The investment..speculation, out right gambling thread

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9481

<p>Read more - I added another story.</p>

<p>I didn’t completely ride out the dip – I held onto some stuff but a lot of stuff got dumped. It could have been worse but I did have stop-loss orders set in my Roth IRA. But not in my SEP-IRA – I think because I had that entirely in mutual funds and you can’t do a stop-loss order with a fund. That’s one reason I’m pretty much out of funds – I still have 2 funds that I’m holding onto, but if something like that happens in the future, I think I’ll let the stop losses kick in, then wait until it all bottoms out. (I mean in terms of equity investments – I realize that options offer plenty of ways to make money in a falling market.)</p>

9482

<p>I’d add that there doesn’t have to be a massive, disastrous move like 2008. We’ve already seen 2 major corrections this year, in February and July. Those could be pretty devastating to someone who was doing a lot of short-term trading. The feds could bump up interest rates. Or the situation in Iraq could explode. </p>

<p>Of course the smart thing to do is diversify trading strategies – mix it up between short-term and long-term options, between bullish and bearish trades.,etc. I’m not comfortable enough trading options yet to do that. I’m keeping my exposure limited and that means not much stuff in play at any given time. </p>

<p>Anyway, my point was simply that because the market is intertwined, statistics about probability don’t work in the same way that they do when each event is random and separate from the others. </p>

<p>I do look at the charts and graphs and market trends in deciding what to do – but I don’t have a lot of faith in them. For example, you posted a while back that you got hurt on AT&T because it crossed below its 200 day moving average. When you posted that I had to go and check, because I bought 30 shares of T for my grandson’s Coverdell account around the first of the year, so I’ve been following it all year, and I was not at all surprised by the downturn. In my view T is a kind of doggish stock that pays a good dividend. So I could see you were right about the crossover, but my charting showed that it kissed the 200-day sma back in May as well,l so it’s not one of those nice charts where an uptrending stock is consistently well above the sma line. And what’s magical about 200-days anyway? Why not look at the 120 day sma, or 150 day, or 90 day? We can convince ourselves that the answers are in the math, but I think that it’s all kind of arbitrary. We are making predictions about the future based on what has happened in the past… but the stock market isn’t governed by strict laws of physics. </p>

9483

<p>I did not say I got hurt in at&t because at&t crossed The 200 day moving average. I was losing because the stock was dropping. Crossing the 200 day was just one of a few things that bugged me. </p>

<p>I am up in at&t right now. Could change this morning. </p>

<p>Trading isnt physics. </p>

9484

<p>My point is simply that you made a judgement of probability in terms of a particular indicator. You might have made a different choice if you had used a different indicator. I look at those trend lines too, but I don’t really get why one person might choose the 200-day average and some one else is making decisions based on a different metric. </p>

9485

<p>First off…on that trade I told doct about…and he told me the probability…I did not really need to be told. I had a pretty good idea because I have traded options hundreds of thousands of times. </p>

<p>I understand we arent using physics here. I have written over 2,000 posts here. I don’t feel like repeating myself. Psychology plays a role. Unlikely events occur. </p>

<p>The trade I told doct about is a good trade. I told a former trader what I was trying to do today. He loved the trade. He told me he made a career out of similar trades and one other kind of trade. That is why I made the career remark. I worked with another guy. He traded a similar way and he made a career for himself. This was despite uncommon and common events that occured. </p>

<p>If we have a calamity and the stock moves 50 bucks, you lose .30 cents. I would hope that Posters would not go crazy and risk more than they can afford on any trade , any trade, because things can always go wrong. You can go broke losing .30 if you throw all your money in that trade.</p>

<p>Like I mentioned, I was short when somebody who lived in a mental institution bid for a stock. That has happened once in history. Once. </p>

<p>As far as the 200 day, you are blowing it out of proportion. I make lots of choices. I have lost over 100,000 times in options or stocks. The 200 day caught my eye and I didnt like it. If I freaked, I would have sold the whole position out.
I didnt do that. I have no idea if I would have made a different choice and it doesnt matter if I would have. Did I say the 200 day made a difference? I don’t remember. I could buy the stock back if I want to do that.
I dont want to buy the stock back here and that could be the wrong decision. That’s the way it goes. </p>

