A Sad Tale

by putting the limit order in which usually fills you get to save some money. but may lose out if it goes up from where you started it. but i like them because i dont want to sit in front of the screen and mwait for the best price. alot of times i am willing to buy at x but not at x+1/2, so i put in a limit order and walk away and do something i like. plus it makes you feel like you got a bargain if you get in a little lower than the ask.

If you bid 1% below the last trade of a stock with 5% daily volatility, there's about a 90% chance you'll fill by the end of a complete trading day. ... You have a 37% chance of trying this 10 times and filling every time; you have a 5% chance of trying this 30 times and filling every time. Is this in the ballpark of the number of trades you're talking about?


The reason the 1% you "saved" is an illusion is that in the long run, you will not fill 10% of the time, and those missed trades will outperform the ones you filled by about 9%.

Yes.


The key point is this:


When you believe you have an idea for a good trade,

are you more likely to win ( and win more when you're right )

when

the market comes to you ( a limit order )

or when

you go to the market ( a mkt order )?

Yes, but more often than not, when people say they are only willing to pay X, it is not because they have done a discounted-earnings model. Nor should it be!


It is not relevant that Company C is going to pay and N-dollar dividend five years from now. Because you cannot strip out or disaggregate that dividend and sell it in isolation. Rather, when you sell a stock five years from now, you will be selling the utility of discounted earnings going forward, say, ten years from that point.


Since the value of a stock - in years to come - will never be immediate earnings, but rather perpetually people's immediate utility for some future stream of earnings, it makes sense to buy it not based on your own utility for a future earnings stream, but based on your belief as to what other people's future utility for a future-future earnings stream will be.


So most people, when they decide they will only pay Price X is not because of anything internal, but perpetually pegged to the immediate price, or to the recent range. In other words, they look at what other peopel appear to want, and then calculate what is cheap relative to that. Of course the correct strategy, then, is to always attempt to buy below the immediate bid, not to attempt to buy below some past price.


There is ten times more, but I'll save it for another post.


eLROY

I think most people can accept and understand your math, Paul. But there is still something inside the "bid-ask" itself - something skirted by a random distribution of last ticks - that seems to get inside people's heads and give them all sorts of bad ideas.


Forunately, there are enough people trying to take the other side, and pick them off, that using indiviudal limit orders doesn't hurt them that much on 99.5% of trades. The main cost is in their own stress and hassle of pursuing an illusory profit.


But the larger illusion, which this bid-ask stressing is just one end of the spectrum of, can indeed cost people a noticeable amount of money in the long run. The use of limit orders is just the tip of the iceberg. It's representative of a whole wrong way of thinking, by people who are susceptible to think too much.


All that having been said, if Ray wants to pay 20 and a stock is at 21, and he doesn't have the time to bother, certainly he should use a limit order


lummy