Well that is a click baity title. What he really meant was that encouraging people to trade stocks is a bad idea period (he is a big proponent of index funds).
I can't say I disagree with that, not that I would categorically lump all financial managers into the 'useless' category either.
But it is important to note that he uses 'trading' in the sense of actively taking and releasing positions in different stocks in order to capture their short term change in value. Not 'investing' which is buying and holding equity (stocks) in company that are growing or otherwise generating wealth (and ideally paying a dividend).
I'm going to propose a counter-argument based on an experiment I'm running on myself. I recently started trading stocks because I wanted to expose myself to a different news-sphere. I believe that I will grow and understand more about the world from doing so. Is it addicting? Maybe, but if I learn more about machine learning because I'm running models on stock data, then it doesn't seem too unhealthy to me. Am I going to gamble all my money away on the news cycle and models that I'm developing? Hell no. But then, maybe I haven't had whatever hit I would need to be super addicted to it.
Another hypothesis: the difference is whether you view it as a means or an end. I do not believe that stock trading will ever make me rich. But I believe it is a means to teach me things. Thus it is less addictive.
A follow-up question is if Robinhood (by massively reducing trading costs/friction) is socially positive or not. Their career pitch is that they democratize America's financial system (https://careers.robinhood.com/), but looking at how the reduced friction just leads to Average Joe losing more money, you could credibly view this as a type of destructive "excessive democracy".
> “People are trying to teach you to come in and trade actively in stocks,” he told his audience. “Well, I regard that as roughly equivalent to trying to induce a bunch of young people to start off on heroin.”
It's actually a pretty accurate description of the most sensational part of his speech.
Oddly, when I entered the passive index world I got absorbed into checking in on my index ETF purchases every day, multiple times per day, and resisting the urge to sell and buy (more index ETFs, lol). I knew in my head this made no sense - the prices will follow the market by design - yet this urge went on for like 2 weeks before I forced myself to stop.
People who fail to read and educate themselves will listen to snake oils salesman pitches and trade stocks like a junkie on heroin. I spent years learning industries, learning how to read quarterly report, to identify signs of fraud, and pay attention to the news every single day.
Like anything you do you have to be committed and determined to be successful. It's not a dark secret that there are no short cuts in life. This article assumes we are all much dumber than I prefer to believe we are. We being people who have money to trade stocks and suffer from big losses.
I learned how to trade stocks by reading books about value investing and accounting practices. Very simple stuff that like anything worth learning takes a bit of time and effort. I don't get the upvotes on this article.
> I spent years learning industries, learning how to read quarterly report, to identify signs of fraud, and pay attention to the news every single day.
How'd that work out for you? Do you beat the S&P 500 YOY with less volatility? If you account for your hours and trading fees? How many years in a row?
If your answer is yes, you should start a fund! Because statistically, whether a mutual fund or exclusive hedge fund, you're a miracle.
> Like anything you do you have to be committed and determined to be successful.
His argument, seemingly based off the Random Walk Down Wall Street data; which basically shows that no matter how committed and determined you are, the broad based index is going to beat you, if not 1 year, year over year.
Given all your preparation and work, do you think you're able to beat the market on a risk-adjusted basis? What marginal edge do you have over professional institutions + quant funds, who are also reading reports and paying attention to the news? (to say the least)
But there is a shortcut in this particular instance: following Charlie Munger's advice and just buying index funds like VTSAX, SWTSX, or FZROX. A 10-year return of 13.25% for VTSAX is really sweet given the very low effort it takes to throw money into that fund.
It's not a matter of being dumb or not: it's a matter of whether the average investor is willing to carefully research companies or not. You seem to do it as a hobby, and it's great that you're getting 12% to 20% returns. But I'd wager that the average retail investor doesn't have the same drive as you do in figuring out which company's stock might rise.
After I told my coworker that I was beating the market in my stock picking account by quite a lot, he said “Man, I’m down 80%, like $10,000. What do you think I should buy to make it back?”
