I however, have some money to invest. I used a very small amount of money to test a system that I came across a few months ago. It utilizes alot of company fundamentals, so it’s not 100% pure technical. So far it has been doing pretty well (beating the S&P 500). I still have most of my assets in index funds however.

You are confusing investing with trading. Investing is not a sum-game at all; however, trading (or trying to beat the market) is a zero-sum-game. Practically speaking, it is a negative-sum-game because of the added costs involved in trying. This means that out of everyone truing to beat the market, more money will be lost than gained.

The thing about negative-sum-games is the longer you play, the greater the likelihood that you will lose (and the greater the size of the loss).

Whether you actively trade or just buy and hold a total stock market index, you will still participate in the growth the traded companies. The zero/negative-sum aspect of trading is relative to simply holding the lowest cost total market index fund (that’s what you’re aiming to beat, right?) You are only better off trading if you can beat the other active traders at their own game. Not only that, but you must beat them by enough to cover your added expenses of trying.

This is why it is actually only remotely possible that an active trader can end up with above average returns. It has nothing to do with skill, it is just math.

If it is a zero sum game then how does the “average” ever increase? If my winning $1 means you lose $1 then there would be a finite amount of value in the market which would never increase or decrease. That is just not the case. The value goes up over time. That means we can all “win”, so to speak, just some more than others.

So, let’s say I bought a stock yesterday for $10, and I sell it today for $12. I “won” $2. Now, let’s further say that tomorrow, it goes up to $15. I didn’t “lose” those $3, I just didn’t “win” as much as I would have if I held on. I won and my buyer won.

Does that happen every time? Obviously not. Some people lose lot’s of money. The same can be said of small businesses, many people lose lot’s of money, but we still consider it a viable option.

“then who do you think comprises the equally-large group of below average traders?
Is it the institutional investors…”

In a word, yes. You certainly know this to be true, that statistically actively traded mutual funds do below average. So, then, who do you think is on the other end of that? If they are, in the long run, below average, who is on the flip side?

Institutional investors have lot’s of information and tools, it is true, but they are also wielding huge amounts of capital. They can’t move in and out of a stock without affecting its price. That means they can’t move on their new information very quickly without tipping their hand, and that is a weakness that can be exploited by small investors who know what they’re looking for.

Not to mention mutual fund managers are expected to be fully invested (or, nearly so) at all times. If they thought the market was going to go tumbling down they can’t pull out and sit in cash until the storm is over. That means when the market tanks, they go right along. Individual investors don’t have such a restriction.

“Do you think it’s even remotely possible that in the long run, you will end up earning below average returns, executing trades in your spare time, with no investing education or experience at all…”

I don’t think someone with no education or experience will consistently beat the market. I think active traders who invest lots time in their education and research have the ability to beat the market. Is is “remotely possible” that I will end up with below-average returns? Yes, of course, in the same way a landlord knows that it is “remotely possible” their new tenant will trash their house, or an entrepreneur knows that his or her business venture may fail. Not everyone will open a business, and not all businesses will survive and thrive, but that doesn’t mean it is not a legitimate way to make money.

I’m going to assume you’re smart. So, you must surely know that for every “winner” in the market, there is a “loser.” That is, when you trade a stock with someone, that stock can only go in two directions: up or down. If you were the buyer and it went up, you won that transaction. If it went down, you lost (and the seller won). It’s a zero-sum game. Those are the only two possible outcomes, agreed?

So, you seem to believe that you have a consistent ability to be on the “winning” end of the majority of your trades. That is, you believe you can consistently beat the average. Right? OK, stay with me here.

If you are consistently earning above the market average, and the people investing in index funds are guaranteed to earn exactly the average, then who in your universe are the losers? Where are all the losers who are enabling you to consistenly be a winner?

It’s a mathematical tautology that “we can’t all be above average.” Thus, if the indexers are guaranteed to be exactly average, and you think you’re above average, then who do you think comprises the equally-large group of below average traders?

Is it the institutional investors, with hundreds and hundreds of billions of client dollars at their command, and immediate access to market information, and instantly-executed trades?

Is it the pension fund managers, with hundreds and hundreds of billions of dollars, and their professional, experienced investing experts?

Just who do you think is on the losing end of all your trades?

