Stock Markets or the Roulette Wheel?

It struck me very forcibly recently that the stock market is used by many in exactly the same way as the betting shop or the casino.

And unfortunately the same type of fools and rogues operate there.

Contrary to my stated intent, I did actually download Zipline and it proved a great deal easier to set up and get working than last time I tried a few years back. Although it is still, clearly, a work in progress. It set me thinking about the absurdity of most forms of trading.

I have been in financial markets my entire career and unfortunately, my cynicism has only increased with time. From hedge fund managers who charge clients a fortune at no risk to themselves (and eventually usually go bust) to run of the mill fund managers and financial advisers, the policy is “slash and burn” all the way to the core.

There used to be some exceptions, the index fund managers being the best example among those, but worryingly even Vanguard looks to be veering off the straight and narrow, presumably in an effort to suck up more fees than is possible with index funds.

Darwinism applies to every aspect of human life – animals, humans included, rape, kill, steal and lie all for the sake of survival on this godforsaken planet. The eternal, tedious struggle for existence. Cosh your neighbor and grab his goods. Overcharge him. Sell him useless crap, worthless insurance policies he does not need, fund management products he will never profit from because you have taken most of the profit out with your bloated fees.

Nowhere is that more evident than in the provision of financial services but of course it occurs in politics and all areas of business. Capitalism is the Big Swindle. Bribe hateful tyrants and shitty ministers to get lucrative and lethal arms contracts. Take them out to dinner and supply them with drinks, drugs and tarts. Pretend you are their friend and suck them dry.

So back to trading and backtesting.

You can’t really blame the addict but you should not feed him. Unfortunately the gambler is everywhere fed by cynical brokers offering cheap or commission free deals. Ghastly people write books because they can’t actually make money trading and they cook up fake fund management companies to make it sound as though they can.

Sharks offer trading courses and all sorts of encouragement for the fools to piss their life savings down the drain.

Why is that relevant to Zipline? Zipline is an excellent product for those who want to back test quantitative trading strategies and all credit to Quantopian who spent a lot of time and money open sourcing the software. Congratulations also to Quantconnect who did the same with Lean.

But the problem is the reality of markets. No criticism at all of Q or Q. But in general it is a pity that people do not understand that trading “schemes” are largely a complete and utter waste of time.

Stock markets go up over time because our greedy and damaging capitalist economies continue to grow while driven by technical innovation. Perhaps it will last, perhaps not. Bond portfolios increase in value if governments and corporates manage to repay the interest and capital on their borrowings.

And that is all the investor needs to know. Next he has to achieve the cheapest possible access to these markets and let his savings accumulate.

We are all, however, greedy. Myself included. We want more than compound interest will provide over time and we convince ourselves that there is a way to achieve the wealth of Midas by footling around with schemes to buy stocks cheap, or buy them dear and sell them dearer. In time we learn what complete and utter bollox that all is unless we stick to the very straight and the very narrow.

I think that back testing software provides a lot of fun for a lot of people. It’s a substitute for Sudoko puzzles, or crosswords.

The trouble is there are not really many ways to make out sized returns over the long term despite what the 10,000 salesmen out there might tell you. Unless you are front running like the HFT brigade, or insider trading.

Momentum seems one genuine feature which has lasted the test of time and may continue to do so. Buy stocks which are going up because they tend to continue on up for a while.

Though few think of it this way, that is exactly what a stock index is. It buys growing companies and tips out losers.

So download Zipline or Lean by all means but recognize that predicting markets is well nigh impossible. Even successful momentum systems get a trade right less than 50% of the time. And machine learning? Well markets are unbounded systems with no clear rules and no fixed variables. It is not like programming a computer to beat some Russian at Chess or an inscrutable Oriental at Go.

I wonder how many people actually trade what they have cobbled together with their back testing software? However many waste their time on useless systems, undoubtedly many more hose their money down the drain on “tips” and gut feeling. FOMO. And so forth.

My recommendation is that simplicity is best. And momentum is the way to go. Put the two together and you may be onto something. Anything else is probably simple gambling and you need to recognize that fact.

6 Comments

    1. Well, I do not make my comments lightly. I have been in and around financial markets my entire career which began in the early 1980s. In that time I have seen many “stars” rise and fall and as you can tell, it has filled me with deep cynicism. Certain structural situations arise and last a while which can be taken advantage of: dealing on inside information was perfectly legal before 1985 in the UK for instance.Dealing on inside information converts trading from wild speculation to a situation where the stack is loaded in your favour. Under priced IPOs are another stacked deck from which I once profited handsomely. Presumably front running is an important (and apparently legal) example of the deck being stacked in the favour of HFT firms.

      Without the deck being stacked in your favour you are relying on useless prediction. Hedge fund managers are currently crowing about their successes in the current crisis. But you can toss a coin to find out who will come out of the crisis smelling of roses and who will ignominiously fail.

      Liked by 1 person

      1. Well… Sometimes, yes. It very much depends from crisis to crisis and on the length of the trend measurement. Some people have recently been taking of using volatility rather than price ro predict a downturn…. Worth looking at perhaps.

        Liked by 1 person

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