Investing Thread - better known as Wall Street Gambling

[quikky]

The market is very, very often wrong in the short term. It just is.

Does this mean all available information has not been factored into the price?

How do you know a price is wrong? If a stock price subsequently goes up or down, does it follow that the price was wrong before the movement?

I guess I'm asking what you mean by "wrong." Prices change as conditions change and as more information becomes available. If conditions and information are different a day before or a day after, does it follow that any of the prices were at any point "wrong"?

A company's value is somewhat subjective, generally a multiple of the P/E ratio is considered the value. There is also the value of simply selling the assets, or liquidation value. When the market reacts strongly and rapidly to some very recent thing, like a tweet or a net earnings number, it typically over-reacts. In many instances companies are overvalued, as in the market has been bullish and things in general are running high. Stocks go through phases, sometimes selling at a premium (VERU leading up to the FDA meeting to decide on whether or not to issue an Emergency Use Exception for their drug for example), which is fine for a while but at some point something has to happen to justify the premium or the price will drop. Tesla typically sells at a premium because it has a cult following and people like Cathy Wood push the stock. Every fad has a salesman, and it's usually someone declaring that we are in a new era and that investing has changed. Nothing has changed, it's just a new fool with other people's money. If someone wants to invest based on emotion, I am happy to take advantage of that.

A stock's price is largely about future expectations, not today's earnings.

[Hardartery]

The market is very, very often wrong in the short term. It just is.

Does this mean all available information has not been factored into the price?

How do you know a price is wrong? If a stock price subsequently goes up or down, does it follow that the price was wrong before the movement?

I guess I'm asking what you mean by "wrong." Prices change as conditions change and as more information becomes available. If conditions and information are different a day before or a day after, does it follow that any of the prices were at any point "wrong"?

A company's value is somewhat subjective, generally a multiple of the P/E ratio is considered the value. There is also the value of simply selling the assets, or liquidation value. When the market reacts strongly and rapidly to some very recent thing, like a tweet or a net earnings number, it typically over-reacts. In many instances companies are overvalued, as in the market has been bullish and things in general are running high. Stocks go through phases, sometimes selling at a premium (VERU leading up to the FDA meeting to decide on whether or not to issue an Emergency Use Exception for their drug for example), which is fine for a while but at some point something has to happen to justify the premium or the price will drop. Tesla typically sells at a premium because it has a cult following and people like Cathy Wood push the stock. Every fad has a salesman, and it's usually someone declaring that we are in a new era and that investing has changed. Nothing has changed, it's just a new fool with other people's money. If someone wants to invest based on emotion, I am happy to take advantage of that.

A stock's price is largely about future expectations, not today's earnings.

That's why it doesn't trade at asset value, but is generally valued as a P/E ratio. Small business, for example, like your local store or something not part of a chain with a ticker symbol is worth 3x it's annual gross. Anything past that is emotion, that's what they are worth as a generally accepted rule. So, running up a price based on an unissued EUE is an emotional move, because the reasonable expectation of sales stemming from that really does not account for the amount of stock price inflation. Tesla is arguably not going to continue to grow at any great rate and most likely will subside and lose market share as literally every other car maker has been legislated into the market. It's price does not reflect that. It has a premium attached that is driven by emotion which happens way too often. There are also things like rogue traders making huge mistakes gambling investment firm or bank money (The London Whale for example). Over time the market corrects and an index fund is the best move for people in general. If you have time and intrrest you can make some money on short term stuff jsut by paying attention. It helps to network with other people doing the same thing. we all look at different stuff and it's like having extra eyes to help narrow down what to research.

[mikeylikey]

<insert company> is arguably not going to continue to grow at any great rate and most likely will subside and lose market share as literally every other <insert future prediction> It's price does not reflect that. It has a premium attached that is driven by emotion which happens way too often.

Lot of hubris here. It implies that you are the only person who can see this. Or at least that nobody with any kind of market-moving ability can see it.

Retail investors make emotional decisions. Sure. Sometimes enough of them make the same emotional decision at the same time that it can put material pressure on the price of a stock one way or another. My contention is that institutional investors are going to notice this before YOU do and price it back in before you can say 'arbitrage'.

How much money did you make shorting Lilly last week?

[Hardartery]

<insert company> is arguably not going to continue to grow at any great rate and most likely will subside and lose market share as literally every other <insert future prediction> It's price does not reflect that. It has a premium attached that is driven by emotion which happens way too often.

Lot of hubris here. It implies that you are the only person who can see this. Or at least that nobody with any kind of market-moving ability can see it.

