Is the stock market +EV?
 

Is the stock market +EV? I mean, if we take every single action and add them together, would that amount be greater each year? And if it is, how can that be? Isnt that supposed to be that when someone makes money another one loses money?

Re: Is the stock market +EV?
 

Of course not. The market grows average 7% year since 1900.

It's not zero sum.

Re: Is the stock market +EV?
 

Here are my thoughts on this.

While it is true that the stock market is not a zero sum game, the question of whether it is or not really shouldn't be a concern. The reason why it is more of a non zero sum game (although arguably it isn't really an issue of non zero vs zero) is that the market creates wealth from nothing as a result of price appreciation.

Now, derivative markets such as futures are more a pure "zero sum game."

This, however, does not mean that trading stocks is easier than trading futures(although many would argue so due to other reasons such as easier risk control on a small bankroll and less perceived efficiency).

Your main objective should be developing a profitable strategy and not buy into a buy and hold forever strategy as a guaranteed winner in the long run.

Re: Is the stock market +EV?
 

[ QUOTE ]
Is the stock market +EV?

[/ QUOTE ]

Yes, the stock market is not a zero sum game. Wealth is created by an increase in the intrinsic value of the companies themselves.

Re: Is the stock market +EV?
 

[ QUOTE ]
Your main objective should be developing a profitable strategy and not buy into a buy and hold forever strategy

[/ QUOTE ]

Yeah, those 'buy and hold' strategies are for suckers. Suckers like Walter Schloss, Wally Weitz, Chris (et al.) Davis, Jim Gipson, Bob Rodriguez, Seth Klarman, Marty Whitman, Arnold Van Den Berg, Charlie Munger, Rick Guerin, Bill Ruane, Tweedy Browne, Rich Pzena, David Polen, Bill Miller, Bill Nygren, Jim Barrow, John Neff, Mason Hawkins, the Kahn brothers, Will Danoff, Dodge & Cox, Charles Brandes, Michael Price, Glenn Greenberg, Bruce Berkowitz, Mark Boyar, Lou Simpson, Phil Carret, John Constable, Tom Russo, Jean-Marie Eveillard and Charles de Vaulx, Dave Dreman, David Knott, Phil Fisher, Max Heine, Eddie Lampert, Louis Lowenstein, Larry Tisch, Ralph Wanger, ......

...those guys are barely even multi-millionaires.

Re: Is the stock market +EV?
 

[ QUOTE ]
Suckers like Walter Schloss, Wally Weitz, Chris (et al.) Davis, Jim Gipson, Bob Rodriguez, Seth Klarman, Marty Whitman, Arnold Van Den Berg, Charlie Munger, Rick Guerin, Bill Ruane, Tweedy Browne, Rich Pzena, David Polen, Bill Miller, Bill Nygren, Jim Barrow, John Neff, Mason Hawkins, the Kahn brothers, Will Danoff, Dodge & Cox, Charles Brandes, Michael Price, Glenn Greenberg, Bruce Berkowitz, Mark Boyar, Lou Simpson, Phil Carret, John Constable, Tom Russo, Jean-Marie Eveillard and Charles de Vaulx, Dave Dreman, David Knott, Phil Fisher, Max Heine, Eddie Lampert, Louis Lowenstein, Larry Tisch, Ralph Wanger, ......

[/ QUOTE ]

Where'd you come up with this list?

Buy and hold forever, is a fine strategy... its just not the most optimal strategy today for a knowledgable individual investor.

Re: Is the stock market +EV?
 

[ QUOTE ]
Where'd you come up with this list?

[/ QUOTE ]
My brain. These are my financial heroes.

[ QUOTE ]
Buy and hold forever, is a fine strategy... its just not the most optimal strategy today for a knowledgable individual investor.

[/ QUOTE ]
Let's compare our after-tax CAGR's ten years from now. If you win, I'll buy you a beer.
-web

Re: Is the stock market +EV?
 

Please continue to buy and hold forever. Thank you.

Re: Is the stock market +EV?
 

