Blackjack vs. Stocks

[Thunder]

Stocks are the best passive investment: they don't require you to actually do anything, unlike a business or real estate, etc.

I recommend that most new investors get what is called an index fund, such as an S&P fund. These funds have very low costs (usually about .1% or so) and outperform almost every other fund over the long haul.

Basically, rather than buying and selling stocks all the time, the mutual fund manager just buys and holds the stocks of the 500 largest companies on the exchange. So you are diversified (you have lots of stocks) and you don't rack up a bunch of fees buying and selling stocks. These funds average about 12% return historically.

There are ways to get better returns. One way is value investing, which I do, which relies on buying companies that are "cheap" relative to the rest of the market. Perhaps their price compared to their innate book value is very low. This strategy tends to outperform the market; over 4 years I have beaten the index by right around 10%. Personally, I look most at price/sales, then price/book, price/earnings and dividend yield.

Others do technical investments. Personally, I don't understand what they do, but craazyman and systems trader are both outperforming the market in the long term, so I recommend talking to them.

http://en.wikipedia.org/wiki/Value_investing

You're better off buying some contracts of the E-mini S&P 500 than doing this. In addition you'll save on capital gains for any contracts you sell within a year. Put it this way... You could have bought 1 contract for $5625 and have made $10,000 in the past year. The S&P 500 has gone up 200 points roughly. For every contract owned, you make $50 per point the S&P 500 moves. Granted unless you are sure the market isn't going to move against you during your expected hold time, you probably want to have at least $10,000 available per contract.

 

[Brock Windsor]

I think the part about the millisecond trades is true. I read something where these computers basically catch orders before they get to the exchange, buy the stock that order wanted to buy, and then sell it back to them at a slight markup. I will try and find the link.

EDIT : http://www.nytimes.com/2009/07/24/business/24trading.html?hp

There is the link. Kind of scary for your average investor.

That article is written for the "conspiracy theory" crowd. The writer alludes to flash orders, rebate trading, and dark pool liquidity without explaining any of them. Then gives a meaningless example where HFT traders made money by forcing "slow investors" (market makers / pension funds) to pay full value. In the example if the "investor" had been a sharper trader he could have easily come in with fake size (or a bunch a small dark batches) on the ASK side and the HFT traders would have pushed the price down thinking the big guy wanted to sell. Then the "investor" could hit the BID with his big block of stock at 20cents less than the open price and the HFT traders would be stuck with the loss. Trading is a zero sum game, good traders earn, bad traders lose. For the average investor looking for value, trading games have ZERO effect in the long run.
-BW

 

[1357111317]

That article is written for the "conspiracy theory" crowd. The writer alludes to flash orders, rebate trading, and dark pool liquidity without explaining any of them. Then gives a meaningless example where HFT traders made money by forcing "slow investors" (market makers / pension funds) to pay full value. In the example if the "investor" had been a sharper trader he could have easily come in with fake size (or a bunch a small dark batches) on the ASK side and the HFT traders would have pushed the price down thinking the big guy wanted to sell. Then the "investor" could hit the BID with his big block of stock at 20cents less than the open price and the HFT traders would be stuck with the loss. Trading is a zero sum game, good traders earn, bad traders lose. For the average investor looking for value, trading games have ZERO effect in the long run.
-BW

I dont think the average investor is going to be able to do all this though.

 

[Brock Windsor]

You're better off buying some contracts of the E-mini S&P 500 than doing this. In addition you'll save on capital gains for any contracts you sell within a year. Put it this way... You could have bought 1 contract for $5625 and have made $10,000 in the past year. The S&P 500 has gone up 200 points roughly. For every contract owned, you make $50 per point the S&P 500 moves. Granted unless you are sure the market isn't going to move against you during your expected hold time, you probably want to have at least $10,000 available per contract.