Retail investors make emotional decisions. Sure. Sometimes enough of them make the same emotional decision at the same time that it can put material pressure on the price of a stock one way or another. My contention is that institutional investors are going to notice this before YOU do and price it back in before you can say 'arbitrage'.

How much money did you make shorting Lilly last week?

It doesn't even slightly imply any of that, you are reading into it. There are many people looking at exactly what I'm looking at and seeing what I'm seeing and probably taking better advantage of it. Large companies use computers and primitive AI to make trades, thaey have preset trading limits and triggers and it is automatic and tends to cause the huge swings that are out of proportion to what goes on. Most of that happens without human input, and the correction happens later when they do step in and make some decisions. They will watch and determine if they can make some money from whatever just happened, and they probably can.
I don't hold or trade in Lilly, and am not interested in starting to. I can't "Short" stocks because I am not an institution that can borrow shares to do that with, and that's not my bag anyway. There are a lot of different ways to trade stocks and options. My preference is in selling covered calls, it is low risk. It is lower reward than the other stuff, but less fail rate. That is also a very limited part of my portfolio, most of my money is in long term investment in funds or specific stocks (Like Abbvie). I would have considered Lilly, but I haven't researched them at all and don't know enough about them to get involved. The retail investors tend to exaggerate the ups and downs, and lose money in the process. If I knew anything about Lilly as a company I may have bought them to hold as a long term investment, if that drop did indeed make them a value purchase.

[dw]

Hubris is an interesting choice of word because classically it is an offense to the gods, and the Institutional Investors have been assigned the powers of gods in Mikey's account - unerring, omniscient.

[convergentsum]

Obviously bubbles do happen, or was a tulip bulb really worth 1/4 million $ in 17th century Holland?

[hector]

Obviously bubbles do happen, or was a tulip bulb really worth 1/4 million $ in 17th century Holland?

I think you're getting at the idea of something's inherent worth. Because obviously a tulip isn't worth 1/4 million dollars. It's just common sense, right?

Except, that's not how markets work. Is a tulip worth X dollars? It is to the person who thinks they can sell it for more than X and make a profit. And before that tulip hit 250k there might have been quite a few people profiting by selling at absurd prices. And if they did profit then yes, the item was worth what they paid for it, as evidenced by their profit.

[hector]

Hubris is an interesting choice of word because classically it is an offense to the gods, and the Institutional Investors have been assigned the powers of gods in Mikey's account - unerring, omniscient.

I dont want to speak for Mikey, but is this how you interpreted his comments?

I interpreted him as saying something closer to "the people with vested interests have factored in all available information." This is not the same as saying that gods have used perfect information. It's actually quite different.

[dw]

Hubris is an interesting choice of word because classically it is an offense to the gods, and the Institutional Investors have been assigned the powers of gods in Mikey's account - unerring, omniscient.

I dont want to speak for Mikey, but is this how you interpreted his comments?

I interpreted him as saying something closer to "the people with vested interests have factored in all available information." This is not the same as saying that gods have used perfect information. It's actually quite different.

What's the difference? In either formulation we attribute powers to them that are beyond mortals, who normally are capable of error, and anticipate retribution against those who challenge them.

[mikeylikey]

What's the difference? In either formulation we attribute powers to them that are beyond mortals, who normally are capable of error, and anticipate retribution against those who challenge them.

Nonsense. Institutions make errors, and I'm not sure how one could sincerely infer otherwise from what I have said.

I am challenging the idea that a retail investor can identify those errors in real time and with enough consistency to make a profit, using the same exact publicly available information that every other profit motivated entity, including the institutions, is already acting on.

Otherwise it's just Morning quarterbacking.

I am not here even considering the fact that, in reality, institutions have far more detailed, relevant, and timely information than retail investors, because it's not necessary to my argument.

[dw]

What's the difference? In either formulation we attribute powers to them that are beyond mortals, who normally are capable of error, and anticipate retribution against those who challenge them.

Nonsense. Institutions make errors, and I'm not sure how one could sincerely infer otherwise from what I have said.

I am challenging the idea that a retail investor can identify those errors in real time and with enough consistency to make a profit, using the same exact publicly available information that every other profit motivated entity, including the institutions, is already acting on.

Otherwise it's just Morning quarterbacking.

I am not here even considering the fact that, in reality, institutions have far more detailed, relevant, and timely information than retail investors, because it's not necessary to my argument.

Do you refer specifically to the Eli Lilly example, or any sort of trade based on the premise that the market is discernibly overreacting?

Because if it's the latter your theory runs into the immediate problem that not all stocks in the market are equally scrutinized, nor equally of interest to institutional investors, for various reasons. But regardless you still have to face the question of whether institutional investors have their own systemic biases (whether these are due to irrationality or to practical constraints).

