A lot of investors don’t realize the importance of this question. If you cannot predict the future to a significant degree, and you sell stocks before you need the money in retirement, it is extremely unlikely that you will retire earlier--or have a higher net worth--than someone who does not so sell stocks. This is because you must be able to predict stock price changes to make a profit after paying the transaction costs involved in selling them and buying replacement stock.

The US stock market has performed 7.5% on average since 1930. It can cost 1% of your investment in average transaction costs to switch stocks. If you can’t predict the future then every time you switch stocks you reduce your average gain below the 7.5%, and the reduction compounds. This is why almost all day-traders whittle away their initial investment toward zero, learning this lesson the hard way.

Now suppose you fancy yourself on par with Warren Buffet, who has shown that he can beat the market average. If you can prove it to someone else then get thyself posthaste to Wall Street, where you will be paid $1 million+ annually for being right just 51% of the time. That’s how few people can do it! Only then invest your excess salary in the market. Until then, stay away from stocks except for a tax-deferred index fund (they don’t try to predict the future, which keeps transaction costs low).

Well, it depends on what you mean. It's generally accepted that it’s impossible to (legally) predict what will happen to stock prices in the immediate future. On the other hand, certain kinds of investments – like investments in small-market index funds – have always provided a good return over long periods of time. Small market index funds will fluctuate from year to year, sometimes rising in value and sometimes falling, but over a span of 10 or 20 years they will always end up being worth a lot more than when you bought them. You only need to worry about 'predicting the future' if you plan to buy specific stocks and only hold them for a very short time before selling them.

Zanket, so your telling me to hold my stocks until retirement, how long have you been an "investor"? A dollar invested today could very well be worth one cent or less at any given point in the future with no prospect of ever rising again. IMO anyone that takes investment advice from a forum such as this needs their head examined. Talk to a stockbroker it doesn't cost anything!

kazakhan:

And just how good was the advice Martha Stewart got from her stock brocker?

zanket:
Transaction fees can be much less than 1%. Scott Trade charges only $7 per trade which is only 0.25% of $2800. I personally trade with a company that offers trades at $0.01 per share.
Index funds are good but "Spider" stocks such as SPY are an even lower cost way to invest in the market without picking stocks. SPY matches the Standard and Poors 500 Index. By the way if you can not perdict the future what is this talk about retiring. Sounds like a perdiction to me.

Well, it depends on what you mean. It's generally accepted that it’s impossible to (legally) predict what will happen to stock prices in the immediate future. On the other hand, certain kinds of investments – like investments in small-market index funds – have always provided a good return over long periods of time.

Yes, that’s the 7.5% average I mention; the long-term upward trend in a broad market index. The 7.5% is for the Dow Jones Industrial Average. Of course there’s no guarantee but it’s a good bet you’ll get a higher return on a stock index fund than the majority of investments. If you cannot skillfully predict the future then any selling in your portfolio reduces your return to below average. That’s why you shouldn’t sell until you need the money to spend elsewhere.

Zanket, so your telling me to hold my stocks until retirement, how long have you been an "investor"?

20 years.

IMO anyone that takes investment advice from a forum such as this needs their head examined. Talk to a stockbroker it doesn't cost anything!

If you know what to believe, you’ll get the best advice from a forum such as this. Stockbrokers have the opposite incentive. I once worked for a company in the business of defending stockbrokers in lawsuits brought by their customers. The brokers used every trick in the book to churn the account; that is, buy & sell as often as possible. The broker makes more money in fees that way. The best investing advice, buy & hold until retirement, pays the broker the least. Not even books have the incentive to impart that advice, for the book would be only 1 page long!

zanket:
Transaction fees can be much less than 1%. Scott Trade charges only $7 per trade which is only 0.25% of $2800. I personally trade with a company that offers trades at $0.01 per share.

The transaction cost I speak of includes the spread cost, which is ignored by the common investor. By far the greatest cost of buying & selling stock comes from the spread, the difference between the bid and the ask price. Indeed, during the market heyday circa 1999 there was some talk of brokers charging no commission at all; they’d make it up in spades on the spread. They decided to not do it I think because it would have revealed to the general public that there’s a hidden cost.

A simple example of spread is buying a new car. It’s worth less than what you paid the moment you drive it off the lot. The difference between what you paid (the ask price) and what it’s worth when you drive it off the lot (the bid price) is a transaction cost.

