hard, you have to be willing to put your ego aside and realize you actually made a mistake that made you a lot of money.
I think ordinary people with the right knowledge and foresight at the right time can beat the market in the short term. The trick is to be extremely patient until you have a reasonable level of confidence you have an edge in a bet with an asymmetrical return, and then take a position with conviction. I've done this a few times in my life, and the knowledge, timing, and luck all happened to work out for me. I've also had that feeling a few other times where things went south. Luckily for me the winners far exceeded the losers. However, I wouldn't con myself into believing I can consistently generate an edge. I simply made a small number of calculated bets when the stars all aligned for me. It's very possible the stars will never align for me again like that, which is why I've now moved most of my money into ETFs and other safe investments.
One way to spot someone who doesn't know what they're doing with investing and trading, is you never hear about their losses. You never hear about their net gains. You never hear them tell you the story of when they drunkenly made a really stupid leveraged stock pick that just happened to work out from pure luck. No, you hear all about the winners, all about how they knew for sure it would work out for all these reasons. You just see the overflowing ego that gambling has drummed up, rather than the intellectual honestly of someone who has sat back and grappled with the tough question, "did I make all this money because I'm smart, or am I just a dump and lucky ape?"
> That right there is the best advice. If you want to get rich quick, you're going to have to make some calculated bets with higher return and thus higher risk. However, if those bets work out and you do become rich, don't fool yourself into thinking you're some kind of super genius that can consistently beat the market.
Don't fool yourself into that, but as the Kelly criterion advises, do play harder with house money.
Isn't there some qualitative difference between financially focused decision making and domain focused decision making when it comes to investing vs. gambling (as you say)?
An expert in some particular field sees different opportunities and make strong educated guesses vs a trader who will react on financial metrics.
In a way, what's considered "tech" is successful innovation that hasn't been commoditized yet. Telecoms are not considered tech anymore, and so is large scale agriculture. In this view, investing in tech is a sustainable strategy. The sweet spot is somewhere between wild VC experimentation and commoditazation when the technology is clearly useful but the growth curve still have 10+ years to run.
> I worry that many of the people who made good money from those investments will now believe that they have some superior understanding that lets them consistently beat the market.
lmao god this feels so much like the mindset of so many tech people in general. They were right about one thing so naturally they're of course right about this next thing...
Why is this the top comment? It is just an opinion without much analysis.
Yes, there is gambling but there is also investing, knowing the difference is key.
>>So my advice to anyone who already got rich from their investments in the last couple of years: Congratulations! Now take that money, invest it in the most boring thing possible, and enjoy life.
>Taking on risk over the last few decades has paid off in spades.
There's two types of risk here: risk that is compensated by higher returns (eg. buying stocks rather than bonds) and risk that isn't compensated by higher returns (eg. buying OTM options rather than stocks). It's not really clear that higher than expected returns in the past decade or so for "tech stocks and/or crypto", mean that they have higher risk-adjusted returns in the next decade.
One interesting thing about "highest bid" and "lowest ask" prices is that they can sometimes move up and down for days without a transaction ever happening.
This can be observed in certain illiquid markets, e.g. for a specific bond of a company. In those cases, the "last trade price" is meaningless and it's very important to instead look at the bids and asks in the order book.
Why? Clearly, no one is actually willing to trade at those prices. Sometimes, one illogical price in illiquid markets drive the orderbook to illogical extremes. Without a transaction, all are meaningless.
Bids and asks are making bold predictions about the current value of an asset. If they are wrong then anyone can enter the market and make a profit. Bid/ask of 99.90/100.10 means that the true value of the asset is between 99.90 and 100.10, because if it was really worth $100.20 someone would come in and buy up all the offers through $100.19 (give or take a bit for risk management, fees, and minimum profit targets). Usually what happens though in these markets is that the bid/ask is $95/$105 and true value is something like $101 but no buyer wants to pay a $4 spread and no seller wants to pay a $6 spread, so no trades happen. The last price could be $90 from back when the asset was $90/$100 true value around $95 and someone really needed to get out and was willing to pay (or didn’t know).
But they _are_ willing to trade at those prices. The person who posted the highest bid is willing to buy at that price and the person who posted the lowest ask is willing to sell at that price. Both regardless of the last trade price.
The lack of "crossing" between those two doesn't mean no one is willing to trade.