My interest here is not to defend "retail" trading but to suggest that the same epistemological problem applies to latter day EMH adherents that applies to pie-in-the-sky retail traders.

How does Hardartery know he's beating the market? How do you know he's not?

[Hardartery]

What's the difference? In either formulation we attribute powers to them that are beyond mortals, who normally are capable of error, and anticipate retribution against those who challenge them.

Nonsense. Institutions make errors, and I'm not sure how one could sincerely infer otherwise from what I have said.

I am challenging the idea that a retail investor can identify those errors in real time and with enough consistency to make a profit, using the same exact publicly available information that every other profit motivated entity, including the institutions, is already acting on.

Otherwise it's just Morning quarterbacking.

I am not here even considering the fact that, in reality, institutions have far more detailed, relevant, and timely information than retail investors, because it's not necessary to my argument.

I don't have to necessarily be that accurate about the stock and still make money. I am making the money by selling covered calls. Thus, the inherent value is what matters. It established the baseline of value that I can calculate against. I own the stocks, I am getting paid for someone else to have the right to buy tham at our agreed upon contract price by a specific date (Strike Price). I have made my money on the initial transaction. If the stock exceeds the Strike Price it assigns and I get that money too, which is to say usually my initial investment, so that I can do it again. If the stock closes below the Strike, the contract expires and I get to sell another one, in effect lowering my break even price. The down side is that if the stock shoots through the roof, it doesn't help me because I have already agreed to a contract fixing my payout. So if the market is up to something (Like a Hedge Fund trying to short in a big way or someone trying to pull a pump and dump, or wild speculation like Dutch Tulips) I don't make extra but at the end of the day I have a good idea of where the value will end up after the market corrects.

[Hardartery]

What's the difference? In either formulation we attribute powers to them that are beyond mortals, who normally are capable of error, and anticipate retribution against those who challenge them.

Nonsense. Institutions make errors, and I'm not sure how one could sincerely infer otherwise from what I have said.

I am challenging the idea that a retail investor can identify those errors in real time and with enough consistency to make a profit, using the same exact publicly available information that every other profit motivated entity, including the institutions, is already acting on.

Otherwise it's just Morning quarterbacking.

I am not here even considering the fact that, in reality, institutions have far more detailed, relevant, and timely information than retail investors, because it's not necessary to my argument.

Do you refer specifically to the Eli Lilly example, or any sort of trade based on the premise that the market is discernibly overreacting?

Because if it's the latter your theory runs into the immediate problem that not all stocks in the market are equally scrutinized, nor equally of interest to institutional investors, for various reasons. But regardless you still have to face the question of whether institutional investors have their own systemic biases (whether these are due to irrationality or to practical constraints).

My interest here is not to defend "retail" trading but to suggest that the same epistemological problem applies to latter day EMH adherents that applies to pie-in-the-sky retail traders.

How does Hardartery know he's beating the market? How do you know he's not?

I aim for 10% gain on every call that I sell, as a minimum. I also aim for 10% a month growth as a target, but realistically 3-5% is plenty and more in line with overall reality. It doesn't sound like much, but funds historically return 7% per year. They will not do that well this year probably. Slow and steady is what I am shooting for, and there are actual Mutual Funds and ETF's out there right now based entirely around exactly what I'm doing.

[mikeylikey]

Do you refer specifically to the Eli Lilly example, or any sort of trade based on the premise that the market is discernibly overreacting?

Both. Why assume that the drop in Lilly stock was an irrational reaction to the fake tweet, and not a perfectly rational adjustment that just happened to occur all at once due to the extra attention the stock got that day? I note again that the price did not rebound to the pre-tweet level, as one would have expected were it purely the result of irrational emotion.

It is a good idea for most people not to react impulsively to short term market fluctuations, because if you do this all the time, you will tend to sell lower and buy higher due to the leading nature of prices. That is not the same as 'beating the market' by actually identifying the mistakes of others.

Because if it's the latter your theory runs into the immediate problem that not all stocks in the market are equally scrutinized, nor equally of interest to institutional investors, for various reasons. But regardless you still have to face the question of whether institutional investors have their own systemic biases (whether these are due to irrationality or to practical constraints).

I did not really intend to make such a big distinction between institutional and retail investors. My point was more that NO investor (IMHO, this is inherent in how market works) can claim to be have unique insight into the incorrect biases of all other investors a majority of the time. But if anything, the little guy is even WORSE positioned to make these kinds of judgements.