The book, A Random Walk Down Wall Street, will explain why the stock market is not zero sum. Investors in stocks are compensated by what's referred to as the "equity risk premium" which is the increased rate of return over bonds for taking more risk. What the ex ante percentage of this risk premium acutally amounts to is a subject of much debate in the investment world. For a thorough explanation of the equity risk premium and the theory behind it the book, The Equity Risk Premium by Dr. Bradford Cornell, is good. Basically what another poster stated is true, over time the valuation of the stock market as a whole increases. Somewhat of an oversimplification, the compounded rate of return over risk free bonds is the value of the equity risk premium.

Re: Is the stock market +EV?
 

Yeah, those 'buy and hold' strategies are for suckers. Suckers like Walter Schloss, Wally Weitz, Chris (et al.) Davis, Jim Gipson, Bob Rodriguez, Seth Klarman, Marty Whitman, Arnold Van Den Berg, Charlie Munger, Rick Guerin, Bill Ruane, Tweedy Browne, Rich Pzena, David Polen, Bill Miller, Bill Nygren, Jim Barrow, John Neff, Mason Hawkins, the Kahn brothers, Will Danoff, Dodge & Cox, Charles Brandes, Michael Price, Glenn Greenberg, Bruce Berkowitz, Mark Boyar, Lou Simpson, Phil Carret, John Constable, Tom Russo, Jean-Marie Eveillard and Charles de Vaulx, Dave Dreman, David Knott, Phil Fisher, Max Heine, Eddie Lampert, Louis Lowenstein, Larry Tisch, Ralph Wanger, ......

...those guys are barely even multi-millionaires.

[/ QUOTE ]

I doubt there is a single name on your list that's worth less than $100M. And a good number worth more than $1B. Boy that long term go it slow approach sure does pay off after a while.

Re: Is the stock market +EV?
 

I personally think the days of buy and hold are gone.

Re: Is the stock market +EV?
 

[ QUOTE ]
I personally think the days of buy and hold are gone.

[/ QUOTE ]
You, sir, are wrong.

Re: Is the stock market +EV?
 

[ QUOTE ]
I personally think the days of buy and hold are gone.

[/ QUOTE ]

I think you know better! [img]/images/graemlins/wink.gif[/img]

There are simply far too many people that don't know any better than to just throw $$$ into their 401K without any thought at all.

Re: Is the stock market +EV?
 

yeah and thats the scary thing....there are so many reasons that i could post that would make buy and hold a suckers mantra.

Re: Is the stock market +EV?
 

[ QUOTE ]
Of course not. The market grows average 7% year since 1900.

It's not zero sum.

[/ QUOTE ]

is it going to continue at this pace? seems kinda unrealistic? wont that number get smaller?

Re: Is the stock market +EV?
 

[ QUOTE ]
[ QUOTE ]
Of course not. The market grows average 7% year since 1900.

It's not zero sum.

[/ QUOTE ]



is it going to continue at this pace? seems kinda unrealistic? wont that number get smaller?

[/ QUOTE ]


there's no telling. but as technology advances are exponential, so is the wealth generated. the tendency may well be to grow even faster due to the exponential nature of information-flow with the internet + technology advances.

Re: Is the stock market +EV?
 

[ QUOTE ]
yeah and thats the scary thing....there are so many reasons that i could post that would make buy and hold a suckers mantra.

[/ QUOTE ]

There really is no real "buy and hold" investing approach. For example, Buffett isn't a "buy and hold" investor, he's a value investor. His holding period is often dictated by what the relative value he's offered by current prices. He's always made money from a combination of short (merger arbitrage, bond arbitration, options) and long term holdings.

Saying that holding stocks for long periods is always a losing strategy is naive. Perhaps you are too young to remember the internet bubble, when millions traded their way to riches, and then right back down to nothing.

Re: Is the stock market +EV?
 