The reason I said "it's important to look at the order book" is because otherwise you might enter a market order and expect to get something near the last trade price. Which you won't.
I do think the "correct price" is near the middle of the spread though. Because this sort of thing happens not just because of illiquidity, but also because everyone involved knows what the "correct" price is. (E.g. because bonds have very predictable cash flows.) There's no difference in opinion large enough to convince a trader to cross the spread.
You should probably get to know some critical aspects of markets too, this article just praises them. That is pretty much the norm, but I think it's a valuable educational endeavour to look at critiques of markets.
Fully agree, especially during current instability. I think that everyone got used to constant "it's about to crash" news but the volatility and uncertainty are visible in recent months. I don't remember when inflation numbers releases were that impactful.
The good coming out of this is the visibility of how strongly dependant cryptocoins are.
but... it does explain some of the most ubiquitous and fundamental problems of markets, like spreads and illiquidity? granted you could go on forever about an infite list of problems, eg that today so much trading happens in dark pools, so much stocks are owned by passive index etf managers who don't take an active role in ownership etc etc but for a rough summary I think this article explained some of the basics quite well
I guess considering this was taken from a course in economics I'm not surprised. They don't criticise markets there or look at critical theories at all.
I guess a few facts like markets are not always efficient, they are often irrational, there has never really been a "free market", its been distorted by governments and powerful agents... Corporations were the ones who created market regulation so that they wouldn't be subject to its vagaries.
One small inaccuracy is the claim that there is only one place for each stock. That has not been true for many years. In the US that was changed by https://en.wikipedia.org/wiki/Regulation_NMS . NASDAQ is the primary listing exchange for MSFT, which means they will hold the opening and closing auctions, but it can be traded on any equities exchange, NYSE, IEX, BATS, EDGE-A, EDGE-X, you name it. RegNMS also has rules that if there is a better price at another exchange, the order must be routed there. This establishes the "NBBO" - National Best Bid and Offer, so in a way there is always one best bid and one best ask, but it's an aggregate over all the exchanges.
But US markets have some special Reg-NMS rules that glue together things across exchanges. Being from Europe I'm not so familiar with it, but I understand it causes some interesting games to be played.
If you want to actually understand how the market works, there's a fair bit more reading to do.
Great point, and you understand the American stock market better than most Americans. This article was true about 20 years ago, but the author is completely wrong when he says this:
"A single market to trade. All stocks for Microsoft (MSFT), are traded on the NASDAQ exchange. All stocks for Ford (F) are on the NYSE."
MSFT and F both traded on 16 difference stock exchanges, not to mention countless "dark pools", each with their own book of bids and offers. But there's a national best bid-offer (NBBO) that all exchanges must respect, so it can behave like a single market. That's what Reg-NMS is about. The benefits of having several exchanges competing each other, while trying to retain the benefits of single market. This is also where HFT enters the picture with latency arbitrage and other trading strategies when prices on those markets get out of sync.
20 years ago, you could say that MSFT only trades on NASDAQ, but that hasn't been true since Reg NMS came into effect in 2005. Each stock has a primary listing market that controls things like halts and opening/closing auctions, but the stock can be traded on any exchange, each with its own dynamics.
This is a nice article but a bit beginnerish and gets facts wrong partly because the author seems a bit vague on the difference between a maker and taker in a transaction. The maker is the party that sits there waiting for bids and offers to come in and that taker is the party that doesn't wait and says buy this now or sell this now. The bid is the lower price that a maker offers to buy stock for and the ask is the higher price that they offer to sell it for. In the first example
> What you can buy it for? (Your best bid)
> What you can sell it for? (What you’d ask for it)
They have it the wrong was around I think in that the amount you can buy an iphone for as a taker / customer is generally higher than what you can sell it for so what you can buy it for is the (dealers) ask price and what you can sell it for is their bid. If you are a dealer / maker with a stack of iphones sitting there then the higher price you offer to sell them for is what you ask and the bid is what you'll offer for people selling you their phones.
There are some other simplifications too like "All prices are completely transparent." In an ideal world but in reality there are off market transactions, wash trading, faking and so on.
One thing is not clear. If person A has 10 items and asks for $10 per item and person B wants only 7 items for $10 per item, what happens? Person A just sells the 7 items and then waits for somebody else to pick the remaining ones? And vice versa what happens if someone wants to buy more stocks than what is offered?