While Scott Trade charges you only $7 per trade commission, they get a kickback from the floor specialist (the actual trader at the exchange) of say $25. The kickback is only a portion of the spread, the remainder of which the specialist keeps. The whole spread comes out of your pocket. To figure out the true transaction cost on a stock, calculate how much money you would have left over if you bought it at the ask price and immediately sold it at the bid price, after subtracting commission. Higher volume stocks typically have lower spreads, so they’re cheaper to buy & sell.

Index funds are good but "Spider" stocks such as SPY are an even lower cost way to invest in the market without picking stocks.

Agreed. This is an exchange traded fund (ETF). Many advantages including that you are not subject to capital-gains taxes (in the US) when other fund members make withdrawals. Now with the mutual fund skimming scandal the ETFs look even better.

By the way if you can not perdict the future what is this talk about retiring. Sounds like a perdiction to me.

I call it planning. I could die before retirement age, but I plan for the possibility of retiring. I plan for the possibility of early death too, e.g. life insurance. If I were making a prediction I’d bet one way or the other, not both.

Zanket:

There are no specialists in the NASDAQ and I am really not sure how they work on the NYSE, however, it looks like the NYSE is thinking about doing away with them. When we as small investors buy stocks we can use "Limit" orders so that we can purchase the stock at the bid price and sell at the ask price. I may be wrong but in electronic based trading I think the only advantage institutional traders may have is that they can see more of the unfulfilled orders waiting for a change in the price.

Zanket:

There are no specialists in the NASDAQ and I am really not sure how they work on the NYSE, however, it looks like the NYSE is thinking about doing away with them.

NASDAQ calls them “market makers.” This page (http://www.investopedia.com/ask/answers/128.asp) concludes: “So, what's the main difference between a specialist and a market maker? Not much anymore.”

When we as small investors buy stocks we can use "Limit" orders so that we can purchase the stock at the bid price and sell at the ask price.

That’s a common misconception. You can’t avoid paying the spread; after all, that’s how the middlemen make their money and there are no free lunches. With a limit order, at best you pay only the full spread plus commission. At worst you are scammed. At best, if you place a limit order to buy at $30, say, then your order will not be executed until the ask price reaches $30, at which time the bid is $29.875, say, for a spread cost of 0.4%. At worst, an unscrupulous broker will not buy the stock on your behalf until the ask price reaches $29.875. The broker then charges you $30 to double your spread cost to 0.8%.

Additionally the specialists keep an eye on limit orders and try to manipulate the price to maximize throughput. The higher the volume, the more spread fees they make. Suppose the stock is at $30.25 and there are thousands of limit orders to sell at $30. Although there is no outright collusion, the floor traders have a common incentive to get the bid price to drop to $30 so they can capture those orders and increase profits. If you must use limit orders, then, beware. I’d trust only a market order and expect it to execute within 2 seconds or so.

Buy LOW


Sell HIGH


That's my prediction and I'm right all of the time, well most of the time anyway! ;)

Most reputable money managers will tell you that buy and hold is no longer the right strategy for investing.

The right strategy is to periodically reassess your risk tolerance and find a good professional accordingly to invest for you. Investing on your own is more like gambling than investing, unless you are willing to quit your job to daytrade full time.

And just how good was the advice Martha Stewart got from her stock brocker?
"Every man & his dog" has their opinions on investing so at least seek professional help before plunging/moving your life savings. My point about stockbrokers was that it doesn't cost anything to call one & ask a few questions about the market/investing/particular company you may be interested in etc. IMO Marthas problems are because she screwed herself. The stockbroker I've used in the past has never said "buy this, sell that", I usually get an overview of his companies reports of a particular stock it's up to me what I do.

What good is a company report when neither you nor your broker can predict future price changes of the company? The problem with professional help is that they don’t make money unless you lose money, assuming he or she cannot predict future price changes. The market is a zero-sum game. If no prediction--and only a handful of people in the history of man have shown they can do it to a statistically significant degree--then the best return/risk is had by investing in hundreds of stocks at the lowest possible cost (the economist who figured that out won a Nobel for it). That is easily done on one’s own, by buying SPY (the exchange-traded stock representing 500 stocks) or by investing in an index mutual fund. Don’t sell until you need the money.

Seeking a stockbroker’s FREE advice is like getting a FREE inspection from a plumber. They will ALWAYS recommend that you use their service. This is why every stockbroker and every money manager will tell you that buy & hold is no longer the right strategy for investing. It never is for these guys. How else are they going to eat?

