And if you avoided the worst 10 days, your earnings double. If you avoided 20 worst days, your earning doubled again.

What is the point of such trivia? That most of the profit or loss happens during the days of high volatility?

The point of the trivia is arguing against trying to time the market. Lots of people predict crashes are coming, so shift money from equities to cash or bonds. Unless you can time it perfectly (you can't), it is better to hold because you don't know when the best or worst days are.

I can attest. Beginning of covid: stocks are crashing, going down 10% every day, I read the paper from that uni in London that says we are going to be alternating light and heavy lockdowns for the next 12-18months. More than a year of lockdown? How can the economy survive this? I’m like: sell, sell, sell. Right when I sold the market went up like crazy and has more than recovered now.

Right and you probably do not follow the market very closely. Which is fine, that is most people. If you start watching it closely though (and I mean over several months to years) there are many patterns that emerge. I knew a lot of people that bought the dip last year. They weren't worried about how long it would take the economy to recover, or if it would go down further because they knew things were VERY cheap and it would eventually come up unless there was a global economic collapse at which point it wouldn't matter anyways.

Most I knew dollar cost averaged down. It paid off very well.

“Buying the dip” sounds brilliant in theory but it fundamentally requires holding on to cash outside of the market waiting for that dip to happen. An order of magnitude more gains have been lost waiting for dips that never come than have been made holding onto cash waiting for those dips.

I have a friend who sold it all in 2017 expecting the crash to come any day now. He’s still holding on to cash waiting for that dip. I’m sure in early 2020 he felt prescient and that this gamble would pay off. Only it didn’t, and he likely missed the one opportunity he had to minimize those lost gains. Not only does buying the dip require correctly guessing the bottom, but by definition you have to have the constitution to put it all in at the peak of bad market news.

Yes and no. There's buying the dip when you actually have the time and money to do a lot of this.

And then there's buying the Covid kind of dip. Personally I didn't sell early enough and I didn't buy back in early enough either. However I also never held onto lots of cash to buy the dip. I simply sold stock I had been holding for a very very long time already anyway, so yes I lost some opportunities but still made enough for it to be worthwhile.

Made up numbers for simplicity but if you have been holding for a long time and your return is 100%, if you sell when it say dips to 90% or 75% or whatever doesn't really matter as long as it then goes down further. That's why big dips like Covid are great for casual investors if you ask me.

Let's say it then goes down to 25% and then goes back up. You don't look every day, you don't trust it yet, because it's been going up and down in between but ultimately dropping down to 25%. But at some point it's been going 2 steps up, one step down for some time and you decide to buy back in at 50% of what your previous holdings had been worth at the peak. You still made a ton of extra money by selling and buying back into the dip.

Usually I'd say your correct. Like if I hadn't been laid off and decided to go back to school I would have had no problem buying the dip during the recession in 2008.

But last year could have gone very differently. The US (and the world in general) was tested in all sorts of ways last year in ways the people and the government are really not used to, and things probably should have gone a lot worse than it ended up going, but somehow the country made it through intact, although unfortunately with a lot of dead people and failed businesses.

It went well (for the stock market, at least) this time. Next time, maybe not, especially with climate change continuously getting worse with almost nothing being done about it.

For myself, I didn't bother selling any of my 401k (and kept putting money into it), so I didn't lose anything, but I did start putting spare money into other assets.

That assumes you have the time to make up for bad market years like that. If you're retired and you see the market tank like that, its hard to fight the urge to not panic sell

I agree that timing the market usually doesn't work. But it doesn't work in both ways. You are equally likely to miss or hit both good and bad days, with the same or similar impact on total return.

This is a guess based on anecdotes on recent volatile periods, the general scenario could be this:

1. Market falls sharply.

2. General public panic and sell, while market timers double down.

3. Market falls further, market timers panic and sell.

4. Markets rebound sharply, with the above-mentioned people missing those good days.

The key assumption is that at least some really good days usually follow really bad days.