In most scenario (assuming good demand for the stock you are buying and a functional market etc.,) a market maker, looking at their order book, buys 7 items from A. They sit on it until they are able to dispose off them to a buyer. In effect, you, as a buyer is buying a stock from market maker.
Most of the equity market is not P2P but mediated by market maker. They take the liquidity risk (i.e., holding a bad stock if demand plummets) and are rewarded for that by making money off of every transaction through bid-ask spread.
Of course I'm greatly simplifying as an equity order goes through a bunch of intermediaries but Market Maker play a central role here.
The orders are partially filled (either on the buy or sell side).
What this means is that the shares eligible to transact do so immediately, and the remaining shares sit on the order book and wait for someone to be willing to trade at that price.
There is a specific option that you can set (usually called "all or none") that will prohibit partially filling an order and only allow it to execute in entirety.
Generally...he'll have to lower the price on the remaining 3 shares to sell them it looks like as there was only demand for 7 items @ $10. Or he can simply wait until someone values them at $10. Conversely, if someone is willing to buy more than is available, people will probably make more available, just at a higher price.
"What makes us Tick" was a high-quality cartoon that explained the theory of the stock market, and the benefits of captitalism in general. Of course, its a Cold War era propaganda cartoon, but its still a really clear and simple explanation.
The "Ticker Tape" may sound quaint, but "Market Makers" are really just those round-lot dealers that are discussed in the cartoon. The overall explanation remains valid for today's market, just with more automation / computers involved today rather than humans on a telephone.
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The one thing I believe people should know about the stock market is: There are people with more capital, time, and knowledge than you who will consistently beat you. Picking individual investments is mostly a sucker's game.
Buying tech stocks and/or crypto in the last couple of years has been a consistent exception to this, but I worry that many of the people who made good money from those investments will now believe that they have some superior understanding that lets them consistently beat the market. But sooner or later they will find themselves in a similar situation as those who thought investing in Japanese Tech companies was a surefire way to beat the market 20-25 years ago.
So my advice to anyone who already got rich from their investments in the last couple of years: Congratulations! Now take that money, invest it in the most boring thing possible, and enjoy life.
To everyone who is trying to get rich quick now: Do your thing I guess, but be aware that you're gambling.
1. Commodities are bad long term bets because technology gets better. I remember people talking my ear off about peak oil and then the US turned into a net-exporter. Short term inelasticity, yes can sky rocket prices; but long term prices go down.
2. Physics based thinking. I knew electric cars were going to work because the math checked out.
3. Economics of scale works. Find companies that understand this and focus on it. When I saw Telsa focussing on a single car for a year I knew they would be a winner.
4. Software scales. People like to make money. Combine the two and its a real winner.
5. Sell when forward price to earnings after cash starts to look wonky. Which was 2007 and I think 2019. Covid and the direct stimulus kinda messed up the timing, but the market is still completely screwed. Either way, sell early and buy the crash.
Telsa, Apple, Shopify, Amazon, Google. Only really lost on Etsy (I can't believe how much they missed the opportunity to become a real platform).
Why bother investing in GM through a broad index fund if I know for sure Tesla will eat their lunch?
This isn't really get-rich-quick. This is looking at companies rationally and projecting where they will be in a year or two. And rationally speaking this market is out of wack and I wouldn't advise investing in even my favourite tech companies right now. I don't think this is Japanese Tech level of readjustment. I think there will be a -%50 S&P500 crash, maybe more, and then in 10 years Apple will be worth more than double what it is worth today. They have fundamentally better technology. Their software competency is below average, but their hardware, fit and finish, design, and cultural cache is world class and it is hard for me to imagine any scenario where they lose other than a US war with China.
There were plenty of tech losers. You still had to pick the winners.
> Physics based thinking. I knew electric cars were going to work because the math checked out.
Electric cars were obvious, but Tesla was not an obvious play. In hindsight, it might seem so, but in the beginning it was far from clear that Tesla would dominate the space. Additionally, time will tell if Tesla's stock stays 8x higher than its pre-pandemic price.
> Sell when forward price to earnings after cash starts to look wonky. Which was 2007 and I think 2019.
This happened many more times than the two massive crashes. If you actually followed this advice, you'd probably be worse off than investing in the s&p - even if you did pick good stocks.
