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.
--
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.
>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.
Tesla's stock price isn't really related to the fundamentals. It's a meme stock that, as you note, benefited hugely from the increased retail interest in stocks during Covid. Even if the GP got into it by looking at the fundamentals their profit is (mostly) because of its status as a meme stock.
I agree it's a meme stock now, but it wasn't always a meme stock. There was a time where it was severely undervalued and that's when I bought. I did not hold it all the way to the top. I sold it way before then.
In retrospect, Tesla was undervalued, but this wasn't a guarantee. Elon is a loose cannon with a history of overpromising to the extent of borderline lying. This got him in trouble with the SEC (funding secured), and he lost his board chair position and could have been ousted as CEO. In hindsight, the SEC obviously wouldn't screw over the fastest growing American company for a dumb meme tweet, but this isn't something people knew at the time.
> 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
This refrain is common enough, but I don't think it really bears out in the math. Elon just sold $16B worth of stock and the price barely budged. If you've got enough alpha to work with every beta seller out there will hop off and it's well, well before the peak.
> There were plenty of tech losers. You still had to pick the winners.
Yes because I applied basic reasoning. People were still investing in AOL and Yahoo when I picked Google. Seriously. AOL and Yahoo. It was bananas. Every person I knew that had any amount of tech savviness was on Google. The search results were clearly superior. "Invest in products that are better" should be a meme on WSB or something.
What I didn't mention above was that in the mid 2000s I also made money off of oil because I was following China's modernization and politics in the middle east. People back then pushed me on just how much oil would go up and when I said I thought it could triple they looked at me sideways. But it nearly tripled then I sold. I tried to get into lithium through SQM, because I thought electric cars and widespread computing were going to strain supplies, but they didn't. That's when I learned the lesson that over time commodities go down.
> 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.
Not really? Buying in at the very lowest part of 2009 gives a lot of range to play with. This bullrun is much, much longer than most, but over time I think it's easier to dodge the correction than to call the top. The reason for this is that to call the top is to predict when human irrationality reverses. Something I'm not great at doing. What I'm good at is first principles. And at some point I don't care how much blood there is in the streets. That fucking share of Apple is undervalued enough to where I would sell priceless art to buy it.
> Elon just sold $16B worth of stock and the price barely budged.
I could be wrong, but my understanding that such huge trades are not put on the market the normal way, but run through big investment banks that are able to use different techniques to avoid harming the stock price. For example, they can exchange the shares with hedge funds, ETFs/mutual funds, pension funds, and they can do the trades in batches over several days.
Elon's sale arguably brought down the price of Tesla considerably. He pretty much announced the sale at the peak - it's down almost 40% from that - when the s&p isn't even down 20%.
But, anyway, a wealth manager investing billions would do the same thing in reverse to buy.
And, still, it would drive up the price unless done over a long period of time - and since timing is important - this isn't really an option.
The goal is to buy the largest percentage of the company with as little money as possible.
If the asks in an order book are (price, quantity) pairs of (p0, q0), (p1, q1), etc. with p0 < p1 < ... and you have $C in capital, then ignoring the "driving price of a stock higher" effect(i.e. if C/p0 < q0) you could buy floor(C/p0) shares.
However, if you purchase more than q0 shares, those will be priced at p1, p2, etc. and you'll instead buy C/(weighted_average([p0, p1, ...], [q0, q1, ... q_remainder]) shares(where the weights are the quantities). And because p0 < p1 < p2 ..., this will be fewer shares than C/p0.
At the extreme end, if you try to "clear out the order book", a stock that is nominally $10 you'd be paying $1 million per share to someone that put in a joke order to sell. So you'd be getting 100,000x fewer shares per marginal capital deployed compared to a smaller investor.
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?
and you think by looking at those you are going to notice some things that analysts in that market have not noticed and is actionable by you because you can tell the current stock price is not correct? Isn't the future performance of Tesla affected by the number of people in its target markets who can afford them? why didn't you look at population demographics?
The fact that our best performing models for the risk-neutral price of equities are unbiased random walks tell me that yes, in aggregate, Wall Street is really good at being correct.
GM stock is current priced as 2.7 Billion dollars per Electric Vehicle sold last quarter. TSLA stock is current priced as 2.7 Million dollars per Electric Vehicle Sold last quarter.
GM only sold a handful of EVs in the 4th quarter of 2021, I'll give you that.
But in previous quarters they sold quite a lot more EVs than they did in the 4th quarter. This dismal 4th quarter EV sales statistic was partly due to supply constraints and partly due to the Bolt battery recall.
Possibly the reason I don't see Tesla as a services or software company is because I have very little faith that level 5 autonomous driving is going to be a thing in the near future. I could be very wrong, and if Tesla's existing hardware on the road can do it, then THAT would be a game changer and very easily justify the current stock price to me.
>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).
I'm not currently invested in automotive. Just drive by some dealerships, empty lots. Not because they are selling out but because business is bad. There will be a work from home permanence, the inflation reality will destroy the automotive industry. The only thing keeping them barely afloat is low interest rates.
Then you also have the market disruptor of Tesla. Ford and GM obviously have some fantastic products coming and even some already here. EV silverado and hummer are amazing. Mach-E and EV f150 are possibly the best.
EV cars is a new generation of vehicle and will harm the existing auto industry. Ford and GM are obviously going to survive no problem. They arent worth a trillion $ because they are behind but have significant costs upcoming. GM and Ford's upcoming profitability is going to be quite poor.
Stellantis looks like they are too far behind. Ram revolution silouette looks good but if the Chevy Bolt proves anything... building a good battery has many hurdles. Stellantis has nothing coming soon and may just die.
>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.
Tesla's first disruption is that after the car leaves the lot. It continues to get better. The traditional auto industry, you leave the lot and your car will be that or worse forever.
The second big disruption is efficiency. AC motors have regen, their motors are ~90% efficient. This creates the new generation of car. A model 3 performance(inexpensive sedan) has a 0-60 of 3.2 seconds. That's faster than all production Corvettes. Faster than a Hellcat. As fast as a Mclaren F1 from back in the day. About as fast as a Nissan GTR or Porsche 911. All the while not being annoying loud, far more practicality, and no emissions.
The most recently disruption... Tesla is now the fastest car with the plaid edition. 0-60 of 2 seconds model s plaid means it's faster than the Demon. Faster than all hyper cars. Yet at significantly cheaper price point. The roadster coming with compressed air to make it faster? Ridiculous.
By the time Ford/GM really get going, Tesla will not have sat around. They will have moved forward.
This is why Tesla has a ridiculous valuation. They effectively are the only competitor in the auto industry for the next several years.
> The second big disruption is efficiency. AC motors have regen, their motors are ~90% efficient. This creates the new generation of car. A model 3 performance(inexpensive sedan) has a 0-60 of 3.2 seconds. That's faster than all production Corvettes. Faster than a Hellcat. As fast as a Mclaren F1 from back in the day. About as fast as a Nissan GTR or Porsche 911. All the while not being annoying loud, far more practicality, and no emissions.
meh. even cheap hot hatches are close to being too fast to fully use on public roads these days. the race to ever quicker 0-60 times is incredibly boring and misguided imo.
a model 3 probably is superior to a hellcat in every measurable way, I'll give you that. although I doubt most hellcat owners would willingly trade them in for anything lacking a loud V8.
but people don't buy Porsches to drag race. there have always been much cheaper vehicles that would beat them handily on a drag strip; it's not what they're are designed for. they are pretty fast on the track, but unlike a Tesla, the appeal of a Porsche cannot be summarized in a single performance metric.
>meh. even cheap hot hatches are close to being too fast to fully use on public roads these days. the race to ever quicker 0-60 times is incredibly boring and misguided imo.
currently drive a hot hatch. Can confirm this. The magic number for me is probably around 4.5s. Anything faster is really not needed.
>a model 3 probably is superior to a hellcat in every measurable way, I'll give you that. although I doubt most hellcat owners would willingly trade them in for anything lacking a loud V8.
Ironically... had hellcat before this. Can confirm this as well. I do miss the supercharged v8 whine.
>but people don't buy Porsches to drag race. there have always been much cheaper vehicles that would beat them handily on a drag strip; it's not what they're are designed for. they are pretty fast on the track, but unlike a Tesla, the appeal of a Porsche cannot be summarized in a single performance metric.
My next vehicle will most likely be an EV truck. I think this is what you are missing right there. I would bet the majority of people driving porsche have not taken them to a track. That's not the purpose.
A car with good accelerating power will automatically give me a high speed performance. ~ Ferdinand Porsche.
I cant find the exact quote, but Porsche said, To build a car that drives well at 200km/h, you must build it to go 300km/h.
Tesla plaid doing 2 second 0=60 is idiotically fast as you would agree. It's not about that. It's about driving it without doing that.
everyone has their own taste I suppose. my next car will likely be a gr86 if I can get one for MSRP. it will be slower, less practical, and have a worse interior than my current DD. but I expect it will be much more fun to drive.
I've driven a couple teslas as well as porsches and amgs. the instant torque from an EV is a very cool feeling, but to me it's not enough to offset the refinement and handling feel of the current best ICEs. I found the interior and overall fit and finish of the teslas I've been in to be quite poor for the price. if you're not tearing away from every stoplight, I guess I don't see why you would get a car like that as a driving enthusiast. I think the real appeal will come when the prices drop a bit more and they become the most straightforward way to get from A to B. after all, this is the only real requirement most people have for their vehicles.
There's lots of weird takes in your comment, but this one:
> I'm not currently invested in automotive. Just drive by some dealerships, empty lots. Not because they are selling out but because business is bad.
is a bad take. Dealer lots are empty because of supply chain constraints. Cars are selling as fast as they come in. Desirable new models like the Ford Maverick have months long waiting lists. Used cars that are 2, 3 and even 4 years old are selling for new or higher-than-new prices.
> 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.