50% of the time it works all the time

The author's colleague had a blog post on the topic, reasoning that missing either the best or worst was not a particularly interesting "what-if" since the best and worst days are both associated with the same bouts of higher volatility. He used the 200 day moving average to try and model the effect of 'missing' both. It honestly didn't turn out so bad, but one takeaway is that backtesting (aside from not being a necessarily great projection) does not model personalities.

https://theirrelevantinvestor.com/2019/02/08/miss-the-worst-...

If one is equally likely to miss both good and bad days, but overall the market is up 10%+ in a year (repeated over decades), then money left in the market will double every 7 years or so (Rule of 72 [1]). In that way it is almost always preferable to invest and hold in index funds.

The S&P 500 has returned about 13.6% return per year from 2010-2020 [2], or doubling your money about every 5.5 years. If that rate continues or increases then of course it makes no sense to try and time the good or bad days.

Of course, some will argue that a pure index fund market won't be priced correctly as it is active/day traders who continually buy and sell to set a proper market rate. If everyone buys and holds like Bitcoin then there is no true reflection of the companies value in the stock. Those that would go under otherwise may be buoyed or bought out just for their stock value. There are many opinion articles out there on the topic, but so far it hasn't been observed at scale (I think).

[1] https://en.wikipedia.org/wiki/Rule_of_72

[2] https://www.businessinsider.com/personal-finance/average-sto...

The good and bad days are not equally likely to be equally good/bad, though. Long-term, the market tends to rise; the good days will outnumber the bad in either quantity or quality.

But the analysis assumes you timed the market "perfectly" and sat out only on the 10 best days.

It’s such a fundamental contradiction you see it everywhere. The quote “buy low, sell high” says we should time the market. Even the classic “percentage of bonds to stocks should be your age” requires us to time the market. And if you just buy stock when you happen to have spare cash, that too is “timing the market.”

I would argue that the percentage of bonds should be your age is not timing the market in any meaningful sense of that phrase. (I also think that's too conservative an asset-allocation, but in any case "make a periodic rebalancing trade according to this preset formula" is the opposite of "time the market".)

I would argue that the distinction between periodic rebalancing and timing the market is subjective. Even if you aren’t trying to rebalance based on market conditions, ie selling at a high, the downsides of market timing are still there just the same. Just because you don’t care about the timing of your trades doesn’t mean the timing doesn’t matter.

By that logic, the initial investment timing matters as well, which is technically true of course but practically not particularly useful. If you want exposure to equities, you have to buy equities at some time.

The part about timing it perfectly is not true. You can time it, for example predict that the market will crash, shift your money to bonds now, the market goes up for another year and then dips below the level you exited at. At that point, you can shift back and you'd have made less money than someone who timed it perfectly but more money than someone who stayed.

>> And if you avoided the worst 10 days, your earnings double. If you avoided 20 worst days, your earning doubled again. >> What is the point of such trivia?

The point is -- it is hard to avoid/miss the 10 worst days since you dont know which ones they will be. It is easy to capture the 10 best days because the easiest thing to do is be invested all the time.

Isn’t it easy to miss the bad days because after it happens, you can buy stocks?

> What is the point of such trivia? That most of the profit or loss happens during the days of high volatility?

Simply that you shouldn't try and time the market, but continue to "buy and hold". The likelihood of picking these exact 10 or 20 days is near 0, so it's an irrational thing to do.

I'd politely disagree. The massive fall and recovery around March 2020 was easy to predict, so I did and made a handsome amount of money. I mean, if a small asteroid fell on an important trade route or if another serious pandemic began, would you seriously suggest to just hold the stocks?

Curious to learn more, if you don't mind sharing. I wrongly assumed things would get quite a bit worse than they were at the point when sp500 turned back up. How did you know that was the bottom? Fundamental analysis? Or were you buying continuously on the way down?

Well, I can't speak for the person you are replying to, but think about a company like this (in general) - has something changed such that the new price (usually a drop) makes sense?

Take Amazon - down 15% or something. The virus is there yet, but is Amazon really worth 15% less? Won't people shop online? There's no way Amazon is going bankrupt, and there's no way that the U.S. would let companies like this fail over the virus, so is it really worth 15% less?

