You seem to be falling for the same myth: That "certain wizards" can get +EV. Every casino on Earth makes money from this myth. I believe that there are no wizards in the stock market (or in business in general), and everyone's gains and losses vs the total market are for the most part random chance.
I'm reminded of the coin flip exercise one of my statistics professors did. Everyone in the class stand up and get a coin. Flip the coin, if it's tails, sit down, and the rest of the class repeats the exercise until only one person remains standing. Then interview that student and ask them how they became such a good heads-flipper, and what great strategy he/she used to flip so many heads in a row. This illustrates the survivorship bias we fall victim to when we look at someone successful and try to determine what wizardry they used to become that way.
There are commodity trading firms that are such substantial players in the markets they trade that they control that market. Certain High Frequency firms have scale and breadth of resources to get higher quality data, faster connections and hire guys that rewrite Linux process schedulers in assembly. Warren Buffet's secret weapon is that he never sells (so you never realize a loss!).
The point being - anything else is gambling. And these guys - who look at a market structurally instead of some sort of casino - will eat your lunch in the long run. Their "edge" is actually orthogonal to price fluctuations.
Just my 2 cents.
That's not how mark-to-market accounting works.
Each has their own secret sauce, and you won’t get their returns just by sitting at home and picking stocks. But they do prove that the market is far from random.
Buffet has been "flipping heads" consecutively for several decades, with no regression to the mean.
There are many articles on this: https://www.forbes.com/sites/adamhartung/2014/11/19/why-you-...
And even more recently he did the cool thing of being a top or the top shareholder of the big 3-4 airline companies in America: United, Delta, American, Southwest.
There have also been some pretty big complete buy outs this century. Two come to mine. One being some manufacturing company. Another being a rail company. Both buyouts were in the low tens of billions. And then Gen Re insurance as mentioned above was no small thing either.
There are of course many risks to their business model, e.g. high fixed costs, competition, regulatory risk, technical malfunctions, etc.
They are "lucky" to be in a position to capitalize on the opportunity, but investment luck does not play a role on a day to day basis.
If you've seen a system like this in action, it's a beautiful thing to behold and cannot be mere luck. Transactions stream in constantly. It's not just one big, lucky bet, but thousands of tiny bets with a slight edge. A plot of profit & loss with respect to time looks like an almost perfectly smooth upward line. And if you're good, you can do this every single day for years and years.
Still, I wouldn't say guys like that have beaten the market in a real way. I've certainly never felt like I did. This style of trading doesn't need outside capital and can't scale. If I gave you $100 and armed you with a scalping bot, I bet you could easily turn it into $200 buying hot tickets on Ticketmaster and reselling them. But would anyone call you a genius trader? Could you do it with a million? A billion?
As a business net of all costs like employee compensation and technology, returns to owners are pretty lousy. Compare owning Virtu stock to an index fund since their IPO. Ouch.
People can have an informational advantage and use it to make intelligent trades.
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Which was generated by fair coin, which by 2 headed? How did you decide?
P(all heads|fair coin) = 2^{-L}
Applying Bayes gets P(double headed coin|all heads) >> P(fair coin|all heads) for a long enough sequence.
Your thought process seems incredibly flawed, the idea you have about coin flipping being at all similar to stock picking is laughable. And this to me would indicate that whilst you may believe that your analogy is a good indication of survivorship bias, it is clear to me that you are suffering from confirmation bias. You're looking for examples that suit your belief, and ignoring some basic elements. Let's look at this one seriously, coin-flipping is an statistically independent event, whilst if we apply even some fundamentals of finance and EMH (which I don't agree with, btw), we will quickly find ourselves in the realm of correlation. I never stuck around Uni long enough to get deep into this stuff, but you could do with some reading on the CAPM model. To quote from wikipedia on the CAPM model:
"Financial correlations play a key role in modern finance."
You only have to look at the fact that many companies have been put out of business by companies like Amazon, which means that at the very minimum, you have at least ONE external factor that has an influence on the performance and price of other securities.
