Katrina's Effect on S&P

[ChromePony]

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Think of poker... a player can start the year with $250, play .50/1 limit and end the year with over $25,000 including rakeback and bonus... a 1000% return. However, there is no way that a player starting with a $1 million bankroll is going to achieve a 1000% return even playing 4K/8K.

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I'm not sure I totally follow this anaolgy. In poker, small stakes players can achieve a greter rate of return because bonues account for such a large percentage of profits, and players are so much worse that bb/100 win rate is greater.

But in the stock market there are no bonuses and there are no worse players, managers of big funds have access to the same opportunities as everyone else and supposedly a lot more experience and information. How is it that funds with tons of money to invest cant beat the performance of individual small timers like you and me?

[ttw22]

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But in the stock market there are no bonuses and there are no worse players, managers of big funds have access to the same opportunities as everyone else and supposedly a lot more experience and information. How is it that funds with tons of money to invest cant beat the performance of individual small timers like you and me?

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From what I understand, there is no stock market equivalent of bonuses, but having a large "bankroll" does make it harder to do so well, since when you buy many shares of a stock (say, as a mutual fund manager), you actually have influence over the price, whereas as most individual investors will not be trading enough stock to substantially change prices, therefore being able to complete their entire orders at the market price. Somebody please correct me if I'm wrong.

[ChromePony]

that sounds resonable...anyone else?

[Sniper]

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I'm not sure I totally follow this anaolgy.

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The analogy has to do with the velocity of money, or as Barry G put it, the amount of action a player can get. A small stakes player can easily get action on his small stakes any time of the day or night, on a large number of sites, on multiples of tables at the same time. The million dollar bankrolled poker player just can't get his entire bankroll on the table in the same way. Is there even 1 place that you can 4 table a 4K/8K game?

The same is the case for a large mutual fund. There are just so few relative places that you can put a million shares to work.

This is simply the Law of Diminishing Returns in action. The more money you have (after a certain point) the harder it is to find ways to multiply it (in % terms).

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But in the stock market there are no bonuses

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There are bonuses (given by brokers) in the stock market, here is one example... http://www.cybertrader.com/marketing/jump/xview.aspx

Active individual traders also receive the best commission rates. While the large mutual funds pay the highest transaction costs.

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and there are no worse players

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It should be fairly obvious that, of course there are strong and weak players in the market.

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managers of big funds have access to the same opportunities as everyone else and supposedly a lot more experience and information.

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Actually, managers of mutual funds do not have the same opportunities, as there are many stocks which they simply cannot trade because a typical investment size for them would buy the whole company [img]/images/graemlins/wink.gif[/img]

Also individuals have access to the same information as the mutual funds.

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How is it that funds with tons of money to invest cant beat the performance of individual small timers like you and me?

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In addition to those issues mentioned already, there are many limits placed on what mutual funds can do.

Most mutual funds must remain almost fully invested at all times, while an individual investor can strategically time the market.

Most mutual funds cannot short shares, while individual investors can take advantage of the market going either way.

I've already discussed the relative ease of trading in and out of 1,000 share lots compared to 100,000-million share lots.

If you truly examine what mutual funds own, you will see that they generally own the same stocks.

The individual trader is not constrained in any way. A speedboat can run circles around an aircraft carrier. Educate yourself in the ways of the market, and you too can easily run circles around the mutual fund managers.

BTW, if you want to see potentially possible returns on $1 million portfolios, check the ranking page of Marketocracy. I will also note that those performances are accomplished with the same "compliance" rules that mutual funds operate. An individual trader not contrained by those rules can significantly outperform even the significantly outperforming numbers there.

There is no doubt in my mind that a mega-multitabler killing the 5/10 or higher limit poker game, could train themselves to turn a 50-100K market port into $1 million in 1 year (before taxes).

[ChromePony]

Thanks for the explaination, now excuse me while I pull my money out of the index and go get rich.

[Sniper]

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Thanks for the explaination, now excuse me while I pull my money out of the index and go get rich.

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Just make sure you take the time to educate yourself first... you don't want to be the fish! [img]/images/graemlins/wink.gif[/img]

[ChromePony]

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Thanks for the explaination, now excuse me while I pull my money out of the index and go get rich.

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Just make sure you take the time to educate yourself first... you don't want to be the fish! [img]/images/graemlins/wink.gif[/img]

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Yes, well in all seriousness I'll probably hang onto my index for a while, at least until I graduate this year and then maybe have some free time to get into this stuff. Im sure there are tons of good books to read and Ive seen plenty of posts listing them, so I guess thats a good place to start.

[Sniper]

Enjoy your Senior year, and Read as much as you can!