Why Did Reddit Trigger a GameStop Stock Surge?

[Vanadium 50]

I may not have been clear. DCA is neither "good" nor "bad", neither "winner" nor "loser". You need to understand what the alternative is. If you have a block of cash, using DCA as an excuse not to invest it right away is a losing strategy. (This is contingent only on higher expected returns when investing - but if the expected returns are lower, the optimum strategy isn't to invest slowly. It's not to invest at all.)

If you have a steady stream of cash - like most people earning a salary - you can call it "DCA" if you want, but these regular investments are still "invest what you can as soon as you can". I wouldn't want people to think this is a bad idea just because the first case is.

 

[russ_watters]

answered that in #703 - relative to a lump sum investment

True, but you hear many talk about DCA benefiting from investing incrementally through bear markets, but that benefit is offset by the risk of poor returns coming late in the investing period

So, my problem is that this advice describes one side of a mirror-image pair of scenarios while ignoring the other. If you mirror the scenario, then the advice is also mirrored: DCA beats lump sum. It's weird and inaccurate to state it so generally without specifying it is only true for a limited scenario that is in fact far less common in real life. Stating it like that, many people might come away with the wrong idea of what they should do with their money.

 

[BWV]

I may not have been clear. DCA is neither "good" nor "bad", neither "winner" nor "loser". You need to understand what the alternative is. If you have a block of cash, using DCA as an excuse not to invest it right away is a losing strategy. (This is contingent only on higher expected returns when investing - but if tehge expected returns are lower, the optimum strategy isn't to invest slowly. It's not to invest at all.)

If you have a steady stream of cash - like most people earning a salary - you can call it "DCA" if you want, but these regular investments are still "invest waht you can as soon as you can". I wouldn't want people to think this is a bad idea just because the first case is.

True, but you also see BS like this:
Dollar-cost averaging helps minimize the impact of volatility when investing as contributions are spread over time instead of invested as a lump sum.
https://www.fidelity.ca/en/investor/investorinsights/dollarcost/

When DCA is just a trade off between sensitivity to near and long term poor returns

 

[BWV]

So, my problem is that this advice describes one side of a mirror-image pair of scenarios while ignoring the other. If you mirror the scenario, then the advice is also mirrored: DCA beats lump sum. It's weird and inaccurate to state it so generally without specifying it is only true for a limited scenario that is in fact far less common in real life. Stating it like that, many people might come away with the wrong idea of what they should do with their money.

I don’t see where I ignored the other side, I said DCA is just a trade off - the extent to which potential losses are mitigated in the early years is offset by a larger sensitivity to losses in later years.

 

[russ_watters]

I don’t see where I ignored the other side, I said DCA is just a trade off...

Well, you initially said lump sum beats DCA without qualifier or even a description of the scenario under which it would be true. It's less than half true. Usually - the way most people invest - DCA beats lump sum.

 

[russ_watters]

I may not have been clear. DCA is neither "good" nor "bad", neither "winner" nor "loser". You need to understand what the alternative is. If you have a block of cash, using DCA as an excuse not to invest it right away is a losing strategy. (This is contingent only on higher expected returns when investing - but if the expected returns are lower, the optimum strategy isn't to invest slowly. It's not to invest at all.)

If you have a steady stream of cash - like most people earning a salary - you can call it "DCA" if you want, but these regular investments are still "invest what you can as soon as you can". I wouldn't want people to think this is a bad idea just because the first case is.

Right. The "better" or "winning" strategy is dictated primarily by how you receive the money. Moreover, the "lump sum" method is not synonymous with "invest it right now", even though people seem to treat it that way. It's a 2x2 matrix with four potential choices:

1. Receive a lump sum, invest it right now.
2. Receive a lump sum, wait to try to time the market.
3. Receive small sums at intervals, invest them when you receive them.
4. Receive small sums, wait to try to time the market (collect a lump sum a la #2).

The key dilemma isn't DCA vs lump sum it's invest right now vs time the market. IMO, they're improperly being conflated. [edit] fixed a significant typo in that last sentence.

 

[BWV]

Right. The "better" or "winning" strategy is dictated primarily by how you receive the money. Moreover, the "lump sum" method is not synonymous with "invest it right now", even though people seem to treat it that way. It's a 2x2 matrix with four potential choices:

1. Receive a lump sum, invest it right now.
2. Receive a lump sum, wait to try to time the market.
3. Receive small sums at intervals, invest them when you receive them.
4. Receive small sums, wait to try to time the market (collect a lump sum a la #2).