Not OP but I remember watching a movie "Who killed the electric car?" in highschool. It's about the EV1, an electric car by GM in the 90s. It had a range of 70-100 miles. If I remember correctly the movie kind of insinuates that the oil lobby ultimately prevented the model from releasing/selling well. So just based on that, the knowledge that electric cars are a viable substitute for a lot (in Europe I'd say most) of use cases has been quite readily available.
But that's the problem in OP's reasoning. Simply knowing that electric cars will dominate in the future is pretty worthless as investment advice. Especially when we are talking about tesla, which's stock price is entirely decoupled from any fundamental values. Today, I actually think that becoming one of many car makers is the best-case scenario tesla can hope for. It was always the question whether they can get enough of a head start in self-driving and battery tech BEFORE traditional car makers start making EVs. Those have decades of a head-start in every other aspect of car making. And to me it seems that most of them fully committed to EVs in the last 1-2 years. So will Tesla's advantage in battery tech buy them enough time to make cars that are as safe and reliable as traditional cars?
Also: I really don't know much about cars, so I might be wrong about pretty much everything I just said :) But it shows nicely that you can find logically sound arguments about future developments which are worth absolutely nothing on the stock market. Just look at the stock market since the beginning of Covid.
No it can be skill. Was Warren Buffet and Charlie munger just lucky, year after year? Was Michael Burry of the Big Short just lucky to short the mortgage backed securities market, no he also side stepped the dot com crash and bought value stocks, recently he had very nice shorts on Kathy Woods ARKK... clearly he isn't just lucky, he has skill. I used to think I have skill yet my results were random for about a decade, then I grew a lot emotionally and in wisdom/perspective, and now I too beat the market average in both return and risk.
Buffet’s last good move was the deal he got for Goldman Sachs in 2007. Then he said he was not going to invest in tech companies because he did not invest in businesses he did not understand, then he dumped a bunch of money in IBM which obviously did terrible, then he relented and finally bought a ton of Apple in 2014 or 2015, which has single-handedly saved Berkshire and kept it relevant.
I also would like to see objective proof of how well Burry has done since 2008 compared to the basically risk-less and cost-less VOO or VTI.
Apple, in absolute terms, has been his best investment (iirc). But yeah. The law of large numbers has gotten him. When you have to invest hundreds of billions, it’s impossible to keep compounding at high rates. I’d put a lot of money on Buffett beating the market if he was managing $50M.
One of Buffett’s built-in edges is access to cheap capital through his insurance companies [1]. That matters less in a low-interest rate environment, which has been the dominant regime for the last 20 years.
These days Apple is not really a "growth" prospect developing something speculative, it's more of a "cash cow" collecting rents.
The former would be the kind of "tech stock" he would avoid; the Apple of today (the latter) is the kind of predictable business Buffett does invest in.
Buffet and Munger manage the companies they buy. You, 99.99% of stock purchasers, and I are dependent on the existing management with no control over decisions companies make. Big difference.
You don't miss all the crashes, but there are some fundamentals that when they get out of whack at best you get a flat market for years and at worse you see a crash. Why buy into an overhyped market?
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.
It's a stochastic argument though. If, say, 60% of day traders lose money, then 40% necessarily make money -- but it's still EV negative unless you have a strong prior you belong in the 40%.
If you drill down into "beat the market" you realize it is a language problem not an investing problem.
If "beat the market" means that you can predict exactly if and when Russia invades Ukraine, then the answer is NO, you cannot know if some drunk soldier is going to accidently shoot off a missile and start a war.
On the other hand, if "beat the market" means that you invest in companies with solid fundamentals and solid management in areas of the economy that are not shrinking at prices that are historically low, then yes you can beat the market in the long term. Buffet and Munger are obvious examples of this.
If "beat the market" means buy everything except NKLA, because that company has obviously been a scam for over a year, then yes "beating the market" is very easy.
Actually I think you have it backwards. The notion that traders consistently beat the market is hurting a lot of people. There are extremely few traders who beat the market year over year. It becomes vanishingly fewer every year you add. Which is what you would expect for a system where luck plays a big role and nobody can actually predict the market.
Tldr; way too many people believe that a lot of people can beat the market and that is what actually hurts the most investors.
How much do you know about the stock market and trading? No offense but I want to know whether I am speaking with someone who has been trading for a few years and has come to this conclusion or someone who read it on a headline somewhere.
While I do have some experience, that's not really that relevant. I'm not saying this because of my own experience (which would be anecdotal evidence). It's based on actual market data, which is what is actually important for making a generalization like this. Many statistics show that overwhelmingly, active investors underperform indexes. And that is especially true year over year because a lot more people can get lucky a few times but they cannot consistently reproduce those results.
One example of some data that shows this is the SPIVA score cards. Here's a nice page that explains it and presents some of the recent results: https://www.bogleheads.org/wiki/SPIVA_scorecards
There is tons of other information if you just Google for it. When it comes to actual evidence of performance, the facts are pretty clear!
How about you? Do you have any objective data to show otherwise?
> 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.
Tesla is trading at a 50x PE (2022 consensus) and plans to grow 50%+ in 2023, 2024.
I don't think that you can expect the stock to be where it is today in 2024 if the PE actually goes down to 12. You'll need to buy it now to lock in that PE of your purchase price.
It is trailing 170 P/E, obviously trailing earnings are not so useful for high growth companies but question is Tesla really a high growth company any more?
The consensus is that Tesla is not priced just for cars, it is priced on some other "intangibles".
Elon has said that Tesla's advantage will be manufacturing. If he is right and the global demand for EVs continues to accelerate, TSLA's PE will be below 6 at current prices before it is no longer growing 20%+ a year.
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.
You can be assured that all the known public information is reflected in a stock's price at a given point in time. Which doesn't mean that profits can't be made in the market.
> 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?
One bit you are missing is that it's entirely possible that today is the cheapest the S&P 500 will ever be. What if your 50% crash only comes after the market has tripled?
Another is this: What if the market crashes 40% but then goes back up? Do you buy at 40% down? What about 30% then?
It's easy to say "well I'll just buy at the bottom" but you can't know when the bottom is until well after it's happened.
The other major piece of the puzzle is that during a 30-50% crash, everyone you know and all the media will be screaming in your ears about how everyone is losing all their money in stocks, and that the only reasonable thing to do is sell now so you don't lose it all. Do you have the stomach to put all your money into the market in those conditions?
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
substitute Ford for Tesla in the early part of the last century, and on the timescales you are talking about, General Motors ate Ford's lunch.
furthermore, Musk is very impulsive and could already have been cancelled by the SEC for his mistakes: I bring that up to point out that by hitching your wagon to this one individual (or Henry Ford) you are taking on enormous risk, risk that is diversifiable and there's no reward for.
you missed the point, when GM surpassed Ford a hundred years ago, Ford was as new as Tesla, and GM was a newer player with fresh ideas that better fit the market, and nobody saw it coming, especially Ford. You see, GM was run by a managerial and marketing genius, and Ford was run by Aspergers. (I can say that, I am one)
Ford is the only one of the so-called “big 3” who hasn't filed for bankruptcy at least once, but there are lots of other US auto manufacturers, and many of them haven't filed for bankruptcy.
Their investment in Tesla alone would be more than enough evidence, if they got in near their IPO.
Throw in an investment in Apple when everyone started switching to Mac circa 2006 (I told everyone who would listen to buy it, but I was a college freshman, so no one listened, but it was so obvious), and you got a stew going.
It didn’t take anything fancy to crush the market if you started 20 years ago and were dialed into tech.
> Their investment in Tesla alone would be more than enough evidence, if they got in near their IPO.
No it wouldn't. Sample size of one is not proof of consistently beating anything. If I showed you a winning lottery ticket, would you consider that as "more than enough evidence" of me consistently beating the lottery?
Pretty impressive to have foreseen, as a college freshman in 2006, the proliferation of broadband mobile internet and the development of mobile devices capable of taking high quality photos and video, mapping services, video calls, health tracking, and other functions that would obviate and consolidate multiple industries.
I was a teenager in 2006 and still understood mobile devices with fast internet connectivity with photos, videos, mapping services, and video calls were going to be a big thing soon, as to a tech nerd like me it was already partially a reality. By that time I already had Google Maps on my phone, was uploading photos to web services through MMS gateways, was browsing the web with Opera Mini, had my email on my device, and streaming internet radio to Bluetooth wireless headphones. It seemed obvious to me that these devices would get faster over time and that the cameras would get better, as I had already seen the progress from the earlier 320x240 cameras to >1MP cameras on phones, mobile data speeds increasing from GPRS speeds to 3G, and WiFi both becoming more common and jumping from 11Mbps to 54Mbps within just a few years. I had seen the greyscale and slow Palm IIx device my dad used to carry turn into the color Blackberry with constant network connectivity happen within a few years, it seemed obvious these devices' functionality would continue to rapidly grow and move into all kinds of markets.
In 2006 I don't know that I would have thought Apple would have dominated the market as much as it has, but the iPhone hadn't been announced yet nor would it have 3G for another year after that. In 2007 I got my first phone with a front-facing VGA camera which could do video calls over 3G networks, before the iPhone had native apps or 3G.
> In 2006 I don't know that I would have thought Apple would have dominated the market as much as it has,
But that is the most important point. The rest is trivial, but knowing which organization will be able to capitalize on it is the only relevant fact if you are trying to optimize for a return.
In 2006, the mobile network owners seemed in prime position to use their monopoly to squeeze everyone else, as well as Blackberry completely dominating the ecosystem.
In 2006, I do not know what kind of evidence a person would have had to KNOW apple, alphabet, Microsoft, Amazon, and Facebook would be where they are relative to ATT/Verizon/T-Mobile/Blackberry.
I agree, the challenge is seeing that it would be Apple that saw the gains moreso than 3Com, Nokia, LG, and others. There were tons of companies which were obvious plays at the time, several of which no longer exist.
I also didn't mention buying Bitcoin, which I did on credit.