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As others have mentioned, beating the market with $1M invested is much easier than beating the market with $10B invested. Especially when your appetite for potentially losing money is much higher.
Let's naively assume that you actually can pick stocks. At $10Bn - you need to pick more stocks - otherwise you would drive up the price too much in buying that much of the stock - unless you only picked Apple and Google and MSFT and Amazon.
To me looking at the stock pricing, Tesla looks like a software company where tremendous growth has been occurring and is expected to continue for some time. To some extent they are a software company, but that software so far has seemed to me to require quite an expensive set of hardware to be sold with it in order to get the software and continuing monthly/yearly/feature revenues sales. This has worked for Apple, so it's not unprecedented, but it'll be interesting to watch how long it can last.
SpaceX makes more sense to me with having high valuations relative to revenues, it's a services company. The service is getting things to space and now also providing internet access. Tesla doesn't look like a software or services company to me, at least not yet. But maybe I'm looking at it wrong?
1. You don't have concern yourself with market impact
2. There are niche opportunities that lack the capacity for funds to bother spending their time on.
Does it mean that the price is going to go up? Suppose everybody thinks like you (I assume everybody does), the market price may reflect anticipated profits already and doesn't necessarily have to go up.
Also success of Tesla isn't the same thing as success of electric cars.
Trying to time the market is akin to individual stock picking.
When it works, it’s usually just luck.
I keep "beating the market" too though I calculated my risk adjusted return and with that metric I wasn't.
So really I was doing better because I'd cranked up the risk, and fortunately we've been experiencing a bull market.
Hard to say whether I've really been making savvy choices or if it's just been a bull market trend that has been saving my ass.
I think the dogmatic "nobody can beat the markets" is hurting people who then think they may as well give up, and patently not true when you look at traders who beat the market year in and year out, and minimize their losses when they do lose.
An important point here is that since nobody knows when this crash will happen or how long it will last or where the bottom will be, you should still keep investing in the companies you think are fundamentally strong and avoid trying to time the downturn.
https://markets.businessinsider.com/news/stocks/big-short-in...
In 1997 a friend who worked at Cisco told me to go all out on Iomega. He also advised me to invest in some 3D storage startup which well went nowhere. No matter how smart you are you just have to play percentages.
Even better consider the case of Cisco itself. It reached market cap of 500B around 2000 and despite being a solid company has not performed too well.
Thus it is quite conceivable that the inevitable market correction will bring the high flyers down.
That is Apple will still be extremely strong, Google might suffer a bit because of dropping ad spend.
Companies such as Shopify, Tesla will actually need to reach reasonable P/E ratios, not the insane ones now.
But it’s not enough to pick winning industries. In every industry there are winners and losers. You have to pick winning industries and winning companies. And sometimes winners become losers. So there’s a timing aspect also.
EVs are going to succeed but I don’t think Tesla was ever a guaranteed success. And Tesla is not guaranteed to keep winning (though they have a great head start and very strong moat).
Maybe everybody knows Tesla is going to win out, therefore everybody wants it, and the price rises like crazy. And then the stock is way overpriced for what you get, and people like you still keep buying it.
There is a reason why Buffet needs to look into the numbers before deciding if something is a good buy or not. You buy underpriced, and sell overpriced. And you just cannot make that judgement without looking at the numbers.
There is another simple theory about your single stocks outperforming the index: smaller cap stocks generally outperform the index. As shown in this video, a monkey can pick stocks and outperform the index just because of this simple reason: https://www.youtube.com/watch?v=5_3Ra-Q6vK4.
> People keep telling me this, but I keep beating the market.
"Humans keep telling me it's hard to predict football games, but if you just squeeze your tentacles up and down enough you will get it right as I did"
-- Paul the Octopus, who predicted all world game results
There are millions of people trying to predict the market. Of course there will be people that did good, and these people (such as yourself) will all be convinced that they got it right for a reason.
But individual experiences mean nothing against the law of large numbers. You yourself have no way to know whether you're good or lucky, unless you show us an algorithm that consistently achieves the results you claim to enjoy.
Remember these simple facts:
- the less you trade, the further away you are from your real average predictive power. If the game is a coin toss and you play 2 times, there is a 25% chance that you get a 100% success rate, and go to HN to boast about how guessing a coin flip is easy. Try to keep that performance after 5000 games and it's an other story.