The key dilemma isn't DCA vs lump sum it's wait vs time the market. IMO, they're improperly being conflated.

You are conflating the fact that people often receive small sums at intervals with DCA. But intervallic investing, like with 401K contributions if often called DCA. Even then, there is no inherent value in the averaging effect of periodic contributions as the protection against early losses comes at the expense of vulnerability to later losses given the timing of returns in a series of periods with the same geometric mean return.

So per above call 2 and 4, discretionary DCA and call 1 and 3 lump sum, then with a positive expected return, the expected values will be in descending order 1 >2>3>4 assuming the DCA period for 2 gets money to work faster than 3

 

[BWV]

Usually - the way most people invest - DCA beats lump sum.

show me how that is true

 

[russ_watters]

You are conflating the fact that people often receive small sums at intervals with DCA.

No. The definition of "DCA" is independent of how you receive the money. DCA is a strategy of investing small sums at regular intervals, period. Failure to differentiate how you receive the money with what you do with it is exactly the problem I'm complaining about.

Even then, there is no inherent value in the averaging effect of periodic contributions as the protection against early losses comes at the expense of vulnerability to later losses given the timing of returns in a series of periods with the same geometric mean return.

The advantage of "invest now" is always the same, whether it's one big lump sum or a lot of little lump sums. It's not missing gains in the interim.

The way you describe it, it's difficult to see what the alternative scenario is. If you receive $100 a month and invest it right away, what's the alternative scenario? Wait until the end of the year and invest all $1200 at once?

So per above call 2 and 4, discretionary DCA and call 1 and 3 lump sum, then with a positive expected return, the expected values will be in descending order 1 >2>3>4 assuming the DCA period for 2 gets money to work faster than 3

How is #2 any form of DCA if it's just one lump sum that you are investing? It's really confusing to call investing a lump sum a version of DCA when it's clearly a lump sum. It really seems like you're twisting "lump sum" into "invest right now" and "DCA" into "wait/time the market".

show me how that is true

If you follow the definitions at face value and not the half-twist you did above, it is self-evident why DCA #4 beats Lump Sum #2. But here's an example:

 

[BWV]

No. The definition of "DCA" is independent of how you receive the money. DCA is a strategy of investing small sums at regular intervals, period. Failure to differentiate how you receive the money with what you do with it is exactly the problem I'm complaining about.

The advantage of "invest now" is always the same, whether it's one big lump sum or a lot of little lump sums. It's not missing gains in the interim.

The way you describe it, it's difficult to see what the alternative scenario is. If you receive $100 a month and invest it right away, what's the alternative scenario? Wait until the end of the year and invest all $1200 at once?

How is #2 any form of DCA if it's just one lump sum that you are investing? It's really confusing to call investing a lump sum a version of DCA when it's clearly a lump sum. It really seems like you're twisting "lump sum" into "invest right now" and "DCA" into "wait/time the market".

i assume what you meant from 2 and 4 is holding back to average into the market, pure market timing is outside the scope here. Not saying you have a better alternative than investing your 401K contributions as soon as the money is available, just that there is is no inherent benefit- the dollar-weighted return (IRR) may be substantially lower than the GM for the overall period. your average return for on annual 401k contributions is the average of the return from years 1-10,2-10,3-10,etc if the highest returns are in the earliest years, then the average DCA return will be lower than the GM over the period

If you follow the definitions at face value and not the half-twist you did above, it is self-evident why DCA #4 beats Lump Sum #2. But here's an example:

View attachment 313577

That example is trivial, with two different DCA methods and with no vol in returns and example 1 is just invested longer at the same return. Try to construct a return series with positive and negative annual returns with a gm of 7%, then playing with the sequencing of returns to see what I am talking about here

 

[russ_watters]

i assume what you meant from 2 and 4 is holding back to average into the market,

Neither of those are "averaging in" as you are investing all of the money at once in both scenarios. They are "holding back to lump sum invest".

pure market timing is outside the scope here.

Market timing, "pure" or otherwise, isn't outside the scope, it's exactly the issue at hand. The timing options are:
1. Now.
2. Later.
3. Average over now and later.