I said, “Just sell everything and put it in an index fund.”
I don’t think he did. He’s probably down more now.
Stock picking is fun, but for me it’s just gambling. If I lost that much, I’d quit.
I think that companies like Robinhood gamifying highly risky trading strategies are super irresponsible. There should definitely be a higher burden to educate end users, and to more tightly limit crazy shit like leveraged positions.
On the other hand, letting people access cheap trading when they are young might let them learn about the stock market the only way it sticks. The hard way. With the current retirement system in America they will be in control of their, hopefully, very large retirement account at some point.
It would be better for people to learn early about trading and experience a few business cycles before they transfer $1 million out of their employees plan into their own E-Trade IRA account at age 55. A lot of older people lost much of their retirement fund in both the dot com and 2008 crashes. Buy high, sell low is the natural behavior of the human animal.
Robinhood sells shares in a bunch of ETFs as well as individual stocks. Their selection isn't as good as a Fidelity or a Vanguard but the value proposition is the lack of transaction fees. There's nothing inherently irresponsible about Robinhood (except maybe how easy it is to get a margin account). It allows individuals to make the same mistakes as any of the larger investment banks.
Super wise gentleman, thoughtful speaker, inspirational story... not always right though... Trading stocks, or active investment is important for the ecosystem, and having people learn hard lessons like not to gamble with money they can't afford to lose is equally valuable. Free Markets depend on willing participants, and progressively greater efficiencies (including in investment)
>Trading stocks, or active investment is important for the ecosystem, and having people learn hard lessons like not to gamble with money they can't afford to lose is equally valuable. Free Markets depend on willing participants, and progressively greater efficiencies
How do ignorant investors making senseless trades and learning "hard lessons" improve market efficiency?
I always laugh when people say Robinhood is a good thing for society. Their zero fees, cool app, and gamification of trading is simply ushering fools into a casino
Cool. What's the best way to minimize transactional costs when buying ETFs (as a buy-and-hold strategy)? E.g. Should I only purchase marketable round lots? Can I do any better than Fidelity/Interactive Brokers for price improvement? Any tips to make my trades as efficient as possible? Or would you avoid ETFs altogether and just purchase mutual funds directly from Vanguard, without any transactional costs? Thanks!
It’s common for a programmer to want to write an algorithm that tries to beat the market. For better or worse, that’s what motivated me to want to learn how to code.
The wisdom of driving people away from trading does make sense however
Instead of writing code to beat the market, they are better off writing code to create valuable datasets they can then sell to wall street. Or applications to help Wall street analyze huge datasets, sentiment or news feeds.
Haha so true. I found coding my own, albeit stupid, trading strategies quite fun back in the day...sortta similar kind of fun building a borked poker bot.
Think it's the combination of money, a bit of math and some cool algos that make it so fun
I totally agree. Also important to note that "always overestimate yourself" and "bank on people who overestimate themselves" are not solid corrolaries.
The boastful are high variance, even taking your own judgement into account. And where there are power-law outcomes, exposing yourself to the wrong kind of tail risk can be fatal.
I feel like there's a lot of misinformation in this thread, not about the article necessarily, but markets and trading in general.
Stocks are kind of the "beginner's" asset. They're fairly easy to understand conceptually. "Trading" them is even easier. However, trading them in isolation for a profit _consistently_ is very difficult or just a product of luck. I don't know anyone who does it and wasn't burned eventually.
The thing to remember is, people doing funds or "trading" professionally aren't just buying and selling FANG stocks all day. They're balancing these trades with futures and options or options on futures and other alternative assets. They're hedging their positions and setting themselves up so that their probability of coming out ahead is much greater than you're standard "it either goes up or down" stock movement.
A simple example is the "wheel" strategy in options. A short put at a .30 delta on the underlying, assuming 1 stddev movements gives about a 70% chance of collecting the premium without assignment (of course this isn't perfectly true, it's an approximation). This is already better than buying the stock, which under the same methodology, would have a 50% chance of profit (either going up or down from the purchase price). When assigned, turn around and open a short call against the assigned shares at a similar delta and repeat. In the flat market we've seen the last year or so, this is reasonably profitable and very low effort.
