May

7

 Thus, this study provides comprehensive evidence that stock investors' actual returns are considerably lower than those from passive holdings and from those documented in the existing literature on historical stock returns. (Alston Mabry)

This study is fundamentally flawed. Clearly it takes a pessimistic viewpoint. 'Investors got taken'. Only the conservative buy and hold crowd can make money. It forgets one simple thing - for every buyer there is a seller. (Philip J. McDonnell)

I may be wrong, but I understand the last sentence as "for every loser, there is a winner" and vice-versa. The problem to me is that the numbers are not at all the same.

OK, at a given moment T1, the number of buyers/sellers (or winners/losers) W1/L1 is exactly the same (with amount multiplication). OK, at the next moment T2, the number of buyers/sellers (or winners/losers) W2/L2 is exactly the same. But the worry is that there is an overlap between W2 and W1. All winners at T2 are not losers at T1 (and the reciprocal). Some winners win again. They win more than they should. (And the reciprocal). And this process continues. The overlap becomes smaller and smaller, but it doesn't vanish. It becomes like a Dirac point, a singularity, a top predator. Rarely do those top predators give their money back.

There is no symmetry. There are many more losers than winners. I find this study completely consistent with the fact that the markets are very Paretian. As far as I recall there is no symmetry between the P/L of big players. There are not enough big players losing the amount of money gained by the other big players. So, where are the big players big gains coming from? The money can only come from the rest of the players, those who cannot manipulate, do not have any edge, etc. The more unarmed people, the "small" players.

The markets are up x% those last years, but this x% performance is very far from being equitably shared between all players.

The more I think on it, the more I see the Paretian laws governing so many aspects of the biological world, just as the math/graphic illustration of (for instance) Henri Laborit's great work/experiments on rats.

I may be wrong, but I'm not at all stressed by the herd. I feel no great danger coming (directly) from this side. But I'm stressed by the big players, those who are very good, very sharp, the top predators. And need a lot of flesh to survive. They may either kill me directly like a rabbit under a harvester, or push the gnu herd in such a way I'll be trampled on.


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  1. eric on May 7, 2007 11:51 am

    couldn’t transaction costs explain this more simply? ie, many people aren’t even aware of the bid-ask spread, let alone price impact, and just focus on the commission. The sum is significant, especially for active traders.

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