[ QUOTE ]
The book, A Random Walk Down Wall Street, will explain why the stock market is not zero sum. Investors in stocks are compensated by what's referred to as the "equity risk premium" which is the increased rate of return over bonds for taking more risk. What the ex ante percentage of this risk premium acutally amounts to is a subject of much debate in the investment world. For a thorough explanation of the equity risk premium and the theory behind it the book, The Equity Risk Premium by Dr. Bradford Cornell, is good. Basically what another poster stated is true, over time the valuation of the stock market as a whole increases. Somewhat of an oversimplification, the compounded rate of return over risk free bonds is the value of the equity risk premium.

[/ QUOTE ]

good book.

-blake

Re: Is the stock market +EV?
 

The Stock Market is -EV for all intents and purposes. Why, the sell side rake: comissions.

Re: Is the stock market +EV?
 

if commissions are causing you to lose you either need to get a new broker, you suck, or are overtrading.

Re: Is the stock market +EV?
 

no what i meant is people are stuffing their money into 401k's expecting to millionaires be 20 yrs later with 12% returns when its unlikely that its gonna happen.

Re: Is the stock market +EV?
 

dude we're up 38 million, but we've paid 16 in commissions. yes we do need a new broker. my point is that if you subtract the profit of the sell side banks, the market loses money, just like in poker. don't know why you have to be such as hardass, but if you feel better about yourself now, im happy for you. better to tilt here than at the tables

Re: Is the stock market +EV?
 

[ QUOTE ]
no what i meant is people are stuffing their money into 401k's expecting to millionaires be 20 yrs later with 12% returns when its unlikely that its gonna happen.

[/ QUOTE ]

people stuff money into 401k because your basically getting a 30% deposit bonus, to use a poker analogy. even if the 401k underperforms your mystery strategy by 5-10%, the 401k wins after a certain period of time.

Re: Is the stock market +EV?
 

if you paid 16 you should def be able to negotiate a better rate(if your currently not getting a good rate), especially if your volume has been increasing

Re: Is the stock market +EV?
 

yes that is the only reason i dipped into a 401k when i used to work but there are plenty putting in way over their company match

Re: Is the stock market +EV?
 

[ QUOTE ]
[ QUOTE ]
I personally think the days of buy and hold are gone.

[/ QUOTE ]

I think you know better! [img]/images/graemlins/wink.gif[/img]

There are simply far too many people that don't know any better than to just throw $$$ into their 401K without any thought at all.

[/ QUOTE ]

Is buy and hold the Vanguard S&P 500 index fund a sucker bet?

Re: Is the stock market +EV?
 

Lets say there is a village with population 2 people and 2 coconut trees. Each day the two people pick 1 coconut. So their wealth is 2 coconuts per day.

Lets say over time, they have 8 kids, so now there are 10 people. And those people have planted 8 more trees, so they have 10 trees. And each person is now an adult who picks one coconut a day.

Now their wealth is 10 coconuts per day.

Let's say one invents a machine that helps pick coconuts faster. Or say one invents special boots with cletes that make it easier to climb coconut trees to pick coconuts. So now each person can pick 2 coconuts per day.

Suddenly their wealth is 20 coconuts per day.

And let's say they invent guns that they can use to capture a neighboring village and steal another 10 coconuts per day from the neighboring village of 10 people.

Now their wealth is 30 coconuts per day.

In theory, over time, as population and productivity increase, you can through education, technological advances, stable government, a stable currency, favorable business laws and organization, an efficient transportation system (land, sea, and air) and a strong national defense that guarantees peace or allow you to conquer more resources and land -- help to increase the per capital wealth of the nation.

The stock market is a reflection of the profitability of the major companies of that nation.

So can companies grow over time and increase their profitability and productivity and wealth generation over time?

Not all situations are zero sum. And not all situations are identical to say a card game or a winner loser scenario.

Sometimes an economic transaction or trade can be win-win, with both parties trading something of little value to them for something of tremendous value to them.

Re: Is the stock market +EV?
 

[ QUOTE ]
The Stock Market is -EV for all intents and purposes. Why, the sell side rake: comissions.

