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Yes, there's no real argument here. I understood your assertion re the zero-sum game (and by and large I agree with it) - I was challenging your assumption that successful traders need to be better than the average trader. My point was that many successful traders make their profits at the expense of poor frightened stuck-in-the-headlights investors who often enter/close positions at extremely sub-opportune times.
Over the life of any business the total returns available to investors in aggregate is no more or less than the sum of the economic value that was created or destroyed by it during in its lifetime. Traders try to beat that economic return by stealing economic worth off those on the other side of the trade, whichever strategy they are employing. It seems we agree upon this.
However..
It reads as if you are implying that short term traders are more often taking economic value from unsophisticated longer term holders, that's a mathematical impossibility because short term traders implicitly make up more of the volume they trade against. Remember the only way to look at it rationally and objectively is to consider the system in aggregate - not your perception of possible individual situations. Longer term holders will, ON AVERAGE, see returns closer to the economic returns of the business. Shorter term holders will, ON AVERAGE, make returns related more closely to their ability to pinch value from other market participants. And the losers (economically speaking) will include proportionately more shorter term holders than longer term holders. That is a mathematical certainty. And as you wisely point out, it is meaningless to attempt to define the intangible boundary between long and and short term - its a general overview.
But don't take me wrong here, I am not necessarily advocating that this is a reason not to trade ! To the contrary, clearly people can make it work, and if it works then stick to it. But I believe it's an important point to understand.
I try to buy businesses when I believe the economic value is much greater than the share price reflects, and being successful at this has not dissimilar implications. For instance It also relies on the same human blunder within the system to serve up the opportunities. The value is stolen from those less sophisticated also. Although it's generally a wealth transfer from the impatient to the patient, it's all part of the same game. I lay no stake to superiority. It also needs a serious amount of time and learning and a certain emotional temperament to do successfully.
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Agreed (and as above), though I'm confident that in the stocks they are active in Hoop and Phaedrus would make well beyond a 5% margin p.a. on buy & hold investors.
Well I think that's the wrong discussion to get into (Their returns are intangible to us and the variables make it meaningless anyway). But there are some interesting mathematical implications that would occur if a good trader could consistently beat all his brokerage and tax AND the economic return of quality businesses such as RYM healthcare (which was my original reference to the 5%) by a margin as high as 5%.
I believe that if we were to look at the track records of lots of successful investors (all flavours; traders, long term etc) over an entire lifetime (it's the only total aggregate returns of all their investing that counts) the compounding growth rate will usually be a lot lower than what we (and often they!) think - even if they are very wealthy. It doesn't take much out performance to compound to some ridiculous numbers over time. So it is logical that it would take a very successful trader indeed to have a positive 'expected value', relative to business returns, of 5% after costs, when you sum all their trades in aggregate over a long period of time.
Obviously if you look at a bunch of individual trades there will be times when the underlying economics is outperformed many times over. But that's as useful as trying to distinguish a line between long and short term traders.
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Active traders, even those who don't participate in shorting, face many more opportunities for profit than those who trade less frequently (though, granted, they also incur more costs in brokerage and potentially tax).
Yes. They face many more opportunities for profit AND LOSS - and they have to beat the costs just to break even. If you agree it's a zero sum game (before costs), then you agree that in aggregate they face equal chance of an economic loss or gain. It's only more skill or an informational advantage that changes an individual's odds to give a positive expectation.
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No argument about the brokers being onto a good thing - no such thing as a losing trade for them! - but again I point you to the fact that in a long-term uptrend (any uptrend in fact) there may not be "real" losers. It is theoretically possible for every participant to have made money on their transactions - not as much as they might have made had they timed perfectly their entry and exit at the beginning and end of the uptrend, but a profit nonetheless.
Yes. It's simply the transfer of economic value I am talking about. That's a very real loss or gain. And the reality is there will be plenty of players who experience real monetary loss in the same manner and plenty that benefit from that.
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There's an old argument here about whether the "underlying business economics" are usefully measured by any metrics other than the share price. I'll avoid that argument but I think the evidence is that many buy & hold investors do exit positions on the basis of fear. You want to argue that that is contrary to the doctrine of the noble flag they have signed up for. Perhaps, but it might well be rational behaviour nevertheless (I'm not going to hang around to argue the wisdom of mass hysteria if the hysterical crowd is heading in our direction!)
Personally speaking, my best financial decisions have been doing exactly the opposite of the hysterical crowd. While it's no walk in the park, quantifying value and price disparity is, at the least, equally as possible as becoming a winning trader of trends.
However.. Overall, and in aggregate, owning businesses for the long term will always be a positive sum game, but generating bonus returns above that, by trading short term trends, will always be a negative sum game. (negative rather than zero due to brokerage & tax). That's different from saying it's impossible to trade profitably or to buy undervalued companies, which it is clearly not.
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A last point - you talk a lot of managing the emotions as being critical to success. I think at least as much comes down to time and inclination - many people fall victim to risk/loss on the sharemarket because they simply aren't able to monitor the markets in real-time. It's not that they lack the requisite strength of character it's just that they're too busy doing actual useful stuff in the real world to be able to respond in a timely fashion to opportunity and risk.
This is a great point. Direct investment in the sharemarket, of any kind, is not for everyone that's for sure. A fanatical obsession is, in my opinion, critical.
Thanks again Voltaire. Your debating skills are well honed.
Sauce