Not saying you have a better alternative than investing your 401K contributions as soon as the money is available, just that there is is no inherent benefit

No inherent benefit than what? Waiting and investing it all as a lump sum at the end of the year? No, there's definitely an inherent benefit in investing it when you get it; not missing the gains. That's always what the benefit is.

..the dollar-weighted return (IRR) may be substantially lower than the GM for the overall period. your average return for on annual 401k contributions is the average of the return from years 1-10,2-10,3-10,etc if the highest returns are in the earliest years, then the average DCA return will be lower than the GM over the period

What's "GM"? You're not defining your terms/scenarios here.

That example is trivial...

Yes, that's my point.

Try to construct a return series with positive and negative annual returns with a gm of 7%, then playing with the sequencing of returns to see what I am talking about here

"playing with different return/volatility scenarios" is a red herring. Unless you're custom-making/cherry-picking the scenarios, "invest it now" is going to be the better option most of the time. The whole point is that there's no way to predict the future so your best option is the one that produces the best result most of the time. That's "invest it now".

 

[BWV]

Neither of those are "averaging in" as you are investing all of the money at once in both scenarios. They are "holding back to lump sum invest".

Market timing, "pure" or otherwise, isn't outside the scope, it's exactly the issue at hand. The timing options are:
1. Now.
2. Later.
3. Average over now and later.

No inherent benefit than what? Waiting and investing it all as a lump sum at the end of the year? No, there's definitely an inherent benefit in investing it when you get it; not missing the gains. That's always what the benefit is.

What's "GM"? You're not defining your terms/scenarios here.

Yes, that's my point.

"playing with different return/volatility scenarios" is a red herring. Unless you're custom-making/cherry-picking the scenarios, "invest it now" is going to be the better option most of the time. The whole point is that there's no way to predict the future so your best option is the one that produces the best result most of the time. That's "invest it now".

Right, invest now > DCA what I have been saying all along
GM = geometric mean

 

[russ_watters]

Right, invest now > DCA what I have been saying all along

So as I've been saying, the problem is conflating the terms. The way you are using those terms is not the way they are being used out in the real world. "Invest now" is not synonymous with "lump sum". "DCA" is not synonymous with "invest later". If you are investing in a 401k with every paycheck, that's both "invest now" and "DCA". So, saying "invest now > DCA" is gibberish for that scenario.

 

[Vanadium 50]

I think we are getting twisted in language.

The only decision one is truly faced with is "where do I invest this dollar in my hand?" The past is past. The future involves dollars you don't have yet. In a choice between "invest now" and "invest later", I can make at least two (no, three) good arguments why "invest now" is the better strategy, but won't unless my arm is twisted.

If it makes people feel smarter to call "investing - at least a little - with every paycheck" "dollar cost averaging", great. If you prefer to call it "pay yourself first", that's great too. If it helps remind you that volatility is part of the game, and the fact that at asset fell right after you bought it is just part of the game and not to worry so much about it, that's OK too. Whatever it takes to handle the psychological aspects of investing.

 

[russ_watters]

If it makes people feel smarter to call "investing - at least a little - with every paycheck" "dollar cost averaging", great. If you prefer to call it "pay yourself first", that's great too. If it helps remind you that volatility is part of the game, and the fact that at asset fell right after you bought it is just part of the game and not to worry so much about it, that's OK too. Whatever it takes to handle the psychological aspects of investing.

I agree with everything you said, and for this last part; DCA isn't a term I ever use, but it looks to me like it's used a lot online, and I'm seeing a lot of what look like click-baitey articles comparing DCA and lump sum that appear to me to muddy the waters and do more harm than good. That was my complaint about the post that started this.

Here's an example where the headline might cause confusion if one doesn't read the article:

https://www.cnbc.com/amp/2021/08/12...better-lump-sum-or-dollar-cost-averaging.html

 

[Vanadium 50]

Welcome to the internet, where anybody living in their parents' basement and listening to a podcast or two can declare themsevles experts. I have moved my thinking from "they must be corrected!" to "pay them no mind" to "I'm happy to be their counterparty".

 

[Vanadium 50]

comparing DCA and lump sum

OK, consider my arm twisted.

(1) If the asset will earn money, why wait to start that earning?
(2) If you have a balanced portfolio and then get some cash, you're now overbalanced in cash. Why wait to correct it?
(3) If your plan is to 'time the market', that implies you have information that (most) of the market does not. That information advantage will only go down with time.