1 - why do you save on capital gains? I don't file US taxes so may be ignorant.
2- So for every contract owned you lose $50 per poin the S&P 500 moves...
3- When would you ever be sure the market won't move against you? Flash crashes happen and the margins will stop you out. Futures are generally used as a hedge for other investments as opposed to a primary investment vehicle. I don't think it's good advice to promote e-mini's, they have their place but are not good for most people.
-BW

 

[Thunder]

1 - why do you save on capital gains? I don't file US taxes so may be ignorant.
2- So for every contract owned you lose $50 per poin the S&P 500 moves...
3- When would you ever be sure the market won't move against you? Flash crashes happen and the margins will stop you out. Futures are generally used as a hedge for other investments as opposed to a primary investment vehicle. I don't think it's good advice to promote e-mini's, they have their place but are not good for most people.
-BW

1. Because the US govt has a rule that for people trading commodities and futures, 40% of short term capital gains get taxed at the long term rate.
2. semantic semantics. Yes if it goes down a point you lose $50 but that is obvious.
3. That's why I advised a minimum of $10,000 for holding 1 contract long term. I can't speak for other brokers, but it would have to drop a substantial amount for me to get a margin call. The S&P 500 right now is pretty calm compared to the last 4 years. You could have a flash crash but you can always put in stop loss orders and usually the volume is pretty heavy before a flash crash which is not the case now. The volume for the eminis are huge so there is far less risk of not getting filled vs. some stocks.

Tell me why the emini S&P 500 wouldn't be good as a primary investment vehicle?

 

[Automatic Monkey]

... Trading is a zero sum game, good traders earn, bad traders lose. For the average investor looking for value, trading games have ZERO effect in the long run.
-BW

To use an AP analogy, stock trading could be compared to a poker game where the house pays the players a rake. The rake represents the real increase in wealth produced by the companies you are investing in with the capital the market provides. But even if the house was paying the players the rake, some players would make money and others would still get their asses kicked. But unlike poker as long as you are dealing in companies that add value to raw materials and labor, it's not quite zero-sum, it is possible for everyone to make money.

 

[flyingwind]

Invest the majority of your money. If new to investing, a balanced investment into an allocation of stock index funds and bonds is the easiest way to investing your retirement portfolio. Wiki Bogleheads and Vanguard for in depth discussions on this. Or read A Random Walk Down Wall Street.

Trade with a small part of your portofolio, where you can test out various trading strategies. If new to trading, best not to risk too much of your portfolio at the beginning as you could easily lose it. There are many trading strategies out there, and different investment vehicles for traders that have different sophistication, software, risk tolerance, portfolio size, trading goals, or access. Voodoo trading strategies are hazardous to your portfolio. It will take a lot of time and experience to become a good trader. As you understand more about trading, you may be more comfortable trading a large part of your portfolio.

Investing is relatively easier compared to trading, imho.

 

[zengrifter]

Invest the majority of your money. If new to investing, a balanced investment into an allocation of stock index funds and bonds is the easiest way to investing your retirement portfolio.

In an fatally damaged economy headed towards total ruin, it would be the easiest way to blow the whole nestegg. zg

 

[shadroch]

In an fatally damaged economy headed towards total ruin, it would be the easiest way to blow the whole nestegg. zg

How much could he lose before May 21st?

 

[Brock Windsor]

I dont think the average investor is going to be able to do all this though.

Of course not. But what traders do has no long term effect on a market investor. It is like a BJ player on third base that hits his 12v3 and takes the dealer bust card. It changed the outcome of THAT hand, but in the long term traders moving prices will help you as often as hurt you. Investors need to find value. The article about HFT trading is trying to spook people into thinking computer programs some how negatively affected their investments.
In my experience it is a common misconception for people to think that trading and investing are the same thing, in reality they are quite different.
-BW

 

[Brock Windsor]

....

Tell me why the emini S&P 500 wouldn't be good as a primary investment vehicle?

LEVERAGE (and all of its associated pitfalls), time decay, expirations, no dividends. Sure an active trader can manage many of these things and profit from the market inefficiencies. But when you equalize the risk tolerance, a typical investor will do better making regular contributions to the SPY "set it and forget it" investing.
-BW

 

[zengrifter]

I think the part about the millisecond trades is true. I read something where these computers basically catch orders before they get to the exchange, buy the stock that order wanted to buy, and then sell it back to them at a slight markup.
SEE : http://www.nytimes.com/2009/07/24/business/24trading.html?hp
Kind of scary for your average investor.

