A company has a product, which is sold to consumers. A company has a structure, which includes employee counts, capital expenses, and so forth. A company has a roadmap. And dividends.
It's not "zero risk" but to suggest that it's no different than tossing chips on a roulette number or a blackjack dealer is completely absurd.
When you buy a stock, you pay two main fees: the basic broker fee and the market spread to the mid price. The moment you make a trade, you're down.
When you toss chips on a roulette number, you pay one fee. You know there's 36-1 chance of your number being chosen but there's also the zeros that give the house the edge, which give you a 36-1 payout on a 38-1 event (depending how many zeros). The fee is 2-3% percent (on a european roulette table). Moreover, you actually KNOW the real probability in the casino and you KNOW the house edge.
In the market, you have absolutely no idea what the real price is. Maybe Steve Jobs dies earlier in an alternate universe and the company implodes before the iPhone money press gets going. Maybe in another universe, he lives longer and tanks the company because he starts believing the hype about himself. Who knows? In this universe your AAPL bet paid off wonderfully. Liking a product and buying shares in the company is a completely reasonable thing to do, but unless you genuinely know something others don't it's gambling and convincing yourself otherwise is a really really dangerous thing to do.
That's an incredibly broad definition of gambling you're offering: if I purchase an asset (from another entity) with the expectation that it will go up, but information I have is at or below what the other players in this 'bet' then it's no different than betting on Black #26 on a roulette wheel? And all this, you suggest, because I can calculate the odds in the latter case, but I'm too unsophisticated to calculate the odds in the stock purchase case? Stock value is based on an underlying asset, which as a whole, is at least expected to go up, as the economy produces more wealth. And anything CAN happen (eg., a company blows up, a product fails, etc.) But a casino, the house is ALWAYS expected to come out ahead. That's why the odds are so long.
Moreover, you actually KNOW the real probability in the casino and you KNOW the house edge.
By your definition, the house I purchased for investment could fall into this category as there was no way I had all the information the others had (seller, for certain, brokers, and other players).
What's your conclusion about gambling, then? That since the odds are known, and they aren't (by myself), in a stock purchase, then __?
Buying insurance is gambling, as is not buying it. Both courses are sensible in different situations.
The trader who buys aapl after massive amounts of research and maybe a new, key insight is STILL gambling. They probably have an edge to the market, though.
Let me put it this way: if you only ever buy a couple of stocks in your life then there's really no good way of picking them. The expected variance in the rate of return on those stocks is so high that any edge you may have is effectively lost. If you win, you win. Great. But if you buy and sell 10 stocks a day for years, you have absolutely no chance of making money without a real edge, as your skill (or lack thereof) becomes the main signal, not variance.
Your strategy will fail longterm. Buying stocks is the very definition of gambling: buying something hoping it will go up in value. Buying a house is probably a decent bet most of the time. Buying house insurance against fire is a loss making bet when analysed in aggregate (insurers make profit) but so useful to you that it becomes a good bet. Buying mobile phone insurance, if you're not young, drunk and clumsy, is a bad bet. Buying aapl on a hunch is a bad bet, but it paid out. Congratulations.
But here's the problem. While everyone is arguing back and forth about competing against Wall St., game theory, probability and the quibbling over "gambling" which turns out to be nothing more than a convention in conversation (others below admit that index funds and housing are also betting, but to a lesser degree), what no one is addressing is what specific trading strategies we're competing against here.
IF you are a day trader and you compete against other retail day traders and Wall Street trading floors, automated trading systems, high frequency and such, that's one thing. IF you stock pick but pick your stocks for multi-quarter or yearly outlooks, and you absorb information about -- not the stocks -- the companies, following news and understanding what their risks are, then that is a totally different strategy.
Much of Wall St. cares across quarters and short-term. Many retail investors too. I would only advocate medium and long-term stock picking.
Everyone brings up Buffett and his advocating of index funds. What no one here has mentioned is that he's a value investor, buying up stocks when companies are, in his estimation, undervalued.
You folks are guilty of sweeping the individual under the rug in favor of the overall statistics. As if the individual who wishes to buck the trend is, at best, lucky, and at worst, an imbecile.
If you're not interested in the area of stock picking, then that's understandable. But if you're pre-emptively convinced that you can never win, because your knowledge is average, well I suggest that if you're an intelligent person that you reconsider. Again, no one here is advocating day trading or beating Wall St at their own game.
You are missing out by not taking a chance on companies that you think might expand in the coming years. Nothing is guaranteed, and I think many folks on here seem to miss that part of the equation.
Most index return comes from a few stocks that generate extreme returns. By picking a single or a few companies, you're likely to miss out on those outsized returns. Buy the whole market and you can't miss.
(Sidenote: clearly, VCs have done the same or very similar calculus with startups.)
Also, for you to have made money on AAPL you would have had to gamble on something. You had to have bought at a lower stock price. If you bought recently, it would be that Tim Cook doesn't suck and they don't botch the new iPhone. If you bought 6 years ago, it would be something else. If you bought 10 years ago it's that the iPhone would remain dominant, etc. etc.