Edit: The reason the "buy and hold an index forever" strategy is recommended is because it's the lowest effort, highest probability of profit strategy one can probably take. I agree with it entirely for 99.9% of people. But that's not to say there isn't other opportunity out there if you're willing to learn about it.
Source: spent a few years at the Chicago Mercantile Exchange working on these sorts of things exchange side and now trade regularly on my own.
Picking up those pennies in front of a bulldozer... Agreed, you can structure trades to greatly improve your risk/return. There are whole other levels of investing like selecting how to interact with capital structures or even the market microstructure of how the trades work.
It's interesting to read how Buffett and Munger made their money. They definitely didn't make it by investing in index funds.
What Munger is really encouraging in his talks is intelligent allocation of money, knowing the boundaries of your knowledge, educating yourself, and recognizing basic human psychological shortcomings (like mistaking speculating for investing).
The more appropriate analogy is that trading stocks is like gambling. And it's not even analogy. Unless you really know what you're doing, trading stocks is gambling, just with less house edge.
Stock trading is to wealth management as opiates/painkillers are to pain management. Both can be part of a larger strategy that leads to an optimal outcome while minimizing risk, but the average layperson might not be able to accurately gauge/understand how minimize this risk. The argument then is consumer-facing stock trading services create a moral hazard similar to the one created by unscrupulous doctors or your neighborhood drug dealer.
Markets are like crack: very addicting. Futures especially. It can be an unhealthy obsession where you cannot sleep, constantly doing a prediction loop watching where the market goes 24 hours a day, sleep deprived, drawn to the ticks up and down.
This obsession with index funds is getting a little out of hand. Sure for many people buying an index might be a good idea. I myself recommend that many people buy an S&P 500 index. But to criticize all active managers is a little wrong. For one, Warren Buffet and Charlie Munger are active managers themselves, you do not see them buying an index fund.
Lets think about what happens when you buy the S&P 500 index. This is usually the most recommended index, and the one I recommend too. You basically give your money to own stocks of the 500 biggest publicly listed companies in the US. If a company is big enough and it gets their stock listed on the major markets it usually gets included in the S&P 500. (There are some exceptions but generally this is the way it works). Does that make these companies good investments? Not necessarily. There is a way to get big without being especially good at what you do (through mergers). It is possible that certain companies were very good investments before, had their stock appreciate, got into the S&P 500, had a change of management or experienced a change of end markets, and became bad investments. This is what happened to GE, for example.
The theory of indexing says that, yes there will be some companies in the S&P 500 that are not very good, but others will be excellent and it will all even itself out and you will make money in general as the economy grows. But that will only work if there are no secondary effects. If putting all money in indexes becomes the usual course of action for institutions as well as individuals then it would be very easy to exploit this. A company just needs to get large enough to get send to the S&P 500 (again this can be done with mergers and without necessarily being very successful or profitable) and then they get a bunch free money send their way by way of indexing. And if you get a bunch of badly run companies merging together to get into the index, indexing will certainly become a rather money losing proposition.
The reason why indexing tends to work and it has worked so far, is that indexers are kind of free riding on active investors. Active investors buy and sell stocks and they thus cause the price to move up and down. The price of the most wanted companies moves up and they get put into the top indexes, where the free riding index investors buy their shares. The active investors do not mind because they were first into the shares, and the free riders just increase the value of their holdings. The free riders do not mind because the active investors in a way pick stocks for them.
This all works fine but the whole system relies on there being enough active investors to free ride upon. And if this whole buying indexes trend goes out of hand there might not be.
