Anecdotally, in the last 6 months none of the parents of kids I went to highschool with have cold called asking about crypto shit. People aren't leaving crypto, cause they already have all left.
When the market turns sour it will be largely irrelevant if you own a collection of individual stocks or a packaged mutual fund, which is of course just a larger collection of stocks (or other securities).
If anything, diversification is going to hurt you. The idiosyncratic risk of holding only a few stocks is going to be a lot higher than if you have a bunch. As such, the correlation to the market is going to be lower, thus potentially helping during market downturns
Honest question: what kind of investment, equity or otherwise, would pay out in the event of a global downturn? Besides gold, canned food, and guns/ammo of course. I can imagine some kind of “contra world economy” fund but could you suggest an example?
A bond fund might do okay. Or a distressed debt fund. But in general you wouldn’t want a fund with negative correlation to the market (since it’ll lose money all the time) but instead, one with low or zero correlation to the market. This is the idea of a market neutral fund: have zero market exposure so the return stream is completely uncorrelated.
Sadly, it may be the taxpayers who will no doubt have to bail out people who speculated, just as they did during the real estate bubble, the dot-com bubble, etc.
(Yes, the Government forgave capital gains taxes on stock options for speculator-investors who claimed not to understand the tax event caused by exercising options but not selling them.)
It will be the people holding USD due to the devaluation due to bailing out equity owners.
And if the US isn’t in position to bail out equity owners, then it has bigger problems and you should be investing in your network, food and water supplies, and guns.
Just like in past bailouts, too much of the voting populace is invested in the value of their equity holdings, including taxpayer funded defined benefit pensions and regular 401k/IRA plan. It’s not politically tenable to let those values go down, assuming the US has the ability to print money still.
I don’t know, I assume if USD stops being the safe haven currency, then there has been a change in the world order, which could be due to war. In that case, I would think you’d need to diversity and have multiple passports and assets in those countries. But that’s planning for those with 8+ figures in wealth.
But at the end of the day, your priorities will be access to water, food, heat, and shelter. So for most people, it might not even make sense to worry about which currency to have, as it will be too late to move into it probably.
It might go back to the good old days where shops would accept gold dollars, silver dollars, treasury bills, or pieces of eight. I know the "reserve currency" of Warlord-era China was the Mexican dollar.
> And if the US isn’t in position to bail out equity owners, then it has bigger problems and you should be investing in your network, food and water supplies, and guns.
Sadly enough, it comes down to network and guns. Because both can get you the rest, and with neither, you'll lose the rest.
I have plenty network, but none of us are much into guns. We're all pacifists, more or less. I have a few guns, and maybe others do, but nothing compared to our environment.
And then there's the police and National Guard. They have lots of guns, and know how to use them.
Exactly this. Large investors such as hedge funds will be trading knowing there is a top and will begin scaling out at a certain point. Once that begins, others will follow leading to a collapse and all those mom and pop investors having bought the high. The wealthy pay others to keep an eye on this and will cash put before the turn.
Do we really think the reduction in trade costs from $10 to $0 is really driving consumer investors to dive in? Or is it the surge in stocks like tesla over the last year that is driving more speculation?
It's more about the difficulty, but the cost is a part of it. People without a lot of money aren't going to go to the trouble of opening a brokerage to invest 200, 400, maybe $2000 dollars. Keep in mind you used to have to go to a physical brokerage or get on a call with an online firm before you could trade.
When it's an app, and you can do it all from your couch, maybe that makes it worth it.
To build on that further, if you only have $100 in your existing account to invest, you're may not think it's worth it to buy a stock if 35% of it is going to be eaten up in fees.
But if you can suddenly invest 100% of that $100, then it's far more worth doing.
Yes. Robinhood has made it so easy for teens and college students to quickly open an account and start trading. Literally just click buy, like amazon. Other online brokerages are more complicated and can be intimidating to new traders. A lot of them dont have much money in their accounts, so no fees is pretty valuable for them and the social aspect is big too.