<p>I dont know the 200 day average of any other position I have. </p>

<p>I am not that big on charts. I do look at charts. I have a friend that is a great trader and he loves charts. I have watched him trade since 1984. We dont trade the same.</p>

<p>I traded with so many people. Everybody had his own indicators. So what? There are many ways to make or lose money.</p>

<p>I am not maximizing anything. I am not trying to do the perfect trade or perfect trades. If I do the perfect trade, it will be luck. I dont even know what the perfect trade is. </p>

<p>I am big on option probabilities and I know they can change quickly. I have experienced this… Off and on for over 30 years. </p>

9486

<p>@dstark - I don’t really understand why you are getting so freaked out by a comment I made. I’m not going to carry on this discussion further because you seem intent on blowing an observation way out of proportion. I didn’t say that a particular trade was good or bad, I said that improbable things happen. Statistical probability works best when considering events that are random, or events that are clearly correlated with factors that are included in the measurement from which the probability is calculated. As far as I know, the formula for calculating option greeks takes into account historical volatility, interest rates, and numbers of days until expiration. I don’t think it takes into account an upcoming product release, or which companies are contemplating a merger, or an upcoming earnings announcements, or whether or not a federal judge is about to rule on a lawsuit that could cost a company billions. So that’s why I take the probability numbers with a grain of salt. </p>

<p>You don’t have to agree with me. I never said that a particular trade was good or bad. I said that I think that there is a limit to what you can conclude from various forms of statistical information. </p>

9487

<p>Calmom, you make a lot of assumptions. Traders don’t or didnt necessarily use historical volatility when making markets or when trying to figure out probabilities. Traders decide the volatility and it is different when there is an upcoming earnings announcement, when there is quantitative easing, a drug is up for approval at fda, there is an upcoming product release, a decision on a lawsuit is pending, etc. </p>

<p>Probabilities change. Volatiities priced into the options change. </p>

<p>The trade I talked about expired in two days. If there was an earnings announcememt today, the trade would be priced differently. </p>

<p>I am going to make an assumption. The weekly options that expire next week in aapl are trading with a higher volatility than the weekly options last week. </p>

<p>There are a lot of traders that hedge and they do well. </p>

9488

<p>Here is my opinion on some of the discussion from yesterday:</p>

<p>“We’ve already seen 2 major corrections this year, in February and July.” I’m not certain which major corrections we had. There was nothing approaching more than 10% in the s&p. There was a correction in the russell but who cares - it certainly wasn’t major and lasted for a short time. I bought options in iwm near the peak before the correction and because I bought protection at the same time that I went long, I lost 0.</p>

<p>“LOL. The problem with “probability” is that they are statistics base on recent past trading history which has absolutely nothing to do with what happens next. Improbable things happen all the time.” The probability calculators use whatever type of volatility you want to put in including implied volatility not historical volatility which includes what is expected to happen by the “collective masses” in the future. Of course, unexpected things happen - black swan events etc. The distribution used is Gaussian which doesn’t corrrectly factor in tail risk. That being said, it is the best we have. There may be other equations that use different distributions - something which I want to look at in the future or derive myself. This is the bottom line: if the market tanks or aapl tanks, for which case do I lose more money - buying aapl stock at the close yesterday for 98.12, selling next week’s puts and collecting premium at a strike price of 97 or selling puts at 95 that have a lower probability of being itm?? In any case that I can think of even if the market tanks, I will lose less money in something with a lower probability of happening.</p>

<p>“Otherwise, we could all just put the trades on and lie on beaches or go shopping or vacation 24/7 or have sex 5 times a day or whatever…” Sounds good to me and most of the time, the correct thing to do. People overthink the market and think they can outsmart it, you can’t. I use many different trading methods to generate returns. Selling puts and using probability is the most consistent way I know of generating a 5 - 10% return with the added bonus of a way out if it goes against you. I have one account in which that is all I do. I have other accounts which I use options to be market weighted and use some of the rest playing around with some specific companies, buying protection etc, even dividend stocks.</p>