 

[bhobba]

Just wanted to mention today, we saw a short squeeze on the whole market. The way it played out is this. Before the market opened, there was some lousy inflation data. That sent the futures on the S&P 500 tumbling over 70 points. Some short sellers thought, excellent - now is a good time to take profits. The market opened about 60 points lower (I did a 4 delta call credit spread myself thinking it would go lower still - I am a very conservative spread trader). The short sellers had to buy back their shares, so the demand went up. Hence the price went up despite the bad news. Other short sellers seeing the price rise on lousy news wanted out, so the price went up further - panic set in and what should have been a big down day became a 150-point up day - which is very rare. Good thing my spread was at 4 delta - it is now at 13 delta. The reason I chose 4 delta is it was 15% above the market, and over the last 60 years, the market has only moved over 15% in a month twice - 4 delta was 15% above the market. We will see if it reaches my adjustment at 25 delta. Maybe it will be short-lived - but we will see.Thanks
Bill

 

[BWV]

Just wanted to mention today, we saw a short squeeze on the whole market. The way it played out is this. Before the market opened, there was some lousy inflation data. That sent the futures on the S&P 500 tumbling over 70 points. Some short sellers thought, excellent - now is a good time to take profits.

Do you have data supporting this, or is this just one of those ex post stories the financial press likes to make up?

 

[bhobba]

Do you have data supporting this, or is this just one of those ex post stories the financial press likes to make up?

It is what all the traders I know said - and I figured it out independently. They have been playing the market for a long time. The evidence is we had lousy inflation data that sent the premarket down over 70 points. No other data came in. When the market opened, it opened 60 points lower and, as expected, went even lower to 80 points lower. Then it turned around a bit, then a bit more and finally started rising through the whole day. Short sellers set automated stops, and you could see the avalanche buying as those stops were hit. Is this proof of a short squeeze - of course not - just the most reasonable explanation. So I will change my statement - an example of a likely short squeeze. The futures are still rising - so may continue today - depending on when it exhausts itself. I have two choices - either close my spread when it hits the stop loss - for a high probability credit spread, usually 3 times the credit or sell a put credit spread to take in more credit to limit losses that way. If a short squeeze, the second option is what most traders would do. I have that set at 25 delta - it's at 15 delta now. Hopefully, it will not reach that, and I will have to adjust

Thanks
Bil

 

[BWV]

It is what all the traders I know said - and I figured it out independently. They have been playing the market for a long time. The evidence is we had lousy inflation data that sent the premarket down over 70 points. No other data came in. When the market opened, it opened 60 points lower and, as expected, went even lower to 80 points lower. Then it turned around a bit, then a bit more and finally started rising through the whole day. Short sellers set automated stops, and you could see the avalanche buying as those stops were hit. Is this proof of a short squeeze - of course not - just the most reasonable explanation. So I will change my statement - an example of a likely short squeeze. The futures are still rising - so may continue today - depending on when it exhausts itself. I have two choices - either close my spread when it hits the stop loss - for a high probability credit spread, usually 3 times the credit or sell a put credit spread to take in more credit to limit losses that way. If a short squeeze, the second option is what most traders would do. I have that set at 25 delta - it's at 15 delta now. Hopefully, it will not reach that, and I will have to adjust

Thanks
Bil

Yes, should be careful of easy narratives and trader lore. Bloomberg's short interest index - the performance of the 100 stocks in the Russell 3000 with the highest short interest - returned 1.9% yesterday, compared to 2.6% for the S&P 500 and 2.4% for the Russell 2000. This does not preclude some change in index short / long positioning, but makes it unlikely that covering by short sellers of individual stocks contributed significantly to the reversal yesterday

 

[kyphysics]

Random Thought:

Price rebound math is brutal. BTC is down from 60K to 20K roughly. That 66% loss requires a 200% gain to get back to even.

Wondering how long meme stocks that fell 75, 80, and 90% this past year take to get even?

 

[BWV]

Random Thought:

Price rebound math is brutal. BTC is down from 60K to 20K roughly. That 66% loss requires a 200% gain to get back to even.

Wondering how long meme stocks that fell 75, 80, and 90% this past year take to get even?

and do you know how something goes down 90% ? it first goes down 80% then it drops 50%

 

[kyphysics]

and do you know how something goes down 90% ? it first goes down 80% then is drops 50%

Always fascinating stuff. Fun to think about.