- Are you able to compute your idiosyncratic returns correctly? Can you show us that your portfolio returns, once residualized on sector, country and beta, are actually any better than a random pick?
- You pretty much only talk about good old common sense fundamental quality / value, which is far from being a major part of equity returns. You reasoning will work for one stock, and not for an other one. A sime value based strategy as you describe is vastly negative on a 20 year period - in absolute terms (not even compared to the market).
- You seem to have no understanding of diversification, and idiosyncratic risk. Companies can fail for an infinite amount of reasons. The less positions you have, the more sensible to "single company failure risk" you are exposed to. Very good companies, with solid earning and projections, did fail on the past, for reasons such as "top management scandal", "defective line of product", "banned from operations in a country", etc etc.
To anyone reading this comment, just remember that 90% of stocks returns do NOT come from the company itself. It comes from the drive of the market or sector as a whole. By investing in broad index funds you lower your specific risk, and get overall exposure to what drives the vast majority of the stock returns.
Would note that we’ve been in about a single interest rate regime for almost precisely that amount of time.
This doesn't sound right. I'd put them as way above average. Possibly leading the pack out of the public companies.
Because even bad stocks are an essential component of a balanced portfolio if they reduce overall portfolio beta (volatility).
The name of the game isn't pure gains, because the gains are not guaranteed. You want to make gains and hold onto them.
And no, you don't know for sure that Tesla will eat their lunch. You have a very high level of confidence that they will. So does the rest of the market, that's why Tesla is trading at a huge premium relative to its financial fundamentals. But this wasn't always the case, and there were more than a few times when Elon Musk brought Tesla to the brink of bankruptcy. If you were confident that Tesla was going to pull through, even back then, you either a) knew something the market didn't, b) were mistaken/wrong (but luck pulled through for you in the end), or c) you were reckless / irrational.
And they still have terrible quality of assembly.
"Telsa, Apple, Shopify, Amazon, Google."
Isn't this really just 'invest in SV scaleups? What are the forecasts for Xiaomi, or s Panasonic?
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You can make money on things that go down as long as they are not too strongly correlated with other things, and you maintain a constant fraction portfolio. One of the search terms here is "volatility pumping", I believe.
Commodities are a stabilizer for portfolios… they let you take more risk in other parts of your portfolio because they are easily marketable, non-productive assets.
Equities on the other hand have unknown amounts and timing for cash flows. Hence people bid the value of stocks up, down, and all around.
And this is why I am going against the advice of the majority(?) and trying to time buying into the S&P 500. I am looking for another crash like the one around when COVID started. Am I wrong and should I also not try to time the market?
If I was 70 and couldn't afford a 5 year correction, things would be different
However, I am sure there are many people who have lost money (or made much less) with reasonings that may be at least as sound as this one.
Remember, you don't have to beat those super smart well resourced AAA-grade investors. You just have to beat the average schmuck with some skin in the game.
- Buy S&P ETFs, most preferably by Vanguard, because they are a non-profit and thus have very low fees
- If you have a large sum of cash, go all-in immediately, don't wait for the perfect time
- Now, just wait, ideally 10+ years, before looking into your account again
Vanguard is certainly a for-profit organization [0]. What, I think you wanted to say, that many of the Vanguard funds are index funds that do not have exuberant management fees.
[0] https://en.wikipedia.org/wiki/The_Vanguard_Group
That might not be the best idea because of escheat. Here's a story about someone who didn't check on their stocks for years and the state claimed them. https://www.npr.org/transcripts/799345159
- ETFs, Vanguard is a good choice for most. If you're older and might need a large percentage of the money fairly soon, consider getting some bonds as well.
- Don't try to time the market
- Don't think you're smart
The only personal difference is I prefer FTSE All World as it is diversified into over 4000 global stocks, while the S&P 500 is (obviously) 500 American stocks. That being said the S&P 500 has been outperforming the FTSE All World for a long time, and I certainly don't want to give anyone specific investment advice.
Additionally, because of many societal conditions, right now many people think they need to hit on a moonshot to have a good life. And given the direction that inflation and many other things seem to be headed, it's harder to argue that they're wrong. Slightly increasing your financial floor matters little if the floor is still dirt.
Nitpicking but S&P has multiple indexes. And you probably mean just a total stock market indexes; not necessary S&P.
