In a recent USATODAY.com a reader asked, “When a person loses money in the stock market, does that always mean another person is winning? Is the stock market simply like a casino where one man’s lost is another man’s gain?”

“Professional investors never like the stock market to be described as a gambling hall. After all, investors never like to think of their investment success as being the result of luck. But the fact of the matter is that there are many parallels between short-term speculation in the stock market and gambling. Short-term speculation on any market is essentially a game of random chance. If daytraders make a bet on a stock, they’re essentially guessing the stock will either go up or down. Since there are two outcomes, the odds are 50-50 that the stock will go up or down. That’s exactly the same probability of hitting heads in a fair flip of the coin. This is assuming the market is efficient and that the investor does not have valuable inside information about the stock. And to answer your question directly, yes, if you sell a stock for a gain, that was a loss for someone else. Remember that there are only a certain number of shares outstanding of any company. That includes every company ranging from General Electric to XM Satellite Radio. If you buy shares, someone on the other side of the trade is selling them to you. If the stock rises after you buy it, you have taken a gain that would have belonged to the investor that sold the stock to you. Similarly, if the stock falls after you buy it, you are absorbing a loss the previous investor would have taken. But that doesn’t mean investing is a zero-sum game. Statistics tell us that investors who invest in a diversified basket of stocks for the long-run almost always profit. During the 10 years between 1995 and 2004, the broad Standard & Poor’s 500 index rose 12.1% on average per year, says IFA. So even though many investors won or lost on individual stocks during that time, the investor who owned a broad basket of stocks and held on to them would have enjoyed a nice gain.”
Matt Krantz
Financial Markets Reporter at USA TODAY

I think the author makes most of the points about zero sum right on, but he misses some elements. All in all one of the better comments on the subject.

For more on the zero sum game read the zero sum whitepaper by Larry Harris and Chapter 3 of the book Trend Following.

From a New York Times article yesterday:

“Marketing materials for Bayou describe Mr. Israel, 47, as a “third-generation trader” who has been trading since 1978. His was a short-term strategy in which he would rarely keep positions for more than three days. He was satisfied eking out small gains rather than making big, directional bets on sectors or industry groups. What Bayou does best, a recent investor note said, “is hit singles on a regular basis.”

A hedge fund that “hits singles” goes bust? Surprise? No. For whatever reason many people think they are playing it safe by trying to get the so-called small consistent profits. Unless you are Jim Simons or Toby Crabel, great success in the “singles” game seems like a mirage.

From the Washington Post today comes a story about the “bunt debate” in baseball:

Earl Weaver

“As a future Hall of Fame outfielder in Baltimore, Robinson played for four seasons under Manager Earl Weaver (himself a Hall of Famer), who is widely considered the father of the anti-bunt movement. In his book, “Weaver On Strategy,” the legendary skipper lists his “laws” of managing, the fourth of which is, “Your most precious possessions on offense are your 27 outs.” Weaver’s Fifth Law is a corollary: “If you play for one run, that’s all you’ll get.” “I hated playing for one run,” Weaver said recently. “But I didn’t always take my own advice. I never bunted with Frank Robinson or Boog Powell or Eddie Murray at the plate, of course. But I did it with [Mark] Belanger and [Paul] Blair, two real good players. I think I bunted them too much.”

Isn’t that a great line? Play for one run and that’s all you will get. There it is in black and white the “secret” to baseball or trading success. I also used a great line about Earl Weaver in my book Trend Following:

“Earl Weaver designed his offenses to maximize the chance of a three-run homer. He didn’t bunt, and he had a special taste for guys who got on base and guys who hit home runs.”

Trend following is always about the home runs. Think there is more safety in hitting singles (or short-term trading’s small gains), think again.

Some claim that trend following trading is no different than the infomercial Wizetrade™. For those who do not know or those living overseas, Wizetrade™ is an infomercial running non-stop here in the United States. It promises clear “signals” for buys and sells. Wizetrade™ doesn’t tell you how the signals are generated (it is a black box), it just tells you to buy on a “green” light and sell on a “red” light. This might sound very simple (and maybe plain stupid), but it is selling like crazy to those who think they have found a nice & easy alternative to buy and hold.

I don’t see how trend following, as described in my book, is the same as the infomercial Wizetrade™. However, it makes me wonder that even if a strategy such as trend following is described in detail, can everyone get “it”?

NOTE: Wizetrade™ is a Trademark owned by GlobalTec Solutions, LLP. I have no association with Wizetrade™. We do not offer or supply Wizetrade™ products or services.

Worth Magazine had some good insights on the new economic event markets such as Hedgestreet.com.

Article Part 1.

Article Part 2.

Also from the NY Times is another article about these new markets.

This paper from Flavia Cymbalista contains the following excerpt:

“George Soros does not offer an alternative particular cut of market reality, a different set of already defined factors. Instead, he operates with that which eludes any particular cut of market reality: intrinsic uncertainty. Rather than assuming a static order, Soros embraces the lack of fixed references in his guiding principle, the belief in fallibility, meaning both the belief in his own fallibility and the belief that the misconceptions and misunderstandings that go into our decisions help shape the events in which we participate.”

I am not attempting to embrace all she says, but she does offer some very good points and great food for thought.

One of our favorite crazy critics sent another rambling diatribe in today. Most of his emails are plain loco, but some are useful to teach lessons.

Today “Mark” writes us:

Your headline today is priceless. It just begs the question: what makes you any different from the broker who works on commission?…At least at Morgan Stanley I have the comfort of knowing that my money is FDIC insured and with a reliable and established company. With you I get some phony stats, a “Holy Grail” and a really f**king expensive lesson on how to read moving averages.”

Some quick thoughts for Mark:

1. I am providing education and commentary. Moving clients in and out of trades for the expressed purpose of generating commission is not my calling.
2. Morgan Stanley accounts are not FDIC insured.
3. Trend following stats in my book are not “phony”. Those stats are on file with the United States Commodity Futures Trading Commission and or the Securities and Exchange Commission.
4. Trend following is best thought of as answering the five questions posed in chapter 10 of my book Trend Following. “Reading” a moving average, whatever that means exactly, does not constitute a trend following trading system.