It's not that institutional investors don't have systemic biases. I'm sure they do. That alone is not useful information. The useful information would be identifying those biases in real time in an actionable (meaning, trading against them) way. But this is literally what every investor, especially the institutions, is already by definition doing all the time vis a vis every other investor and institution.

If a person or entity could actually specifically point out systemic biases as manifest in actual under/overvaluing of assets, before they are noticed and priced into the market by everyone else, in a predictable and provable way, it would be the most profitable enterprise in the history of mankind.

[convergentsum]

If a person or entity could actually specifically point out systemic biases as manifest in actual under/overvaluing of assets, before they are noticed and priced into the market by everyone else, in a predictable and provable way, it would be the most profitable enterprise in the history of mankind.

In theory, but can history inform us as to how well that pans out? How much did investors betting against the market in 2008 make? Vs how much *should* they have made, if all sorts of frauds weren't being perpetrated to give institutions time to take up safer positions?

[mikeylikey]

If a person or entity could actually specifically point out systemic biases as manifest in actual under/overvaluing of assets, before they are noticed and priced into the market by everyone else, in a predictable and provable way, it would be the most profitable enterprise in the history of mankind.

In theory, but can history inform us as to how well that pans out? How much did investors betting against the market in 2008 make? Vs how much *should* they have made, if all sorts of frauds weren't being perpetrated to give institutions time to take up safer positions?

I'm not sure what you are getting at here. Fraud and insider trading are ways to beat the market? I mean, yeah. I don't see how that is incompatible with my thesis, which is simply that the average investor cannot reliably identify inefficiencies that the rest of the market has somehow missed.

[Philbert]

Re: Tesla. The most significant limitation is not ignorance of how much the underlying company is worth, it is ignorance of how long it will take for the stock to reach that value. The market can remain irrational longer than a strict value investor can remain solvent.

@Hardartery's strategy takes advantage of differences in risk preference. He is happy making his 10% and his target OR making his 10% and keeping the stock, while those who buy from him would rather lose 10% for a chance of making a profit at the target price. He has not discovered a secret the larger market is ignorant of, he is working toward a different goal than the majority of the market, and especially the actively traded portion of the market. The risk is if more than 10% of the stocks he owns go to zero while a few greatly exceed target price, in which case he absorbs the downside without any of the upside to compensate for it. Considering how correlated most risk assets are now this is an unlikely scenario.

Re: Lilly, the stock was irrationally priced either before or after the tweet, or both unless someone can explain how the tweet fundamentally altered the profitability of making and selling essential medications.

[Hardartery]

Re: Tesla. The most significant limitation is not ignorance of how much the underlying company is worth, it is ignorance of how long it will take for the stock to reach that value. The market can remain irrational longer than a strict value investor can remain solvent.

Hardartery's strategy takes advantage of differences in risk preference. He is happy making his 10% and his target OR making his 10% and keeping the stock, while those who buy from him would rather lose 10% for a chance of making a profit at the target price. He has not discovered a secret the larger market is ignorant of, he is working toward a different goal than the majority of the market, and especially the actively traded portion of the market. The risk is if more than 10% of the stocks he owns go to zero while a few greatly exceed target price, in which case he absorbs the downside without any of the upside to compensate for it. Considering how correlated most risk assets are now this is an unlikely scenario.

Re: Lilly, the stock was irrationally priced either before or after the tweet, or both unless someone can explain how the tweet fundamentally altered the profitability of making and selling essential medications.

Exactly. I have invented nothing here and am doing nothing special. I just happen to like the strategy and it works well for me. It might be a terrible idea for someone else.

[convergentsum]

If a person or entity could actually specifically point out systemic biases as manifest in actual under/overvaluing of assets, before they are noticed and priced into the market by everyone else, in a predictable and provable way, it would be the most profitable enterprise in the history of mankind.

In theory, but can history inform us as to how well that pans out? How much did investors betting against the market in 2008 make? Vs how much *should* they have made, if all sorts of frauds weren't being perpetrated to give institutions time to take up safer positions?

I'm not sure what you are getting at here. Fraud and insider trading are ways to beat the market? I mean, yeah. I don't see how that is incompatible with my thesis, which is simply that the average investor cannot reliably identify inefficiencies that the rest of the market has somehow missed.

There are those, but I had in mind the frauds which delayed the payouts on the credit default swaps.

[Hardartery]

Looking over the market this morning it appears that Eli Lilly is back up to where it was. So, emotional market panic is now moderated over the space of a week or two and that was apparently a good opportunity to take advantage of over-reaction. Cause the market doesn't make short term mistakes or panic, and the smart money large firms would never do anything stupid with money like invest in FTX because they have all of that information that we don't have. Sure.