Buffet and Munger have some good cause to criticize active managers. Many of them have not been very good at all. Money management is one of those professions where it is not easy to determine ahead of time where someone is good or bad at it. Even excellent money managers can have a couple of bad years and terrible money managers can get lucky once or twice. Thus, you have to wait several years to see whether someone is actually good at managing money and during that time they actually have to have money to manage. So to even test whether someone is a good money manager requires taking on a lot of risk. And because being a money manager can be so very lucrative and glamorous and because it is so hard to distinguish the good ones from the bad ones the whole field attracts a lot of smooth operators that know how to ape the look and talk of a person the public would expect to be a successful money manager but they do not know how to do it.
This is a problem with many other professions that are glamorous but where it is hard to initially tell the good from the bad. These include TV/Movie director, TV/Movie writer, politician, newspaper column writer, artist etc.
That being said there are money managers that are undoubtedly very good. Buffet and Munger are themselves a couple of examples. There are many others. Perhaps there aren't enough of them. Perhaps we as an economy are having a problem of not being able to train and recognize able money managers. That may be the case, but that does not mean we should abandon the concept of an active investor. The world actually needs active investors, money managers and asset alocators in general. The dream of simple, cheap and easy passive investing cannot work without them.
Non facetious question, did they make their money doing what they're suggesting (passive investing), or do they have the knowledge that for most people passive is the best answer?
[+] [-] ChuckMcM|7 years ago|reply
I can't say I disagree with that, not that I would categorically lump all financial managers into the 'useless' category either.
But it is important to note that he uses 'trading' in the sense of actively taking and releasing positions in different stocks in order to capture their short term change in value. Not 'investing' which is buying and holding equity (stocks) in company that are growing or otherwise generating wealth (and ideally paying a dividend).
[+] [-] peterlk|7 years ago|reply
Another hypothesis: the difference is whether you view it as a means or an end. I do not believe that stock trading will ever make me rich. But I believe it is a means to teach me things. Thus it is less addictive.
[+] [-] usaar333|7 years ago|reply
[+] [-] everdev|7 years ago|reply
From the article:
> “People are trying to teach you to come in and trade actively in stocks,” he told his audience. “Well, I regard that as roughly equivalent to trying to induce a bunch of young people to start off on heroin.”
It's actually a pretty accurate description of the most sensational part of his speech.
[+] [-] crescentfresh|7 years ago|reply
Oddly, when I entered the passive index world I got absorbed into checking in on my index ETF purchases every day, multiple times per day, and resisting the urge to sell and buy (more index ETFs, lol). I knew in my head this made no sense - the prices will follow the market by design - yet this urge went on for like 2 weeks before I forced myself to stop.
[+] [-] petra|7 years ago|reply
Or just a lucky few beat the index funds with it today ?
[+] [-] dsmithatx|7 years ago|reply
Like anything you do you have to be committed and determined to be successful. It's not a dark secret that there are no short cuts in life. This article assumes we are all much dumber than I prefer to believe we are. We being people who have money to trade stocks and suffer from big losses.
I learned how to trade stocks by reading books about value investing and accounting practices. Very simple stuff that like anything worth learning takes a bit of time and effort. I don't get the upvotes on this article.
[+] [-] smileysteve|7 years ago|reply
How'd that work out for you? Do you beat the S&P 500 YOY with less volatility? If you account for your hours and trading fees? How many years in a row?
If your answer is yes, you should start a fund! Because statistically, whether a mutual fund or exclusive hedge fund, you're a miracle.
> Like anything you do you have to be committed and determined to be successful.
His argument, seemingly based off the Random Walk Down Wall Street data; which basically shows that no matter how committed and determined you are, the broad based index is going to beat you, if not 1 year, year over year.
[+] [-] whitepoplar|7 years ago|reply
[+] [-] orojackson|7 years ago|reply
It's not a matter of being dumb or not: it's a matter of whether the average investor is willing to carefully research companies or not. You seem to do it as a hobby, and it's great that you're getting 12% to 20% returns. But I'd wager that the average retail investor doesn't have the same drive as you do in figuring out which company's stock might rise.