People don't like hearing that the market can be beat because they don't like feeling inadequate. But it can be beat if you understand industries and physics and consumer sentiment. Bonus if you can read financials, but even some basic market indicators are good enough.
I wonder why people who tell me this do not have a driver, private jet, and a chef, even after telling it to me for over a decade. In the biggest bull market in history.
In fact, they all still go to work for someone else.
This is spot on. Everyone who is confident and correct in their ability to consistently beat the market for decades is obscenely wealthy. The math is really straightforward. Even a paltry initial investment will compound massively over the years if it has a high ROI.
Some people do have this ability and in fact have become very wealthy, but there are many orders of magnitude more people who think they have an edge but have just had a lucky run.
> People don't like hearing that the market can be beat because they don't like feeling inadequate.
I didn't dispute the fact that the market can be beaten. There's overwhelming evidence for that (e.g. Renaissance, Berkshire). I didn't even dispute your claim that you have beaten the market. I merely asked for some evidence to back up that claim. The fact that you responded without providing any evidence makes me think you actually haven't beaten the market consistently. Perhaps you have had one or two good bets that provided spectacular returns.
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.
Yes, you're right, I was not precise. That's what they used to say about themselves:
“The Vanguard Group is truly a mutual mutual fund company. It is owned jointly by the funds it oversees and thus indirectly by the shareholders in those funds. Most other mutual funds are operated by management companies that may be owned by one person, by a private group of individuals, or by public investors. ... The management fees charged by these companies include a profit component over and above the companies’ cost of providing services. By contrast, Vanguard provides services to its member funds on an at-cost basis, with no profit component, which helps to keep the funds’ expenses low.”
He probably meant to say that Vanguard is owned by the funds themselves, not by some external private entity. That makes their incentives be more aligned with making the funds cheap and efficient.
> 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
It is also wise to look at your accounts at least once a year because some of your investments might pay dividends that you have to report on your tax returns.
In America, yes. The person you're replying to seems to live in Europe. I believe in many European countries there's no tax on accumulating ETFs that reinvest dividends, until you sell them and realize the capital gain.
In a way this erases the tax efficiency difference between dividends and buybacks.
ETFs do pay out dividends from the underlying stocks. This does not require you to look at the account (in the US you will get a form at the end of the year summarizing what you have to pay taxes on).
- 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.
Many companies in the S&P500 source much of their revenue globally. They are registered as US companies but their business exposure covers the world, so you achieve much of the same diversification but in a US legal framework for business and securities.
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.
Owning equities (through index funds) is one of the best ways to always beat inflation. They are the part of the economy that appreciates because of future returns, in future money, not past dollar amounts.
That said, most of current CPI "inflation" is not economy wide price increases, but comes from 1) car prices, because car manufacturers massively messed up and production is way down for the past two years, and 2) energy, which is from several global market issues. There's also housing, which is not in CPI, but that's also easily attributable to underproduction of housing since 2008 (and probably even for decades before that, honesty).
We are actually in incredibly good economic times, especially considering the massive destruction that the pandemic has wrought, and in the US, the lowered number of workers due to years of reducing immigration. I am glad people are not overly exuberant, but I with they were focused on the things that mattered more.
If that were the case that too much money was printed, then one might expect broad economy wide price inflation, but instead it's really focused only in areas that have supply bottlenecks.
But too much money printing wouldn't cause the major auto manufacturers to majorly underproduce less than they typically do, and it wouldn't cause energy to go up. Of the 5.5% "excess" points of inlfation, the breakdown of cost areas is:
2.1 vehicles (of which 1.6 is used cars)
1.8 energy
0.7 food
0.6 housing
And except for food, there are clear supply bottlenecks there. For food, beef farmers have been complaining about monopsony from meat processing plants for more than a decade. There's likely a small amount of rentierism going on there. As there is for the housing crunch. (Though housing also takes a long time to respond to changes in demand patterns, such as the one induced by the pandemic)
Very true. On the other hand, it was previously believed that the real estate market could never go down, which led to highly leveraged positions in that market from homeowners to banks.
What does a broke person who will not be able to pay off their student loans for decades and who will never be able to afford a house care about being slightly less broke? Your life is a painful grind either way where you're just barely staying afloat. If you're stuck in poverty barring a risky long-shot hitting, then it's entirely logical and rational to take big risks with the little you do have.
The real problem isn't that stocks or crypto or any other financial tools exist, it's that so many Americans lack reasonable hope and opportunities for a better future outside of seeking out things that seem unthinkably risky to many people here.
Why not go to Vegas and play roulette then? At least there you know exactly what your odds and payouts are and there isn't a massive information asymmetry.
I just don't think saying "Don't put your money in ETFs where you can get returns of ~10% a year for 40 years barring mass catastrophe" is particularly valuable. Even someone putting 83$ a month into an SP500 index can expect to make almost 400K over 40 years. Whereas I would expect a person yolo'ing 1000 a year on random shitcoins and memestocks to lose $40K over 40 years.
Maybe I'm crazy but I think if you can find 1000 a year to throw away on pure gambles surely its a far better choice to invest that in something that's virtually a sure thing on long time scales?
Everyone is looking for get rich quick schemes which frankly short of starting the next Instagram in your basement simply don't exist.
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?
The stock market is not a zero-sum game. Money-now is worth more than money-later to companies offering stocks, who know how to earn more money with that money. Long-term strategies simply take advantage of this fact to make long-term gains. Investments are just codified strategies on what ways you can put your idle money to work in someone else's hand.
Buying an index fund full of stocks at their current market price is no more illogical than running code you didn't write yourself. It's way way less work, it probably works better.
Better yet, trusting someone else's market price is much easier than trusting someone else's code because of the thousands of black-hat investors searching for profitable vulnerabilities in the market prices.
> 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.
>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.
There is also a catch: Suppose someone reads this, thinks "I think I could be as good as it as this HN user" understanding valuations and market psychology and whatnot.
Maybe you can. I am not sure if I can. But one thing I learned while trying, studying some companies and trying to find out where I could have relevant domain insight and then somehow coming up with an estimate for correct stock price when to buy/sell is a hugely time consuming hobby which isn't super fun.
Isn’t dollar cost averaging fundamentally valuing “timing the market” over “time in the market?”
I’d need to do a Monte Carlo to provide hard evidence but I’m fairly sure that lump sum investing is, on average, going to provide the greatest return. For people just starting out in investment, whose appetite for risk is high, that seems the way to go.
Edit: Leggio and Lien (2001):
> We find DCA [dollar-cost averaging] consistently remains an inferior investing strategy to Lump Sum investing using the risk-adjusted performance measures.
> The failure of DCA as an optimal investing strategy for all assets and portfolios considered is likely because DCA is a conservative investing strategy best suited for investors interested in a forced savings plan that avoids the consumption of earnings.
Thing is, I don't think any individual investor is going to experience "on average" stock market patterns, they are going to experience a particular random walk. I think averaging is "better" if you are risk averse and concerned about worst case scenarios.
If said investor is risk-averse, I'm not sure I would be recommending going all-in on broad market index funds either.
Generally speaking, we're here recommending approaches to young investors, whose timelines are long enough that risk shouldn't be meaningful. Based off that, the result that will produce the best return on average is not going to be DCA.
The word average is extremely misleading. What most people want is to avoid exceptionally bad outcomes, and e.g. maximize the P10 value of the portfolio in that Monte Carlo simulation.
Look no further than the Kelly Criterion to see an example of maximizing EV being worse than maximizing the median outcome.
As another example, if you have $1M and I offer you a game of chance where I flip a coin. Tails you win back 101% of your buy in. Heads I get to keep it all. The EV maximizing strategy is to put your full $1M stake. But if you follow that strategy (especially if you do so long term) is ruinous.
I invest lump sums when I get windfalls, like bonuses, likely because I haven't invested as much as I want because my repayment mortgage (saving me 2-3%/annum) eats all my monthly income.
I sell everything when I need to buy a property because I'm not rich enough to use my stocks as collateral.
> 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.
Keep saying this and watch your peers assets balloon in value. There’s really nothing to argue about, spreading this “I can’t beat the market mantra” is bad for everyone. Also asserting that tech, which is essentially the largest growth area won’t keep growing is a radical opinion
I think what's getting increasingly difficult is identifying what a "tech" stock is. Companies like Uber and AirBnb blur the line as their innovations are mostly not the silicon and CS kind but are about economics and working around regulations. It's easy to call Google a "tech" stock, but what about Netflix? At this point streaming technology is mostly commodified. Is Netflix a tech company or an entertainment company? I think a strong argument could be made for the latter.
So saying that you should invest in "tech" stocks is increasingly ambiguous.
>Keep saying this and watch your peers assets balloon in value. There’s really nothing to argue about, spreading this “I can’t beat the market mantra” is bad for everyone.
While I don't doubt that you could beat the market given enough effort, I'm skeptical that you can trivially beat the market with a strategy as simple as "buy tech stocks". I'll invoke the efficient market hypothesis here: if tech stocks are expected to grow 20% but non-tech stocks are only expected to grow 10%, why would anyone buy non-tech stocks? Wouldn't everyone bid up the price of tech stocks so that their returns would only be 10%?
Dude I used to work at a hedge fund, the whole efficient market hypothesis isn’t what you think, and it’s insane to think it means you need to buy every single stock. You’re just going to lose a bunch of money investing this way
Only 2000–3000 but they're so strongly correlated you could practically diversify just as much with less than 20–30, for 1/100 of the transaction costs.
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).
Yeah kind of. Except market makers can pull liquidity in a microsecond and have higher privileges on many exchanges that retail investors investing through brokers do not.
The best measure if pricing in my view is "what average price would I get or slippage would I see if I sold X shares right now?"
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 context here was the highest bid / lowest ask. The context was not orders deep in the order book. If your order is the best order available in the book, anyone can just take it, and you will not have any time to move your order before a trade is executed.
