Is the stock market really +e.v.

[va_chier]

if someone pick stocks at random and sold them at random would they show a profit over 50 years? Does someone have to lose for you to show a profit?

[Ray Zee]

yes they would show a profit. so it would be plus ev. but thing is whether it would show a greater profit than say bonds or gold or real estate. in the past it did mostly beat the competition. but not likely over the next 50 years.imo.

no, someone doesnt have to lose for you to win. if a stock goes up everyone that currently holds it wins. although people can have positions that also lose.

[va_chier]

so if 99% of the people in the market used the buy and hold method those 99% would still show a profit long term? Isnt the market a zero sum game?

[crazy canuck]

Isnt the market a zero sum game

To quote poster one word answer:

[ QUOTE ]
NO

[/ QUOTE ]

[lehighguy]

Stocks go up in value because thier underlying assets (companies) go up in value. This is because of the expansion of the economy over time. Let us say for arguement sake that stocks have a long run return of 11% (i'm making this up). This 11% is based on the increase in the value of the underlying companies.

So if everyone buys and holds they will return 11% over the long run. This is the part of the game that is NOT ZERO SUM.

However, if you try to beat the market (return greater the 11%) by purchasing the better stocks at the right time then you must get your profits from somwhere. That somewhere being the poor sap on the other end of that trade. There is a long debate over wether anyone can beat the market over the long run but you can find that in other threads.

Here's a comparable. Imagine a poker game where the house put and extra $3 into the pot at the end of every hand rather then taking it away as part of the rake. As such, new money would be flowing into the table constantly (the 11%). However, the better players will still do much better then the fish since they will not only benefit from the extra money but also their own play.

[va_chier]

nt

[AdamL]

They'll pay $11 but in real dollars. If everyone buys and holds and the economy grows at $11, the shares sell one year down the road for $11 still, but that $11 buys a bigger basket of goods.

[OrangeCat]

The Wall Street journal has the famous “dart board” contest where the dart board usually shows more of a profit in the short term than the picks by the highly paid analysts. However, WSJ didn't talk about when to sell these picks.

I have a hard time believing that random entries and exits could possibly show a profit. An axiom I’ve heard from many traders is “it’s not the entries that matter, it’s the exits.”

[adios]

[ QUOTE ]
but thing is whether it would show a greater profit than say bonds or gold or real estate. in the past it did mostly beat the competition. but not likely over the next 50 years.imo.

[/ QUOTE ]

I'm surprised nobody asked you about this comment. And why might that be?

[felson]

I don't see any reason that random sells should be any worse than random buys. Every transaction is a simultaneous buy/sell anyway. And I'm pretty sure that in the WSJ dartboard analysis, they sell the prior holdings at the same time that they purchase the new ones.

[felson]

[ QUOTE ]
if someone pick stocks at random and sold them at random would they show a profit over 50 years? Does someone have to lose for you to show a profit?

[/ QUOTE ]

Almost everyone says yes, and this is the idea behind index funds. You don't buy a handful of stocks at random; instead you pretty much buy the entire stock market.

[OrangeCat]

[ QUOTE ]
I don't see any reason that random sells should be any worse than random buys. Every transaction is a simultaneous buy/sell anyway. And I'm pretty sure that in the WSJ dartboard analysis, they sell the prior holdings at the same time that they purchase the new ones.

[/ QUOTE ]

That’s right, the hold time was fixed at six months. My point was that the WSJ dartboard did not use random sells. IOW, it was not a randomly managed portfolio, which is what I thought the initial post was about.

It seems to me that a pro would be smart enough to sell the stinkers and keep the winners while a randomly managed portfolio might do the opposite making the random sell portfolio even worse by comparison. But a true believer in the efficient market theory might argue otherwise.

What I said above about the dartboard usually beating the experts was incorrect. The pros beat the dartboard and INDU. Here is the summary from WSJ online:

“But in the end, after 142 six-month contests, the pros came out ahead, racking up an average 10.2% investment gain. The darts managed just a 3.5% six-month gain, on average, over the same period, while the Dow industrials posted an average rise of 5.6%.”

Link to complete article (http://216.239.57.104/search?q=cache:6WrkjrflJmQJ:www.econ.iastate.edu/classes/econ353/rksingh/financialnews/Journal%27s%2520Dartboard%2520Retires.doc+dartboar d+stocks+wsj&hl=en%20target=nw)

[goodedesign]

[mosta]

yes someone will show a profit: your brokerage house, and you will be the big loser--to them. (I know, you mean to suppose zero commissions, and I agree random selection will approximate an index with a positive return, etc etc. But I think it's important to keep in mind with all this talk about privatizing all retirement investment just how incredibily gigantic a windfall that would be for Wall Street firms, and how bad for the non-savvy (ie 99%) investor. (And don't take that to mean that I would necessarily be against it!))