This x1000 I've seen plenty of friends of friends who probably had issues passing HS Algebra thinking they're "Daytraders" because they made some money off BTC or GME in the past few years and I just cringe so hard. My index funds consistently return ~20% a year lately. If you aren't even matching that you aren't a trader you're a sucker.
Kind of. What you have to remember is what game you’re playing. While financial firms can outspend and out-research you at an individual level, they can’t take the same risks you can or move as quickly as you can. If I decide I want to go all-in on some company I can just do that. Your friendly neighborhood hedge fund? Not so much.
Most people should buy index funds or similar, no change there, and even those who decide they want to pick stocks should mostly have a broad portfolio, but you can pick stocks if you want and you can be successful.
If you put all your money in at thr wrong moment, like say the Nasdaq in 99 then you waited 13 years just to break even.
But if you bought monthly you would have done very well because you averaged into the market.
The alternative is if you really understand valuations, diversification, risk and market psychology, like I do, then you can consistently beat the market. Most people cannot and most people you pay fees to do it on your behalf won't.
You could consider buying berkshire hathaway instead of a stock market index.... assuming the lead investors don't die too soon.
I think it's more than that. There are people with more capital etc. who specifically use that to take advantage of people like you. I don't just mean pump-and-dump kinds of stuff either. HFT exists to take advantage of the arbitrage opportunities created by traditional kinds of trading in aggregate (and sometimes to take advantage of other HFT bots) creating a kind of "friction" that is hard for less capitalized traders to overcome. The market is as much of a fight as a race, and it's really hard to win against the heavyweights unless you're one yourself.
> Picking individual investments is mostly a sucker's game.
Definitely true in the short term, for the reasons mentioned above. Still mostly true in the longer term. At least there's a chance that a sufficiently canny investor can pick a basket of stocks that will grow over time, but statistically it's almost certain that you'll fall behind the S&P index. Even the very best fund managers, with all of the resources at their disposal, rarely beat that more than a couple of years in a row.
That right there is the best advice. If you want to get rich quick, you're going to have to make some calculated bets with higher return and thus higher risk. However, if those bets work out and you do become rich, don't fool yourself into thinking you're some kind of super genius that can consistently beat the market.
This can be a hard lesson for people to learn (it took me a long time), because in most aspects of life success is more skill based. With investing, there is more decoupling between action and outcome due to randomness, and you have to always consider you may have made the right choice and lost, or you may have made the wrong choice and won. In the case of the latter, take your winnings and be happy, but don't delude yourself into thinking you made a good play. This is extremely hard, you have to be willing to put your ego aside and realize you actually made a mistake that made you a lot of money.
I think ordinary people with the right knowledge and foresight at the right time can beat the market in the short term. The trick is to be extremely patient until you have a reasonable level of confidence you have an edge in a bet with an asymmetrical return, and then take a position with conviction. I've done this a few times in my life, and the knowledge, timing, and luck all happened to work out for me. I've also had that feeling a few other times where things went south. Luckily for me the winners far exceeded the losers. However, I wouldn't con myself into believing I can consistently generate an edge. I simply made a small number of calculated bets when the stars all aligned for me. It's very possible the stars will never align for me again like that, which is why I've now moved most of my money into ETFs and other safe investments.
One way to spot someone who doesn't know what they're doing with investing and trading, is you never hear about their losses. You never hear about their net gains. You never hear them tell you the story of when they drunkenly made a really stupid leveraged stock pick that just happened to work out from pure luck. No, you hear all about the winners, all about how they knew for sure it would work out for all these reasons. You just see the overflowing ego that gambling has drummed up, rather than the intellectual honestly of someone who has sat back and grappled with the tough question, "did I make all this money because I'm smart, or am I just a dump and lucky ape?"
Don't fool yourself into that, but as the Kelly criterion advises, do play harder with house money.
An expert in some particular field sees different opportunities and make strong educated guesses vs a trader who will react on financial metrics.
lmao god this feels so much like the mindset of so many tech people in general. They were right about one thing so naturally they're of course right about this next thing...
>Taking on risk over the last few decades has paid off in spades.
There's two types of risk here: risk that is compensated by higher returns (eg. buying stocks rather than bonds) and risk that isn't compensated by higher returns (eg. buying OTM options rather than stocks). It's not really clear that higher than expected returns in the past decade or so for "tech stocks and/or crypto", mean that they have higher risk-adjusted returns in the next decade.