[+] [-] empath75|7 years ago|reply
I said, “Just sell everything and put it in an index fund.”
I don’t think he did. He’s probably down more now.
Stock picking is fun, but for me it’s just gambling. If I lost that much, I’d quit.
[+] [-] sammycdubs|7 years ago|reply
[+] [-] QuackingJimbo|7 years ago|reply
Robinhood disgusts me. 99% of their users should not be trading individual stocks (or worse)
[+] [-] njarboe|7 years ago|reply
It would be better for people to learn early about trading and experience a few business cycles before they transfer $1 million out of their employees plan into their own E-Trade IRA account at age 55. A lot of older people lost much of their retirement fund in both the dot com and 2008 crashes. Buy high, sell low is the natural behavior of the human animal.
[+] [-] abvdasker|7 years ago|reply
[+] [-] jppope|7 years ago|reply
Epsilon Theory has a couple of notes regarding Berkshire => e.g. - https://twitter.com/EpsilonTheory/status/1098596558495453187 - [thread] https://twitter.com/EpsilonTheory/status/1096360266416209920
[+] [-] longerthoughts|7 years ago|reply
How do ignorant investors making senseless trades and learning "hard lessons" improve market efficiency?
[+] [-] QuackingJimbo|7 years ago|reply
I always laugh when people say Robinhood is a good thing for society. Their zero fees, cool app, and gamification of trading is simply ushering fools into a casino
[+] [-] whitepoplar|7 years ago|reply
[+] [-] dont-trd-charts|7 years ago|reply
The wisdom of driving people away from trading does make sense however
[+] [-] AznHisoka|7 years ago|reply
Selling shovels, so to speak.
[+] [-] janee|7 years ago|reply
Think it's the combination of money, a bit of math and some cool algos that make it so fun
[+] [-] JohnFen|7 years ago|reply
Is it? I'm pretty sure that I don't personally know a single programmer who has done this.
[+] [-] meesterdude|7 years ago|reply
[+] [-] HenryBemis|7 years ago|reply
[+] [-] snazz|7 years ago|reply
Good life advice, especially for dealing with people who have a tendency to boast of their accomplishments.
[+] [-] repsilat|7 years ago|reply
The boastful are high variance, even taking your own judgement into account. And where there are power-law outcomes, exposing yourself to the wrong kind of tail risk can be fatal.
[+] [-] latencyloser|7 years ago|reply
Stocks are kind of the "beginner's" asset. They're fairly easy to understand conceptually. "Trading" them is even easier. However, trading them in isolation for a profit _consistently_ is very difficult or just a product of luck. I don't know anyone who does it and wasn't burned eventually.
The thing to remember is, people doing funds or "trading" professionally aren't just buying and selling FANG stocks all day. They're balancing these trades with futures and options or options on futures and other alternative assets. They're hedging their positions and setting themselves up so that their probability of coming out ahead is much greater than you're standard "it either goes up or down" stock movement.
A simple example is the "wheel" strategy in options. A short put at a .30 delta on the underlying, assuming 1 stddev movements gives about a 70% chance of collecting the premium without assignment (of course this isn't perfectly true, it's an approximation). This is already better than buying the stock, which under the same methodology, would have a 50% chance of profit (either going up or down from the purchase price). When assigned, turn around and open a short call against the assigned shares at a similar delta and repeat. In the flat market we've seen the last year or so, this is reasonably profitable and very low effort.
Edit: The reason the "buy and hold an index forever" strategy is recommended is because it's the lowest effort, highest probability of profit strategy one can probably take. I agree with it entirely for 99.9% of people. But that's not to say there isn't other opportunity out there if you're willing to learn about it.
Source: spent a few years at the Chicago Mercantile Exchange working on these sorts of things exchange side and now trade regularly on my own.
[+] [-] thoughtstheseus|7 years ago|reply
[+] [-] pspencer|7 years ago|reply
What Munger is really encouraging in his talks is intelligent allocation of money, knowing the boundaries of your knowledge, educating yourself, and recognizing basic human psychological shortcomings (like mistaking speculating for investing).