It seems plausible that it's mostly the former. Kind of like gambling: if you know you're going to lose $20 just for playing, you have to be significantly more confident in your ability to win than if you don't have to lose anything just for playing.
The article cites some random blue-collar worker who makes a good point: trade costs mean you're paying basically 7% in fees on smaller stuff, which is what most "Mom and Pop" investors can afford. Nobody wants to do that.
I'm with you that surging stocks are more responsible, although the lack of trade costs probably pours oil on the slippery slope to irresponsible risk.
Favorite anecdata is the froth around the reddit user WSBGod, which pushed that crazy sub to near the top of /r/all and seems to have potentially given birth to another bitcoin-esque HODL guru.
Options trading is super cheap now, you can buy vertical spreads for free[0] on Robinhood, where 10 .20 verticals would’ve cost 200 plus (20*.65 + 4.95) or 217.95 (plus whatever the spread costs, usually .02 on SPY) or almost $220 just to open the position, and the same amount to close. You’re looking at 10% transaction cost just to open. Robinhood just lets you jam your entire $200 into option premiums netting you better returns (or smaller losses). Robinhood has made speculating on cheap spreads and weekly options a lot cheaper.
It doesn’t really make much of a difference to people trading ITM options or hedging, but speculation is much cheaper now.
Edit: With SPCE, PLUG and perhaps TSLA, it was retail long call option buying that forced the MMs to buy the underlying to hedge, forcing the price further upwards which made more people buy calls which lead to MMs buying more shares to hedge. Eventually the buying stops, as we’ve seen with TSLA and SPCE. At one point during TSLAs parabolic rise, 1.8 TSLA calls were trading for every 1 SPY call. SPY usually has the highest option volume, since it’s the most liquid ETF. Option markets have a lot of influence over the price of the underlying.
[0] Meaning your order flow is sold to market makers, and you might get a slightly worse fill
“Option Volatility and Pricing” by Natenberg is the standard text on options. There are also multiple option strategy websites that explain the different single and multi-leg option strategies, if you just want a cursory overview.
You can try your hand at paper trading, thinkorswim by TD Ameritrade has paper trading, and you just need a token deposit of a few bucks to open an account which includes paper trading.
Honestly, the fact that opening an account is easy and that there are now nice, slick, easy-to-use trading platforms has done as much as the lower fees.
When I opened my first online brokerage account back in the ancient times (2005), the brokerage websites were scary, and lots of stuff still required printing out paper and sending it in.
Even then, trades were still cheap (I was paying $7/trade) -- but the whole process made it feel daunting, and made clicking the 'buy' button feel scary.
Nowadays, buying shares is almost as easy and fun as buying shit on amazon -- and when you couple that with the fact that "everybody knows" that the reason that rich people are rich is because stocks -- it shouldn't be too surprising that everybody is racing to get in to the game.
On top of everything else, we are currently in the longest and best bull market in the history of the public stock market -- which means that we have a big crop of folks that have no personal memory of stocks losing money.
I frequently talk to folks that think that 2015-2016 is what a "scary market" looks like, and also frequently talk to people that remember with fear the "2011 crash". If that's what you think a bad market is like, you're going to be ready to put your last penny in.
As others have pointed out, these "free trades" aren't actually free. In exchange, you lose good order execution. Brokerages like Robinhood seem to outsource this to other market makers which in turn give them a kickback for sending those orders their way.
A friend was trying to convince me that high frequency trading was a good thing because of the liquidity it added to the market would allow me to sell my stock in milliseconds. If I've been holding a stock for twenty years, when I go to sell it, do I really care if it takes twenty minutes instead of twenty milliseconds? From the look on his face it was obvious that in his world investing in stocks long term is completely alien. Can't be too hard on him though, he did warn me of the Great Recession months in advance, with problems he was seeing in credit default swap pricing being what he considered the Archduke Ferdinand of the financial system.
"do I really care if it takes twenty minutes instead of twenty milliseconds?"
No, nobody sensible cares. But the stuff people are suspicious of is supposed to be regulated so that your executions are only improved. If somehow this isn't true, it should be a bright line crossed and a big scandal with people going to jail or at least big fines.