[/ QUOTE ]

Commission costs are negligable when compared to the added wealth created by the market [img]/images/graemlins/wink.gif[/img]

In the market, it is theoretically possible for ALL participants to win!

Re: Is the stock market +EV?
 

[ QUOTE ]
yes that is the only reason i dipped into a 401k when i used to work but there are plenty putting in way over their company match

[/ QUOTE ]

I'm actually refering to the tax free nature of the 401k investment. I didn't make that clear.

Re: Is the stock market +EV?
 

now...yes

Re: Is the stock market +EV?
 

[ QUOTE ]
I'm actually refering to the tax deferred nature of the 401k investment.

[/ QUOTE ]

FYP

Re: Is the stock market +EV?
 

[ QUOTE ]
Buy and hold forever, is a fine strategy... its just not the most optimal strategy today for a knowledgable individual investor.

[/ QUOTE ]

I want to comment on this. First we have to define optimal strategy. For me that strategy is maximizing return for the amount of risk taken. In any trading strategy one needs to quantify risk vs. expected returns. To make a long story short, Portfolio Theory deals with choosing portfolios where the least amount of risk is taken to acheive a desired rate of return. Any more risk that is taken to acheive those same rates of return is unnecessary risk and therefore the portfolio chosen is "ineffecient." So in your particular trading strategy you need to identify the risk taken vs. the expected rate of return. Let's assume for arguments sake that your strategy is one that minimizes the risk taken for the amount of expected return. Also let's assume for arguments sake that your strategy yields returns that are greater than the overall markets return. I can replicate your returns in theory and acheive the minimum amount of risk that is needed to acheive those returns by simply using leverage in purchasing SPY. Think about that for a moment. For all the trading one does over an extended period of time, who can achieve the same returns and guarantee that they're taking the minimum risk by buying SPY and using leverage if one desire's a greater than market return(I'm using SPY because it's a proxy for the valuation of the stock market as a whole). I have my doubts whether or not very many trading strategies achieve their returns by taking the minimum amount of risk necessary to acheive those returns. Now the above more or less is based on an "effecient" market and we've debated the effeciency of the markets many times before on this forum. Taking advantage of ineffeciencies in my mind is another matter altogether. My believe is that the stock market is quite effecient but not instantaneously so. Ineffeciencies do present themselves but they are corrected in most cases remarkably (to me anyway) fast IMO. So I guess my point is that if you're trading strategy is based on finding ineffeciencies and you're good at determining them, then ok I can understand why an active trading strategy might be better. But if your strategy isn't based on finding ineffeciencies, I doubt that your strategy is better than a buy and hold strategy with all due respect.

Nice Post Squiffy, You Nailed it (n/m)
 

..........

Re: Is the stock market +EV?
 

I take it you are also not a fan of technical analysis then.
I also presume you have read Malkiel's "A Random Walk Down Wall Street." Maybe this book is really championed on 2+2. I'll gladly admit to having NOT read this academic garbage. It sounds very convincing and a lot of other academics and wall streeters also tout this crap and so the general public assumes that they know best and it's right(NOTE: although it appears academics nowadays are moving more toward the idea that some inefficiencies do exist that are being arbed). People gladly accept that markets are random, it's a convenient way not to think, a convenient way to justify losses. As such, they think profitable trading strategies are just lucky streaks, snake oil, or simply don't exist. But then they are taught that you CAN win by buying and holding an index fund.

However, traders like to trash Malkiel's work, and rightfully so. I suggest taking a look at "A Non-Random Walk Down Wall Street" by Lo and MacKinlay.

[ QUOTE ]
So in your particular trading strategy you need to identify the risk taken vs. the expected rate of return. Let's assume for arguments sake that your strategy is one that minimizes the risk taken for the amount of expected return. Also let's assume for arguments sake that your strategy yields returns that are greater than the overall markets return. I can replicate your returns in theory and acheive the minimum amount of risk that is needed to acheive those returns by simply using leverage in purchasing SPY. Think about that for a moment. For all the trading one does over an extended period of time, who can achieve the same returns and guarantee that they're taking the minimum risk by buying SPY and using leverage if one desire's a greater than market return(I'm using SPY because it's a proxy for the valuation of the stock market as a whole).