You don't have to time the exact moment of the bottom, you just find it once you see double digit loses in extremely good and valuable companies who are pulled down with the market. Airlines? Yea probably wouldn't have been an ideal buy, though if you waited long enough you've rebounded on them. But it seemed pretty safe to buy the big tech companies, Berkshire, etc. when they were experiencing double-digit percentage market losses over a likely temporary phenomenon.

Now, was it possible that things would have gotten much, much worse? Yea. So OP and myself could have been wrong, but instances like this are a bit of informed gambling, if you will.

I did too, but I think that's besides the point.

Except it is much easier to participate in best days than avoid worst ones.

Participating in best days requires you to just have your money invested all the time.

If you know how to avoid worst ones, let me know. We are managing risk for one of the biggest banks in the world and would like to buy this intel for a bunch of billions of dollars.

the point is to remind folks that if you want to invest in the market safely, use index funds...otherwise, enjoy gambling

This "trivia" points out the flaw in the "long term average" argument: The stock market is occasionally so volatile that 40 days out of 34,675 have an inordinate effect on returns over those 34,675 days.

Over 95 years of trading, 0.12% of days account for far, far, far, far more than 0.12% of market impacts.

Yeah so what are you going to do about it?

What kind of argumentative nonsense comment is this?

The point is that of course there are the outlier days that disproportionately affect gains/losses, that doesn't invalidate the long-term average argument though unless you have some way of identifying those periods in advance. If you could do that then you A) would not tell anyone until B) the SEC came knocking at your door to explain how you turned $1k into $1B over a very short time span.

I think it's a legitimate question: we all have a large chunk of savings stuck in this game because of perverse incentives set by corrupt/inept US gov. Now what?

Hedge with options. You can even out the highs and lows, make your returns predictable with in a tight window and act accordingly.

I understood it as: HODL

How do you "miss" 10 days?

Unless you are a day trader (aka gambler), "normal person investing" is about trickling cash into an account slowly over time into low-cost funds/etfs, covering the grid, and pretty much never selling until retirement. Maybe a rebalance here or there over the decades, but you're never "out" unless you're paranoid and liquidate into a cash position, but refer to point A.

This is the strategy myself and many of my college friends took when we graduated in the late 80's. And we're all pretty comfy right now. We had a few buds that went all day-trader and they lost their shirts, with one and only one exception.

When the 2008 crashed happened the office I worked in had lots of people take their money out of their 401ks, IRAs, or brokerages for years. In hindsight it may have been irrational but from what I remember, people were scared. Some people lost their job for years (remember the various news stories about 99-week unemployment people?), you needed whatever money you could get. If that meant cashing out everything you had, so be it.

There were other people that weren't fazed by it and obviously had the chance to not miss the "days."

Guessing this type of anecdote may be more common than people think.

Not only more common -- that is effectively what crashes are: demand for liquidity exceeds the supply, and the way markets are set up, this condition causes an even greater demand for liquidity, in a feedback loop.

Most of the time, you can get liquidity, but only at a price that really hurts. Sometimes you can't get it at all.

That makes sense, growing up my parents never contributed or had a 401k and I myself didn't start taking investing or contributing to anything until last year.

> This is the strategy myself and many of my college friends took when we graduated in the late 80's. And we're all pretty comfy right now.

I wonder if your Japanese peers in a Nikkei 225 fund over the same time period would agree with your strategy. Buy-and-hold for them is still down 50% over the last few decades.

Lot of people bring up the Nikkei but averaging in money in was still better than holding cash over a long enough time period. I highly doubt anyone bought at the peak and then never bought again afterwards.

Not if they were slowly and continuously trickling in as the gp suggested. Still Japan is a cautionary counter example to the stock market always goes up.

Why would expect the Nikkei 225 to provide similar returns to the S&P 500? Company quality varies greatly between these indexes.

> Why would expect the Nikkei 225 to provide similar returns to the S&P 500?

Why would you expect them to be different?

> Company quality varies greatly between these indexes.