Then again, if you panic over a "flash crash", then I guess you should be concerned about liquidity?
> If I've been holding a stock for twenty years, when I go to sell it, do I really care if it takes twenty minutes instead of twenty milliseconds?
I think you may care actually. To give an example, I was holding a stock for several years that recently went up in price quickly, without much change in the underlying business. Simply, analysts started changing their rating on it. When this stock got high enough, I started to feel nervous, and I was watching the market open on a day when I was prepared to sell. Immediately, the stock started to tank, and I sold it right away.
I sold it at a good price, and even though I was a long term investor, I made a short term decision to sell based off the (IMO) extremely irrational price.
Where can one find better order execution? Citation needed, but I read the market makers buying these orders tend to get investors prices better than the bid-ask spread, so it's still good for retail investors. And it's not like it's any worse than when it was $10 per trade.
The kickback is because the flow is uncorrelated with the market, not because the execution is worse. Robinhood would never be able to execute better than a good market maker. Ever.
It would be more accurate to frame payment for order flow as: "We get private institutions to offer you better than public prices; so you'll routinely buy each share a few cents lower, and sell a few cents higher than you would at a broker that does not offer this feature."
The institution can do so not because it's a giant scam, but because they have confidence that a seller on RH is not about to sell a billion more of the same name, depressing the price. They know that it's going to be a small and essentially random trade, which is easier to risk manage.
unless you buy and sell a gazillion times a day /week, does it really matter?
Stock at $118.78 or $118.84 means what to Joe that invested $2400 ? NOTHING, the upside is that he actually invested and that money cannot be easily spent on stupid stuff. Free or barely free is the same in this case, considering that stocks can move up or down by a lot.
Because of this, it's legally forbidden for them to mess with your prices in such a way that you lose anything.
I think people see that these firms make money from selling order flow and as a result assume that they must be losing money somehow. That isn't the case. Some firms (e.g. HFT) are simply willing to pay a little extra for the counterparty to their trade to be a dumb joe instead of another HFT firm. This can lead to both you and the broker winning.
That makes some more sense. I would like to get a better picture of how trading works in terms of exchanges, fees, and agreements though. I'll have to research this.
Actually you’re probably getting better prices than institutional investors. HFT firms are willing to give better deals to individuals since they’re taking on less risk that the trader will move the market.
I can't link to/find the article[1] because of Bloomberg's paywall, but Matt Levine of Money Stuff has said a few times that free trades in exchange for order flow is a good deal for retail investors.
If the trade is free you increase trade volume. Say fair weather stock investors come out an play, the more they trade the more they usually lose, and the more they need to refill their trading accounts from their hard earned Money.
Why would they lose the more they trade? I mean yeah they’ll lose some on the spread but not very much. You would expect their returns on average to match the market.
People often imagine they'll make huge amounts of money by making a tiny amount on each trade, very frequently and consistently. The arithmetic on the percentages makes it appear possible. It just works just as well (or better/worse) in reverse.
I'm not sure what's typical these days, but let's say the spread on a large cap liquid stock is 0.02% and the spread on a small cap illiquid stock is 0.40%.
If you trade once a year, the cost is comparable to the management fees on an index fund. Not much, but already you're paying more than someone who is fully diversified.
If you trade everything once a month, and average -0.40% each time, you are down 20% after five years!
If you trade more frequently, say 200 times a year (not every day, but most days) and stick to the liquid stocks so that it only costs 0.02%, then you are also down roughly 20% after five years, before the actual returns.
Also you tend to lose when playing the short game, short game is more easily predicted by algorithms. So you are not only going against pros, you are going against machines that has speed and world class math phds
>“There’s sometimes no fundamental reason for it. It just is based on perception — a perception based on narratives that run only an inch deep,” he said in a note. “Let’s see how much longer it persists. This kind of activity often unwinds much faster than the windup.”