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.
One aspect of buying securities and currency is the stability. People like stability, they will pay extra for secure cash flows, consistent courts, and rule of law that is predictable. In which case, because of its practical distance from Russia I would be optimistic about the US’s relative position, even if nominal equity values decline, they will maintain their relative value assuming the US does remains relatively more stable than other countries.
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.
Many market makers profit off speed and information advantages while providing liquidity. There are alternative market structures like frequent batch auctions that would allow better trading, lower spreads and negate the HFT speed arms race. This paper is a good overview:
And the reason their orders execute in front of others' is because they offer the best price. If they didn't exist I would have to pay a little bit more to buy, or sell for a little bit less.
Is the full paper available without a login? Alternative matching schemes to price-time priority suffer their own drawbacks. Either there's no guarantee your whole order will fill (pro rata) or trade at all, and there can still be a speed arms race (there's an incentive to get your order in at the last possible moment before the batch to benefit from maximum information).
The alternative schemes he's referring to are batch auctions, which don't eliminate price-time priority per se. What they do is bucket time priority into discrete chunks, which eliminate a certain class of high frequency strategy that probably isn't particularly economically productive.
The problem with batch auctions relative to continuous time trading is that that discreteness forces market makers to charge larger spreads. That's the primary trade-off. Volume would likely be dramatically reduced while achieving comparably efficient asset allocation, but at slightly higher average transaction costs. Those higher average transaction costs however would likely go along with better tail behavior of spreads in unusual market conditions, and maybe better human interpretability under unusual conditions as well.
What it comes down to is a question of how much those non-monetary benefits are worth to your economy. The longer you force market makers to hold inventory, the more they have to charge for that risk, all else equal. However, when market volatility spikes, they're also going to be less able to play certain types of high frequency games that erode liquidity when it's most needed. It's kind of a robustness/efficiency trade-off, like many things.
Thanks for the insight, would appreciate any recommendation on where I can read more about this.
I'm curious what would attract market makers to this sort of exchange if it exposes them to more risk. Unless they can charge a premium for taking on that risk. But then why would traders want to pay more when they can get better prices (from tighter spreads) on today's more popular exchanges?
This is sort of the standard textbook on how exchanges and markets work, and has a nice discussion of the tradeoffs inherent in call auctions vs continuous time trading.
If you really want to get deep and are comfortable with math, this paper:
explains the general framework market makers are using to make decisions.
> I'm curious what would attract market makers to this sort of exchange if it exposes them to more risk. Unless they can charge a premium for taking on that risk.
Ultimately, market makers are service providers. They are selling liquidity to people, and they get compensated for that. What that means is that they will go wherever their clients go. And they wouldn't necessarily make less money in a higher spread regime, larger spreads mean bigger margins for the MMs. I think they probably would overall make less, because volume would decline so much, but it's just a little more complex than more risk == bad.
> But then why would traders want to pay more when they can get better prices (from tighter spreads) on today's more popular exchanges?
It's a little complicated. I mean, the sort of facile answer is: they wouldn't, and don't. We have a free market, if anyone wanted to they could start one of these up right now.
A slightly better answer is that some clients would prefer it and some wouldn't, and there's a reasonable argument to be made that the ones who would prefer it are more important to healthy market functioning. Specifically, it'd be much better for larger asset managers who research stocks and make careful picks based on rigorous analysis.
Right now, those asset managers, who are the people that really make the markets efficient, are being statistically frontrun by HFTs, both market makers and others. That is, some MM notices someone buying large blocks in a pattern consistent with one of these smart asset managers, and they label this "toxic flow". Backing up slightly, market makers want to sell to dumb money.
Consider a world where the only trades that occur are by "smart money". Someone only trades if they know the stock is going to go up or down, and there is no other trading activity aside from this. In this world, the MMs would make zero money, because they'd be constantly getting "adverse selected". MMs make profits roughly in proportion to the overall quantity of dumb/smart money. They make money when lots of trading happens, but the price doesn't go anywhere.
Getting back to the main thread, MMs are constantly trying to identify "smart money", and when they find that smart money, they either re-center their spread in the direction the smart money is trading, widen their spreads, or stop providing liquidity entirely. Continuous time trading makes it considerably easier to separate smart and dumb money than a batch auction would, and this means that overall these smart managers are making lower profits than they otherwise "should".
The flipside of this though is that these tactics actually improve the price that retail traders get. This is why Citadel buys Robinhood's order flow, and then offers them better prices than the open market does. They can do this because they "know" that all of the Robinhood flow is dumb money, and consequently they can safely tighten their spreads for those users.
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.
Can anyone recommend a quality book with similar content? Mind you, not about investing strategies, but just basic facts about financial markets (including stocks and bonds). I’m fine with textbooks, provided they’re relatively easy reads, and under 500 pages.
I'm also interested in this. I've been looking to understand the mechanics of financial markets and I don't know where to start.
In particular, I'm really curious about ETFs/mutual funds and what exactly happens "behind the scenes" when I buy a share i.e. what a share of a fund represents, how it translates to individual companies' shares, NAV, creation/redemption etc. I've heard these terms before, but I haven't been able to build a full picture.
Since this is mostly about one mechanical aspect of markets - what is a "bid/ask" spread - it applies beyond the stockmarket to crypto markets. Except those tend to have fewer rules about the order book.
Does anybody know what happens when the bid is not equal to but higher than the ask? What is the price that will be used? Or will this not lead to a transaction at all?
As others have mentioned this depends on how matching works on the exchange.
The case where the bid is higher or equal to the ask is known as a "crossed book". I most cases, this should never happen and if it does it would be as a result of a bug in the matching algorithm. If you place a buy/sell order with a price that is in excess of the best ask/bid respectively then that order will be matched against the opposite side. Under normal conditions what you suggested should be impossible.
Generally if a bid is introduced that is higher than the ask, the volume at the ask is matched, then the volume leftover at each ask level is matched in order of price (then time).
I don't know the answer, but I think it would make sense to consider which offer came in first:
First case: you ask for 100 and then I bid 105 --> transaction clears at 100, the ask price
Second case: I bid 105 and then you ask for 100 --> transaction clears at 105, the bid price
This is because I implicitly think about bid offers as "I want to buy this for at most X dollars" and ask offers as "I want to sell this for at least X dollars".
Yes, usually transactions are executed at the resting order prices (i.e. whatever is already being advertised in the market, and a transaction can involve multiple orders at different prices).
The article focuses on order book basics of matching buyers and sellers, which is a pretty small part of "understanding the stock market" for anyone who wants to invest.
I would also look at long-term history, business cycle (in the stock market terms), inflation and rates, liquidity crises as a background for investing. Those are much more valuable for an investor than order book details. My 2c.
Am I the only one in HN who is not into the stock market? I live in Western Europe and I would say 75% of my acquaintances don't do stock market. People I have known in the past (old people) didn't do stock market either. They all seem to have lived a normal life (decent jobs, decent house, decent family). Nothing extravagant but they got enough money to be "happy" in life.
Europeans can have the luxury of not worrying about investing since many European countries offer livable pensions (for now…the demographic future for this isn’t looking so good).
However, this isn’t as great as it sounds. While the European model for healthcare and education is better, their pension schemes are arguably a much worse deal than what Americans can have.
In Europe, you’re basically paying the government to take your money and invest it in much too conservative, in fact, negative-yielding! bonds right now due to pension fund mandates.
You can’t take the proper amount of risk given your age (in your 20s-40s you should be almost fully allocated to stocks) because the pension fund needs to constantly be paying out money to old people—they can’t risk huge drawdowns.
There’s a surprisingly large amount of middle class Americans who will retire millionaires just because they are able to save for their pension privately and take the proper amount of risk for their age (eg. Target date funds).
Meanwhile, in Europe, governments shelter people from the harsh realities of how financial markets work, but you have to hope and pray that enough people are born in the coming decades to make up for the conservative pension mandates. And you have to pray that the government allows you to retire sometime before you die (in the nordics, retirement ages are constantly being pushed back and pension benefits are shrinking...due to said demographics).
I predict every country will eventually move to a hybrid private/public pension model like the US over the next 40 years. So you'll have to start caring eventually.
> a hybrid private/public pension model like the US
I'm not sure pensions exist in the US beyond a few public sector ones. The US model is entirely private at this point for all intents and purposes.
Also keep in mind that only about 55% of the US population owns any stock (including retirement accounts) [0], so (IMO, not an economist) the US is most likely looking at a retirement crisis in the coming decades.
The US has a public pension scheme called "social security," which guarantees at least a minimum level of income in retirement to all citizens (although, not enough to live on IMO).
This is intended to be supplemented with private investments via 401k & IRAs, which are actually relatively new programs (created in the late-1970s, but nobody even talked much about them until the 90s).
So while most millennials understand they need to be saving privately in these vehicles (r/personalfinance has 15 million members), there's a huge forgotten generation in the middle who slipped through the cracks between the transition from industrial-era corporate pensions to personal saving.
These are the folks who will unfortunately bear the brunt of the retirement crisis, having to get by only on Social security.
This is a myth. People struggle on state pensions throughout Europe, but for some reason young Americans idealize everything that comes out of Europe.
In Germany(a country of 80 mil), the average pension is $1000 once you get to 65. In France it's not much more. The social security in the US beats that, plus you can usually afford a private pension, because the government doesn't take 50% of your paychecks.
I personally know someone in Austria that worked all his life for the railroad, then he got sicker and sicker, but the state wouldn't give him a disability pension. He could barely work sitting all day. Then he got disability at around age 60, but he needed money so much that he had to collect scrap metal to make ends meet. Very sick, after 60 years old, collecting metal. This is just an anecdote...I know, but still.
In France, the average pension is 1393€ (~ $1574) [1]
Also the retirees purchasing power is higher than the working population [2]
Don't get me wrong, there are still too many retirees with too little money in France.
But on average, the retirees are doing OK compared to the rest of the population.