Can you elaborate on that? Has the "company quality" differed between the two indexes 30 years ago and was the market mispricing it? Is the market pricing these indexes correctly now? Do you think the S&P 500 is going to provide better results than Nikkei 225 going forward?

Japan has a population of 125 million people and is one of the largest economies in the world (3rd / 4th largest depending on if you're using GDP or PPP).

Why wouldn't they have similar companies?

Lots of well known global brands in Glorious Nippon, too.

This is a common misconception. It's so common that I feel it merits a decent explanation -why- it is incorrect. Not to pick on your comment - it was just the first one I saw that mentioned the Nikkei :)

You can't simply look at the price graph of an index or a stock and make judgments. Aside from dividends, companies can do all kinds of wacky things such as special distributions, perform buybacks, issue new stock, pay out class action settlements etc. Oftentimes stock holders can make extra money through stock yield enhancement programs: if I hold a share of Google in my account at Interactive Brokers, and it has a borrow fee of 5%, IB will automatically lend my share out to people who want it, giving me some decent cash on the side. They split this 50/50 between you and them, so if I had 1 share worth $1000 of Google, that'd be 5% * 1 * 1000 = $50/year lending cost, of which I'd get half, or $25 profit. (Worth noting: My share remains mine to do what I want with at all times - the lending doesn't affect me at all.)

Unfortunately it doesn't even stop there. Even the total profit is not a good enough indicator. Imagine a stock market that craters from 2020 to 2030, going from $50 to $20. With dividend reinvestment and other things added, your total account value is $25 in 2030, or half of what you put in. However, in the same time, the cost of living halved. Your investment would buy exactly as much bread, eggs, housing, Netflix etc as it would when you put it in. Was your investment a good one? You still can't know: you'd also want to take a look at things such as other foreign markets, exchange rates, risk, volatility, and alternative types of investments (bonds, housing, land, etc.) I'll ignore those factors for the rest of my comment, but if you want to see data on the Nikkei and CPI, this is great: https://dqydj.com/nikkei-return-calculator-dividend-reinvest...

Anyway, back to Japan. Buying the Nikkei at its absolute peak in 1989 and simply holding it (with dividend reinvestment), never adding a penny to your account, would have produced total returns of 54% in US dollars or 13% in Yen. Still poor returns on an annual basis, yes, but this is with two rather unusual assumptions - 1) buying at the absolute all-time peak way back in the eighties after a to-this-day unprecedented growth spurt, and 2) investing on that one unfortunate day and never putting in another penny. Most people put money in gradually over many years.

Specifically, what the gp comment said was "trickling cash in slowly over time". Assuming you put money in for the decade preceding the 1989 crash, your total returns today would be (by year, investing in December, US dollars):

1989 54%, 1988 71%, 1987 134%, 1986 261%, 1985 558%, 1984 821%, 1983 956%, 1982 1237%, 1981 1172%, 1980 1241%, 1979 1603%. Average 737.1%.

For the decade after the crash, and later:

1989 54%, 1990 130%, 1991 133%, 1992 187%, 1993 154%, 1994 106%, 1995 106%, 1996 120%, 1997 216%, 1998 215%, 1999 112%. Average 139.4%.

1999 112%, 2000 208%, 2001 356%, 2002 432%, 2003 272%, 2004 230%, 2005 163%, 2006 141%, 2007 157%, 2008 257%, 2009 189%. Average 228.8%.

If you had contributed $1000 per month from '79 to '89 you would have $1.1 million today; if you did the same from '89 to '99 you would have $316k; if you did that from '99 to '09 you'd have $434k.

Over any span of time, if you contributed a few hundred dollars per month to the Nikkei during the length of a typical career, you would be a US dollar millionaire today. I would say his Japanese peers are doing just fine.

My old job 401K was shifting into the new job 401K, so for a week or so my $ was in a check in the mail between companies, and I think I missed like 2% gain. It's semi real $. It's annoying.

This is one reason why paying for a wire transfer, ACATS transfer or other ways to move money faster can make sense: like the top comment said, you lose the top 10 days and you lose half your return.

