Non self weighting stock market strategies
 

I just started reading Gambling Theory and Other Topics by Mason Malmuth. First off I'd like to say discovering the works of Sklansky & Malmuth and the 2 + 2 site has been a dream come true. Fantastic material! However I must respectively disagree with his assesment that the best stock market strategies are non self weighting.

There is a problem in my opinion with comparing the stock market with other forms of gambling. First off the stock market is not a zero sum game like other forms of gambling. There is not a loser for every winner. Secondly if you believe the market effeciently prices securities (of which their has been reams of academic proof) then there is no gain from looking for mis-priced securities. Lastly, over 90% of professional money managers have failed to beat the stock market averages over the long run. These are professionals with more experience and resources than you and I and still their performace as a whole has been dismal. All of this would lead one to conclude the best stock market strategy with the best EV would be no load index funds rather than a selection of a handful of stocks. Granted, investors like Warren Buffett stand in contrast to this philosophy. But it is still my belief that most investors would be well advised to invest in a manner to approximate market averages rather than taking abnormal risks for below market expectations.

Re: Non self weighting stock market strategies
 

Hi,

I don't know the name of the author, but he was featured on PBS Nightly Business Report recently, where he just invested in undervalued stocks of the S&P 500 and beat the S&P 500 index over the last 10 years. Maybe, some other poster may know his name.

Good Luck,

Mark

Re: Non self weighting stock market strategies
 

There are thousands of professional money managers, a small sample will do well by random chance. If you take 1,000 monkies and have them predict a coin flip at the end of 1,000 coin flips one may do well enough to get on PBS as an expert coin flip predictor, but this does not prove he is an expert coin flip predictor.

Too many individuals kid themselves into believing they can substantially beat the market picking individual stocks. Some will, but the vast majority are best served by emulating the market averages.

Re: Non self weighting stock market strategies
 

[ QUOTE ]
There is a problem in my opinion with comparing the stock market with other forms of gambling. First off the stock market is not a zero sum game like other forms of gambling. There is not a loser for every winner.

[/ QUOTE ]

This is sometimes true, the reasons someone are selling an individual security and the reason someone else is buying it are often very different, but I would contend that most of the time one of the people involved in the transaction will come out the loser.

[ QUOTE ]
Secondly if you believe the market effeciently prices securities (of which their has been reams of academic proof) then there is no gain from looking for mis-priced securities.

[/ QUOTE ]

This is true IF you believe in efficient markets. I would like to see these reams of proof as my understanding is that efficient market theory is still considered controversial. I believe the markets are efficient to a certain extent but not completely efficient.

[ QUOTE ]
Lastly, over 90% of professional money managers have failed to beat the stock market averages over the long run. These are professionals with more experience and resources than you and I and still their performace as a whole has been dismal.

[/ QUOTE ]

Just because they are professionals doesn't mean that they are better at anlyzing a business than you or I. Also, they have regulations either from the government or the funds they run that put them at a disadvantage to the individual investor.

[ QUOTE ]
All of this would lead one to conclude the best stock market strategy with the best EV would be no load index funds rather than a selection of a handful of stocks.

[/ QUOTE ]

For most people I would agree. I don't think most people have the time or the will to be successful at buying individual securities.

[ QUOTE ]
But it is still my belief that most investors would be well advised to invest in a manner to approximate market averages rather than taking abnormal risks for below market expectations.

[/ QUOTE ]

Once again I agree, but the key word here is most. Most people should seek an average and comparatively safe return because the gamble on one's retirement is simply to big to add in unecessary risk. Kepp in mind that most people are also better off never playing Poker because the average player ends up losing money. A lot of the same reasons would apply.

Re: Non self weighting stock market strategies
 

The stock market is not a zero-sum game, that's apparent. Clearly the market has not stayed at the same level all these years, it has grown. However, if you consider people who beat the market average to be the "winners", and people who do not to be the "losers", then someone who made 9% in a 10% market will be considered to have lost.

As for fund managers, they have to gear their investments towards positive monthly performance. This means they cannot simply wait on a security for two years. Many experts say this is an edge that the individuals have over the fund managers, nobody is forcing them to perform well every month. Since the individuals don't have the time or the information that the managers have, it is futile for the individuals to immitate managers by short-term trading, so yes, most people are better off with indicies as a large portion of their portfolio.