I think this is very, very risky. Families or individuals putting a lot of money into stock that is largely driven by the media and rally around the stock price increase is how you ruin people's financials. The Tesla stock mentioned in the article being one of them, as the recent bitcoin-esque rises are really hard to explain by fundamentals.
But it seems to me to be the case for a lot of tech stock in particular. Lots of them going up 40% or 50% year over year yuo really have to ask at some point if this is going to continue for another ten years or if it's going to come down at some point.
One of the best signs a crash is imminent (say within a couple of months) is when your family members start bragging about their stock holdings at parties. That's the time to get liquid if you haven't already done that by then. Of course that means you're indirectly still trying to time the market but at least you'll err on the safe side.
I've earned a fair bit of money trading and would never put it down to anything but dumb luck and having enough reserves to be able to sit out the worst. If you're trading with money that you need you're doing it wrong.
With free trading and the tight spreads on most equities and no edge, random trading shouldn’t hurt you that much. Your volatility will be worse, though. Sorry for the plug, but here’s a blog post I wrote about it:
We run a Monte-Carlo and find the average return and vol for randomly generated portfolios for 2 stocks up to 50. The average return for all portfolios is the same while the vol decreases as you add stocks to the portfolio. While high vol will hurt a compounding portfolio’s return due to volatility drag, the arithmetic return will be the same.
So, in other words l, if you have zero skill trading today (essentially buying and selling randomly) you’re not, on average, going to underperform the market appreciably. As such, I don’t think it’s a problem for individuals to trade long equities with no leverage with money that they need (since it’s basically the same as the market). The problem is when people start trading forex derivatives or options or whatever. The volatility of these instruments can be staggeringly high which can lead to risk of ruin (St Petersburg paradox etc).
Does your model still work if people don't trade completely randomly?
I would expect the average small trader to behave similarly to many other small traders, and I would expect the trades they make to correlate with each other. I assume if you invest randomly you get more diversification than if you invest in companies that feel good to you.
It makes sense partially. I would argue that anyone with retirement money in the market "needs that money".. dont trade with the rent money is probably a bit more accurate.
That is the old adage "when the shoe shiner starts giving you stock tips get out"... but you cant time when it will crash or when it will correct and go back up. You might save yourself from the single event "the crash" but over a lifetime of trying to do this you actually will lose more money by not exiting and entering at the right time.
For example you convert to cash because you hear a family member talking about their stock. The market continues to go up another 20% before crashing 30%. You really only saved yourself 10%... now hopefully you rebuy before it goes back up... if you misread the entry point you might actually lose more than just staying in the market. Unless you have a crystal ball you will likely not time it correctly.
I prefer "time in the market beats timing the market"
You also need to couple this approach with a “target date” style strategy. If you’re 100% in stocks and getting ready to retire when a crash comes, you’re screwed. Have fun working at Walmart the rest of your life.
You need to rebalance between risky investments and “safe” ones, with the percentage of safe ones going up as you age. This does two things: 1) allows you to keep your gains safe in a crash, and 2) give you a reserve you can use to buy back into stock “cheap” after the crash.
I agree. I think this signifies as the "biggest fool" flag. When we take a position that seems foolish from a fundamentals point of view, expecting to make our profit from a bigger fool.
And "smart investors" frequently in earlier, look for their exit in events like this. Made much more explicit in pump and dumps...
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[ 3.0 ms ] story [ 140 ms ] threadIt can lose money for months and/or years, but all it takes is one black swan to make all the money back and more.
(Yes, the Government forgave capital gains taxes on stock options for speculator-investors who claimed not to understand the tax event caused by exercising options but not selling them.)
And if the US isn’t in position to bail out equity owners, then it has bigger problems and you should be investing in your network, food and water supplies, and guns.
Just like in past bailouts, too much of the voting populace is invested in the value of their equity holdings, including taxpayer funded defined benefit pensions and regular 401k/IRA plan. It’s not politically tenable to let those values go down, assuming the US has the ability to print money still.
But at the end of the day, your priorities will be access to water, food, heat, and shelter. So for most people, it might not even make sense to worry about which currency to have, as it will be too late to move into it probably.