Do you think it’s even remotely possible that in the long run, you will end up earning below average returns, executing trades in your spare time, with no investing education or experience at all, and your 20-minute-delayed stock quotes, and your “When-we-get-around-to-it” eTrade stock executions?

Index funds are a fine place to put your money if you don’t have the time or inclination to trade. There is nothing wrong with that. But I am a little tired of the trader-bashing that goes on here.

JakeIL7 says: “GRS is not a place where those that play that particular game gather (at least not in large numbers)”

I could be mistaken, but this gives me the impression I am not welcome here. That would be sad for me, as I have enjoyed reading GRS for almost as long as it has been around.

I know that active trading is currently taboo in the PF world, but I would encourage a bit more open-mindedness from this group, which I think tends to be of above-average intelligence and acumen.

Occasionally if you are smart and informed, you can find a really good oppurtunity. But that happens only so often, and if you invest regularly you will start inventing oppurtunities that dont really exist.

If what you say is true, why invest in stocks at all?

PS The reason for all the flashing lights is competition. Except the eTrade commercials. Those are all about getting you into the game before you know what you are doing. Ignore those

Unless you pull a Mcfly and travel to the future to pick up a Wallstreet Journal any “strategy” you pull from past data is nothing more than bupkis, conjecture and magic!

It is not necessarily a matter of a person’s capability. It is their knowledge of the game (and it is a game, just with very high stakes) and the amount of time they can spend on playing the game (or hobby, if you prefer).

Those who have not spent time learning the game and those who do not have the time to play the game SHOULD use passive, index investing. GRS is not a place where those that play that particular game gather (at least not in large numbers)

A point of contention: In your first statement you say you can trade off the correlations without reasoning. While I agree it is possible, it is not necessarily a good idea. It is a VERY easy way to get burnt. Example #1: The people who are now underwater on their mortgages through no fault of their own.

If the lottery numbers came up the same for 12 weeks in a row, there may be no legitimate reason, but I’m still going to buy a lottery ticket and play those numbers in week 13. Markets are not perfectly efficient, nor are they random in the long term. Trends do occur, and I make money off of them. Index investing is fine for the casual investor who does not know what he or she is doing. However, there are those that can and do make money with alternate strategies. To completely discount them is only doing yourself a disservice.

Those who can make money trading do, and those who can’t preach passive, index investing.

A correlation does not prove a causation

In other words, just because there is a correlation does not infer that it has meaning. You have to do a much more rigorous analysis to determine if there is a causal factor at work – and what is the cause(are large institutional investors buying on Mondays, bringing up the prices? Do people buy the day after they get their paychecks?).

Or is it completely coincidental, in which case you cannot say that it’s a trend and should not use it as a basis for an investing paradigm.

http://www.crossingwallstreet.com/archives/2010/08/the-four-day-work-week.html

Answer: I bought 200 shares of BGU (a 3X Market Bull ETF) on 11/30 at $59.21. I just sold them today at $64.33 for a profit of $1004.02 after a comission of $19.98 (0.16%) on both transactions. After tax I still keep $720 for a cool 6% net gain in a couple of days.

Don’t get me wrong, I’m a long-time investor, but I do keep some play money to experiment with trading strategies.

To dismiss this article is foolish. Every strategy has a place and time.

As you have always pointed out, little things compounded over years do matter.

I can understand why something like this would get you so worked up and usually I would agree with you. This time, I am not so sure. Hear me out then let me have it in an manner consistent with GRS posting policy.

This article is not aimed at everyone, it is aimed at traders that (try) and make money on the short term trends in the market. Is the gambling? Yup. And like gambling most of us fail to have a positive outcome. But, there are some people, like Blackjack card counters and poker pros, that are successful.

In these articles you start with a trend which is just statistics. Like the ones you identified. THEN you present hypotheses that show that trend to be reasonable (that is, based on something other than pure random numbers). Finally, the trader asks themselves “Do these reasons support my bet on this trend continuing in the future? What will kill this trend?”. Then they put their money down and see what happens.

Is this investing? NO. This is trading and while my hat is off to those who can do it well, the average (or even above-average) GRS reader should never try and use this info with their retirement funds.

As to the specific article, there are two items that I think show some support: money becoming available for investing at the first of the month (although I think this one is a little weak) and a key manufacturing report (which is VERY important in THIS market). The article is not bad from an info for traders point of view although the editor should have gone thru it one more time for style.

