I’ve always been a fan of insider trading, though I’ve never had insider stock knowledge nor the money to invest. Everything else is look of distaste gambling, to one extent or another, and I only “gamble” on sure things. If the fix ain’t in, neither am I.
Which leads me to wonder how you measure the risk of a perp walk.
As a W.C. Fields character once said:
Outraged woman: Poker? You play poker? But that’s a game of chance!
W.C. Fields: Not the way I play it.
A great book to read is “Against the Gods: The Remarkable Story of Risk” by Peter L. Bernstein. It will answer your question.
The scene is from My Little Chickadee, and the speaker is a man, not outraged.
Diversification is nothing special or secret, and it has benefits beyond merely limiting one’s exposure if a particular security or set of securities goes south on you, namely that benefit that it’s likely that while some are going south, others are perking up.
That’s sort of what I was trying to get at in my earlier reply to Flyer. If you could perfectly diversify (i.e. have equal shares in EVERY stock, then your rate of return would mimic the market. But nobody has that, so it’s entirely possible that the market may return 7% over some time period, but that your particular tiny little chunk of it may only return 5% or may even return 9%.
That’s where investing is exactly like gambling.
Neither CPI nor Core CPI use the substitutions you mention. Substitutions are done in calculating Chained CPI. This has been proposed for use in determining benefits raises (e.g. Obama’s 2014 budget), but it has not happened. Chained CPI is not generally (ever?) reported when you hear about the latest CPI figures.
I never said that diversification was any big secret. I was just saying that the rich can do it better.
How about these schemes where you go long on a stock, and short it was well-so that theoretically), you generate a positive return when it rises and drops? The trick is deciding at what point to buy and sell-but a computer program could do this. Another question; do high-frequency traders make consistent gains? If you buy and sell every hour, can you always make money?
If you go simultaneously long and short a stock, that’s the same as not doing anything at all (so riskless profit of zero). There is a strategy (called the long straddle) where you buy both a call and put option on a stock with the same strike, and that makes money if the stock goes significantly up or down. Is that what you are thinking of?
Long straddles can fail to turn a profit if the stock stays about the same price, so there is still some risk involved. There is also a “short straddle” that has the opposite profile – you get profit if the stock doesn’t move much, and losses if the stock moves a lot in either direction.
High frequency traders can make consistent gains by seeking out legitimate arbitrage opportunities. It is very unlikely that you as an individual trader will be able to take advantage of the same opportunities since the high frequency traders since they only exist for fractions of a second.
Suppose you buy a stock that shows a +/- 2% variation per day-you buy when it is down, then wait for a 2% rise (you sell). Now, you need a lot of shares to make money-at what point does unloading a 100,000 share block affect the sell price you can get?Is it possible to make a consistent 1%/day, or 365%/year?
If it consistently continues to show a ±2% variation, then yes, you could do that. Except that you have no way of knowing that it will, and the more people assume that it will, the less likely that it’ll actually do so.
Basically what Chronos said. Even if the stock obeys this pattern for a while, you are still exposed to events like, “XYZ corp’s only manufacturing plant hit by meteor” which will definitely break your stock out of this cycle. It is important to remember that stock prices represent the fortunes of real companies and are therefore prone to whatever misfortunes can befall real companies.
But even if that stock obeyed that pattern consistently, and the underlying organization was magically immune to any kind of real world risk, your strategy depends on there being people willing to buy stock from you when it is up (presumably because they expect it to go up more) and sell it to you when it is down (presumably because they expect it to go down more). If the stock is known with certainty to always lie in that +/- 2% band, eventually these guys are going to smarten up and stop selling to you when it’s down and buying from you when it’s up.
Actually I believe there are simple arbitrage situations that are more-or-less sure things. One I stumbled upon involved two closed-end funds, ECF and BCV. These funds are managed by the same company and have very similar portfolios, but their prices fluctuate. Right now I see that one trades at a 15.2% discount, the other at 16.2%. If you bought the one right now while selling the other you’d gain 1%. (I studied this 20 years ago, when the difference in discounts was often larger. But treat this as an example of a concept, and not as a specific recommendation.)
What’s the catch? With daily volume in the low thousands you won’t be able to trade much without affecting the price, so the total profit available from this opportunity, after commissions, may be just a few $100 per month. The reason such opportunities exist may be that smart traders wouldn’t waste their time for such miniscule profits. But a small investor can pick up a few crumbs this way.
(I never did the full arbitrage per se, but since discounted funds are a convenient place to park money, I held both, making any buy/sell decisions based on the discounts.)
Or to put it another way, maybe those guys who buy when it’s up 2% because they think it’ll rise further are right. Or maybe the guys who sell when it’s down 2% because they think it’ll drop further are right. All of you have access to the same information, and you’re all coming to different conclusions. Why do you think you’re any smarter than they are?