<p>I should also point out that in general I don’t believe most of technical analysis. I spent more than 2 years around the time of the 2008 debacle writing code using every indicator known from simple to exponential moving averages of different time durations, stochastics oscillators, rsi etc. etc., combining them in all kinds of conditional statements. I generated all kinds of neat contour plots for a better visual understanding with all kinds of ways of putting in stop losses. I even used these to generate what ifs for the great depression. NOTHING CONSISTENTLY WORKS PARTICULARLY FOR INDIVIDUAL STOCKS.</p>

<p>I also generally don’t believe in “blink” as it goes against what we have learned in behavioral finance.</p>

<p>:)>- :)>- </p>

9489

<p>What did you learn in behavioral fnance?</p>

<p>“I should also point out that in general I don’t believe most of technical analysis. I spent more than 2 years around the time of the 2008 debacle writing code using every indicator known from simple to exponential moving averages of different time durations, stochastics oscillators, rsi etc. etc., combining them in all kinds of conditional statements. I generated all kinds of neat contour plots for a better visual understanding with all kinds of ways of putting in stop losses. I even used these to generate what ifs for the great depression. NOTHING CONSISTENTLY WORKS PARTICULARLY FOR INDIVIDUAL STOCKS.”</p>

<p>:). </p>

<p>“The probability calculators use whatever type of volatility you want to put in including implied volatility not historical volatility which includes what is expected to happen by the “collective masses” in the future.” </p>

<p>:)</p>

9490

<p>Being on the west coast, you guys sure go to bed late and get up early!</p>

9491

<p>I used to wake up at 3:20.</p>

<p>What did you learn in behavioral finance that makes you think Blink doesnt work?</p>

9492

<p>The same things as you have. I’m assuming by blink you mean intuition? Here is an abstract from a paper by:
Brad Barber at the University of California:</p>

<p>The Behavior of Individual Investors
We provide an overview of research on the stock trading behavior of individual investors.
This research documents that individual investors (1) underperform standard benchmarks
(e.g., a low cost index fund), (2) sell winning investments while holding losing
investments (the “disposition effect”), (3) are heavily influenced by limited attention and
past return performance in their purchase decisions, (4) engage in naïve reinforcement
learning by repeating past behaviors that coincided with pleasure while avoiding past
behaviors that generated pain, and (5) tend to hold undiversified stock portfolios. These
behaviors deleteriously affect the financial well being of individual investors.</p>

<p>There are of course tons of papers like this. There was a paper in scientific american sometime around 2010 or so by Schiller I think which discusses the housing bubble and how people make decisions.</p>

<p>Here is another abstract from a paper entitled “Wisdom of the Crowds” which specifically cites Seeking Alpha:</p>

<p>Social media has become a popular venue for individuals to share the results of their own
analysis on financial securities. This paper investigates the extent to which investor
opinions transmitted through social media predict future stock returns and earnings
surprises. We conduct textual analysis of articles published on one of the most popular
social-media platforms for investors in the United States. We also consider the readers’
perspective as inferred via commentaries written in response to these articles. We find
that the views expressed in both articles and commentaries predict future stock returns
and earnings surprises.</p>

9493

<p>Doct, I like that.</p>

<p>With Blink, I am talkng about split second decision making. Some people are good at this…some not as good. </p>

<p>“Blink is a book about how we think without thinking, about choices that seem to be made in an instant-in the blink of an eye-that actually aren’t as simple as they seem. Why are some people brilliant decision makers, while others are consistently inept? Why do some people follow their instincts and win, while others end up stumbling into error? How do our brains really work-in the office, in the classroom, in the kitchen, and in the bedroom? And why are the best decisions often those that are impossible to explain to others?”</p>

<p>I guess I can out throw out the 200 day as an indicator. :)</p>

<p>One thing about these trades…we dont have to hold on to them through expiration.</p>

<p>If 80 percent of the profit of a trade has been achieved (I am making up the number) and there is a risk of losing a proportion of the profit or actually losing, the trade can be closed or changed. I guess the trades can always be closed or changed. :)</p>