OK, now have at it!

But, you know, like maybe this article’ll get ya thru some bad times. Know what I mean. For sure.

Great post.

But, you know, like maybe this atricle will get ya thru some bad times. Know what I mean.

Great post.

I’m not really surprised that USA Today let a word like “thru” into the paper.

The bottom line is that stock prices change day to day based on new information. News is random and cannot be predicted, so stock price changes are random and cannot be predicted.

And as with anything that is truly random, we can see (sometimes strikingly clear) images in randomness if we look hard enough at what has already occurred (think Rorschach tests). The mistake is to think what we are seeing as real somehow caused the seemingly random events when it’s really the other way around (was the butterfly image actually already contained in the ink before the paper was folded?). The random events caused what is seemingly real.

Even if there were such a trend, and even if it held into the future, an efficient market would eventually level it out as soon as it became public knowledge.

Think about it.

If everyone knew that stocks were going to rise slightly in value on the 1st of the month, then there’d be a surge in buying on the 31st, as everyone bought in to take advantage of the spike, right?

And what happens when demand increases on a fixed supply? The price goes up. So the price would go up on the 31st.

Instead of the 1st.

Because by the time the 1st comes along, everyone has already bought in, expecting their big gain.

But wait, there’s more!

Now that everyone knows that the price is ACTUALLY going to spike on the 31st (as everyone moves to make sure they’re in the market for the big gain on the 1st), people would start buying earlier. Say, the 29th. Which moves the price spike back even further.

And further and further, until there’s no spike at all, and any additional trading gets lost in the regular market noise.

The market is efficient.

I hate it when people make financial generalizations that have no real factual basis.

Beyond that – love that you nitpicked on “thru” – only acceptable in texting if you ask me. To be honest though – the Pi reference is my favorite thing about this post! Love that movie!

“I thought the other day being it was ‘Cyber Monday’ that Amazon and other tech stocks would get a boost from speculators.”

AC, not to pick on you, but whenever I see people write stuff like this, I always wonder: Did you think active traders forgot about “Cyber Monday?” Do you think they were somehow caught off guard? Did you think that on Friday, they’d be selling their Amazon stocks for $170, and then Monday morning they’d wake up and be like, “Oh crap, it’s Cyber Monday, isn’t it! I’d forgotten all about it!” then suddenly the stock would jump to $180?

Did you think everyone else following Amazon stock wasn’t already expecting a sales boost on Cyber Monday?

The ONLY reason you could reasonably expect a boost in Amazon’s stock price would be if you somehow had a hunch (or insider information?) that Amazon’s sales numbers would be even higher than they had already predicted. And why in the world would YOU – some random guy on the Internet – believe that you would have a better idea of Amazon’s expected sales than professional Wall Streeters, or even Amazon insiders themselves?

The truth is, any expected boost from “Cyber Monday” was already built into Amazon’s stock price on Friday. It was built in months ago.

Burton Malkiel was right. The market is efficient.

The fact is (and yes it is a fact) that historically (read: not just 2010) the stock market has exhibited superior performance on the first day of the month. There are several logical, non-hocus pocus reasons for this trend (month-end portfolio adjustments by institutions, investment of monthly stock purchase plan proceeds by mutual funds, and month-end salary draws by members of the investing public which route them into various investments).

Are the returns guaranteed? Of course not, but there is a difference between gambling when the odds aren’t in your favor, and gambling when they are. Casinos make money because the odds are in favor of the house. However, in the case of the “First Day Effect”, there has historically been a greater than 50% chance of the market being up. Also, the gains have been larger than the losses. Mathematically, placing small bets (to be consistent with your gambling analogy) will pay off in the long run.

Am I recommending putting everything you have into this strategy? Of course not! But using 5-10% of your account to buy a leveraged 2X ETF like QID or SSO the last day of the month and then selling it before the close on the first day will not make you go broke. The ETF will not drop to $0.00 in one day, and even if it does, the most you would lose is 5-10% something you buy and holders should be used to by now.

I do respect JD and this site (I’m a daily reader), but I do differ in opinion on topics like this. You may think “tricks” like this are crazy, but I think holding investments when they go down is crazy.