I was commenting for the Americans. In the US you get a "meagre" state pension (social security) and people believe that Europeans have so much more...well that US state pension is on average $1500. But Americans have in general much better private funds, because they have lower taxes.
It's absolutely true and Americans like to do the evangelization of these strange beliefs about Europe.
There are good and bad parts about every system and thinking everything is perfect in Europe is about as dumb as Euros are socialists and its bad dogma.
> There’s a surprisingly large amount of middle class Americans who will retire millionaires
This seems like a serious bug in the system, doesn't it? Why would old people retire as millionaries while young people struggle working long hours and can barely save anything?
Compounding interest...if you start early enough and take advantage of employer contribution matching, etc. But most people in the US won't retire as millionaires, let alone even retire. Unforeseen life events often cause people to dip into retirement savings and in some cases wipe out any gains. Also, once in retirement, life in the US can still be quite expensive. For example, Medicare and all the additional supplemental insurance(s) you need is absurdly expensive for retirees. Everything in the US is "out of pocket".
Because the lack of effective pensions require you to either work til you die or live off Social Security. Most people don't want to do either, so they direct a significant amount of their earnings to 401ks and the stock market.
The fact that young people struggle really doesn't have much to do with this.
In the UK you can stick whatever you want into stocks and shares isas, if you can afford it.
The problem is that housing costs rise to suck every spare penny of income from pretty much everyone so very few people have spare money to put into those isas.
I believe this is also a side-effect of these poor pension schemes.
European governments see the demographic timebomb coming, so they massively incentivize their citizens to invest in a primary residence, treating it as forced savings. This inflates local real estate values to ridiculous levels, especially while interest rates are low.
However, incentivizing your citizens to take leveraged bets (big mortgages) on a single piece of real estate is...not great.
This means the investment portfolio of the average European citizen is ONE specific apartment (zero diversification), and negative yielding sovereign bonds (via government pension funds).
Since most European mortgages are not fixed rate, it will be interesting to see what happens as interest rates start rising in Europe.
While the bonds will start paying better interest, that mortgage exposure might start to wreak havoc on the average citizens finances...
"Since most European mortgages are not fixed rate, it will be interesting to see what happens as interest rates start rising in Europe."
It's the second time I see this on HN. However, the reality seems more contrasted. From [1]:
"A striking feature of the credit market in the euro area is the very large heterogeneity across
countries in the granting of fixed versus adjustable rate mortgages. Fixed rate mortgages
(FRMs) are dominant in Belgium, France, Germany and the Netherlands, while adjustable
rate mortgages (ARMs) are prevailing in Austria, Greece, Italy, Portugal and Spain."
Something I didn't realise until recently was in the US it's normal to have a 30 year mortgage with a fixed rate from the start, rather than a fixed rate for a few years and then either a variable rate or requiring a remortgage. My understanding is that most mortgages in the Netherlands tend to be 5-10 years fixed rather than lifetime.
In the UK I feel there's a lot of distrust of stock markets amongst normal people, partly because the FTSE doesn't grow (back in 2000 it was about 7,000, today it's about 7,500), and that's the one reported on the normal news. There's no widely reported "FTSE dividend reinvested" measure.
Add in the mortgage mess from annuity mortgages where people were sold the idea they could have their cake and eat it too, ended up without enough money to repay their mortgage at the end. Throw in the pension collapse of Equitable Life, the pension fraud from Maxwell, the stock "boom" in the 90s where normal people bought shares, driven by the selloff of nationalised industries, and then seeing those shares vanish in 2000 and never really recovering and you get a general distrust of private hands managing money, and a preference to trust the government.
This meant people put their money into houses starting in the late 90s, which combined with increasing household income as new families became dual-income led to increasing house prices and a snowball effect. Even 2008 didn't really impact, as it was mainly sold as a US problem which had an effect on the UK, but not a major one.
The UK government (any colour) will do anything to keep house prices growing as that's how you get votes.
At least in the Nordics, most folks I know in the past years have been taking out floating rate mortgages.
Makes complete sense given interest rates are zero right now. However, if the ECB keeps getting surprised by inflation (like the Fed is in the US), interest rates may have to be start rising in fast, dramatic fashion.
Yes, for perspective relatively modest 3 bedroom houses in London are going up in price, every month, by more than the average person in the UK as a whole takes home.
You can be in the top 1% by income in London and still simply not be able to afford a small family home.
All the income from people in London is extracted by those owning the land, because you need to live somewhere to earn that money. It's basically monopoly, doesn't matter if you pass go and collect £200 or £2000, all that happens is the people owning the properties around the board take it until you run out (or if they want to extend the game
I am very worried (UK) that the government retirement safety net may not be there for us, as the retirement age is being pushed up beyond 70 but I am not sure most people can work full time that long without health issues.
Nor can we assume that the exceptional stock market returns of the past 15 years will be repeated, which means we need to save more for the same result.
I feel great pressure to earn a high wage in order to save a lot of it into a pension. This feel like a matter of survival.
Germany is even worse than you describe. The pension system managed by the government is not backed by any assets at all, but works by taking from the working population to the retired population. Given the age distribution in Germany this means young people are increasingly paying more to this system, while retired people receive less and less per person.
This was of course obvious already a while back, so the government decided to introduce additional ways to encourage saving for retirement (by giving tax discounts). However, they also managed to screw this up, because only contracts from certain insurance companies apply for these tax discounts. And these contracts have such a high management fee, that the real return of those constructs is negative.
<There’s a surprisingly large amount of middle class Americans who will retire millionaires just because they are able to save for their pension privately and take the proper amount of risk for their age (eg. Target date funds).>
Yet there's a surprisingly large amount of middle class Americans who have no retirement savings; either due to YOLO, or medical emergencies, or misunderstanding how to invest towards retirements.
It might depend on your definition of "surprisingly." According to this source, about 10% of American households are millionaires and about 80% of those are first-generation millionaires (i.e. they didn't inherit the money).
Additionally, only about 1% of those millionaires are under 35. (This is a point that gets lost in the debate about inequality, in my view; most wealthy people are old for what I think are extremely obvious reasons.)
In the UK almost everyone will have been moved over to a "defined contribution" pension whose value is determined by the stock market, usually in the form of a "stakeholder pension".
I don't "do" the stock market but I do have such a pension. And every few months sweep spare cash out of my current account into an index fund. Effectively I pay people to worry about this stuff on my behalf.
People who retired more than about 10 years ago are far more likely to have "defined benefit" pensions whose value is independent of the stock market.
Not the parent, but I live in Germany and while the new coalition government is expected to push for moving he public pension system to stock based pensions, the current system consists of a public pension system (that employees pay into via their employer to pay out current recipients who previously paid into it) and a private pension system everyone is strongly encouraged to pay into. As I understand it the private system is not directly tied to the stock market though.
For most people outside the very niche finance and tech investment bubbles stocks are largely understood as a form of gambling and managed funds as a high yield alternative to a savings account with a small risk of losing money (but this requires some disposable income so again this is somewhat self-selecting).
The ordinary Hans Wurst (German Joe Blow) just follows the economy section of the news for a general feeling of if things are going good or bad because line goes down means prices go up and they probably won't get a raise.
From a leftist point of view the most frustrating thing about red-green is that they market themselves as progressives and leftists but then just follow the same neoliberal economical politics as everyone else. It's deeply ironic that the reforms that did away with large swathes of the welfare state and labor protections were implemented by a red-green coalition government, not conservatives or the FDP.
The lesson most voters take away from this seems to be that leftism is just false advertising and if you vote for leftists you just get the same politics but more dishonest, not that the "leftists" they keep voting for aren't actually interested in leftist politics (though I can see why Die Linke might be unappealing as they're a headache even if you see them as the only viable option).
Everyone is exposed to it if they trade in the major currencies. The government will reduce the purchasing power of the currency to ensure the nominal returns to meet the defined benefit obligations are met. This, in turn, will boost the price of equities such as land and stocks, and eventually trickle down as inflation for food and fuel.
You will get your defined benefit pension, but how much you can buy with it is variable. And it is going to be less than you think. That is the only way the equation balances with lower economic growth (especially due to lower population growth) and increased competition for resources from the other 7B people in the world.
Whether or not you care about the stock market is basically a question of whether you run a functioning business or not. If you run a function business then you are have cash sitting on accounts. Even for a fairly modest business, a reasonable operating cushion dictates that you always have 6-7 figure cash reserve. Ideally you want this money to be sitting somewhere where it generates good returns, yet can be accessed quickly and with low transaction costs. Therefore shares and funds start to make sense. These days you can actually move cash directly into funds from your corporate online bank.
Shares (and all their financial derivatives) are a good hedge for profitable limited companies, because they either go up in value (yay! profit!) or down in value (yay! tax deductable loss rolled over to next year!). So long as the company is otherwise making a profit, shares are actually pretty hard to lose out on.
Also pensions. Most pensions are backed by index funds which are generally related somehow to stocks and shares. If you need to manage a pension fund, you have to pay at least vague attention to the stock market.
The stock market is a terrible - criminally negligent - place to keep a company's operating cash. I would be fascinated to read advice from an accountant or other financial professional that says otherwise.
I once worked at a company which used a money market fund for its cash. That gave them a slightly better return than a bank account. In the end, not sufficiently better to be worth bothering with.
If the company has an excess of cash and nothing good to spend it on, I think it's fine to put it in the stock market. Maybe you wouldn't count this as "operating reserves" - I wouldn't do that with the money that's earmarked to pay suppliers but not due for another month, but I would do it with the money that's earmarked for opening a new business location at an indefinite time in the future.
You can get whatever risk profile you want from the stock market in return for less yield. If you can accept two-nines certainty that you won't lose half your money in six months, any broad index fund will do. That would be acceptable for a lot of "modest businesses" which find themselves with "6-7 figures cash reserves". If you need better, you can do fancy things with options, or put a fraction of the money in the bank and invest the rest.
