Stocks and Trading Thread - Channeling your inner Mono

[Tonitrus]

It should be...I am not sure the $600K house I bought will be worth $1M next week, but I'll sell a contract on it that says if someone will buy it at $1M next week (Zillow thinks it is at about $850K), they can, but they have to pay me $10,000 for that privilege, and if they won't pay $1M, they don't get it, but I keep the $10K.  Then the following week, it is appraised at $1,100,000.

Oops, turned out to not the best call I could have made...but I come out pretty well ok.

[Admiral Yi]

Let's say you're selling your house.  One buyer offers you $1,000,000.  Another buyer offers you $1,100,000.  If you take the first offer, should you go "ka-ching, I bought that house for $600,000 five years ago", or should you go "did I just give away $100,000?"

Bad analogy.  In the Tesla case we don't have the second buyer's offer yet, just the possibility of a future offer.

[DGuller]

Let's say you're selling your house.  One buyer offers you $1,000,000.  Another buyer offers you $1,100,000.  If you take the first offer, should you go "ka-ching, I bought that house for $600,000 five years ago", or should you go "did I just give away $100,000?"

Bad analogy.  In the Tesla case we don't have the second buyer's offer yet, just the possibility of a future offer.

You have a second buyer.  When the option matures in the money, buyer number one is the option holder.  Buyer number two is the open market.

[Tamas]

DG in your thinking selling any stock that will ever reach a higher price point than your sale price was a net loss.

I recommend you do not start stock speculating because you will blow your brains out with that attitude.

[DGuller]

Though I know it is not exactly along the lines of what you are saying, but it is pretty close to the mindset of thinking that I could agonize, as a "loss", over every stock that I've ever sold that is now worth far more than I sold it for. 

That's a lot of agony/loss that one could do without.

Yes, that's right.  The factually correct mindset is knowing that it's not possible to avoid losses from buying high or selling low, though they may be very slightly reduced.  The factually incorrect mindset is pretending that losses that you couldn't reasonably avoid didn't happen, and are really those magical paper losses that are different from real losses.  As a poker player and an insurance actuary, I'm perfectly fine with the notion that I can only eliminate a miniscule percentage of the errors committed due to imperfect information; I do what I can, and it would be harder to do what I can if I had to handicap myself with an incorrect notion of what an error is.

[Admiral Yi]

You have a second buyer.  When the option matures in the money, buyer number one is the option holder.  Buyer number two is the open market.

At this moment in time, you don't have a second buyer.  *If* the market price rises in the future to the strike price, then you will have a second buyer.

Present tense and future tense.

[Admiral Yi]

Yes, that's right.  The factually correct mindset is knowing that it's not possible to avoid losses from buying high or selling low, though they may be very slightly reduced.  The factually incorrect mindset is pretending that losses that you couldn't reasonably avoid didn't happen, and are really those magical paper losses that are different from real losses.  As a poker player and an insurance actuary, I'm perfectly fine with the notion that I can only eliminate a miniscule percentage of the errors committed due to imperfect information; I do what I can, and it would be harder to do what I can if I had to handicap myself with an incorrect notion of what an error is.

This is a manifesto for inaction.

[DGuller]

Yes, that's right.  The factually correct mindset is knowing that it's not possible to avoid losses from buying high or selling low, though they may be very slightly reduced.  The factually incorrect mindset is pretending that losses that you couldn't reasonably avoid didn't happen, and are really those magical paper losses that are different from real losses.  As a poker player and an insurance actuary, I'm perfectly fine with the notion that I can only eliminate a miniscule percentage of the errors committed due to imperfect information; I do what I can, and it would be harder to do what I can if I had to handicap myself with an incorrect notion of what an error is.

This is a manifesto for inaction.

I don't follow.  The only manifesto I see here is acknowledging that when your asset goes down in price, you lose money, regardless of when and at what price you acquired that asset.

[Admiral Yi]

I don't follow.  The only manifesto I see here is acknowledging that when your asset goes down in price, you lose money, regardless of when and at what price you acquired that asset.

Actually, we've been talking about acknowledging when your asset goes up in price after you've sold.

And this mindset does lead to paralysis.  Because any purchase you make could crater tomorrow, you'll never buy anything.  Because any holding could skyrocket tomorrow you'll never sell anything.

[DGuller]

I don't follow.  The only manifesto I see here is acknowledging that when your asset goes down in price, you lose money, regardless of when and at what price you acquired that asset.

Actually, we've been talking about acknowledging when your asset goes up in price after you've sold.

And this mindset does lead to paralysis.  Because any purchase you make could crater tomorrow, you'll never buy anything.  Because any holding could skyrocket tomorrow you'll never sell anything.

It's not a mindset, it's reality.  Mental accounting is a bias, not a sound way to think about things.  The fact that sometimes humans are ill-equipped to handle rationality is a different matter.  I still think that the best way forward is to not go down the rabbit hole of "playing with house's money" bias, and instead work on the emotions that make you paralyzed.

[Admiral Yi]

Here's another way to think about it.  Let's say people have irrational fears about investing in the stock market.  For example my favorite uncle has it.  He's sure the day he invests will be 1929 all over again.

So maybe people need some mental tricks to get over that irrational fear.  "Playing with house money" could fall into that category.

My mental trick is to fall back on the efficient market hypothesis.  All available information, positive or negative, including about the future, has already been incorporated into the current stock price.  That's the price some of the smartest people in the world, with access to reams and reams of data, and with no other job than this, have decided that stock is worth.  So if I buy *any* stock I am buying it at the fair market value.  If I sell a stock I am selling it at the fair market value.

[crazy canuck]

My mental trick is to fall back on the efficient market hypothesis.  All available information, positive or negative, including about the future, has already been incorporated into the current stock price. 

We all need our fantasies I suppose.

[Tamas]

I am not sure I follow the drama here.

You own a stock. Its price goes up 20%. That meets the profit target you wanted out of it, so you sell it. 3 months later stock's price increases a further 30%. So what?

[Josquius]

I can see how it'll be annoying if the price goes up the day after you sell, though the longer after the rise happens the less painful it gets, and more fool you for keeping an eye on it and torturing yourself.


All this stuff with options and calls boggles by brain.

[Tamas]

I can see how it'll be annoying if the price goes up the day after you sell, though the longer after the rise happens the less painful it gets, and more fool you for keeping an eye on it and torturing yourself.

Yes but DGuller suggests that if you sell for profit, then later the stock price increases, you have suffered financial loss. Which you did not.