That article is written for the "conspiracy theory" crowd.

I disagree, its out of control, the machines are taking over >>

Algorithms Take Control of Wall Street
​

 

[Thunder]

LEVERAGE (and all of its associated pitfalls), time decay, expirations, no dividends. Sure an active trader can manage many of these things and profit from the market inefficiencies. But when you equalize the risk tolerance, a typical investor will do better making regular contributions to the SPY "set it and forget it" investing.
-BW

Leverage is up to the individual investor to manage. In a way it's beautiful because you can determine how much leverage you want unlike with stocks where you know they typically are only going to move from 0-5% a day depending on the type of stock they are, float and etc. Time decay is really not that big of an issue. Yes I could buy say march 2013 contracts of the eminis but as long as I sell it before the expiration date, what's the worry? If you're that worried, you can get 2015 contracts if you wanted. It may not have dividends but stocks that have dividends generally don't move much. All I can say is if you think the market is going to go up long term, you will at the end of the day have more money in your pocket from investing in the eminis than stocks and your risk will be lower because you can trade it 24 hours a day basically and not worry about a company coming out with bad news when you can't trade it. Stocks are manipulated far more than the eminis.

Let's take one of the hottest performing blue chip stocks out there over the past year, Apple. Apple a year ago from looking at my charts was at about 253. It's now at 335.22 That's a 32% gain. Not too shabby. Now take the emini S&P which has gone up close to 200 points. Say you're a very conservative investor. You decide to only buy 1 contract with the $20,000 you have. 200 points *$50 = $10,000. Now if you were a bit more of an agressive investor, you may have bought and held two contracts and thus made about $20,000 for a 100% return

If you had bought Apple with that $20,000 you would have made only about $6480. So tell me again which is the better deal. Now consider the fact that most people's portfolio's didn't do better than a 10% return....

The only way you'd do better buying Apple or other stocks in this case is if you were totally wrong about the general direction the market would be going this past year. If you're not even sure what direction the market is going to be going in over the long haul, you definitely don't want to be investing.

 

[Dyepaintball12]

I personally know several people who make tons of money trading in the stock market who use nothing other than technical analysis and tape-reading. However, this is going to take just as much time as playing blackjack.

Buying a mutual fund is a mistake as these funds cannot short stocks, and this can be a very bad thing (think back a couple years).

You also don't need an investment adviser. Just do your research and if you choose to invest in a company be prepared to watch your money go up and down, up and down. I also strongly agree with the post about picking companies with strong leadership, an example being Disney w/ Michael Eisner and Frank Wells in the mid-80s.


- Dye

P.S. Young technology companies are basically creating a new bubble right now so it could be a good time to get IN, as long as you get OUT before the burst.

 

[Brock Windsor]

Leverage is up to the individual investor to manage. In a way it's beautiful because you can determine how much leverage you want unlike with stocks where you know they typically are only going to move from 0-5% a day depending on the type of stock they are, float and etc. Time decay is really not that big of an issue. Yes I could buy say march 2013 contracts of the eminis but as long as I sell it before the expiration date, what's the worry? If you're that worried, you can get 2015 contracts if you wanted. It may not have dividends but stocks that have dividends generally don't move much. All I can say is if you think the market is going to go up long term, you will at the end of the day have more money in your pocket from investing in the eminis than stocks and your risk will be lower because you can trade it 24 hours a day basically and not worry about a company coming out with bad news when you can't trade it. Stocks are manipulated far more than the eminis.

Let's take one of the hottest performing blue chip stocks out there over the past year, Apple. Apple a year ago from looking at my charts was at about 253. It's now at 335.22 That's a 32% gain. Not too shabby. Now take the emini S&P which has gone up close to 200 points. Say you're a very conservative investor. You decide to only buy 1 contract with the $20,000 you have. 200 points *$50 = $10,000. Now if you were a bit more of an agressive investor, you may have bought and held two contracts and thus made about $20,000 for a 100% return

If you had bought Apple with that $20,000 you would have made only about $6480. So tell me again which is the better deal. Now consider the fact that most people's portfolio's didn't do better than a 10% return....

