[rubyn00bie]

Prices are pretty well modeled using Brownian motion. Most economists should know this while almost no one in the normal population will be aware of it. Sometimes people are just lucky, but overall the more trades you make the more you'll converge on the average return rate.

I would also like to note, that predicting price is different from predicting an overall increase in the value of the underlying security.

https://en.wikipedia.org/wiki/Brownian_model_of_financial_ma...

[veeenu]

The assumptions underlying Brownian motion of prices have been disputed for quite a while now: the normality hypothesis can be rejected on most if not all historical financial returns series, as it turns out that most returns are actually fat tailed processes with very significant (and variable over time) correlations between distinct assets, which makes research around portfolio theory even harder to conduct.

[inter_netuser]

This is absolutely correct

If the markets were efficient and equivalent to random brownian motion, Jim Simons wouldn't be producing 50%+ returns for decades non-stop in HFT.

His net worth is 25 billion dollars, and there are other countless billionaires, made from the "efficient" markets.

That's how much this fallacy is worth.

[jcrben]

Depends on your timeframe right? Shorter time periods are a bit more random. But there's also clearly some autocorrelation which makes sense given the inflationary / deflationary expectations at play

[veeenu]

Yes, definitely. The big issue there is that intraday intervals vs daily closes vs monthly prices all require very different kinds of analyses and features as they target different scales of behavior. For example, you could exploit order book models for intraday which make little sense for longer time frames. In the same way, portfolio theory on intraday intervals tends to not hold as well as it does on longer timeframes.

[samvega_]

Which assets are that?

[veeenu]

Most if not all of them. Especially during a downturn, all assets of all classes tend to correlate and produce negative returns. During big crises, stocks that before seemed uncorrelated/anti-correlated have a tendency to increase their correlation and go down together; at the extreme, even bonds cease to act as a diversifier against stocks plummeting.

[stouset]

Further, every time you trade, the overwhelming likelihood is that the counterparty to that trade is a financial professional with dramatically more access to company-specific research and information than you. This imbalance is minimized when you trade infrequently and maximized when you trade frequently.

[dandelany]

Meanwhile in the Theranos thread next door… “What just amazed me is how gullible all the investors were, and how they didn't do due diligence, hire outside experts, or anything. Weird.” Financial professionals do dumb things, sometimes en masse, and I think there are still some opportunities to make money if you have a good nose for BS/mass delusions.

However, the problem with this strategy is, as Keynes put it: “The market can stay irrational longer than you can stay solvent.”

[stouset]

It's also very easy to convince yourself that you have particular insight that those other people lack. You might even occasionally be right. But generally speaking the odds are that they understand something you don't, not the other way around.

Specifically to your Theranos point, Theranos was never public. Conning individual investors out of private investment money is somewhat different since the people who saw through the bullshit don't have an easy way of profiting off of that sense. The options were to buy in or opt out, and plenty of investors wisely decided to opt out but there was no play for them to profit off of the collapse.

[tptacek]

For retail traders, isn't it overwhelmingly likely that you're just going to trade with the inventory of a market-neutral internalizer?

[hbrav]

Yeh. It would be more accurate to say something like this:

A retail trader will usually be trading with some sort of market maker. That market maker will also trade with informed traders, and sets their bid-offer spread accordingly to offset this adverse selection. So the retail trader is paying a bid-offer spread that is the result of other informed traders in the market.

Of course, as a retail investor you may have access to a broker (e.g. Robinhood) that tries to exclude informed traders so it can set a lower spread.

[stouset]

There are market-maker intermediaries in between but structurally you're playing the game primarily against professional finance teams with massive amounts of research, automation, and up-to-the-microsecond information you don't have access to who are the ones actually setting the price.

[gruez]

It's not either-or. You're right you're mostly trading with a market internalizer, which is pocketing the spread (ie. bid: 10.00, ask: 10.05) but isn't really making money on price movements. However, you're still against hedge funds/banks for medium/long term price movements (eg. you buying a stock after they pumped it, and selling after they dumped it).

[awb]

I don’t think that’s quite right. Otherwise, you could just follow the opposite of your unprofessional trade strategy as a cheap proxy for a professional trading strategy.

I think the market is dominated by front-running trades and randomness.

[initplus]

This reasoning doesn't work because the market isn't a sequence of discrete binary choices. If the "opposite" of a bad strategy was a good one anyone could have great returns by designing some obviously terrible money losing strategy then doing the "opposite".

[hollerith]

Right, and even if the market was a sequence of discrete binary choices, bad traders will make many bad binary choices, but many of their choices will be good ones. (They just won't know which are bad and which are good.)

In other words, reversing every choice in a mediocre sequence of binary choices yields another mediocre sequence of choices.

[RhysU]

Taking into account trading costs, a meh strategy and its inverse can both lose money.

[civilized]

Front-runners still have to run in front of something, though. And it's probably not going to be the purchases of some little retail investor.

[jareklupinski]

> Brownian motion is the random, uncontrolled movement of particles in a fluid as they constantly collide with other molecules

sounds like the economy to me :)

[gitfan86]

As someone who has beat the market over a 17 year period, I attribute it to having made very few trades AND being lucky.

There are a lot of ways that a company can go under. All it takes is one mistake or one black swan event and what would have been an amazing investment 99.9999% of the time goes to zero.

[bluGill]

On average, but prices come from the value of the company behind them long term which is not always brownian and so someone who knows the company can get in/out ahead of someone who trusts only brownian motion.

[blitzar]

Stonks always go up. /s