Economics/Investing: How to underperform the stock market?

Whazupp

Stock market analysts and all kinds of "experts" are continually talking about how to be a winner in the stock market in the long run. Yet, as far as I know, there isn't really much statistical indication that any investment strategy actually beats a randomized index of passively held stocks in the long run.

Now, let's say (i'm nuts) and I seek to select the investment strategy that minimizes my returns. What is it? And what's the evidence?

mgb_phys

Turn on the TV during the day or at 4am.
Watch the ads on the channel guide
Pick the stock trading guy with the loudest shirt - follow his advice

russ_watters

I would think that since stock prices are a historical record, you could select a strategy, then see how it has done the past 5...10...50 years. Picking stocks that are obvious scams (as mgb suggests) would seem to be a good strategy for maximizing loss - don't know if you can find any records of such ads from the past, though.

I suspect, though, if you wanted to lose money over the past 5/10/50 years you couldn't lose (win?) with GM, Unisys, and US Steel.

montoyas7940

Well you know, there is this guy with very consistent results...

I think his name is Nadoff... or Madoff maybe.

Anyway, excellent returns for years, YEARS I TELL YA!

You should look him up!

Phrak

React to news.
When the market shrugs off good news, invest.
When the market shrugs off bad news, divest.
Listen to folks like me.

Whazupp

The strategies you have suggested in this thread seem to be based mostly on intuition. Do you have any statistical evidence that they really are worse than randomization in the long run?

montoyas7940

Have you heard of a trading strategy called dogs of the DOW. I won't go into it here because you can just Google it. It tends to be better than random. So, you could devise an anti-dogs strategy and test it for past results.

CRGreathouse

Determining which strategy to use based on past results and then grading the goodness based on the same past results is highly questionable. It's like fitting a high-order polynomial to stock returns and expecting meaningful extrapolation.

montoyas7940

He wants a bad investment strategy. I think most buy high sell low plans would qualify.

mgb_phys

Just follow the same advice as the housing market.
When the market is booming buy anything you can - after all prices going up is good.
When the market crashes sell everything - don't buy because prices going down are bad.

CRGreathouse

Everyone here (myself included) thinks these plans would qualify. But the OP says (post #6) he wants evidence that these plans are bad. How do we know when we think we're at a high point (to buy, since we're trying to lose money) that we actually are?

I'd tend to go with an all-in penny stock approach: choose one penny stock and invest everything in it. It may survive, but if so sell it and go all-in on another. This should lead to the gambler's ruin soon enough.

mgb_phys

http://dilbert.com/2008-12-13/

montoyas7940

Oh yeah, if but for a moment to be able to see the future...

John Creighto

What you look for is trends in earnings demand and supply and not treads in stock prices. If you follow stock price trends to much you risk going down hard like a hedge fund when the trend collapses. Trends can give you information but beware of over valued stocks. Prior to the collapse the price to earnings ratio of stocks suggested little potential return yet people still continued to follow the trends.

Now the situation is quite different. Some Banks have dividend yields of 8%. Corporate bonds have considerably higher yields and AAA debt because of it being discounted on the market is giving yields of 17%. Their is definitely potential to make money now.

Whazupp

Yes quite intuitive! Because even if the expected value of a penny stock is in line with the overall market, there is still considerable risk of "losing everything". So if you go all-in enough times on penny stocks, then eventually you will fall to the gambler's ruin.

However, the expected value of penny stocks is still in line with the overall market. So this strategy will (with a finite number of repetitions), not necessarily make you lose all your money, but sometimes make extreme riches instead.

On average in the long run, this strategy doesn't seem to be any worse (the expected value) than other strategies, except that it is very volatile.

CRGreathouse

I agree, there is a real risk of making extremely high returns this way (and thus failing). But there are several things that do make this strategy worse:
* In the unlikely case of substantial gains, essentially all of the return is short-term profits, maximizing tax burden.
* As returns accumulate, the amount invested becomes comparable to the market cap of the penny stock, (arguably) diluting the amount that can be made. For large companies that risk is much lower.
* There is an upper bound on money that can be made, but no lower bound on the probability of making money. If the GWP is $66 trillion, then there's no meaningful way to make more than (say) $10 quadrillion. Abstracting dramatically: If penny stocks are 1-in-80 chances of increasing your money 100-fold (and 79-in-80 chances of losing everything), further 'all-ins' after the first 6 iterations a $10,000 investment becomes 100% downside.

montoyas7940

Oh! It all just seems so ... wrong. To intentionally lose money investing make the frugal side of me cringe.

Try this and see if there are any holes in my idea.

Use options. If the stock price has risen when the option is due don't exercise it. Of course also follow the opposite course of action for a falling stock. You will lose every time. Plus you will have the added expense of buying the option.