The only way you'd do better buying Apple or other stocks in this case is if you were totally wrong about the general direction the market would be going this past year. If you're not even sure what direction the market is going to be going in over the long haul, you definitely don't want to be investing.

You are not comparing Apples to Apple...
-When you buy an emini you are getting 50:1 leverage on the moves in the S&P 500 futures. The broad market.
-If you leveraged Apple at 50:1 you would have crushed the emini results because Apple beat the market average.
-If in your example the S&P didn't go up but dropped 20% (200points.. and it has happened in a day before) you would have lost 100% of your investment. Apple dropping 20% (with no leverage) would have only lost you 20% of your investment.
-Leverage KILLS. Suppose I was on the wrong side in year one of my portfolio and leveraged 50:1. That could easily wipe out 90% of the value. You need MANY years of 100% returns to get back to where you started.

 

[Thunder]

You are not comparing Apples to Apple...
-When you buy an emini you are getting 50:1 leverage on the moves in the S&P 500 futures. The broad market.
-If you leveraged Apple at 50:1 you would have crushed the emini results because Apple beat the market average.
-If in your example the S&P didn't go up but dropped 20% (200points.. and it has happened in a day before) you would have lost 100% of your investment. Apple dropping 20% (with no leverage) would have only lost you 20% of your investment.
-Leverage KILLS. Suppose I was on the wrong side in year one of my portfolio and leveraged 50:1. That could easily wipe out 90% of the value. You need MANY years of 100% returns to get back to where you started.

Well that's the point kind of. You can't leverage Apple that much nor would you as your risk of ruin would almost certainly be close to 100%

When has the S&P 500 dropped 200 points in a day?? Either way that's irrelevant really if you make sure to put in a stop loss. To get any sort of leverage with stocks, you have to buy on margin unless you're playing with penny stocks. That's just an additional fee. Used in the hands of an astute investor it's a great tool. Used by a reckless gambler, you're right it can hurt which is why they have raised the margins so much in recent years for various commodities to the detriment of pros.

Aside from the increased leverage you can have at a lower cost, if you're holding your position for less than a year, you will save on capital gains taxes. That's something you can't get with MF's and stocks.

I haven't heard one advantage yet for owning stocks over the eminis unless you're a terrible investor and expect to lose money

 

[Brock Windsor]

Well that's the point kind of. You can't leverage Apple that much nor would you as your risk of ruin would almost certainly be close to 100%

When has the S&P 500 dropped 200 points in a day?? Either way that's irrelevant really if you make sure to put in a stop loss. To get any sort of leverage with stocks, you have to buy on margin unless you're playing with penny stocks. That's just an additional fee. Used in the hands of an astute investor it's a great tool. Used by a reckless gambler, you're right it can hurt which is why they have raised the margins so much in recent years for various commodities to the detriment of pros.

Aside from the increased leverage you can have at a lower cost, if you're holding your position for less than a year, you will save on capital gains taxes. That's something you can't get with MF's and stocks.

I haven't heard one advantage yet for owning stocks over the eminis unless you're a terrible investor and expect to lose money

-You CAN leverage Apple price moves or any stock 50:1 or more. (Futures, CFD's, Options, Broker leverage, etc..) Your ROR WOULD be extreme.
-The S&P has NOT dropped 200 points in a day. It HAS dropped 20% in a day (Black Monday) which would be MORE than 200 points if it happened today.
-Stop losses do not make bad trading days irrelevant. What if you always buy at the top and get stopped out right before the market turns back up? You will miss all the recovery and catch all the drawdowns. Think that can't happen? Think the roulette wheel can't come up red 20 times in a row?
-Eminis are based on the price of the S&P500, which is 500 stocks. Plenty of arb funds will hold the 500 stocks of the S&P500 and buy and sell the tiny difference in the futures price against the funds underlying stock asset value. During a flash crash (like last May) they still own the underlying asset so don't need to worry about being wiped out by a margin call. A trader that only holds the futures contract will get stopped out if liquidity disappears for a split second.
-I don't want to beat this horse anymore. I think at the least I've provided an argument for other readers that they need to do their homework and know what their edge is before entering a trade or making an investment.
Good trading.