(I am a financial professional, but not in this field, and this is not financial advice)
Doesn't seem sensible to invest your operating cushion in something as volatile as the stock market, especially given the corralation between a recession causing your operating margin to crash and a recession causing your business to need that operating margin
The US stock market has been ridiculously pumped from the last decade-plus of money printing, I wonder how many people think that's normal.
Hedge your risk. Investors get diversity (portfolio) spacially: they get a piece of lots of businesses. Entrepreneurs diversify temporally: they can reasonably only put their time into one thing at a time, and only a few over a lifetime.
So if your business is doing well you can avoid putting all your eggs in one basket by investing some cash personally outside the business. And the easiest way is to jus put it into an index fund and then concentrate on your business.
Eggs and baskets. If I owned a company that provided for my current income, I would not want to place myself in a position where the faltering of that business killed both my current income and my retirement at the same time.
By all means plow a lot of it back into the business, but there’s good reason to pull some out over time as well.
You don't have to be "into" the stock market i.e. doing day trading. That's unlikely to make you rich unless you do it as a full-time job (and even then...). You can get lucky, but that's usually about it.
Instead, invest a regular amount of money monthly into ETFs. Those are relatively low-risk, but should still yield significant returns over the course of decades.
It's true that most people (at least in Germany) don't trust the stock market. The problem is that your wealth is being eaten up by inflation and interests on savings are low or even negative. You will lose money. In addition, Germany's mandatory pension funds are in a bad shape and most private insurances (e.g. Riester) are not worth it.
The situation is not the same as in my parents' generation and unfortunately, a lot of people are not realising that.
As a Swede in Switzerland, I think the main difference to the US is the cost. European commissions is mostly "buy and never look again." That fosters a culture where only a few people care and talk about it.
In Switzerland, I have to pay ~0.1% stamp duty on every purchase and sale of stocks and ETFs (in a Swiss broker). The UK has a 0.5% stamp duty on stocks. The idea for these brokers to compete on price doesn't make much sense at that point. It's "fine" that the normal fund has a 0.5-1% fee. There's some movement here, but only if you care to engage outside your existing bank (IBKR in the UK, Avanza++ in Scandinavia, Degiro in Europe in general).
Investing is good, and---as has been said---pensions are often invested in the stock market, whether you know it or not. But you just don't talk about it, because being active is costly. In Sweden, the defined contributions are auto-invested in a balanced fund unless you engage. There's something to be said about having sane defaults when you create a system.
As for the US, I'm not sure Robinhood was a step in the right direction. We should encourage people to own companies, not try to profit from Brownian motion. But that's perhaps a topic for another discussion.
Finally, I'm heavily into the stock market. I have several accounts across the world (though not really by design). I'm fascinated about this oddity that I can buy more food in the future just by having a different piece of paper, compared to someone else. But I also spend a stupid amount of time trying to find ways to reduce cost of investments. My guess is that most people don't, and it's kind-of the first step for a European that's paying >1% in fund fees. Or who don't even know how much they're paying.
There is a lot of interest in the stock market currently. Individual investors (‘retail’) have been buying a lot of stocks in the last 12 months.
Some would say this is typical behaviour before a crash. Business people become folk heroes (Musk) and the news is all about stocks and macroeconomics.
It is also the case that professional traders make a lot of money out of retail investors. The percentage of retail investors that actually make money are, iirc, quite small. It doesn't make sense to do something when you don't have the time to get good at it, and being bad at it means you're going to lose money.
Sometimes you're forced to (when an investment is tied into a basic necessity, like a house), but you're always going to be at a disadvantage.
I mean the rights of tenants are such that if you want to live in decent conditions / a stable domicile, you have to buy a house, thus becoming a property investor.
I think the act of buying a house to live in should be considered more an act of consumption than of investment.
It’s not 100% consumption, but it’s almost surely we’ll over 50% consumption and yet people get confused by the fact that a slice of it is forced savings and a sliver of it is an investment and they focus on these latter two more than is appropriate and in so doing are prone to less rational decisions than if they thought of it as mostly consumption IMO.
I think houses mostly do depreciate in value. The land underneath them does not and this can often mask the former.
I live in a nice part of my city. My house is 100 years old, has terrible insulation, very old retrofit wiring, and needs constant maintenance to stave off decline. The house, with all the upgrades over the years, is likely worth about what it was when built. The land underneath it is a lot more valuable than it was 100, or even 25, years ago.
Seems like semantics to me: you can't buy a house without essentially buying land. If you could, I absolutely would.
The fundamental problem here is not one of economics, but of politics. You can't live in a stable, dignified manner without paying to be part of a state-run monopoly (land ownership), so everybody who can does, so land titles (note the word) become absurdly expensive.
There is no real connection between land and living space - multiple story housing exists, and if housing was built to a reasonable density, there's more than enough land for everybody to live in whatever size house they could afford to build.
It’s sensible though to think “Why don’t houses depreciate like used cars? After all, they also wear out.”
Side note 1: There are places where you can (sometimes only can) lease the land for 99 years. This has the predictable effect in terms of willingness to build/improve the land, especially as the lease term is drawing to an end.
Side note 2: these discussions almost inevitably summon the proponents of land-value-tax to encourage denser use of valuable land. They’ll be along shortly, I’m sure.
> There is no real connection between land and living space - multiple story housing exists, and if housing was built to a reasonable density, there's more than enough land for everybody to live in whatever size house they could afford to build.
All land does not have the same or even similar perceived utility to all people. Some land is has much more demand relative to supply than other land.
Kitchens also don't appreciate in value. However, if you're trying to rent a flat in berlin, you'll probably find yourself paying brand-new+ prices for the previous tenant's kitchen.
I live in Germany and its the same. Not that that's a good thing. People here are old-fashioned and still believe in "Concrete gold."
Fact is, as soon as you've got a meaningful amount of wealth, you're going to want to invest it so you can either get income from it or grow the principal. It could be in a home, multiple properties, or the stock market.
> People I have known in the past (old people) didn't do stock market either. They all seem to have lived a normal life (decent jobs, decent house, decent family). Nothing extravagant but they got enough money to be "happy" in life.
No offense but you're going to have a tough time comparing to a boomer in terms of wealth generation and building if you're a millenial. I know people who got houses handed to them for very cheap 30-40 years ago, and those houses are worth tremendous amounts of money now. On top of that they have good pensions and insurance from a long time ago. Or they have a rental contract where they're paying 1/3rd of their neighbors so their expenses are low.
There's a great income and wealth divide in Europe between the haves and the have nots, and the haves are very good at keeping their wealth and passing it down to their heirs. Meanwhile in most European countries, punitive taxation makes it extremely difficult to move up in social class, even from middle class to upper middle class.
> Meanwhile in most European countries, punitive taxation makes it extremely difficult to move up in social class, even from middle class to upper middle class.
German has extremely liberal inheritance taxes. On the one hand this is often justified with the existence of the German "Mittelstand" (medium sized businesses typically owned by one family over generations), on the other this means the easiest way to get rich is to have rich parents.
Low inheritance taxes are actually a great predictor for maintaining social inequality over generations. If you wanted to reduce social inequality you'd instead want to drastically lower VAT (which disproportionately affects poorer people), adjust income taxes to lower the tax burden on lower incomes and raise it on higher incomes, and drastically raise taxes on income from capital (rather than labor). This isn't even simply an opinion, this is scientific consensus.
That reduces social inequality, but that is not the singular goal of a society. Producing goods and services and wealth for the nation is a goal that competes with “tax away almost all the gains of these activities”, which is why there’s debate about how to balance these things.
Frankly, who is "the nation" if not its people? As long as even a single individual suffers poverty, "the nation" has failed. If "the nation" is its people, protecting every single person from hardship is a higher goal than allowing a minority to live in excessive luxury.
If you think the "wealth of a nation" is measured by the luxury of a few rather than the poverty of the many, you might as well just revert to feudalism.
That OECD study is really tricky as it only goes to mean income. The interesting bit would be to really rich and there I am not sure Scandinavia would score so well.
Thank you for the chart. Germany is further down the list than even I thought, admittedly. How sad ist that. Here I thought that at least Germany having a good social safety net and free university would mean it is somewhat easy to pull yourself out of low income if you are intelligent and have the drive, as well as parents who gave you a bit of encouragement in your early years. Seems like even that is harder than I thought.
Do you have one for mean income to upper class by chance? Even +1 Std Deviation move would be significant in terms of wealth building.
I think traditionally most people in most countries ignored the stock market and consider it boring to talk about.
Maybe less so in the USA? Not sure.
But a lot of computer folks have spare money at the moment, and in that situation you have a few options: consume more, keep it in a savings account, or invest. And some significant proportion choose invest.
Keep it in a savings account is a common option, but quite a bad idea.
Probably the majority of people who invest do so in property, considering it safer than stocks (which I disagree with, although there are other reasons to like property).
This may be changing a bit in recent years, because access is easier now. In Sydney I see adverts for stock brokers at the bus station.
Seems like some gamblers have switched to the stock market to get their fix too.
In the US if you have a retirement savings account (which is very advantageous to have) it’s likely to be a 401k or IRA which you have to manage yourself. So having some basic understanding of the stock market is essential to your financial future.
You are likely indirectly into the stockmarket, through pension funds or social security. In the USA, a lot of people (especially in big tech) are more directly involved through a 401k, which allows to pick stock/bonds.
It could also be that you prioritize investing money into a house instead?
Ah don’t be afraid of it. You’re missing out an opportunity to live a worryless retirement and to even leave a solid chunk of assets to your kids/partner. Simply invest a few hundreds euros (probably 300-400 will be enough) every month into an ETF which tracks some of the very broad market indices like MSCI World, FTSE All World or even S&P500. You have very good chances of becoming a millionaire or almost-millionaire by the time you retire. Good luck!
My parents didn't do stock market, for the simple fact that you got a nice interest from a savings account. Those times are gone now. Some people have a hard time grasping the alternatives.