Unfortunately for a 401k transfer there's no wire or ACATS (or even ACH) options, so you're basically screwed there. As far as I know you're basically forced to wait around for the money to move by check. However, you can insure yourself against the "risk" that the market jumps while you're out of it by using a smaller, separate account and options.

The investment horizon for the average American is 45 years, 2 weeks doesn't mean diddlysquat.

Except that the grandparent comment was showing how missing the best 2 weeks of days over 45 years really does wipe out a significant amount of gain.

I agree with this except I think if you know a stock or two is good, diversification is unnecessary. I’ve only had two stocks in my portfolio for the last ten years.

Same for the lottery, if you just know which numbers are good then you only have to buy one or two tickets ever and you're set for life.

You cannot study about lottery numbers however. Whereas studying business isn't impossible.

All of the available evidence demonstrates that even experienced fund managers with access to extensive, expensive, and focused research on the companies they invest in perform no better on average than VTSAX.

Further, there’s no strategy to find the winning fund managers. The distribution of winners and losers over time seems to be exactly what you’d expect from random chance, and even fund managers who’ve been successful for years have the exact same odds of having their next year be awful as anyone else.

This is a bad analogy. The stock market is not a lottery. It’s a place to buy and sell shares of a company. Most people treat it like a lottery and that can serve you rather than hurt you if you know what you’re doing.

For all the DD you do, there is no predicting the future.

Plus there is a very real incentive for companies to do shady things, e.g. Volkswagon or Enron.

Are you sure those companies you're holding aren't lying out of their ass? Can you prove that? Like, unless you're in the accounting dept. at those firms -- or someone who can otherwise get those numbers -- you can't.

At that point it's gambling. It may be akin to counting cards, where you can make probabilistic guesses, but best case is still uncertain.

Otherwise you're rocking a very special secret, or are manipulating the market. But for the rest of the us stock plebs, is effectively gambling.

Yes.

I am happy for you that your 2 picks have been good. But most likely you have been lucky (maybe you picked AMZN, TSLA). Modern portfolio theory states that diversification gets you closer to better returns on average with lower risk. [1]

https://en.wikipedia.org/wiki/Modern_portfolio_theory#Divers...

I would say people who picked amzn and Tesla are lucky. The jury is out on amzn. Bezos did something no public company ever did to the extent he did. He put customers before profits in an extreme way. Then, he built another multi billion dollar unit from scratch with AWS. So far, it’s worked out but the PE makes it speculative nonetheless. But the gap is quickly closing making it an investment grade issue. I don’t know so I leave it alone knowing I’ll regret it one day. That’s fine. I stay away unless I’m 95% sure. I would say s&p 500 represents 100% certainty overtime, because if it wasn’t, life as we know it wouldn’t be the same anyway we’d have bigger problems. Tesla is just a dumb gamble. There’s no justification at all for its price and history shows us what can happen with auto stocks.

Methinks 'johnwheeler' is full of it and probably just discovered reddit, WSB, and stonks

Ultimately it's about risk (permanent loss) control, and if you've done the research into those couple of companies, have high confidence in their continued success, and are diligent in continuing to update your views, then it sounds like you're managing risk well. There's always the chance of unknown, idiosyncratic, and potentially disruptive factors though--from a financial planning and risk management perspective, even founders are urged to diversify away from their own company's equity eventually, regardless of how successful they are.

Yes there’s a bigger chance of a black swan event. You have to answer for yourself if the extra point or two of cagr is worth it.

Time in the market vs timing the market. The former is easier to do but you need to be patient, the second could give more gains but the chance of you timing the market right is basically zero

> It's likely to be a "picking up pennies in front of a steamroller" type trade.

What does that mean?

If there's a highway made of pennies that is being maintained by a steamroller, you can make a very consistent but small profit by picking up pennies every day. Except for that one day that you get run over by a steamroller.

A better example is imagine that every day you bet on coin flips. Every day you go home after you're up $1. You start off with a $1 bet, and double the bet every time you lose. So for example one day, you might lose $1, then lose $2, then win $4 for a total profit of $1.