Snapchat stock was $83.11 recently and fell to $9.34. Almost a 90% drop.

Wonder if it'll get back to $83.11 by 2030?

 

[BWV]

Always fascinating stuff. Fun to think about.

Snapchat stock was $83.11 recently and fell to $9.34. Almost a 90% drop.

Wonder if it'll get back to $83.11 by 2030?

https://en.m.wikipedia.org/wiki/Anchoring_(cognitive_bias)

 

[phinds]

Wondering how long meme stocks that fell 75, 80, and 90% this past year take to get even?

I think most of them may go out of business before they ever do that.

 

[BWV]

Amazon.com stock dropped by over 90% in the early 2000s

 

[russ_watters]

Wondering how long meme stocks that fell 75, 80, and 90% this past year take to get even?

I think most of them may go out of business before they ever do that.

Amazon.com stock dropped by over 90% in the early 2000s

Given that the Nasdaq dropped by 78% in the crash, an extra factor of 2 doesn't sound like much to me. I'm not sure if Amazon had pivoted yet from selling books to selling everything, but the meme stocks have not made pivots that would imply future justification for even their current values. There really was never any justification for their spikes and their crashes were not due to an overall market crash.

Also, that makes the odds for BTC going back to $60k much better than the meme stocks. Since BTC's value is based on nothing whatsoever its value can be anything for no reason. Meme stocks are companies, so they have basis for their value which makes massive price fluctuations for no reason harder to do.

 

[bhobba]

Nobody knows. That's why I dollar cost average (DCA) into low-fee ETFs like Vanguard VDHG. Just keep doing that and forget about market gyrations. Also, with a small amount of money, I trade options. My current strategy is to sell low delta spreads. The exact strategy is called the Monthly Income Machine you can Google on if interested. But I only do it with a small amount of money. If your strategy is viable it will grow, if not, that is why you do it with a small amount of money. The kind of returns you can expect after tax (and is, of course, dependent on your tax situation), is a bit less than DCA into ETF's here in Australia (you need to consult a good accountant). The trouble is you can't spend capital gains, and if you sell - then whack - you pay tax. That's why it complements DCA well - that can provide, along with dividends from your ETFs, the income you need to live. The other strategy is to sell puts and calls on your ETFs to increase returns. It's called the wheel those interested can Google on. The majority of your money should be in low-fee ETF's you do not sell. But as to predicting what will happen in the long term with individual stocks - even Warren Buffett can't do that - he simply buys sound companies and holds them. He is good at picking companies that do well long-term - but not all his picks work out. If you have faith in Warren, you can always buy his class B shares and like an ETF hold for the long term.

Thanks
Bill

 

[kyphysics]

Given that the Nasdaq dropped by 78% in the crash, an extra factor of 2 doesn't sound like much to me. I'm not sure if Amazon had pivoted yet from selling books to selling everything, but the meme stocks have not made pivots that would imply future justification for even their current values. There really was never any justification for their spikes and their crashes were not due to an overall market crash.

Also, that makes the odds for BTC going back to $60k much better than the meme stocks. Since BTC's value is based on nothing whatsoever its value can be anything for no reason. Meme stocks are companies, so they have basis for their value which makes massive price fluctuations for no reason harder to do.

Yeah, Amazon may not be the best case for a rebound. . .You can argue it was a once-in-a-lifetime super company. I have doubts about whether Zoom, Snapchat, Pinterest, Shopify (which has been hurt by "Buy w/ Amazon"), Teladoc, Square/Block, etc. will have the same wide-reaching, transformational success and profitability to justify their once lofty valuations.

Amazon and Netflix aggressively attacked their spaces with first-mover advantages when so many people didn't believe in the internet. They laughed at their business models and potential to disrupt traditional brick and mortar stores.

Nowadays, everyone already knows how powerful the internet is in quickly reaching a wide audience and the ability to make money using it (be it in e-commerce, advertising, business/productivity tools, etc.). Not sure Shopify can attack Amazon successfully with what they do. Teladoc has lots of competitors (even Zoom is used in telehealth). Men don't seem so interested in Pinterest. "Older" people don't use Snapchat. etc.

Some of those growth meme stocks could be huge, but I wouldn't think Amazon would be the template to use for most of their trajectories.