When you buy the shares of company A instead of company B, because you want to gain more, you are betting that the price of company A is undervalued on the market compared to company B. This is perfectly fine IMHO, but it's still a bet.
So, if you distribute your investment and use index funds for stocks, I would definitely say you're not gambling by any reasonable definition of the word. In between, I'll leave it to everybody to decide for themselves where they want to put the threshold.
I would be interested to hear more of your thoughts about this.
http://fortune.com/2015/02/03/berkshires-buffett-adds-to-his...
All securities are held by someone and the total return of the market is the total return of all those securities. For someone to outperform the market he has to hold a mix of securities that outperforms and whoever holds the opposite mix underperforms. Sock market returns are very much zero sum.
>the other side of well managed hedge funds are usually poorly managed pension funds/hedge funds
How do you pick ones from the others?
>index fund ETFs that blindly buy a bunch of stocks without looking over their financial statements
That's the point of those ETFs, replicate the index exactly. If they're replicating the market average then they're doing exactly their jobs.
Well, I think there's "actively managed funds" and there's yourself. Funds are companies with infrastructures, eyes on them, politics in them. And so forth. I think it's a valid point that it's hard to time the markets and such.
But as a simple person looking at companies you believe in, you can buy and hold. An example. If in 2001/2 when you saw an iPod for the first time, you thought to yourself that the company that made it has potential, maybe you bought some shares in it. That's just one of a lot of examples. Also it helps if you're in the industry that you're examining. We're in tech so maybe we've used some of the products that we believe in, and others we don't believe in.
So that's one consideration.
Also, hedge funds and asset managers do a bit more than buy and sell stocks. They do complex, sometimes crazy things that involve leverage, options/contracts, and very complicated instruments.
There's nothing WRONG with buying a stock index fund, but if you see a company you think might have a winning product, and from some quick analysis seems like it's reasonably well managed, then that's something.
Not everything has to be technical analysis of high risk biotech stocks, shorting strategies and so forth.
And for the retail folks like us, we don't have to "trade" actively, as in buy and sell every day.
That's my middle ground between "competing against high frequency traders or golf course CEO conversations" and "buy index fund and close my eyes for 15 years".
https://blog.projectpiglet.com/2018/01/causality-in-cryptoma...
Basically, we used it to generate pretty awesome returns, and we bias our "trade potential" advice towards reduced risk: https://projectpiglet.com/
It was easy for us to rack up some nice returns:
https://blog.projectpiglet.com/2018/01/30-weekly-returns-usi...
All that being said, I personally limit my exposure to volatile assets - so I wont put more than I'm willing to lose in cryptocurrencies, and regularly pull out profits.
1. Are you actually getting any alpha using this method? Averaged over multiple years?
2. If you are, are you earning a decent hourly rate for researching companies and following the market?
2 - that's an extreme perspective, since there's value in learning that doesn't have an hourly cost. The TOC of my time may or may not be higher than what a fund manager would cost (or the index fund approach being discussed). Then again, monitoring the portfolio 3-4 times a day for a couple of minutes isn't that bad. Initially finding the stocks of interest and doing some basic research does take time.
[edit: grammar]
Your approach has validity, but it's valid for people who a) have no time or b) inclination to learn the market.
It's just ONE approach. You've presented it as "the" approach, full stop. It stems presumably from the idea that you can't "beat" the market.
But that depends what you invest in. And as a human with a brain, and a human with 24/7 Internet, you can do a little research and invest in conservative, dividend-yielding mammoth blue-chip-type companies, or you can seek value.
What I do is:
Step 1. Move all my 401k holdings from previous employers into a Vanguard IRA brokerage account (there are brokerage and non-brokerage variants of the IRA, the latter allowing you to purchase individual domestic stocks and ETF's online).
Step 1b. Create a Seeking Alpha account and add stocks, ETF's, etc. that I'm interested in to my portfolio. I'll watch these stocks for weeks/months as well as read some of the material / URL news links that appear (including analyses).
Step 2. Allocate a certain percentage of the entire portfolio "Boglehead" type funds/companies of the exact type you've just described. Baby boomer nervous-can't-be-bothered investor mindsets.
Step 3. Allocate a certain percentage to companies I know either because I may have worked there, I use their products, or as I work in technology I like the idea of the product or company. AAPL is an example.
Step 4. Allocate a certain percentage to a 'gambling' value stocks. I find these by looking at the NYSE "Biggest losers" and "Biggest winners" lists. If I see something interesting, perhaps I feel I'll either ride a pump and dump trade cycle or simply I feel that the company was unfairly oversold, I'll add that to my Seeking Alpha portfolio, follow it for a few weeks/months, and purchase on a low.
There are a lot of different trading strategies. If you were railing against day trading only, I perhaps would agree with you. But here you're suggesting that the only valid form of stock market investment is to follow a mediocre approach (which is high risk: what if it's time to retire and the market corrects right before?!)