Stocks and Trading Thread - Channeling your inner Mono

[Admiral Yi]

OK.
If you are picking stocks actively, what you are doing is betting that the market price is lower than the true value.  Which means you think your own judgment about the stock is better than the considered judgment of other market participants.

Not at all.  When I pick stocks I do it with the assumption that the market price is the true value.

[The Minsky Moment]

Not at all.  When I pick stocks I do it with the assumption that the market price is the true value.

But then by definition you can't outperform the market portfolio, you are just taking on extra transaction costs.

[Admiral Yi]

But then by definition you can't outperform the market portfolio, you are just taking on extra transaction costs.

One doesn't need to outperform the market to avoid the label of sucker money.

I don't see where the extra transaction costs come from.  The commission for buying an individual stock is exactly the same as for an index fund.

[alfred russel]

One doesn't need to outperform the market to avoid the label of sucker money.

I don't see where the extra transaction costs come from.  The commission for buying an individual stock is exactly the same as for an index fund.

An individual stock isn't the same as an index fund--it has much greater risk. Recreating an index fund through the purchase of individual stocks is going to be more expensive.

[alfred russel]

"You are just sucker money."

OK.
If you are picking stocks actively, what you are doing is betting that the market price is lower than the true value.  Which means you think your own judgment about the stock is better than the considered judgment of other market participants.

What that means practically is that you are betting that you know better than:
1) The active managers - reasonably smart or sometimes really smart people who spend their professional lives analyzing stocks,
2) Quant types that deploy PhD math geniuses, supercomputers and proprietary algorithms to ferret out opportunities, and
3) Traders with inside information that you don't have.

That seems to me a bad bet - it's the old adage about what is going on if you can't spot the sucker at the card table - it's probably you.

This really likely only comes into play with small caps. However, there is a form of the efficient market hypothesis that stocks will only be efficiently priced to the extent that they still provide a fair excess return for skilled market professionals. If so, a person may not be able to beat the professionals, but still beat the market, by accepting a lesser return.

[MadImmortalMan]

Sold Kinder Morgan for a significant gain last week.   I could have made more had my sell limit order not kicked off at my set price, but I'm still happy.

I sold half of mine, making it no longer my single largest position. It was up ~53% since I opened it, not counting the divs. So I'm happy too. I got all my original cash back plus many quarters of dividends along the way. We'll see what happens to it when the consolidation is done.

[Admiral Yi]

An individual stock isn't the same as an index fund--it has much greater risk. Recreating an index fund through the purchase of individual stocks is going to be more expensive.

Of course.  I would not recommend that anyone put everything they own into one stock.

But that doesn't validate Joan's argument.

[MadImmortalMan]

It's very hard to beat the market when you're managing a very large pile of money. The more you are managing, the harder it gets. That's why mutual funds can't do it.

[The Minsky Moment]

An individual stock isn't the same as an index fund--it has much greater risk. Recreating an index fund through the purchase of individual stocks is going to be more expensive.

Of course.  I would not recommend that anyone put everything they own into one stock.

But that doesn't validate Joan's argument.

It does if one assumes - as is true - that there exist very inexpensive options for replicating the market portfolio and getting perfect diversification.  The question then becomes why deviate from the cheap market portfolio?

[alfred russel]

Of course.  I would not recommend that anyone put everything they own into one stock.

But that doesn't validate Joan's argument.

I think it does.

Since you don't claim to have abnormal insight (you assume the market price is the "true" price), you are either accepting an inferior product (higher risk) or greater transaction costs.

[The Minsky Moment]

However, there is a form of the efficient market hypothesis that stocks will only be efficiently priced to the extent that they still provide a fair excess return for skilled market professionals. If so, a person may not be able to beat the professionals, but still beat the market, by accepting a lesser return.

Except that the empirical evidence does not support the existence of excess returns by the professionals, except the rather equivocal results for the "2-and-20" hedge fund/PE industry.  And there are good reasons to think that premium - assuming it exists and represents genuine alpha - is Not easily replicable even in part by non-professional ordinary Joes.

Personally I would not invest the time and trading costs to find out but OMMV.

[Admiral Yi]

It does if one assumes - as is true - that there exist very inexpensive options for replicating the market portfolio and getting perfect diversification.  The question then becomes why deviate from the cheap market portfolio?

There are a variety of reasons: preference for greater risk/reward than the market average, preference for higher dividend yield, yada yada yada.  Plus it's fun.

You seem to be backing off your original statement about sucker money Joan.

[alfred russel]

There are a variety of reasons: preference for greater risk/reward than the market average, preference for higher dividend yield, yada yada yada.

There are different types of risk. The risk related to being non diversified does not increase reward. Diversification reduces risk without reducing reward.

The risk / reward profile of the market average may not be the best for you, but generally the most efficient way to find such a risk / reward profile is through adjusting the asset classes you are investing in or specific sectors of the market. In the latter case, there are so many mutual funds specializing in different areas, that will probably be the most efficient way to change the risk/reward profile from the general market.

Plus it's fun.

Aka, gambling is fun. 

[The Minsky Moment]

There are a variety of reasons: preference for greater risk/reward than the market average

Either market portfolio with leverage, or buy S&P futures ---> same result, but cheaper and better diversification

preference for higher dividend yield

Modigliani-Miller suggests don't bother but if you wish there are passive funds for that too.

Plus it's fun.

Like I said before I perfectly valid reason,  I meant that in all seriousness. 

You seem to be backing off your original statement about sucker money Joan.

Nope, just using more polite language.

[Admiral Yi]

Diversification reduces risk without reducing reward.

This is not true.

Aka, gambling is fun. 

Gambling means no time value of money and house odds.  Investing is not gambling.