Is the counter-intuitive premise that investing is a "loser's game" true?

Question

.. in which the winners are often those who make the fewest egregious errors, rather than those who act on strokes of genius?

How true? Why true? Why not? Expound!

4XTrader: I read and absorbed your answer word for word.. superb!

A useful approach to investment strategy begins with an examination of the errors that occur in investment management. Some investors churn portfolios in response to basic human emotion and crowd psychology.. others choose the latest fad, investing in markets or assets after they have earned good profits for their earlier investments and bailing out only after damage has already been inflicted on their own wealth. Some of these errors are so obvious that they would be downright amusing if they were not so very costly.

Many investors are fond of suggesting that "if it ain't broke, don't fix it". In business, this is sometimes true.. in investments, it is rarely true. Common sense tells us that recently successful investments are priced to offer less reward today than yesterday.

This means that if it "ain't broke", we probably should fix it!!

Answer 1

I would have to answer "Yes" to this question with a caveat. I believe the statistics they came out with is that 90% of people that trade stocks lose money and in the futures/options area it's higher. Most people believe that the key to making money in investing is to have some magical formula or system that will tell you when a stock, futures contract, etc is going to rise an fall. That is far from the truth. What people fail to realize is that investing/trading or whatever you wish to call it is nothing but probabilities. When taking a trade, a pro is going to be looking at the statistical probability that the asset with rise or fall.

For example, many people invest on intuition, or a gut feeling. They hear a sound-byte or hear a "hot tip" and off to their brokers they go, hence 90% losing in the markets. A pro will look at multiple items to see if indeed there is a strong probability that the asset is going to do a specific thing. I'm not a pro, but I'll give you an example of a trade I got into. I was looking at the S&P 500 stock index futures contract. There were several indicators that were telling me that prices should fall; volume was decreasing telling me that the buy pressure pushing prices up were fading, Open Interest was increase telling me that commercials were opening more short positions (the commericals are the big boys in the market and they are hedgers, so they're generally short, so if Open Interest is increasing and the commercials are the ones that dominated the market and they are primarily shorters, that was telling me the commercials were moving into a net short position), price action was hitting key resistence areas which was basically dead on to key pivot point areas and key Gann Cardinal numbers, and momentum indicators were falling. There were a confluence of indicators all pointing out that the S&P should fall. This was a high probability trade. Doesn't mean it will in deed happen, but the likelyhood that prices will fall was much greater because of so many indicators flashing the same signal, I took it as a high probability trade.

Let me give you a non-trading example. Let's say there's this guy you really like and you want to ask him out. Now, let's say your friend tells you he likes you to. Unless he told your friend directly how he feels about you, then you really don't know for sure as to the accuracy of your friends statement. But, let's say not only does your friend tell you he likes you, but 5 other people say the same thing because they see how he acts around you. In addition, you also notice that when he walks into the room and sees you, he lights up. He is more attentive to you than the other ladies. With that much data pointing to him liking you, the probability is much higher he does than just a single friend telling you. Granted, the data could still be wrong, BUT with so much data pointing to the conclusion he does, the likelyhood that he does indeed like you and will accept your invitation is much greater - a higher probability.

When it comes to options trading, you have the options buyer and the options writer/seller. When it comes to buying options, you have limited losses (the premium you paid), but the potential for unlimited gains. In options writing/selling, you have limited gains (the premium paid to you by the buyer), but the potential for unlimited losses. Guess who makes money consistently? It's the options writer/seller. Why? First, 80% - 90% of all options expire worthless. So, if you're buying options, you only have a 10% to 20% chance of making money. With the options writer, you want the option to expire worthless, so they can keep the premium paid them for the option and since 80% - 90% expire worthless, then there is a 80% - 90% chance they'll make money. Also, when buying an option, the buyer must be right on 3 things - the timing of the move, the direction of the move and the magnitude of the move. For example, let's say wheat is trading at $3 per bushel and today is 8/23/2006. Let's say the options buyer purchase a Sept. '06 450 call option on wheat. What the buyer believes will happen is that wheat will rise $1.50 before the option expires in Sept 2006 (about 4 weeks away). In other words, he needs to be correct that wheat will rally or rise (direction) by at least $1.50 (magnitude) before the option expires in Sept (timing). If he's wrong in any one of those, he'll lose money. Add to that that most people buy way out of the money options with 4 weeks or less to expiration because they are so cheap. Well, the probability of that happening is slim to none. On the flip side, the options writer is only concerned with 1 thing - "What is the probability this option will expire worthless". They use the Black-Scholes option pricing model to determine probability. Using 4 variable (price of the underlying, option strike, days till expiration and implied volatility), the computer will compute the probability of the option expiring worthless. From there the seller just looks at the risk/reward ratio to determine if it's a viable trade. If the computation says there is a 85% chance the option will expire worthless, that's a trade I'm most likely going to take. If the computation is say 75%, then I'm going to look a bit closer at the trade and see if the reward (premium paid me) is worth the additional risk.

Also, most traders don't go in with a plan. They just get in on a trade and have no idea on how to handle the trade. They need know at what price they wish to enter, what their maximum loss they are willing to take and set a stop loss order, how much of a profit they wish to make, how they plan to exit the trade, etc. Most people don't do this, they just get in and when things go wrong, they freeze.

The main goal of investing/trading is to make money, but the primary objective of trading is "capital preservation". Enter each trade with a plan that will manage risk and preserve capital. Manage the trade and the profits will follows.

