----- Speculators Lose, Market Makers and Investors Win -----

Discussion in 'Strategy Development' started by aeliodon, May 5, 2007.

  1. Just look at ET, you have all kinds of speculators trying to forecast the market. They are going NUTS especially right now as longs don't know if there going to wake up to a 10 point gap then and another 40 point sell off like on 2/27. And bears are going crazy as they're getting smoked every single day. This is why speculators rarely survive past the ten year market. This is primarily because they try to understand a market that is as vast as infinity - the market as a whole cannot be understood or manipulated in any way. If it could be understood then you have complete idiots turning 2k into 2 billion.

    Market making, on the other hand is profitable. Buy the bid and sell the ask when there is a major demand/supply shortage/imbalance. No trying to understand the market, no forecasting involved.

    Investing is profitable. Just dollar cost average into a historical trend like buying the S&P index regularly and enjoy the average 8% yearly return or so that it offers on average. Even if one had started to dollar cost average into the S&P at the all time highs, he'd still be pretty big in the money right now. Remember with dollar cost averaging you buy more shares at lower prices and less at higher prices even though you go in with a fixed amount of money. Again no trying to understand the market, and no forecasting involved.

    Now I'm not saying all speculation is ultimately unwinable. Speculation can be 100% accurate and risk-free (its only worth it if these two conditions are met); but you have to develop a rare combination of market-making and investing. And avoid the forecasting and trying to make sense of the market trap.
  2. mde2004


    I agree, about 90% of the posters on the ET forum are losing money trying to time and trade this market daily yet no one ever admits it.
  3. inf000


    of course 90% lose

    whats your point :confused:
  4. If you invest in the S&P you had to take a 50% drawdown in your account between 2002 and 2002.
    Sure a lot of that might have been profits but it was still a 50% drawdown non the less.

    Thats a pretty shit risk to reward profile, having to take a 50% drawdown to make just 8% a year in the long run.

    A good trader can easily average 8% a year with a very low chance of ever getting even a 5% drawdown.

    Im not talking about a billion dollar hedge fund.. im talking about a small agile trader with no impact or liquidity concerns.

    However a good trader isnt going to do all that work just for 8%,
    I want to average 40%+ returns and i am prepared to take at most a 25% drawdown in my account to get it.
    A 50% drawdown is still way too risky to me if i only earn 40% a year.
  5. are you predicting the percentage of ETers that lose? or do you know the facts?
  6. It is true that over time, the market has ALWAYS gone up. The key there being that you have the time to wait out sideways or choppy conditions. Obviously short-term 'corrections' are excellent buying opportunities if the plan is hold over the long term.

    And for any doubters out there, take a look at this dji chart:


    If you can stomach and/or buy during these temporary down moves, your dollar cost averaging results can rise dramatically.
  7. Q12


    The fact of the matter is that most "passive" investors are actually closet timers to some extent. So many got sucked into the tech runup in late '99, then held on for for the ride down. Most of these same "buy and hold" investors then threw in the towel and went ultra conservative in mid-2002. It wasn't until after the 2003 run up that they felt comfortable enough to continue with their "buy and hold" endeavors. So, they've had some gains here in '04, '05 & '06 but most likely they've still lost over the past 7 years. Of course, there are obviously exceptions and some extremely disciplined investors that simply buy and hold that are now slightly above breakeven from the peak in early 2000.
  8. this is absolutely correct, but most losing traders on ET will never admit it.

    longterm, the stock market builds wealth. there has never been any 20 yr period in history where dollar cost averaging into a wide variety of stocks (such as the wilshire or its equivalent) would not have given positive gains, and in most cases - gains far superior to most other asset classes.

    in the long run, good companies reflect their value. grandma's in idaho know this. extra shrewd investors (buffet et al) will jump on solid companies when they are out of favor - companies like mcdonald's, coke, p&G etc.

    trading can be exceptionally lucrative, but it is not simple and most TRADERS will lose money, whereas most investors will do wonderfully.

    most traders see the opportunity, don't see the risk, and then blow an account out. they provide liquidity. thanx guys.
  9. Businessman - a lot of speculators like to quote the 50-70% drawdowns that the market has experienced in the early 1930s and from 2000-2003 as evidence to avoid the 'dangers' of investing. They cite this evidence purely for ego reasons so they can continue justify market timing. Note that when i say investing i mean dollar cost averaging - and not buy all-in. When you dollar cost average then a 50-70% decline is the buying opportunity of a lifetime that comes around only once in every generation.

    If dollar cost averaging makes one feel uncomfortable then one needs to consider market making. The the current top trader in the world - Jim Simmons at Renaissance Tech - I'm sure all they do there is market making when some well-researched market imbalances occur.

    Like I said thus far the evidence suggests that the only way to speculate successfully is to be either a dollar cost average investor or a market maker. To combine both methods is the holy grail.
  10. Forget the Pro's or Cons of speculating, investing or marketmaking, whats most fascinating here on ET and other boards is that there are people constantly ranting and raving about what the market should do :eek: ! What they don't realise is that in most markets they trade there are players who pay more in costs than what the average piker has as total account equity,yet these pikers under the pretence of heavenly knowledge proclaim the end of the world, fortunately they are ever so short sighted........
    #10     May 6, 2007