[/ QUOTE ]

Okay, if I follow what I think you're saying, this is very dangerous. You are arguing that using an ETF(SPY) you're guaranteed to have minimum risk over other strategies - simply not true. You also state that you can generate greater than market returns while keeping risk at a minimum by leveraging SPY - again not true.

Markets are not random. Certainly, fairly efficient(and getting more so with rise in arbing black boxes), but not random. As such, you seem to accept(as academics are now doing) that arbitrage opportunities do exist in markets, albeit short lived. But you go on to state that you do not think a non-arb strategy will be better than a buy and hold. I, being a believer that markets are not random and can effectively be handicapped, contend that we can analyze past patterns as well as present activity in the book/t&s to determine strategies that would crush buy and hold. I would even go as far to say that markets, with fair accuracy, can be predicted - you might want to take at what Jim Simons of RenTech has accomplished, although information on his fund's high frequency methods are scarce, but I will say that this will lead you to a study of cycle analysis. Fourier transforms, wavelets, etc. I wouldn't recommend seeking a holy grail from this point of view(as a matter of fact, I myself am a discretionary trader), but rather just to suggest to you what can be accomplished in the markets when you let your mind explore the possibilities.

Re: Is the stock market +EV?
 

[ QUOTE ]
Is the stock market +EV? I mean, if we take every single action and add them together, would that amount be greater each year? And if it is, how can that be? Isnt that supposed to be that when someone makes money another one loses money?

[/ QUOTE ]

Is poker +EV? Depends on you. Same with the market.

Stock market money comes from consumers as well as other market players. I met a guy who bought 100 shares of Home Depot and held it through 9 stock splits and is worth over 15 million dollars now. That money came from people buying hammers and saws, etc. in Home Depot.

Futures is zero-sum. Money only comes from other traders after subtracting commissions.

Re: Is the stock market +EV?
 

Adios,

I will direct you to Hirsh's Stock Traders Almanac, for simple strategies that beat long term buy and holding the SP500, at reduced risk.

Re: Is the stock market +EV?
 

[ QUOTE ]
Is poker +EV? Depends on you. Same with the market.


[/ QUOTE ]

No, they are not the same... Poker is -EV overall, because the rake is substantial. Yes a good player can beat it, but he's still working in a significant -EV environment. In poker, to win you must take money from other participants, and beat the rake.

In the market it is possible for all player to win, because your wins do not result from someone else losing.

Re: Is the stock market +EV?
 

Sniper,
You totally misunderstand what I'm saying. Whether poker or the market is +ev or -ev depends on the INDIVIDUAL. (That's what "depends on you" means)
Also the possibility that all market players can win is theoretical nonsense that does not apply to the real world. Reality is most market players do not win.

Re: Is the stock market +EV?
 

[ QUOTE ]
You totally misunderstand what I'm saying. Whether poker or the market is +ev or -ev depends on the INDIVIDUAL. (That's what "depends on you" means)


[/ QUOTE ]

While an individuals skills impact their own results, their skills do not change the characteristics of the game.

Poker is a -EV game. The Stock Market is a +EV game.

[ QUOTE ]
Also the possibility that all market players can win is theoretical nonsense that does not apply to the real world. Reality is most market players do not win.

[/ QUOTE ]

You are wrong, in the long run, most participants are winners in the stock market!

Re: Is the stock market +EV?
 

[ QUOTE ]
[ QUOTE ]
I personally think the days of buy and hold are gone.

[/ QUOTE ]

I think you know better! [img]/images/graemlins/wink.gif[/img]

There are simply far too many people that don't know any better than to just throw $$$ into their 401K without any thought at all.

[/ QUOTE ]

Just as many people overthink their 401K's and put it into the flavor of the day.

I've seen to many times where a fund has had a great quarter and they swap out of the one that has solid 10 year performance.