It's a foolproof strategy! You win $1 every day and you can't lose. But of course it assumes that both you and the house have an infinite stake. But if not, one day the house flips 16 heads in a row and you don't have $65536 to bet a 17th time so you go home down $65535. Kind of makes your $1 daily wins look pretty stupid now, doesn't it?

There are tons of options plays available on the stock market that have a risk profile similar to the coin flip example.

This is called a martingale bet (https://en.m.wikipedia.org/wiki/Martingale_(betting_system)). Doubling down on losses would be an example of a martingale bet.

I think this is also a reason why tables generally have set limits.

I don't think so. If you as the player make bets a series of bets, each with a negative expected value then your total expected value will also be negative. It doesn't matter if you double after every loss.

The limits are mostly because the casino can't afford to take on a 20 billion dollar bet from someone like Bezos. Even if it has a positive expected value, they will still go broke the 49% of the time they lose it.

The martingale strategy works because this theoretical gambler has infinitely deep pockets to withstand the losses.

Setting bet limits can reduce the effectiveness of the martingale strategy.

I don't think it matters, even with infinite pockets. Let's say 3 is the max number of losses we will accept. 50-50 coin flip, start of betting a dollar. 7 out of 8 times we win a dollar. 1 out of 8 time we lose a dollar, double lose 2 dollars, double, lose 4 dollars quit.

(7/8)(1) + (1/8)(-7) = 0

Generally: n = number of losses before quit.

E(x) = (1-.5^n)(1) + (.5^n)(-2^n+1)

     = (1) - (1/2^n) - (2^n-1)/(2^n)
     

     = (2^n)/(2^n) - 1/(2^n) - (2^n+1) / (2^n)
     
     = (2^n -1 - 2^n + 1) / (2^n)
     
     = 0

So with a 50-50 our expected value is 0 even with an infinite bankroll. Which makes sense, there is no way to transform a series of neutral or negative expected value bets into a positive expected bet by combining them.

With an infinite bankroll there is no reason to stop at three losses. In an infinite series of fair coin flips there will be deviations in the distribution around the mean. A gambler can simply choose to stop at any point of excess “wins” as long as he isn’t stopped out due to exceeding his bankroll.

The crazy thing about infinite pockets is that the strategy will favour the gambler even if the odds are 1-99 (or any nonzero probability of winning).

Using expected value for assess winning strategies don’t work with infinite bankroll.

Think of a slowly advancing steamroller, with pennies scattered before it. You can run around picking up these pennies, for small but consistent gain over a long period of time. Just don't take your eye off the steamroller!

The canonical example in recent times is the XIV blowup of 2018, which inversed VIX (a security tracking market volatility). So if you held XIV you basically bet that large market moves wouldn't happen - you're shorting volatility. Take a look at the graph to see how that ended up; the steamroller caught up to them! https://www.rcmalternatives.com/2018/02/why-did-xiv-implode/

There are trades where you can make a small profit regularly, but on bad days you take huge losses. The huge losses outweigh all the potential profits by a large margin. Just like picking up pennies is a small gain while risking death to do so

Traders who engage in such behavior are also humorously said to "eat like chickens, shit like elephants"

I think it means doing something high risk for low reward.

It means doing something high risk but the risk has low probability, and for low reward.

No rational mind would do anything high risk low reward, unless the risk has low probability. Then it's just like selling insurance.

A good example is selling options for premium.

You can sell a put option against a stock.

Say the stock is $100 right now, and you sell a put option one month out for a strike price of $90.

The seller of this put option essentially bets that the stock will still be above $90 in a month.

The buyer of this put option is betting that the stock will be below $90 in a month.

For executing this trade, you, the put seller, receive premium, say $1. The buyer pays you $1.

You have a sold a very high likelihood bet and received $1 for taking on the risk. The buyer has bought a very low likelihood bet and spent $1 for the chance to win.

This sounds great! In the long run, stocks tend to go up so you should win this bet the vast majority of the time, collect your $1, and make the same bet again.

This is the "picking up pennies" stage.