[+] [-] unknown|7 years ago|reply
[deleted]
[+] [-] AlphaWeaver|7 years ago|reply
[+] [-] pakitan|7 years ago|reply
[+] [-] Pils|7 years ago|reply
[+] [-] dont-trd-charts|7 years ago|reply
[+] [-] hristov|7 years ago|reply
Lets think about what happens when you buy the S&P 500 index. This is usually the most recommended index, and the one I recommend too. You basically give your money to own stocks of the 500 biggest publicly listed companies in the US. If a company is big enough and it gets their stock listed on the major markets it usually gets included in the S&P 500. (There are some exceptions but generally this is the way it works). Does that make these companies good investments? Not necessarily. There is a way to get big without being especially good at what you do (through mergers). It is possible that certain companies were very good investments before, had their stock appreciate, got into the S&P 500, had a change of management or experienced a change of end markets, and became bad investments. This is what happened to GE, for example.
The theory of indexing says that, yes there will be some companies in the S&P 500 that are not very good, but others will be excellent and it will all even itself out and you will make money in general as the economy grows. But that will only work if there are no secondary effects. If putting all money in indexes becomes the usual course of action for institutions as well as individuals then it would be very easy to exploit this. A company just needs to get large enough to get send to the S&P 500 (again this can be done with mergers and without necessarily being very successful or profitable) and then they get a bunch free money send their way by way of indexing. And if you get a bunch of badly run companies merging together to get into the index, indexing will certainly become a rather money losing proposition.
The reason why indexing tends to work and it has worked so far, is that indexers are kind of free riding on active investors. Active investors buy and sell stocks and they thus cause the price to move up and down. The price of the most wanted companies moves up and they get put into the top indexes, where the free riding index investors buy their shares. The active investors do not mind because they were first into the shares, and the free riders just increase the value of their holdings. The free riders do not mind because the active investors in a way pick stocks for them.
This all works fine but the whole system relies on there being enough active investors to free ride upon. And if this whole buying indexes trend goes out of hand there might not be.
Buffet and Munger have some good cause to criticize active managers. Many of them have not been very good at all. Money management is one of those professions where it is not easy to determine ahead of time where someone is good or bad at it. Even excellent money managers can have a couple of bad years and terrible money managers can get lucky once or twice. Thus, you have to wait several years to see whether someone is actually good at managing money and during that time they actually have to have money to manage. So to even test whether someone is a good money manager requires taking on a lot of risk. And because being a money manager can be so very lucrative and glamorous and because it is so hard to distinguish the good ones from the bad ones the whole field attracts a lot of smooth operators that know how to ape the look and talk of a person the public would expect to be a successful money manager but they do not know how to do it.
This is a problem with many other professions that are glamorous but where it is hard to initially tell the good from the bad. These include TV/Movie director, TV/Movie writer, politician, newspaper column writer, artist etc.
That being said there are money managers that are undoubtedly very good. Buffet and Munger are themselves a couple of examples. There are many others. Perhaps there aren't enough of them. Perhaps we as an economy are having a problem of not being able to train and recognize able money managers. That may be the case, but that does not mean we should abandon the concept of an active investor. The world actually needs active investors, money managers and asset alocators in general. The dream of simple, cheap and easy passive investing cannot work without them.
[+] [-] RickJWagner|7 years ago|reply
These guys have won the game, they are trying to teach others how to do it. We have much to gain, just by listening.
[+] [-] ydnaclementine|7 years ago|reply
I guess I answered myself (the second)
[+] [-] unknown|7 years ago|reply
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[+] [-] JohnFen|7 years ago|reply
[+] [-] fucking_tragedy|7 years ago|reply
[+] [-] throwaway-1283|7 years ago|reply
[+] [-] cde-v|7 years ago|reply
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[+] [-] walamaking|7 years ago|reply
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