Question for All?

[adios]

If you pick a stock and it goes up say 20% in a month and reaches your target price. Have you been lucky or good or both? I guess my question is how much does luck play in making money in the financial markets especially if your holding periods tend to be very short i.e. say 3 months or less? I mean in poker you can play well and lose for short periods of time or play poorly and win for short periods of time (actually the periods can be longer than most people suspect depending on your skill level etc.) just due to variance. How much of a role does variance play in trading and/or investing in the markets especially when holding periods are short?

[Ray Zee]

love to burst the bubbles here. but i would say its 100% luck in both the short and long term in the market. the long term trend would be up because of inflation and productivity. but any individual would have all luck deciding his fate.

unless you knew something or figured out something others dont know. then its no longer luck at all. your results from that will be higher or lower due to luck of the market movements. so the old saying only buy what you know about is true.

for most all stock investors all you are doing is trying to beat inflation.

[Javelin]

Skill is not being right but being right for the right reasons. In the long term, it mostly comes down to fundamentals so being right about the big picture will eventually payoff (if you can take short term pain). People who thought stocks were overvalued in 1999 were right but anyone who shorted the market in size would have been wiped out... so while they were right, it didn't do them a lot of good. So even trading the fundamentals, there is a lot of luck involved.

In the short term there is a lot of random noise so its very difficult to attribute performance to fundamentals. It is possible to be right about technicals and have a short term view on the market... thats if you believe in technicals which a lot of people don't.

So is there such a thing as a good trader or just a lucky one? I think there are good traders... i definitely KNOW there are bad traders, so by that logic there must some good ones!

[adios]

I'll have more comments later but I'd like to perhaps amplify one comment:

"i definitely KNOW there are bad traders, so by that logic there must some good ones!"

And by this logic if you somehow got truthful advice from good traders, you would do well yourself.

[Zeno]

"so the old saying only buy what you know about is true."

This is why I have problems with the diversity concept and why I posted about it a few weeks back. Prudence does seem to dictate that a certain percentage of your money should be invested in the "standard way". But I think a certain percentage of your investment money should go into "things that you know".

For example, I have concentrated on purchasing only two stocks, Motorola and GE (I view these as long –term investments, meaning at least 3 years or more). Nothing else. But I have also set aside money to purchase a Roth IRA again this year and have contributed to a 401k plan (which just ended by the way because of a job change). So if X were the amount of money you plan on investing in one year, what percentage of X would you put willing to put into “non-diversity investing”? This may of course depend on your personal risk tolerance but I think it is a valid question.

I would like to come up with a plan of savings and investment that allows me to take a more substantial risk, with a certain percentage of my earned income, to hit the home run with. Would this type of investing really depend that much more on random chance (luck) than the supposed more "moderate" way of investing?



"for most all stock investors all you are doing is trying to beat inflation."

Can't the same thing be said of most ways of investing including bonds, precious metals etc. So is it all luck? [img]/forums/images/icons/shocked.gif[/img]

-Zeno

[Ashe]

Nothing is sure in the short term… all you can do is make educated bets and hope that they hold. (But you can make money)

I trade mostly in call options. (I have other conservative investments too. I just don't actively trade them.)

When dealing with options, I am forced to look at and decide on different time frames to invest.

What I have seen, when focusing on different time horizons, is that even though a stock is undervalued, and you know it’s undervalued, you still don’t know when the market will realize this.

Example, I had picked JPM when it was trading about 20 (less than year ago, now its in the mid-30s). I knew this stock was undervalued, so I bought some call options. Well, time went on and they expired, costing me my entire investment. So I bought some more calls. They expired too. By the time I finally started making money on this position, after buying my third set on options, I was so far behind, that as soon as I recover my losses, I sold out the position and netted a great profit of $0.

Now, I had a great idea, but due to time constraints I made no money on these options. Thankfully, I started a DRIP in JPM around the same time.

After writing this, I’m kinda wondering why I’m still trading in options. The thing is I’m making money doing it, so I would say that you can make money in the short term. It’s just a lot riskier. (In the event of a market crash, all my calls would be worthless.)

Ashe [img]/forums/images/icons/smirk.gif[/img]

[adios]

IMO excellent comments in all the posts to this point. To amplify your thoughts a little:

1) When you speculate in BUYING options you are limiting your downside per trade, therefore if a catastrophic market event goes against your position, you've defined the worst case scenario. To point out the obvious, SHORTING puts limits your downside as well as SHORTING calls does not.

2) I would think that trading options you've defined an expected value (EV) for the trade. Options are designed to be 0 EV sans transaction costs. So to point out something that Ray stated you have to know more than others about which direction the stock will move and when it will do it. The other thing about any strategy you probably should analyze alternative strategies to see if they'd be more profitable than buying the options. Please don't get me wrong about options, David Sklansky posted a trade when the Martha Stewart bruhaha first hit the wires that he was going to do with options and it netted an 8 fold return I believe. He stated the reasoning very clearly as well.

[Ray Zee]

zeno, yes all investments are just trying to beat inflation. of course that is not what people think. you might not invest if that was what you really knew. but think about it. that is what makes prices of anything ultimately rise and stay up. it has its down effects also.
diversifying your portfolio is only good for managing risk. you invest for the future so that when you retire you have a way to maintain a high living standard. so that is the main reason to diversify, so you dont put that in jepeordy by putting too much in one place. in general everything you invest in you should know alot about. buying things just to diversify is foolish as is putting all of it in a few stocks and risking a lifetime of work for a perceived chance at a higher return.
diversity is also investing out of the market. as the market as a whole rises and falls together. so you should have real estate, and tangible assets as well. could be antiques, gold, old cars, or what ever gives you pleasure.

trying to hit the home run. remember the home run hitters also have the highest strike out %.

[brad]

well i dont think this is an opinion question. i think u can quantify it much as in poker.

as for win rate i dont know

but

i think for variance with all the software out there i think u could do a sim (like a monte carlo sim) to determine it at least roughly (use historical data but obvoiusly you know ).

sounds like it wouldnt be any use (hey it tells me when market goes up im lucky [img]/forums/images/icons/smile.gif[/img] ) but maybe if u just look at a very specific segment of the stock market then it might give u some results.

[Aragorn]

It is a complicated question. First, doing it once doesn't prove a thing. If you can do it repeatedly, you are probably exhibiting some skill.

A one-month time frame is probably luck. But it depends on whether you are a technical or fundamental trader. Fundamentals take a long time to overcome the noise in the market. Technical factors are more likely to appear in the short run.

But given the basic fact that almost no professional can outpeform the market over an extended period, I think most amateurs who think they can are deluding themselves.