Sadly enough, it comes down to network and guns. Because both can get you the rest, and with neither, you'll lose the rest.
I have plenty network, but none of us are much into guns. We're all pacifists, more or less. I have a few guns, and maybe others do, but nothing compared to our environment.
And then there's the police and National Guard. They have lots of guns, and know how to use them.
I do think small investors will be more likely to actively manage their investments, though, which is against most of their interests.
When it's an app, and you can do it all from your couch, maybe that makes it worth it.
But if you can suddenly invest 100% of that $100, then it's far more worth doing.
The article cites some random blue-collar worker who makes a good point: trade costs mean you're paying basically 7% in fees on smaller stuff, which is what most "Mom and Pop" investors can afford. Nobody wants to do that.
Favorite anecdata is the froth around the reddit user WSBGod, which pushed that crazy sub to near the top of /r/all and seems to have potentially given birth to another bitcoin-esque HODL guru.
It doesn’t really make much of a difference to people trading ITM options or hedging, but speculation is much cheaper now.
Edit: With SPCE, PLUG and perhaps TSLA, it was retail long call option buying that forced the MMs to buy the underlying to hedge, forcing the price further upwards which made more people buy calls which lead to MMs buying more shares to hedge. Eventually the buying stops, as we’ve seen with TSLA and SPCE. At one point during TSLAs parabolic rise, 1.8 TSLA calls were trading for every 1 SPY call. SPY usually has the highest option volume, since it’s the most liquid ETF. Option markets have a lot of influence over the price of the underlying.
[0] Meaning your order flow is sold to market makers, and you might get a slightly worse fill
You can try your hand at paper trading, thinkorswim by TD Ameritrade has paper trading, and you just need a token deposit of a few bucks to open an account which includes paper trading.
As long as rates stay low, all kind of asset classes will experience capital inflows and thus higher asset pricing.
Having money in the bank is just stupid for average people, and they've found out about it.
When I opened my first online brokerage account back in the ancient times (2005), the brokerage websites were scary, and lots of stuff still required printing out paper and sending it in.
Even then, trades were still cheap (I was paying $7/trade) -- but the whole process made it feel daunting, and made clicking the 'buy' button feel scary.
Nowadays, buying shares is almost as easy and fun as buying shit on amazon -- and when you couple that with the fact that "everybody knows" that the reason that rich people are rich is because stocks -- it shouldn't be too surprising that everybody is racing to get in to the game.
On top of everything else, we are currently in the longest and best bull market in the history of the public stock market -- which means that we have a big crop of folks that have no personal memory of stocks losing money.
I frequently talk to folks that think that 2015-2016 is what a "scary market" looks like, and also frequently talk to people that remember with fear the "2011 crash". If that's what you think a bad market is like, you're going to be ready to put your last penny in.
I'm also afraid to think about how folks will react to the next crash.
No, nobody sensible cares. But the stuff people are suspicious of is supposed to be regulated so that your executions are only improved. If somehow this isn't true, it should be a bright line crossed and a big scandal with people going to jail or at least big fines.
Then again, if you panic over a "flash crash", then I guess you should be concerned about liquidity?
I think you may care actually. To give an example, I was holding a stock for several years that recently went up in price quickly, without much change in the underlying business. Simply, analysts started changing their rating on it. When this stock got high enough, I started to feel nervous, and I was watching the market open on a day when I was prepared to sell. Immediately, the stock started to tank, and I sold it right away.
I sold it at a good price, and even though I was a long term investor, I made a short term decision to sell based off the (IMO) extremely irrational price.
You can also go to a big brokerage like Goldman or Schwab and probably get good execution, but I haven't used those before.
The institution can do so not because it's a giant scam, but because they have confidence that a seller on RH is not about to sell a billion more of the same name, depressing the price. They know that it's going to be a small and essentially random trade, which is easier to risk manage.