Now what is the steamroller? The steamroller is the low likelihood but very high loss scenario that this stock or ETF absolutely crashes while you are on the selling side of this open put option bet.

If it crashes to $N where $N < $90, the put option buyer has the option or right to sell you the stock at $90, even if it is worth hardly anything. So you have now paid $90 for a stock worth less than $90. It could be $0, the company could be bankrupt. Your loss is -($90-N)+$1. (Note that because of your $1 premium, your breakeven on this trade is when the stock is at $89, not $90.)

If you put up the collateral (the money needed to buy the stock at $90) for the bet with your own money, you are out that money. If you put up collateral on margin (borrowed money) you can be mega screwed.

This is the steamroller. You picked up $1 here and and there but then you got hit with a -$20 or -$50 or -$90 steamroller when you may have not even had the money to cover it.

Yes the steamroller is very low likelihood, but you have to hit pick up a LOT of pennies in a row to still come out on top after getting hit by the steamroller.

It is important to note that there is a ton more nuance that can go into running this kind of strategy, but in general for the average person, buy and hold will always outperform a strategy like this for several reasons, not least of them being that the income received for premium is taxed at income rates, where gains from buy and hold will be taxed at capital gains rates.

Very sophisticated investors do run this strategy with many ways to handle the tail risk, and their sophisticated strategies do not necessarily stop them from getting absolutely screwed when things go bad like during the flash crash at the beginning of coronavirus. Modeling and mitigating tail risk is hard, because terrible events are not as common as normal events and when things go terribly, they usually go terribly in a way no one has ever seen before.

Just a quick note here, selling puts is actually the worse of the examples you could have mentioned, because you can simply use it as a way to maintain an open order for the stock at a given price while getting paid for it.

Selling calls would be a better example, since in that case losses are potentially limitless.

True, but a casual investor is less likely to sell naked calls with infinite loss.

When they sell covered calls and lose the bet, the only loss is missing out on the run up of the stock.

I mostly just used the put example because it maps better to compare to a buy and hold strategy - good if market is up, bad if market is down.

It's also a well-known pennies-in-front-of-steamroller strategy that hedge funds have gotten very publicly burned on before, so anyone interested could research more.

Your trades have a near-zero (probably positive) mean but very negative skewness.

It means doing something very risky for little overall gain.

it's like shoplifitng. big penalty if caught, small reward if you get away with it, which most do until too late. asymetical payoff.

Pat of most modern economic theory around the stock market is slow and steady, sustainable growth. It's a fairly 'liberal' policy choice as you can't, say, tweet something to spike or drop a stock price and benefit (or have those in the know benefit). For example, several economists say that stagnation in the market is not necessarily a bad thing and shooting for the moon in stock pricing by chasing continual growth can lead to companies overreaching or expanding then crashing hard, hurting consumers and their employees worse than the gains created short term.

https://www.wbur.org/onpoint/2020/02/12/economists-slow-econ...

This is in addition to noting the stock market is not a representation of the economy or its health. slow, continual, predictable growth is critical for planning economic and fiscal policy along with preparing for rough times, like when a pandemic shuts down global production.

I often refer back to the stock market or simply inflation rate before the US went off the gold standard and instituted massive reform and regulation of markets. Some years the US would bounce back and forth between extreme negative then positive inflation rates, ex:

https://tradingeconomics.com/united-states/inflation-cpi

Set the chart range to MAX for effect, or see a table of data here:

https://inflationdata.com/Inflation/Inflation_Rate/Historica...

In 1920 inflation was close to 22% in the spring but a year later was about -15%. No way that was helpful for preparing for an economic downturn like we see in the general accepted 10 year business cycle today. Image starting a company and all your initial costs are 20% higher than you planned, then once you get production up and running your goods are worth 15% less! Market stability breeds stability but not high return brokerage accounts.

Ah yes, real estate, the classic example of something "growing consistently with low variance over a long period of time", is akin to "picking up pennies in front of a steamroller".

Nah, actually, I think that growing consistently with low variance over a long period of time means that the asset is objectively a good buy...

>f something grows consistently with low variance over a long period of time

but that is what compounded interest is, no?

