[mmarian]

I haven't read Taleb's book. But wouldn't the logic you employ apply to any strategy?

eg I could also say that you could fool yourself believing that investing in the S&P 500 index is a strategy with high-probability of performing well, with a hidden surprise of low-prob cat losses.

[czl]

> But wouldn't the logic you employ apply to any strategy?

You ask a good question.

Consider a game like rock-paper-scissors. The goal is to predict your opponent's move. Among all possible strategies, the random strategy is unique because it can't be predicted. Any other strategy can be anticipated by a smarter opponent. Being random means you can't lose to a smarter opponent.

In trading, buying low and selling high requires prediction. Any strategy that relies on prediction becomes predictable to smarter opponents. Buy-and-hold index investing is the only strategy immune to this exploitation because you're effectively betting on everything. With passive index investing, your investments grow at the rate of business growth, making this strategy special.

[mmarian]

I agree that competitors could outsmart you. But that's just like in any other kind of business. Doesn't mean entrepreneurs should give up trying to start a business.

And the probabilities of you succeeding won't be good, of course. But neither are the chances of a startup succeeding good either.

[czl]

Trading, particularly short-term "buy low, sell high" strategies, differs fundamentally from businesses that create products or deliver services. In trading, profits are often directly linked to the losses of other market participants, making it a zero-sum activity. In other words, for every winner, there must be a corresponding loser on the other side of the trade.

This dynamic is similar to gambling games like Texas Hold'em poker in a casino setting. While skilled players may consistently profit at the expense of less experienced participants, the overall wealth within the game remains constant. No new value is generated; instead, existing wealth is redistributed among the players based on their relative performance and luck. When research time and fees are added trading is largely “negative sum”.

NOTE: Some trading activities, such as market making and arbitrage, provide liquidity and help maintain fair pricing in financial markets but these operations require expensive low latency market access and are dominated by market insiders and are not possible for retail traders.

[mmarian]

While I do believe it provides liquidity in all cases, let's just focus on the zero-sum aspect. My response is - so what if it's a zero sum game? Why should someone care if that's the case? It's not as if all startups out there add value to the world.

[czl]

> It’s not as if all startups out there add value

There is a fundamental difference between startups and "buy low, sell high" trading. Even if only a minority of startups succeed, they can create significant value for society by introducing innovative products, services, or technologies. In contrast, even if the majority of traders were "successful," there would be no net value created, as one trader's gain is another's loss, and the overall wealth in the system remains unchanged.

> so what if it’s a zero sum game?

While you may not initially be concerned about the distinction between positive-sum and zero-sum activities in society, studying history and economics may change your perspective. Positive-sum activities, such as entrepreneurship and innovation, contribute to economic growth and improved living standards, whereas zero-sum activities, like “buy low sell high” trading, do not.

> why should someone care?

Consider this analogy: if "buy low, sell high" trading is like playing chess, and your opponents are a collection of the best chess engines money can buy, operated by the world's top experts (think Magnus Carlsen), how profitable can you realistically expect your trading to be? The odds are heavily stacked against the retail trader. Some professional traders pay brokers to have retail orders routed to them for this reason much like how professional poker players want to play amateurs for their income.

While a small fraction of professional traders manage to beat the returns of buy-and-hold index investing, the fleeting existence of market-beating strategies is not a valid reason for the average investor to attempt them. Just as you cannot predict which lottery tickets will be winners, you cannot foresee which trading strategies will outperform. If this was possible highly paid professional traders that devote their life to it would be able to do it but only a few actually do and luck plays a big role in their success.

Markets have “seasons” and what seems to work in one season can be devastating in another. Markets also change in response to the trading strategies being used (aka “reflexivity”) and “paper testing” can give false confidence.

[mmarian]

> Positive-sum activities, such as entrepreneurship and innovation, contribute to economic growth and improved living standards, whereas zero-sum activities, like “buy low sell high” trading

Right, so where do hedge funds fit in? They hire a lot of people and pay them very well; they sponsor tech events like this: https://www.man.com/pydata-london-59th-meetup. According to your rationale, they don't add any value to society?

And if you add the criteria that they should be a business - how do you think these active investors start? Do you think they just suddenly have $500m in funding and 50 people?

> how profitable can you realistically expect your trading to be? The odds are heavily stacked against the retail trader.

I'd expect it to be hard to become profitable, just like any other kind of business out there. You need to put in a lot of effort, a lot more than what people tend to expect; again, like with any other business.

> Markets have “seasons” and what seems to work in one season can be devastating in another. Markets also change in response to the trading strategies being used (aka “reflexivity”) and “paper testing” can give false confidence.

Sounds like a VC-funded startup to me :) You can make an amazing pitch deck, raise millions in funding, and burn it all to the ground when you realise there are no customers.

[czl]

> I never claimed that my strategy beats the sp500. It has underperformed, especially the way the market has been. The market has returned 25% over the last year.

After two years of research, you have developed a trading strategy that, compared to the S&P 500, "has underperformed, especially the way the market has been"? If your strategy depends on buying / selling it will trigger taxes each time this happens, yes? Short term gains taxes? When people switch from sp500 to your strategy how much less will then earn over a decade? Yet you claim your strategy "works"?

> The expected performance of the strategy is somewhere between 10% and 30%, but it is not clear what exactly.

If a profitable pattern exists, what makes you think nobody else has found it and that it will continue to exist in the future? Is it because few look for these profitable patterns? Are they poorly funded? Do they lack incentives to do it?

> I don't think it's necessarily fair to call others "dumb money". They can hold for longer and still profit with the market.

"Dumb money" refers to hobby traders who believe stock trading will make them rich. Some rely on gut feelings, while others use advice from astrology or technical analysis. Why do you suppose professional traders pay for order flow from such traders?

> The market is not a zero sum game because the market capitalization is several multiples of the total invested funds. The market is a money printer in its own way.

For every trade, there is a counterparty on the other side, and your gain is their loss and vice versa. This makes trading a zero-sum activity. Furthermore, for every trade, there are middlemen who charge fees, making trading a negative-sum activity.

Long-term buying and holding is positive-sum investing and does not require a trading strategy or searching for profitable patterns.

> Precious metals as a currency do not work because the government doesn't have the freedom to mint an unlimited supply of hard assets.

The purpose of a currency is to facilitate transactions and maintain stable prices in the short term while losing value in the long term to discourage hoarding. Gold cannot achieve this because the amount of gold cannot be adjusted to match the size of the economy as it grows or shrinks. When the economy grows, using gold as money will cause it to stall because people will save up gold as it becomes more valuable instead of spending it. Deflationary currencies like gold are detrimental to economic growth, which is why modern countries no longer use them.

> The government holds a gun to people's heads, locking them up if they don't use the highly inflationary national currencies.

Are you surprised by inflation? Saving your wealth using a currency does not make sense since it is designed to lose value over time.

If you prefer precious metals, what prevents you from keeping your wealth in gold (a negative-sum asset) and converting it to fiat currency only when needed?

> Countries are run by politicians, bureaucrats, and armed police mafia who care about their paycheck and pensions which wouldn't be so big if not for free moneyprinting at the expense of the citizenry. The people do not have freedom of their choice of money.

Countries are "owned" by their voters. Government debts are your debts. Inflation is just another tax like other taxes. If you are dissatisfied with the current situation, get involved to change it.

[mmarian]

Not sure what you're replying to, that wasn't the question I asked.

[czl]

HN had an error during saving and when I attempted again I picked the wrong message and can not change or delete it now. I will add an extra answer later.