And this is all without even starting on the even more hilarious notion that information across the market is symmetrical, that's right, I as a lowly consumer exchange peasant, have the exact same information available to me as Jim Simons and the team at RenTec. Who's Medallion Fund, by the way, returned a 35% CAR over a 20 year period. You have to be mental to believe the shit they teach in undergraduate Finance.
How instead you come up with real numbers? Like you pick a stock or say an index like the Nasdaq and analyse if its movements are truly random or not?
Also you are aware that true random might mean perfect distribution? You don't know whether the tick is up or down but you know you'll have a distribution that is 50/50 up or down. So you can market make based on it (buy and sell on the same time).
There are more to trading than day trading: Collecting premium on futures or options, arbitrage, collecting interest on bonds, etc...
My stock picks have been:
* Google in 2003, because I worked in a call center and saw EVERYONE using it all the sudden to find answers on tech support calls.
* Chipotle at their IPO because I saw the huge lines at every location in my city.
* Amazon in 2008 after the big stock market crash, simply because it just seemed super undervalued considering everyone was still using it / loved it.
* Broadcom in 2014 because it was obvious the cellular industry was going to keep growing and they were well-positioned / undervalued at the time.
None of that thinking required me being a wizard. Nor was it luck. More just seeing obvious momentum and being willing to act.
First, it's easy to look around your little bubble and see that people are lining up at your local Chipotle or that people use Google for solving tech support problems, and conclude that Chipotle and Google are taking off. They may be not be doing as well in other locales/sectors.
And second, how do you know that these signs of promise aren't already priced in? If you can see signs that Chipotle is doing well, so can everyone else. And they have deeper pockets and better information-gathering capabilities than you do. Nowadays satellite imaging and computer vision are used to count the number of cars in parking lots of retailers to predict earnings!
Lastly, there are innumerable complicating factors that the average retail investor has no idea how to account for. Maybe the stock price is low because their EBITDA is barely staying ahead of debt service payments. Did you read the SEC filings? Maybe they're having difficulties scaling their supply chain because they lost a big contract with a major supplier. Do you know enough about the domain to account for how much that should affect the stock price? Who knows, maybe there's even a seasonality factor to the number of people who go to eat spicy food, and your guesstimates will fall apart in 6 months.
I wouldn't even bother with this kind of investing. It's just gambling. If you seem to be winning over time it's either because you're lucky or because the markets are going up in general. So just invest in index funds- you'll have lower volatility and you won't be betting against people who have nothing to do but sit around all day thinking about how to beat you.
> look around your little bubble
I didn't (and don't) have a bubble. In fact, I frankly despise the Bay Area and SV because it constantly tries to put you in a liberal / wealthy bubble.
>If you can see signs that Chipotle is doing well, so can everyone else.
Apparently not, though. They doubled on IPO but most people were still VERY skeptical of them. I could see that they had 100% solved the problem of "fast casual" service.
>Nowadays satellite imaging and computer vision are used to count the number of cars in parking lots of retailers to predict earnings!
That should make you want to invest in the #1 company that manufactures satellite components.
Almost everyone lives in a bubble. Unless you're a nomad traveling constantly, you mostly just see what's in the vicinity of your house or apartment. Your local area with the successful Chipotle is a bubble. Tech support is just one tiny slice of the uses for a search engine- a bubble.
> Apparently not, though. They doubled on IPO but most people were still VERY skeptical of them. I could see that they had 100% solved the problem of "fast casual" service.
Usually when people say this, there was some element that they didn't identify which made the investment riskier than they realized. It seems in retrospect that it was inevitable that the stock would go up, but if you could go back in time and get inside the minds of other investors you might be appalled to learn of the complicating factors that you didn't even take into account.
Just think about it for a moment. Think about how much human effort and capital is poured into price discovery in the markets. Billions of dollars. Teeming trading floors, millions of lines of code, people all around the world running models and analyzing filings and biting their fingernails watching the ticker. Do you think you know better than they do what the price of Chipotle stock should be?
The answer to that question may well be "yes" if you have expertise in the domain and you're experienced with investing and financial modeling. But it's probably not.
> That should make you want to invest in the #1 company that manufactures satellite components.
Which is what everyone else is thinking too. The trick is determining whether the price that the market has agreed on is too high or too low.