So, yes, I have to agree with your above statement with the following caveat; it's not so much a matter of making fewest errors, but knowing how to act and acting quickly when an error is made. For example, you can make good money trading and be right just 50% or 60% of the time. Yes, you want to make as few mistakes as possible, but mistakes will happen, you just have to have a plan on what you will do when a trade doesn't go your way and then act quickly and do not second guess. In the trading world, there is the following motto:

Let profits run, cut losses short and have good money management. Most people fail miserably in all three:

Let profits run - instead of using a trailing stop loss, they get out as soon as they get a small profit. They should just keep moving their stop loss order up as profits are accumulating.

Cut Losses short - most people don't use stop loss order or have not predetermined what the maximum loss their willing to take will be. I've seen it time and time again. Someone gets into a trade and has lost several thousand dollars and are wondering what they should do. If they got into the trade knowing exactly how much they are willing to lose before they get out, then they would have set a stop loss order and when it was triggered, they'd be out. Instead, they hold onto hope that price action will come back and they'll break even or make a small profit. What they fail to realize is that price action can continue to go against them and thus incur further losses.

Money Management - basically, not overtrading your account. You get those people that have a $10,000 account and trade $9,000 of it in a single trade. Okay, and if the trade goes horribly wrong, you could in fact deplete your account equity by 90%.

Sure, you could have a person that just happens to have caught the trade just right, but you will not make money consistently on a stroke of genius. Most people are not intune with the market. Remember, all price action is is a reflection of the hopes, fears, dreams, etc of the masses. Unless you know how the masses are going to respond, you're going to lose. I personally have no idea how the masses with react, so I don't base my trades on strokes of genius.

I do agree with the premise that the most successful traders are the ones that "minimize mistakes" or the effects of mistakes. The people I see that consistently make money are the ones that make it a priority to preserve their capital and to not worry about the money. Their priority is to manage the trade and the profits follow.

Please forgive the length of this answer and any grammatical errors as grammer was/is my weakest subject.

Answer 2

I believe many lose at stocks because they are playing it like a sprint, instead of a marathon. To play like a sprint you have to have a lot of money open, not tied up in mortages, payments etc. When I look at it, it is a combination of those who have farsighted vision, and keep away from killer mistakes. If you can sit on something and let it gestate it could earn you big time. Think of those who had faith in Viarga and got in on the company that produces it when the stock was low, and Viarga was just an ambitious dream. By hanging in there and letting it play out. Those people now have stock worth way more than when they got in. Right now, under the redar is the next big thing. Maybe in stem cells or AIDs treatment. Those who think "maybe" and have the money to sit on, could make a kiling. Many do not have money to just "sit on". they need to try to get in, have the stock earn quick so they can sell at a profit. It is usually those investors that end up losing their shirt. If I had the money back in the day when everyone thought Apple was tanking, I'd be rolling now. I know Apple was a strong company that was just going through a bad patch. And when it re-hired Steve Jobs as chairman, I really knew. And I told people who could afford, GET IN NOW while everyone was dumping Apple as a dog. And look at where Apple is today? Stocks is a marathon, not a sprint. It is like the 15 round prize fight as oppose to the 3 round bout in the amateurs.

Answer 3

There is smart investing like into a 401 K where your employer contributes, it's tax deferred and the investment options are often acceptable and low/medium risk. Or investing into a Roth Ira (you save taxes!). Or if you really know what you do investing with a bit higher risk can turn out just fine, that's what the pros do.

There is stupid investing, then yes - it is a losers game. If you don't understand the markets and it's rules and you believe everything somebody on TV says. Stupid. If you invest in high risk investments hoping you can make the quick buck: stupid.

There are investment geniuses but also they lose here and there. They just - due to their experience and resources ($$$) can allow such mistakes. They will catch up. They make just less errors.

Answer 4

No, investing is neither a zero-sum game (like chess, a player wins the other losses) nor a loser's game (like roulette, where on the long run the casino wins and gets all the money).

When you invest your money (in a stock, in country bond) you create new wealth (industries, jobs, consumption), so the wealth sum is not constant, in general the total wealth increases with time.

Whether you lose or win depend on your ability to evaluate the risk/reward relationship.

Answer 5

1st question. Investing is not necessarily a loser's game if it's done right but it is always somewhat of a gamble. Second question. Those who make money consistently, know how to play the game safely and make few mistakes.

Answer 6

It is neither...."intuition" is responsible for both good and bad calls....Obviously, the fewer egregious errors the better...but, alternatively, ONE monster hit and the "genius" got lucky....

Disciplined behavior will normally win out in the long run
Anyone can get lucky short term

Answer 7

Yes you could learn invest by yourself. it is your money, you should know how to do with it. for starter check this site out.

http://www.pathtoinvesting.org/index_fla...
http://www.stockcharts.com
http://www.streettalklive.com>... university. a lot amount of information. It will serve you well
I accumulate in good amount in 401k at the young age.I could share with you. when consider invest in stock market. you should consider basic 3 things:

fundamental analysis==(economic data,finincial health, management, business model, competetion)>>what to buy

technical analysis==(chart+indicator)>> when to buy

Sentiment/schycho analysis==>>mood of investor, Contrarian point of view.
Market cycle===>> check out book Trader Almanac by jeff hirsch will give you inside stuff
When you combine 3 thing, It is one of the powerful knowledge goinh with you for the rest of your live

At the age of 32. my 401k is amassed 71,000.00 and 30000.00 in taxble account. by follow simple rule

Answer 8

Investing by well informed , trained ,intelligent and patient investor is almost always a WIN WIN situation.

Answer 9

Hard work is always supposed to win. You only hear about the
"Dumb Luck" rags to riches stories.
Hard work pays off more for me.

Answer 10

yes and no,it depends on if you have the money to invest