Stocks are considered "risky", but if you have a 10+ years timeframe, an index fund is not risky at all.
I also have 75% of acquaintances that don't do stock market or crypto. And that's the reason why my savings are outperforming all of them.
Also Europe here, and leaving aside what others have said about how everyone is invested in the stock market whether explicitly or not (which is entirely true), this rings true for me as well - it's also backed up by data.
This makes sense when you think about it - in the past you would have built habits and understanding from relatives and your community (e.g. "Don't invest in stocks that's gambling and they always crash!"), whereas since the Internet came along people have more access to data and perspectives from more places.
All of the above said, the last few years, and especially since the lockdowns, the behaviour in the markets has been really alarming. The FT.com link above touches on this, but the rush into [stocks/cryptocurrencies/leveraged funds/options] is something I've never seen before in my lifetime. I don't think the world has ever seen anything like this level of amplified speculation. Bitcoin, Leveraged ETFs, and Options didn't exist in the 1920's. The Netherlands had futures contracts towards the end of Tulipmania, but I haven't seen anything to say that they were leveraged.
In the late 1990's it was clear and readily apparent to everyone that the Internet was a massively important step forward. We agreed on that. It wasn't a controversial or widely disputed viewpoint. The market still imploded because of the sheer amount of rampant speculation, so to think something worse won't happen to a multi-trillion dollar market based on a technology many people think only has value for running Ponzi schemes seems to be pretty irrational.
To top it off, the wall of hype seems impenetrable at this stage ("have fun staying poor!" etc), so it remains to be seen what happens when the plates stop spinning this time.
tldr; Your grandparents might be proven right after all.
> In the late 1990's it was clear and readily apparent to everyone that the Internet was a massively important step forward. We agreed on that. It wasn't a controversial or widely disputed viewpoint. The market still imploded because of the sheer amount of rampant speculation, so to think something worse won't happen to a multi-trillion dollar market based on a technology many people think only has value for running Ponzi schemes seems to be pretty irrational.
In the 1990s it wasn't clear to everyone that the internet was a massively important step forward. You were younger and probably part of the technically-savvy, forward-looking generation that could clearly see the internet being massively important in future. However, *many* people in the older demographic lacked this insight and didn't fully embrace the internet until the mid to late 2000's. I think we'll see the same thing play out with crypto. Writing everything off in the sector as being ponzi is especially flippant.
Personally I have a philosophical (read marxist) reason to avoid it. Fundamentally I see the stock market as an exploitation tool which the rich use to siphon money away from workers and into their own pockets without contributing.
Every dollar you get but didn’t work for was a dollar that somebody else worked for but didn’t get. The stock market is full of transactions which yields profits for the rich while leaving workers at a loss by means of lower benefits. I refuse to participate and become a class traitor.
I’ve never worked in an industry which tries to push stocks onto you as much as software development. They keep paying me out options, giving me stock plans, etc. My strategy is to get sell as soon as I’m able, and transfer the money to a savings account in my local credit union. Don’t let them get away with not giving me my money, but don’t let them dictate how I keep my savings.
profits, outside of law encroachment or sheer luck are due to risk taken, the majority of adults dont want to risk more than their time and as we age our risk aversion increase. Creators of wealth are few and between, because they risk more and usually are more skilled than the average joe. This is also the reason why wealth dont survive over generations . these are few of the "marketing driven" meritocracy we have and taking part in this ecoomic competition is normal. morality arise when a public company has a dirty business model and one can decide to not support them, choosing ESG investments (real not marketed)
>This is also the reason why wealth dont survive over generations .
There is loads of counterexamples for this though. Especially in older countries in Europe it can become very apparent.
Also having wealth (trough inheritance) enables one both more opportunities and reduces risk.
A poor person taking a "gamble" on a business (if they can start one that doesn't require long rampup or capital) will struggle to feed themselves if it fails. A rich person (if not just focused on inherited assets) can try multiple times and is often encouraged to because of this but also trough exposure to fundamentals from family.
Isn't being offered stock in your own company broadly consistent with Marxist principles: workers own a share of the wealth they create? Maybe not as much of a share as they'd like, but I wouldn't have thought that was reason to avoid taking any.
Off-topic from the thrust of this conversation, but I always considered the above extremally risky. If your company goes tits-up, you loose your job and your savings.
This happened to a lot of people during the dot-com crash of 2000.
(Unless you have a high risk tolerance, you will want to diversify much more.)
It's orthogonal to Marxism but Marx and Engels both engaged in stock trading (not to mention that Engels literally owned a factory).
Employment is by definition exploitative because a capitalist system requires the owner to derive profits from labor, i.e. pay workers only a part of the value they generate. This isn't a value judgment, this is a matter of definitions: the capitalist mode of production is by definition exploitative because avoiding exploitation would steer the owner towards bankruptcy and thus kill the entire business.
The only solution to avoid this contradiction is to not have a separation between ownership and work, to abolish the capitalist class, i.e. ownership of a business is granted by working for that business, with all the rights and responsibilities ownership implies. However the ultimate ideological goal is usually (similar to how Free Software doesn't want to control copyright but abolish ownership of software) to abolish the notion of ownership or even businesses as distinct entities, much like discrete ownership of land was a nonsensical concept before enclosure (i.e. it was "your land" because you used it and the community was okay with you using it).
I think the most frequent misunderstanding of communism comes from trying to fabricate communist structures within capitalist power dynamics. Most of the prominent "communist experiments" had very little to do with actual communism because they were built around the assumption that they were building a foundation for communism to happen later rather than directly building communism in the here and now (hence the Eastern Bloc phrase "real socialism" as a euphemism for authoritarian governments with mandatory labor and limited democratic instruments, none of which is compatible with the definition of communism).
The thing most people seem to forget is that the goal of "abolishing the capitalist class" is to also abolish the working class as a subjugated dependent group because it is only a meaningful concept when contrasted with an owning class. The Soviet Union failed terribly at this by replacing the capitalist class with bureaucrats, effectively still maintaining a distinct working class and hoping he bureaucracy would magically "wither away" eventually while doing nothing to make that happen. They also tend to forget that the distinction between capitalist and worker is purely about ownership and there are many overlapping hierarchies of power, and owner vs worker is merely one of them (although one of the most important ones).
hnbad answered this much more thoroughly than I’m able. I would just like to add that in my experience stock options and grants has been an excellent way of pretending to pay me more then they actually pay. It feels like they are giving me a lot extra until you actually look at the numbers. And I bet a lot of workers get fooled by this. For me it feels like an exercise in cognitive dissonance, that is my employer is trying manufacture a cognitive dissonance in my brain which favors them.
Of course owning these stocks gives me nothing over their monitory value, so having them benefits me nothing over having an interest account with equal interest rate. So I just look at them as a bonus pay with additional headaches (moving money out of the stock market is harder then to cash in a normal check). And as while the power imbalance exists between workers and bosses, I would rather just get paid in regular salaries without the extra complexities.
In Iceland there is mandatory retirement funds. You can choose which fund and many people pick a fund that is only made off of government bonds. More people probably don’t have a clue what their retirement fund is made off, it is just some number on their paycheck, so they participate in the stock market both indirectly and unknowingly. I think it is kind of a stretch to say that these people are doing stocks. Most people I know use every opportunity to withdraw early from their fund.
At most these people do stocks like a person who returns their compost to the city does public gardening.
Ah, I never fully understood how the market maker worked. I intuitively understood that buying/selling at market price gets you an instant trade at a possibly slightly worse price but didn't realise the market maker made money from that.
One thing the article doesn't mention is why people buy and sell stocks. The stock market used to be for companies to raise funds before they turned a profit. Usually for businesses like railways which need huge amounts of capital before they can even begin to operate. Nowadays it's usually companies that are already profitable. Speculation is also a much bigger concern for people than it probably should be. It used to be that just owning a share in a company was good because a company is (hopefully) productive and pays you a dividend. Now people only seem to think about "beating the market" which is a shame, I think.
Stock markets allow for price discovery. The market gives a verdict on what it thinks stock in a given company is worth, and it's there in public for all to see.
They also allow liquidity. A public company can't stop you from selling your stake, or buying more. This is something you'd definitely value if you've ever been screwed out of equity at a startup.
Suppose there is some difference between buying price range and selling price range. The dealer (middle man) could become temporary in-between buyer or seller and take some of the profit due to this price difference.
For example this could happen at a stockbroker or at a crypto exchange.
The order flow is usually public. If a broker were to intercept a client order in flight to pocket the difference, it would be called front running and it is illegal in most places.
Crypto is not regulated, so the order book could be completely fictional and there would be no recourse.
I'm not sure what you're saying, but the spread between buying price and selling price is exactly how the temporary middle man gets paid for the risk they take in matching up buyers and sellers. The size of the spread depends on how large the perception of that risk is.
Buyer tells the trader to buy for (up to) 140. Seller wants to sell for (at least) 120. Trader gives 120 to seller, gets 140 from buyer, gets to keep 20 for himself.
If the seller is already in the market for an ask at 120, and there is a buyer ready to buy at 140, no trader can come in an pocket the difference in a regulated market.
If there is no buyer yet and a trader suspect there might be in the future, it could try to buy at 120 and hope to sell in the future at 140. Of course the the sale might not materialize and they will need to take the risk.
Yes, and that's exactly how the middle man is compensated for the risk they take by buying something from someone they don't want, hoping to resell it shortly after.
If this happens on an exchange (such as Coinbase), there is no risk, since the trader/middle man knows that there is a buyer for 140 and a seller for 120, so he can 'front run', buy at 120, sell at 140, keep 20.
Best execution kicks in on most exchanges. The second order never hits the order book (nobody observing the book will even see it) and the trade executes at the price of whoever put on their bid/offer first.
This is regulated in some senses (doing this as exchange is a big no-no).
Also this is theoretically, the point of High Frequency Trading...
