Hello,
I will explain why various trading+investing strategies are a complete waste of time. I will go from the best strategy to the worst. Each point will be a criticism, or a reason not to use each strategy. I will assume that most of you know what these are, so no explainer is needed.
Section 1: Decent Strategies (These genuinely work, and are not scams perpetuated by brokers/advisors who want fee money.)
- Value Investing (Examples: Benjamin Graham, Warren Buffett)
- Value Investing relies too much on financial statement auditing, in making sure that there is no fraud. Most investors do not have the time to audit financial statements themselves
- Over-reliance on certain fundamental indicators: This is a minor criticism, but most often value investors are too focused on PE ratios or ROE, which results in tunnel vision.
- Macro Investing (Examples: Ray Dalio, George Soros)
- Over-Diversification: Macro investors seek to profit off of macro trends, however, in doing this, buy too many securities, and end up overlooking the nuance of each security. This is why macro funds barely outperform.
- Reliance on "bold" predictions: Macro investors make bold predictions, such as "China will be bigger than America", which may or may not be actually true. When macro investors are right, they are hailed as geniuses, and oftentimes nobody acknowledges the Survivorship Bias. The truth is, that the world is infinitely complicated, and bold predictions are hard to make. (I know I make some macro predictions, but I mostly do this to troll wannabe Ray Dalio macro investors, I don't actually short any Chinese companies, for example.)
- Growth Investing (Examples: Phillip A. Fisher, Chase Coleman)
- No Consideration for Value: Growth investors buy at any price, and therefore have a highly risky strategy, because the stock price relative to intrinsic value is directly proportional to risk.
- Reliance on "bold" predictions: Same as the Macro investors, the growth investors are too confident in their ability to predict the future. They are also affected by the Survivorship Bias.
Section 2: Mediocre strategies (These will perform average, and no better, but no worse)
- Efficient Market Hypothesis/Random Walk Theory/Index Funds (Examples: most academics and John Bogle)
- It's Not True: Newsflash, markets are irrational. It makes no sense in the first place, especially after the 2021 and dotcom bubbles.
- Contradictory Theories: If markets were efficient, they wouldn't follow a random walk, and vice versa.
- Capital Asset Pricing Model and Modern Portfolio Theory (Examples: most institutional investors)
- (Past) Volatility is not equal to risk: MPT and CAPM often uses the standard deviation of prices as a measure of risk, but it is simply a bad measure of risk. If prices have been proven to be irrational, then that would prove that wide fluctuations may not be for an appropriate sign of actual risk.
- Deep "Value" (Examples: r/wallstreetbets)
- Short Squeezes require lots of capital: To make a sharp upward move, a large crowd, or a large sum of money is needed to rally up the price of the stock. This is quite similar to the Hype Stocks category, but far less stupid.
- It is unlikely to make multiple squeezes: A short squeeze causes huge losses of capital for the company which is short, and therefore short sellers would later avoid shorting high-short interest stocks.
- High Volatility: Once the squeeze is achieved, many purchase call options, however forget to realize that options are priced mostly on volatility, this will result in huge Theta decay. Also, high volatility will make it hard to find a good time to cash out.
Section 3: Awful strategies (Avoid these strategies at all costs.)
- Hype Stocks and Greater Fool Theory (Examples: Cathie Wood)
- No Intrinsic Value: The Greater Fool Theory assumes that there will be someone to pay a higher price for your stocks, therefore prices will endlessly go up, and have no present value.
- Historical Data: Every single time there is a speculative bubble, there is a big reversion to the mean. There are too many examples to name, but some of them are:
- The Dotcom Bubble (2000)
- LBO Bubble (Early 90s)
- Junk Bond Bubble (Late 80s)
- Roaring 20s (1920's)
- Technical Analysis (Examples: Most of the buffoons on Elitetrader.com)
- TA ignores everything useful: TA does not use fundamental numbers, and therefore is not a good predictor of future stock prices. TA does not predict "investor psychology", nor does it predict insiders or "whales" buying. You are a lunatic, and you need to take your meds, especially you @margin_gamble.
- Crypto (Examples: Most of Gen Z investors, unfortunately)
- Crypto Has No Fundamentals: Similar to TA, crypto is purely speculative, and therefore is not an investment. Why not go to Vegas instead? At least you will have some fun while losing your life savings.
