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Since I have been a guy that has basically been in the market since college, I have a bit of experience. When I was trading, I could beat the market. I had an edge and one of the major ones was speed. I was next to order flow and could act on it. When the speed edge went away with co-location and electronic trading, my bottom line reflected it.
One lucky thing I did was get an MBA from Chicago Booth. If you listen in class and take notes, you learn about efficient markets, and why markets are efficient. You learn what it takes to make an efficient market. Some of my fellow compatriots in my classes didn’t listen and don’t believe in free-market capitalism or markets decision-making abilities. But, they have the sheepskin anyway.
I was thinking of this as I perused the market this morning.
Read an article in the Financial Times that showed how messaging traffic on Reddit for stock trading was way down. As the economies of the world re-open, people who were locked up and resorted to trading are going back to their regular gigs and not trading. For many, it was a losing proposition anyway. For others, they couldn’t stomach the volatility, which if you traded things like GameStop you certainly saw.
I looked at my own account the day markets set a brand new high. I looked at it. Here is a chart of the Dow since last June. I used TradingView.com, a company I mentored in Chicago TechStars back in the day to create it.
Look at all the spikes!
Some wealth managers and traders will tell you they have programs with “signals” that will tell them when to buy and sell. They’ll give you all kinds of gibberish that sounds smart and technical which leads people to believe they have some sort of edge.
They don’t.
If you tried to buy and sell at each spike, you’d have chewed up commissions and I guarantee you that you wouldn’t have been able to time the market. In my entire trading career, I rarely bought or sold the low or high of the day. Because there is so much action and volume that trades at those points, often you’d scratch whatever trade you made.
But, if you followed Eugene Fama’s Efficient Market Hypothesis and just bought a no-load, low fee, mutual fund that replicates the S+P 500, you’d sleep well at night and you would have made money.
Of course, if you want to magnify your risk, you can buy single stocks, or you can buy sectors of industries and see what happens. When things change, you buy and sell. But, the way to make money is buy and hold.
If you don’t know how much risk you are comfortable with, find someone that uses the Riskalyze system to figure it out.
I remember this guy who approached me to do a hedge fund. He explained to me how much money he made using some strategy. When I looked at it closely, all I saw was that he was first. Just lucky to be early.
Often, it is hard to discern when you are actually smart and right versus just plain dumb luck in the market. When you look in the rearview mirror after making money, confirmation bias can screw up your analysis and lead you to believe you are smarter than you really are.
If I was actively trading these days, I might be looking to short some of the brokers out there like Robinhood, Schwab, and Interactive Brokers. My experience has been 90% of people fail at trading actively, so we will see retail volume fall.
Warren Buffett says you don’t need a wealth manager to manage your money and for the most part, he’s right. That is, if you execute a buy and hold strategy. Good wealth managers understand how to get out of investments in the best tax-advantaged way possible. They don’t have systems that buy and sell all the time.
Here Fama talks about his theory.
I agree no one can time the market. I do not agree that the market is rational -- hence the expression "the market can remain irrational longer than you can remain solvent." (or something like that). I do believe psychology and inflows have a ton to do with the market - see BTC. But your main point is spot on.
Is that the video you meant to attach? It has pictures of Eugene Fama, but it does not have him speaking.