<p>When I worked, I was always weighing the possibilities and whether to close out trades. Imprecisely…but close enough.</p>

<p>I find that trading at home…it is a little harder to close out early. The commissions for one thing. I dont know…I usually sell puts so maybe that is part ot it.</p>

9494

<p>I try to squeeze out every dollar - even $1.40. Looks like I’m going to have to watch that 200 -199.5, 198 - 182 put spreads for the rest of the day.</p>

9495

<p>:)…</p>

9496

<p>DocT, you must have stratosphere rate of return. BTW, my mutual returns 22.5% since last Oct, less than a year. I have to beat that otherwise I’m actually wasting time. </p>

9497

<p>@DocT

</p>

<p>Thank you for saying what I was trying to say, only better. </p>

<p>I agree with you on the “blink” --it tends to lead to impulsive, wrong decisions. The worst is that I have found over the years that I personally am very susceptible to sunk-cost kind of thinking & decision making. I think that’s why I also have learned to resist the temptation to try to make up a loss on one stock through some sort of strategy tied to the same holding. The only possible advantage that gives me is that if I have held a particular stock for a long time I tend to get more familiar with its trading patterns and likely response to certain events or market conditions.</p>

9498

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</p>

<p>This made me think to ask you experts–how do you select a mutual fund?</p>

9499

<p>Mathilda, I won’t invest in mutual funds any more – I prefer ETF’s. </p>

<p>An ETF is like a mutual fund, except it is traded on an exchange like an ordinary stock. (ETF = “exchange traded fund”).</p>

<p>The main difference from the investor’s point of view is that typically a mutual fund will be set up with automatic dividend reinvestment, which means that every time you get a dividend,the money is used to buy more shares of the fund. So even if the per-share price goes down, over time your fund will tend to grow because you own more shares. </p>

<p>However, most brokerages allow you to sign up for automatic dividend reinvestment plans (“DRIP”) so you can create the same benefits for yourself with an ETF. </p>

<p>The downside of a mutual fund is that you generally need a minimum amount to invest, sometimes there are added fees either when you buy in or leave the fund, often the brokers will charge a higher commission for mutual fund transactions, and it you have less control over the per-share price when you sell. </p>

<p>I think there are some advantages of mutual funds in some situations – such as when a young person is just starting out and needs to choose an investment vehicle for a 401K, or when parents are setting up a 529 account for a young child. If you really want a set-and-forget type of investment, they can be useful - and then you just want to look at the fund reputation and try to find a no-fee, no-load fund. Everyone seems to like Vanguard funds, so that would be a start. (“no-load” just means that you aren’t being charged a premium to buy into the fund or to sell out)</p>

<p>But Vanguard also offers ETF’s If you have an online broker, usually when you are looking at the fund there will be some sort of a rating – for example, from Morningstar - so if you are a total newbie, you are probably fine to just follow their recommendations. I’m not saying that just because Morningstar gives some fund a 5 star rating that it’s the best choice for you - but they are in the fund-rating business, so following their advice to start is probably better than trying to figure it out for yourself. </p>

<p>Beyond that, you need to think about your investment goals. For a retirement or a college savings fund, then you would think about how many years until the money will be needed. There are funds that have a “maturity date” - both mutual and ETF funds – that doesn’t mean that you have to hang onto them until the year indicated, but it gives you a clue as to investment strategy. For example if bought a fund with the target date of 2025, it would mean that the fund would be invested more aggressively in the early years, but as the target date approached, more and more of the money would be shifted to low-risk, safe investments like bonds,</p>

9500

<p>Mathilda,
I had a lot of indexes fund in my IRA account so I was not looking for anymore index fund.
What I did was use the Vanguard tool to search for 3,5,10 year rate or return and then select mostly fund rated 4 or 5 stars and then I check for the year the stock market dropped the most which is 2009 and check to see how these funds stack up. I then looked at the top 10 holdings of each fund. Next I checked their Morningstar ratings. The one that had a gold rating is the one I ended up purchasing. It turns out this fund has a lot of biotech stocks and maybe why it gone up better than the S&P index.
Not all the active managed funds have ETF equivalent.</p>