Sadly this is only theoretical, seemly they are quite willing to make the market messy to force this difference to exist so they can profit more, and not many governments so far are bothered by that.
I work in HFT. We do not front run orders. We make money by finding correlated assets that when traded together, will create profits more often than not. Usually there is a mathematical relationship between the two (this is what the Black-Scholes model proved and won Nobel prize).
The reason that this trading style is called "High Frequency" is that everyone knows these relationships and therefore it's a race to get there first. Much like the scene from "Glengary Glen Ross", the first person who gets there gets a lot, the second person gets a nibble and the third person gets nothing.
The whole value of this is profits for the firm and high liquidity for everyone else. Not saying it's a noble pursuit, but we follow all the SEC, FINRA and other market regs (most importantly NBBO).
Some HFT DO front run (after all, they got caught).
But that is not what I was talking about even. I am talking about the firms that do spoofing, layering, etc...
Basically a lot of HFTs that instead of just doing "daytrading" style trades or arbitrage, attempt to influence the market in some way, hopefully making the spreads bigger and whatnot.
I have a book written by André Kostolany, which taught me one thing and I believe I've forgotten the rest, because only this one fundamentally matters:
Don't hunt for rising stocks, but chase the falling stocks. Everything that goes down either eventually goes up again, or dies.
While this sounds like it's not helpful, all that's required is figuring out if a company is likely going to die. Even without any manual research, time is ultimately telling. The longer a company at the bottom doesn't die, the more likely it's going to rebound eventually.
But it's not an unreasonable approach. Declines are often driven by panic. If you can determine that it's an irrational panic and the fundamentals of the business remain strong, then you can invest while it's undervalued. It's certainly better than buying just after something has gone _up_.
I assume you have good intentions, but your post is severely lacking. One crucial thing with this strategy is time. WHEN is the time to buy a falling stock? While it is falling? Or when it is rasing again? Are we talking intraday or months?
On a long enough time frame, every company will go extinct and every stock will go to zero.
And your post is in direct contradiction of two other common stock insights:
- Don’t catch a falling knife
- The market is efficient. If a stock price goes down, there is probably a reason for it.
I think there is no definite answer, and it's therefore only natural that common insights contradict each other. I've read Ben Graham's often recommended book, and the take there is that the market is a lot of times completely irrational, if not most of the time. A reason for a stock going down could be that it's not "sexy" and not viewed as the future big thing, but if the company has a solid business model, people will come back to it. There were plenty of examples of that. But what is a good business? Well, you need to know a lot of metrics companies publish on their earnings, debt etc. and also you need experience to see through any possible accounting shenanigans (e.g. Under Armour admitted last year they kept moving future earnings to the current quarter so it seems their current quarter was more profitable than it really was).
The reality is that it's much more complicated than any one liner, and that most normal people that invest, invest based on gut feeling. It only really works by chance. Or they invest in index or mutual funds.
I agree, I'm not a believer in the efficient market hypothesis anymore. I think the stock market is driven in large parts by narrative, which explains outliers a lot better. I just found the tautological advice of my parent poster a bit weird:
> Everything that goes down either eventually goes up again, or dies.
Sounds smart, says nothing at all. Hence, "buying a beat-down company" is probably not advice that really works. And there are so many companies that never reached their ATHs again.
This is a strategy for ruin. You can easily backtest this yourself. Just go back in time and buy a stock that was -20% and see how many times you make a profit.
The market has inertia. What goes up usually continues going up and what goes down usually continues going down.
And going down, not going bust but never getting anywhere near the just below peak level you bought at is common as well, and can easily lose 50-90% of what you invested without the company ever going bust.
If you bought Yahoo at 20% below its peak value, the fact the company still exists two decades later isn't much consolation.
the only thing you should know about the Stock Market: it favors those with more capital, if you don’t have much to begin with, don’t expect making life-changing amounts
Why do you think so? I think it's the opposite. With little capital you have way more opportunities in medium/small/micro caps while someone like Warren Buffet has limited pool of possible investments as you can't pour billions into 100m company.
I think like lots of things... If you expect to do better than other people, be prepared to know more or do more then them. Many people dedicate their lives to learning the stock market and what to do. It's unlikely someone can beat them with doing the bare minimum research.
Not saying there isn't shady stuff going on too. There definitely is, but even if there wasn't it is a skill based game.
> Many people dedicate their lives to learning the stock market and what to do. It's unlikely someone can beat them with doing the bare minimum research.
This hints at some sort of deserved meritocracy that just doesn't exist. Funding is king nowadays when a large fraction of trades happen via HFT. Implying that all you need is knowledge in order to reach wealth is misleading at best.
HFT is irrelevant, those firms basically compete with themselves and there's really not all that much money in it anyway. They're just providing liquidity and can basically be ignored 99% of the time.
You realise there are proprietary trading firms with algorithms making billions of $ every year just trading stocks at high frequency, right?
If anything they actively avoid trading against themselves and seek out opportunities in markets where retail investment is still at high participation.
Yes, they make a few billion between them in an ultra-competitive, expensive to compete in environment. My wording wasn't the best, but what I meant is that HFT firms only compete with other HFT firms. They're basically all battling to offer the cheapest service possible to other market participants, and can offer even better prices to retail due to the non-toxicity of the flow.
Virtu has a market cap of what, 6bn? Citadel was valued at 22bn from the recent funding round. Those are the biggest players in the space, and it's becoming increasingly monopolised. Meanwhile JP Morgan has a market cap of 450bn, BlackRock a market cap of 110bn, and BlueCrest manages 40bn of its own money. Considering how much attention it gets, HFT is pretty innocuous. The notororiety is basically because they pay 23 year olds 400k/year and it sounds scary to outsiders.
Most prop trading firms arent public. Rentec have something like $150bn under management and are making 20-40%/yr return. If they had a public "market cap", they'd be huge
Medallion makes those returns and is capped at 10bn. The rest is more traditional fund management (and performance isn’t great).
Also from what I understand Medallion is HFT in one sense (fast trading with short hold times) but not to the point proper firms are where being fastest is necessary for edge.
They definitely haven't. The paper I think you're alluding to showed that monkeys picking 30 random stocks from a 1000 stock universe performed better than a capitalisation-weighted index of the 1000 stocks. However the former will obviously have greater exposure to small-cap stocks, which were known to outperform the bigger stocks.
Trading is a clear example of money helping to make money. When wealthy you can take more smaller yet useful risks, wait longer, have more time to learn from mistakes. Low capital means waiting for very long to accrue anything meaningful and often you'll lose it all before you get to learn or have to sleep/eat less to gain new capital to invest.
Not just that but if something is on the stock market in 2022, the big gains have already been extracted. The people with large amounts of capital privately invest then use the stock market to cash out.
How is having $1000 invested proving OP's point? There are lots of problems with this article if you take things in it at face value, but what you mentioned are not really. Why did you cherry-pick the 85k value?
I just posted this to show that at least the math can work even with extremely small amounts. Having lots of capital only buys you lower and lower risks.
My theory is that finance is all about making things too hard to understand, so that fraud, monopolizing/size advantages and market manipulation are easier to get away with. Fifty years ago that was possible on the stock market because it wasn't open to the general public. During the 80s/90s it was opened up to consumers and since then (adjusted for inflation) it hasn't really gone anywhere. Profits have now moved elsewhere, to where the complexity and the hiding places are (hft, crypto, derivatives)
I greatly enjoy Michael Lewis and his books, but Flash boys was extremely inaccurate, full of factual errors. I've worked in the finance industry, in HFT at one of the firms mentioned in the book. I joined around the time Flash Boys came out, and it was required reading in the firm. Here are some points:
- Michael Lewis really only got one side of the story - that of Brad Katsuyama, who had a vested interest in casting HFT players in a bad light to promote his own business - building the new exchange IEX.
- Brad also blamed HFTs for systems at RBC failing to make massive trades like they used to. There was nothing nefarious here - RBC had just fallen behind the time in technology, like trying to send a Fax in a world where everyone already uses Email. If Brad, or RBC, or RBC software engineers picked up the phone and called any of the exchanges, they would probably gladly update them on the industry and save them all the work of re-discovering it themselves.
- The claims about front-running are completely false. Front running would mean that a market maker somehow knows someone's orders at two different exchanges and somehow is able to "get in front of the line" or even know that those orders belong to the same person. This would mean the exchanges leak information or allow certain users "ahead of the queue". None of this is true. What Michael Lewis called front-running, was HFT firms reducing their risk on other exchanges when they would get traded against on one exchange. They did this without any knowledge that Brad Katsuyama was on the other end, or that he was just late trying to make the same trade at another exchange at a later time. There are no guarantees that you can make the same trade at different exchanges - the same rules apply to everybody.
- Unsurprisingly, IEX as an exchange is no different from others, in that they need market makers (a.k.a. HFTs) to provide liquidity on their exchange. I wrote the code for the FIX gateways to connect our firm to IEX, and it was all business as usual.
I work in the industry too and the things that people mislabel as "front running" is really aggravating. At worst, you could call it "order anticipating": using publicly available knowledge to figure out that if someone hit Exchange A and B, they're probably headed to Exchange C next. But they have no inside knowledge that the same party will in fact send an order to Exchange C next. They're taking a risk by anticipating that.
"Front running" as defined by the SEC has a more narrow definition. It basically means that you have a customer that has placed an order for XYZ and you aware of the order, but you placed your own order to be executed in front them, thus forcing them to buy it from you at a higher price than if their order was executed first. HFTs are not "front running" anybody.
I've seen a lot of pompous threads and misinformation masquerading as facts threads but this one takes the cake for both on HN for me. I've never seen so many people high on themselves for investing in Tesla and Apple. I feel sorry for the people who read these comments or have to talk to these people about the market. Insufferable.
The only thing that I need to know about the Stock Market is that you should buy SPY, change your brokerage account password, and never touch it until retirement age.
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.