This can be observed in certain illiquid markets, e.g. for a specific bond of a company. In those cases, the "last trade price" is meaningless and it's very important to instead look at the bids and asks in the order book.
The lack of "crossing" between those two doesn't mean no one is willing to trade.
I do think the "correct price" is near the middle of the spread though. Because this sort of thing happens not just because of illiquidity, but also because everyone involved knows what the "correct" price is. (E.g. because bonds have very predictable cash flows.) There's no difference in opinion large enough to convince a trader to cross the spread.
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The good coming out of this is the visibility of how strongly dependant cryptocoins are.
Ukraine kicking off is not going to help in a sane world, but it's not a sane world so I half expect all time highs while Odessa burns
I guess a few facts like markets are not always efficient, they are often irrational, there has never really been a "free market", its been distorted by governments and powerful agents... Corporations were the ones who created market regulation so that they wouldn't be subject to its vagaries.
One small inaccuracy is the claim that there is only one place for each stock. That has not been true for many years. In the US that was changed by https://en.wikipedia.org/wiki/Regulation_NMS . NASDAQ is the primary listing exchange for MSFT, which means they will hold the opening and closing auctions, but it can be traded on any equities exchange, NYSE, IEX, BATS, EDGE-A, EDGE-X, you name it. RegNMS also has rules that if there is a better price at another exchange, the order must be routed there. This establishes the "NBBO" - National Best Bid and Offer, so in a way there is always one best bid and one best ask, but it's an aggregate over all the exchanges.
But US markets have some special Reg-NMS rules that glue together things across exchanges. Being from Europe I'm not so familiar with it, but I understand it causes some interesting games to be played.
If you want to actually understand how the market works, there's a fair bit more reading to do.
"A single market to trade. All stocks for Microsoft (MSFT), are traded on the NASDAQ exchange. All stocks for Ford (F) are on the NYSE."
MSFT and F both traded on 16 difference stock exchanges, not to mention countless "dark pools", each with their own book of bids and offers. But there's a national best bid-offer (NBBO) that all exchanges must respect, so it can behave like a single market. That's what Reg-NMS is about. The benefits of having several exchanges competing each other, while trying to retain the benefits of single market. This is also where HFT enters the picture with latency arbitrage and other trading strategies when prices on those markets get out of sync.
20 years ago, you could say that MSFT only trades on NASDAQ, but that hasn't been true since Reg NMS came into effect in 2005. Each stock has a primary listing market that controls things like halts and opening/closing auctions, but the stock can be traded on any exchange, each with its own dynamics.
> What you can buy it for? (Your best bid)
> What you can sell it for? (What you’d ask for it)
They have it the wrong was around I think in that the amount you can buy an iphone for as a taker / customer is generally higher than what you can sell it for so what you can buy it for is the (dealers) ask price and what you can sell it for is their bid. If you are a dealer / maker with a stack of iphones sitting there then the higher price you offer to sell them for is what you ask and the bid is what you'll offer for people selling you their phones.
There are some other simplifications too like "All prices are completely transparent." In an ideal world but in reality there are off market transactions, wash trading, faking and so on.
In most scenario (assuming good demand for the stock you are buying and a functional market etc.,) a market maker, looking at their order book, buys 7 items from A. They sit on it until they are able to dispose off them to a buyer. In effect, you, as a buyer is buying a stock from market maker.
Most of the equity market is not P2P but mediated by market maker. They take the liquidity risk (i.e., holding a bad stock if demand plummets) and are rewarded for that by making money off of every transaction through bid-ask spread.
Of course I'm greatly simplifying as an equity order goes through a bunch of intermediaries but Market Maker play a central role here.
[1] https://www.investopedia.com/terms/m/marketmaker.asp
What this means is that the shares eligible to transact do so immediately, and the remaining shares sit on the order book and wait for someone to be willing to trade at that price.
There is a specific option that you can set (usually called "all or none") that will prohibit partially filling an order and only allow it to execute in entirety.
"What makes us Tick" was a high-quality cartoon that explained the theory of the stock market, and the benefits of captitalism in general. Of course, its a Cold War era propaganda cartoon, but its still a really clear and simple explanation.
The "Ticker Tape" may sound quaint, but "Market Makers" are really just those round-lot dealers that are discussed in the cartoon. The overall explanation remains valid for today's market, just with more automation / computers involved today rather than humans on a telephone.