I understand the idea, and I might agree. I just wanted to point out that in the book "The Intelligent Investor", there was the idea that you could think about investing into the second best player in a certain space.
I think the reasoning was that there is more opportunity for growth for a second-grade company than a first grade company. Maybe the first-grade company is not looking at the problem in an innovative way. I think it probably depends on the case.
I tried to look into "second-grade" in my copy but that's a term relating to stocks, and not the leaders of an industry.
Maybe I'm misinterpreting that book or misremembering it
Edit: By the way, good job on the successful investments! I wish I was as confident about my observations of different businesses.
Why? Seems to me that all stock picking has the exact same level of risk.
As someone who has done some gambling in the stock market using this kind of thinking it has not been a good strategy compared to just buying and holding index funds. Sometimes I get lucky and sometimes I get unlucky buying individual stocks but my most best returns have been buying broad index funds and holding them.
This ignores the people who also "saw the obvious" in 2003, 2008, and 2014 who lost their shirt.
The examples I listed were not random chance. They are companies that had absolutely dominated their market positioning and were later massively rewarded for doing so. It's fairly easy to see when a company is eating everyone else's lunch.
Again, it isn't just random chance. It also isn't rocket science..
Of course, it is possible that one beats the market if either 1) one has privileged information, or 2) one has exceptional insight. Both situations are possible, but rather implausible.
If it's so easy, then everyone would be buying the stock and it would be pushed up. Then you're risking buying an overpriced stock that's not going to be able to deliver on the expectations required for it to pay off.
Amazon is clearly eating everyone else's lunch in its domains but then it's trading at over 275 times earnings. It's not remotely obvious that you should buy Amazon stock at that price.
I've personally invested all my capital into my own ventures at this point, so I haven't really thought much about the next big thing, stock-wise.
But, short answer, look around at what products people (or businesses) are addicted to now that they weren't two years ago.
Not many people I know are addicted to Teslas. And Amazon was just as addictive two, or even five years ago. So it's well past its prime now (lol).
Stock picking is the same as gambling, you look for value and try overtime to beat the market. Also like gambling is how people remember and talk about their wins but forget/ignore their losses.
If the market would crash 30-50% tomorrow, which stocks would you buy? Probably Google, Apple, Facebook, Amazon, and the likes.
Everyone has losses, and you can't always be right. But within your area of expertise or interests, you should probably be able to pick a few good stocks of good companies because you actually care and understand how they operate. But to do it structurally and consistently is harder.
I'm sure someone will reply bullshit, but that's at least what I believe. The market isn't efficient.
Eg - Everyone using google, everyone eating at Chipotle, everyone being addicted to cell phones, etc.
Regarding non-consumer facing companies, I don't see what the problem is. If you have no information about the company, then it's gambling to buy it. So you miss out on some companies, no big deal. Most people only have enough money to make a few bets, so you should bet on what you know about. It's not like a test where you lose points if you don't answer a question; you don't lose money if you don't buy a stock you don't know about.
When did you sell? And what is you track record of wins vs losses?
I missed out on Apple because almost NOBODY used Apple in the Midwest in the mid 2000's -- everything was MS. That's a great example of me living in a bubble (which I just said in another comment that I didn't, but there ya go)
I missed out on Priceline even though the tech support center I was working in had a whole division dedicated to doing their customer support! Basically, they just never seemed "legit" to me, they seemed like a scam, who the hell wants to "choose your own price" for something important like a flight and then wait and see if it gets accepted? Very weird to me. People also never seemed too excited about them in general... extremely hard to predict they would become the acquisition masters that they did.
Both solid examples of blind spots in my strategy.
like RenTec/Medallion... who sometimes look too good to be true, then again, if they were doing something illegal for 30+ years, you'd think by now they'd be caught. The only alternative explanation is they indeed have a unique model of the markets they continuously refine that allows them to outperform most everyone.
In absolute terms Renaissance isn't even spectacular. There are capacity constrained traders whose Sharpe Ratios and return on capital are multiples of RenTech's. What's impressive is that they manage to do it with a billion dollar AUM. That's small compared to some of the biggest HFs, but far more than a typical high turnover strategy can put to use.