[BadBoyBenny]

It would depend on how fast they were buying and selling them at random. She might be better off buying stocks at random and ignoring them for 50 years.

[BadBoyBenny]

Lots of people think they are investing like Warren Buffet. Most of them aren't getting his returns, or even a return that equals the market averages. For the random person off the street, buying an index and holding is a better option. (and then using the time he would spend reading books and 10-k's to make a wage)

[mosta]

[ QUOTE ]
Isnt the market a zero sum game

To quote poster one word answer:

[ QUOTE ]
NO

[/ QUOTE ]

[/ QUOTE ]

unless you're in derivatives.

[GeorgeF]

1) If you keep buying/selling the bid/ask spread and commisions will eat into your capital.

2) If you chose a large number of US stocks randomly you would acheive market returns similar to vanguard total market index, good or bad.

3) In practice you buy when you have the money and sell when you need the money. Randomness might not be achievable.

[college_boy]

“But in the end, after 142 six-month contests, the pros came out ahead, racking up an average 10.2% investment gain. The darts managed just a 3.5% six-month gain, on average, over the same period, while the Dow industrials posted an average rise of 5.6%.”

Link to complete article (http://216.239.57.104/search?q=cache:6WrkjrflJmQJ:www.econ.iastate.edu/classes/econ353/rksingh/financialnews/Journal%27s%2520Dartboard%2520Retires.doc+dartboar d+stocks+wsj&hl=en%20target=nw)

[/ QUOTE ]

Actually the dartboards won when fees were calculated. The publicity from the experts is what caused their picks to go up over the short term, not their stock picking strategies. Adjusted for longer time periods the dartboards performed slightly better and with fees the experts' were never ahead at any point.

[gvibes]

[ QUOTE ]
[ QUOTE ]
but thing is whether it would show a greater profit than say bonds or gold or real estate. in the past it did mostly beat the competition. but not likely over the next 50 years.imo.

[/ QUOTE ]

I'm surprised nobody asked you about this comment. And why might that be?

[/ QUOTE ]

There are a lot of people speculating that historical (i.e. since 1928 or so) equity returns (I think roughly 6% over the risk-free rate) aren't maintainable long term. My guess is that Ray is referring to this phenomenon.

On second thought, Ray may be saying that that equities are SO overvalued right now, that equities will not even outearn the risk-free rate.

I personally will spread my investments among foreign and domestic equities, foreign and domestic bonds, real estate, and commodities, with semiannual rebalancing. My returns may not be incredible, but variance is more of a pain in the ass in investing than in poker.

[gvibes]

[ QUOTE ]
yes someone will show a profit: your brokerage house, and you will be the big loser--to them. (I know, you mean to suppose zero commissions, and I agree random selection will approximate an index with a positive return, etc etc. But I think it's important to keep in mind with all this talk about privatizing all retirement investment just how incredibily gigantic a windfall that would be for Wall Street firms, and how bad for the non-savvy (ie 99%) investor. (And don't take that to mean that I would necessarily be against it!))

[/ QUOTE ]

Are you an AARP member or something??? /images/graemlins/wink.gif

I agree that it would be a windfall of sorts to the investment industry. There may also be a good chance that a lot of shady brokers out there will talk stupid people into a stereotypical churn-and-burn portfolio.

However, I'm somewhat optimistic, as the federal government has already created what shoudl be a model for a simple, low-cost investment provider, in the tsp - tsp.gov

Defined benefit plans are a thing of the past - defined contribution plans are the way of the future.

Then again, I'm a classic liberal, and I believe that people should have freedom to direct their own retirement investments, and the responsibility to bear the consequences of those decisions.

[eastbay]

[ QUOTE ]
Stocks go up in value because thier underlying assets (companies) go up in value. This is because of the expansion of the economy over time.

[/ QUOTE ]

What exactly does "expansion of the economy" mean? It kind of sounds like trying to explain something by rephrasing it a different way.

eastbay

[adios]

[ QUOTE ]
[ QUOTE ]
Stocks go up in value because thier underlying assets (companies) go up in value. This is because of the expansion of the economy over time.

[/ QUOTE ]

What exactly does "expansion of the economy" mean? It kind of sounds like trying to explain something by rephrasing it a different way.

eastbay

[/ QUOTE ]

First of all the original quote is awkward. Expansion of the economy means growth in GDP. As GDP increases corporate profits tend to increase.

[Soxx Clinton]

I find it hard to believe that stocks (as defined by the S&P, say) would underperform bonds/real estate/gold over the next 50 year period. I'd say the probability of that happening is virtually nil for a number of reasons that are beyond the scope of this board, particularly bonds.