No one on EliteTrader will beat the market… here is why

Discussion in 'Trading' started by neutrino, Dec 17, 2008.

  1. I posted some of my thoughts on another thread on why you can’t make any money from speculation (above the normal long-term return for stocks), but I didn’t get challenged so I decided to post this in a separate thread.

    I’ve been trading for a couple of years now, but only a week ago I finally realized that the academics are actually right and markets are efficient enough so that no short-term profits can be extracted from them on a consistent basis. Since then I stopped trading. To continue trading I need to convincingly disprove this hypothesis, or just accept it and put my money in an index fund and get a job or start a real business. So I hope on some feedback from you guys to help me and I hope we can make a discussion and challenge the very basis of our belief systems as traders – that we can beat the market.

    Please have some patience and read at least the first two paragraphs below :)


    There is no edge in trading and speculation. In a perfectly competitive market as is the stock market, the expected economic profit is ZERO, i.e. you cannot earn more than the normal return for the security you are trading without taking additional risk. This means that if you are a stock trader (or equity futures trader) you are expected to earn about 8% nominal return or about 6% real return (after inflation). You will also have to subtract trading costs from the normal return, so in effect you can expect to earn less than the normal return.

    In markets which are not perfectly competitive (such as venture capital, real estate) you can still earn zero return above the normal return for these markets, but YOUR SKILL, INTELLIGENCE, EXPERIENCE and TIME INVESTED, will have a much bigger impact on your results than in a perfectly competitive market. Your skill and brains will count most (to a point where even dumb people can have spectacular results) where there is almost no competition or where you somehow manage to protect your business - with a brand (Nescafe), a patent (Pfizer), network effects (Microsoft, eBay), scale (Wall-Mart), addictive product (Coke, Phillip Morris) etc... That's a true edge. You have no edge buying and selling stocks - every information is publicly available and easily obtainable (including the price history!!!), your stock is no different than any one else's and you have a transparent, continuous auction process with tens of millions of buyers and sellers, no barriers to entry and a tiny spread. Your IQ, discipline and nervous system simply don't matter in such market. Whatever profits from inefficiencies there are, they are divided into millions of pieces between your competitors. The only true edge you can obtain is if you manage to buy at the bid and sell at the ask, because the fair price is in between - so effectively you buy below the fair price and sell above it. And also stay diversified, because you can earn a free lunch from undiversified investors, if there are any.

    A lot of people think that if they are really smart, and hard working and disciplined and creative in their regular life, in school or in their non-trading job experience, they will have a similar results in the stock market and should be at the top of the game. But there is one crucial difference between the stock market and the normal environment we grow up with. If you are smart and work hard, indeed you have a very high chance of beating the next guy. But that chance quickly erodes when you put your skill and time in a perfectly competitive market. Imagine your chances of success playing poker against a single opponent. Let's say they are 99% against an unknown opponent. Now imagine playing at a table with 100 unknown opponents. The rules of the game will have to be changed somehow, there must be more cards in the deck etc., but the idea is that your edge (strategy, discipline, emotional control etc...) will rapidly vanish. No longer will you be able to track the behavior of your opponents and there will be no point in that because each one of them will have a negligible effect on the game. Your profit will be closer to the expected profit for all the players on the table, i.e. zero minus the rake for the casino. Everything will be determined by chance and not skill any more. The probability of leaving the table last with all the money is much lower than 99% now even though you are still the same player. If such game existed no one will want to play it, they'd rather go to the roulette. Traders and investors however are constantly bombarded with success stories and "new" information to trade so that they stay in the game and make commissions for Wall Street.

    Think about it - no one with brains will go into a very, very competitive market such as retailers or groceries stores. But they rush toward the stock market, which is much more competitive (only the bond market is more efficient actually).

    Many traders believe they have a system that has a mathematical edge. The truth is that their system HAD a mathematical edge, but it has a built-in systematic risk because the odds are very, very high that this system is already discovered or will be discovered soon enough to erode its profit margins and bring its return back to 10% adjusted for risk minus commissions. The nature of the market always changes as long as there are people to look at it, so it is in a constant evolutionary state that is completely unpredictable. Back testing is always curve-fitting by definition and is especially dangerous when applied to publicly available information.
  2. Granted i didnt read most of that drivel, but i am more than certain you will not only be challenged, but ridiculed, forever to be sectioned off in the 'retards of ET' area of this wasteland.
  3. I've done wayyy better than the market for years. I guess I should give it all back...since I can't do that. :(

  4. Beating the market isn't as hard as being positive constantly. Problem is, being down 20% when the market is down 40% still doesn't pay the bills.

    I've never met a year in year out consistently profitable stock trader in my life personally. I hear there are some here. This szeven has a reputation as being a king. I wish I had those skills. I won't nay say; I just will say opportunities are much better in illiquid markets.

    I think going forward, many millionaires will result picking up the pieces from this latest collapse. And that will have nothing to do with edge. Just fundamentals of the fed diluting the money stock.

    Now I 'trade' in a very long time frame and get a kick out of pontificating and doing analysis... I've lost my ass short term trading - just doesn't work with me.
  5. Read the first few sentences and concluded that the OP is a failure and is trying to justify his shortcomings.
  6. I am i king, it's true, i just moved from the Gala's to the Braeburn's.
  7. maxpi


    and you posted this on a website owned by guys that made $100 million trading because..........
  8. That's the interesting thing. I beat every market I traded in the last 5 years since I started trading by a significant margin. But this means absolutely nothing. If I am going to continue to do this in the next five or fifteen years, I want to know that I have a chance to beat the market in the future. There are very few examples of people that could do this for 20 years. And my original post explains why. So in my case I am trying to prove that I was lucky and not that I was good.
  9. ggoyal


    clubber lang is right. just because the op failed, he is trying to say it can't be done, when I have seen with my very eyes people do it for extended periods of time and live large off of it.

    Why don't you do yourself a favor and spend some screen time. it will work. just devote 3-4 months non stop, you will see patterns you can profit from.

    These articles are a lot of times published by financial advisory firms who want you not to trade and simply put up money with their advisors so they can charge an "asset based fee". ignore them, trust me, if one knows how to trade, they wouldn't be saying that, or doing another job.

    Do you feel good about yourself now that you have justified to yourself that you can't trade because OTHER PEOPLE said so?
  10. ... because there may be someone here who has come to similar conclusions and can share their insights. Or I may be just plain wrong and trying to outsmart the millions of people trying to outsmart you is a game worth playing.
    #10     Dec 17, 2008