Stock at $118.78 or $118.84 means what to Joe that invested $2400 ? NOTHING, the upside is that he actually invested and that money cannot be easily spent on stupid stuff. Free or barely free is the same in this case, considering that stocks can move up or down by a lot.
I'll be honest that I don't have the full picture, but happy to learn something new if it's a different story.
Because of this, it's legally forbidden for them to mess with your prices in such a way that you lose anything.
I think people see that these firms make money from selling order flow and as a result assume that they must be losing money somehow. That isn't the case. Some firms (e.g. HFT) are simply willing to pay a little extra for the counterparty to their trade to be a dumb joe instead of another HFT firm. This can lead to both you and the broker winning.
[1]- Maybe this one: https://www.bloomberg.com/opinion/articles/2019-05-21/the-tr... ?
I'm not sure what's typical these days, but let's say the spread on a large cap liquid stock is 0.02% and the spread on a small cap illiquid stock is 0.40%.
If you trade once a year, the cost is comparable to the management fees on an index fund. Not much, but already you're paying more than someone who is fully diversified.
If you trade everything once a month, and average -0.40% each time, you are down 20% after five years!
If you trade more frequently, say 200 times a year (not every day, but most days) and stick to the liquid stocks so that it only costs 0.02%, then you are also down roughly 20% after five years, before the actual returns.
I think this is very, very risky. Families or individuals putting a lot of money into stock that is largely driven by the media and rally around the stock price increase is how you ruin people's financials. The Tesla stock mentioned in the article being one of them, as the recent bitcoin-esque rises are really hard to explain by fundamentals.
But it seems to me to be the case for a lot of tech stock in particular. Lots of them going up 40% or 50% year over year yuo really have to ask at some point if this is going to continue for another ten years or if it's going to come down at some point.
I've earned a fair bit of money trading and would never put it down to anything but dumb luck and having enough reserves to be able to sit out the worst. If you're trading with money that you need you're doing it wrong.
https://smabie.github.io/posts/2019/11/28/div.html (Diversification, Risk, and Leverage).
Or you can cut to the chase and check out this graph: https://smabie.github.io/assets/div.png
We run a Monte-Carlo and find the average return and vol for randomly generated portfolios for 2 stocks up to 50. The average return for all portfolios is the same while the vol decreases as you add stocks to the portfolio. While high vol will hurt a compounding portfolio’s return due to volatility drag, the arithmetic return will be the same.
So, in other words l, if you have zero skill trading today (essentially buying and selling randomly) you’re not, on average, going to underperform the market appreciably. As such, I don’t think it’s a problem for individuals to trade long equities with no leverage with money that they need (since it’s basically the same as the market). The problem is when people start trading forex derivatives or options or whatever. The volatility of these instruments can be staggeringly high which can lead to risk of ruin (St Petersburg paradox etc).
I would expect the average small trader to behave similarly to many other small traders, and I would expect the trades they make to correlate with each other. I assume if you invest randomly you get more diversification than if you invest in companies that feel good to you.
This makes so much sense.
Oh no, it's directly.
For example you convert to cash because you hear a family member talking about their stock. The market continues to go up another 20% before crashing 30%. You really only saved yourself 10%... now hopefully you rebuy before it goes back up... if you misread the entry point you might actually lose more than just staying in the market. Unless you have a crystal ball you will likely not time it correctly.
I prefer "time in the market beats timing the market"
You need to rebalance between risky investments and “safe” ones, with the percentage of safe ones going up as you age. This does two things: 1) allows you to keep your gains safe in a crash, and 2) give you a reserve you can use to buy back into stock “cheap” after the crash.
You are the shoe shiner, not Joe Kennedy.
https://en.wikipedia.org/wiki/Joseph_P._Kennedy_Sr.#1929_Wal...
And "smart investors" frequently in earlier, look for their exit in events like this. Made much more explicit in pump and dumps...
Buckle up, 'cause here we go!
This could be the big crash (that most traders have been expecting since years ago). Or not. :D
It also times closely with the most meaningful rate cut by the Fed in five+ years.
(mostly, near zero yield for the cash on your brokerage accounts)