But I agree that this why market timing does not work, at least not for the vast majority of ppl and funds. If you miss those good days, you are screwed.

Yes, and you can expect relatively steady compounding returns at the risk-free rate (the clue is in the name.)

When you see return rates higher than the risk-free rates that still seem like they exhibit low variance, then one of two things are true:

1. Either you have found something that produces way too much reward for its level of risk. This is for anything publicly traded somewhat unlikely.

2. Or you have found something that's prone to rare, but incredibly big swings. The fatter the tails, the more likely it is you'll get a long, good run followed by something that completely wipes you out.

I think the way you should think about the stock market is similar to beating the Casino in blackjack & card counting. When you know the deck is rich ins face cards make more aggressive bets, when its low in face cards be frugal. I.e. don't put lots of money into the market when its hot & put more money in when its cold. That way you statistically have a better chance on getting a good return.

You are making the classic mistake of confusing domains exhibiting a normal distribution of outcomes (casino games) with domains exhibiting an exponential distribution of outcomes (the market). This is the sort of thinking that traps people into believing "it went up a lot, therefore it has to revert to the mean and go down" or vice versa - there is no basis for such a belief in exponential domains.

The market appears to be subexponential, which is a worse class of distributions than the exponential. Just as a technical note.

That is a very astute point. I say it more as a broad model. And to the point of casino games - I speak to blackjack only which has a finite set of cards in a deck.

I would argue, broadly, that there is a finite value in the stock market we just don't know what it is (and it changes significantly) but I do agree with you that there are some very significant differences and is a potential flaw in the analogy.

There is also no basis for such a belief in the casino games.

Actually there is a basis for it in blackjack and how to card count. That said I'm not sure what casino's are doing these days ever since the card counting was figured out.

They use a decent size shoe of several decks and reshuffle more than just in between rounds. Furthermore, the dealer only deals from a subset of the shoe IIRC.

I figured they had a way to break up the benefits of card counting - thanks for informing me!

Certainly not in the sense of the gambler's fallacy, but you can be sure that someone's fortunes from playing casino games will exhibit mean reversion in the sense that the next game is always more likely to bring their cumulative winnings closer to the house edge rather than further from it. Not so with the stock market. The stuff about card counting is basically impossible to do these days but can alter the house edge, and also doesn't apply to the market.

> I.e. don't put lots of money into the market when its hot & put more money in when its cold. That way you statistically have a better chance on getting a good return

Was the market hot in 2017, 2018, 2019?

With the caveat, historical returns do not predicate future returns. If you invested in the S&P 500 from 97-99 and didn't sell before the large sell off of 2000 you would have to wait until 2010 before you saw positive inflation adjusted returns.

Could you define what metrics you would use to see if the market is "hot" or "cold"? Could you let us know what each of those metrics would change in terms of contributions?

It's easy to say "hot and cold", but those things aren't easily definable, but it would be easy enough to backtest any theory you have. I'm pretty skeptical it's going to be valuable without getting into PhD level math coupled with an experts understanding of global politics and trade.

How do you know any of that though? Nobody really does. The fancy hedge funds and the skittish retail investor are all just guessing. Buy and hold seems to be the only sane strategy.

It is like driving down the street by looking out the back window. You are confident there isn't a dump truck parked in the middle of the street, because you didn't see one in the last 3 blocks.

I don't know, clearly - no one knows. I do know that investing in equity during the hot years is not a winning strategy at any point in time, unless you sell before it goes cool. At least from an index based fund perspective. If you stock pick (i.e. Amazon at peak 99 prices you would still have performed exceptionally well)

The stock markets are cyclical - it's tough to see how we can continue to buy into a market that is considered overbought by many financial talking heads. Once returns materialize elsewhere + cap gains tax changes materialize I expect froth will come out of markets...

Please let us know, on a percentage basis of you earnings, how much is allocated to personally managed stock portfolio?

How is that relevant?

Weren’t you pontificating on stock investment strategies? I’m going to need bonafides.

very true but we have no other advice that works for the upwards mobility of a large population