Is the stock market +EV?

[buffett]

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

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FYP

[adios]

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

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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.

[adios]

..........

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.

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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).

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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.

[wildwood]

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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?

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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.

[Sniper]

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.

[Sniper]

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


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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.

[wildwood]

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.

[Sniper]

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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)


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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.

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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.

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

[Uglyowl]

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

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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.

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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.