Don’t take my word for it. Test the broker. Ask them to make predictions whether a stock price will go up or down. Track their performance of many stocks over time. If you find that they cannot predict, then contemplate how valuable their advice is. I tell you that if they cannot predict, their recommendations are worth precisely nothing! What you will find instead is that no broker will take you up on this offer, because all but the dumbest of them know that they offer only value perceived, not real value.

Investing on your own is the pinnacle of investing if you diversify among large companies and never sell until you need the money. You are gambling if you ever sell beforehand. Buy & hold investing takes only 15 minutes a month so there’s no need to quit your job. The odds are billions to one that your gains will exceed the average day trader’s ten years hence.

predicting the future is a very very small part of investing.

Other than the mundane stuff like opening an account and buying shares, what else is there about investing that involves a broker?

You are confused between investing and gambling.

Investing is all about financial management. Predicting the future is a very small part of management. A big part of management is managing the risks.

Buying stock is buying a piece of a company. You need to make sure the company has good management team in place, good organizational strategy, sound business model, good cashflow, high assets low debt, etc.... It takes a lot of research and inside knowledge. A well managed company with solid fundamental is going to grow. No crystal ball is required.

Not all companies are in growth mode anyway. Some stocks are bought because of dividends. No crystal ball is required either.

Managing risk requires only buying & holding all highly liquid stocks. That’s all there is to it. It doesn’t require an MBA or outside help. It is mathematically proven that, in an unpredictable market, the portfolio that contains all stocks offers the highest risk-adjusted reward in the long term. A stockbroker or money manager will not offer value in managing risk or provide any useful info about a company that you cannot look up yourself on Yahoo.

You do not need to know that the company has a good management team in place, good organizational strategy, sound business model, good cashflow, or high assets low debt, unless you can use that info to predict future price changes in the company’s stock. If you can’t predict to a statistically significant degree--and only a handful of people in the history of man have shown that they can--then all that research and inside knowledge is exactly useless.

I agree that a well-managed company with solid fundamentals is likely going to grow, but is the average such company going to beat the market average? No. If it did, then thousands of people at least could be expected to have beaten the market average to a statistically significant degree by investing so simply. But that hasn’t happened. One problem is that well-managed companies with solid fundamentals don’t stay that way forever, and mismanaged companies with poor fundamentals can turn around, and you cannot predict what on day it will change. The solid company's stock sells at a premium to the mismanaged company's, making them equal value on average. If you get dividends you’re effectively selling part of the stock (it reduces your long term average gain below the market average). You’d want to do that only if you need the money.

If you aren’t clairvoyant, all you need to know about a company is whether billions of dollars’ worth of its stock has been floated to the public; that is, is it a highly liquid stock? All S&P 500 stocks qualify. If yes, then add it to your portfolio if you can buy it at a low spread as described above. Since spreads are themselves unpredictable, it’s best to buy into a popular large-cap (highly liquid stock) index fund or the SPY or other broad-market exchange-traded fund described above.

The bottom line is, if you try to predict future price changes and you are wrong like the other 99.99999% of people have been wrong about their clairvoyance, the costs of switching stocks will reduce your odds of matching the market average from approaching 100% to approaching 0%. If you switch stocks even a couple times a year, it is extremely likely that in ten or twenty years your return will fall significantly below the market average, in which case you under-performed the buy & hold investor who did no research. Switching stocks is gambling because it assumes clairvoyance that presumably does not exist. The pinnacle of investing does not include gambling, so the pinnacle of stock market investing is buy & hold.

My Bachelor's degree is in Finance, and I made straight A's, and I have been investing in the market for 15 years, and I have no idea what the hell you are talking about.

Sounds like you lost your ass on some stocks Z.

If you have been switching stocks (not buying & holding) for 15 years and have exceeded the market average that a buy & hold investor can get with no research, you have beaten extremely high odds against you. Is that simple enough?

If you have a finance degree, surely you learned about the efficient market theory (random walk) and modern portfolio theory (diversification). They taught that to you, right?

Nope, I’ve gotten the market average in stocks. As close as one can expect to get to it with an index fund anyway.

One of the funniest moments of my college years: A certain PhD was teaching us about the dividend re-investment model of stock valuation, and I brought up a certain stock that I owned (MSFT) and explained that it was one of the best performing stocks of that fiscal year, and yet it paid no dividend. Obviously if the dividend factor is 0 in the equation, the equation breaks down. Predictably, I was met with a change of subject, much like the trend on this forum when a posters argument is met with completely objective data. From the subsequent exchange following my question, I realized that even a so-called "expert" on a subject can often be lost in book-learning and have no real expertise in the current reality of a given subject. Not a bad lesson to carry with you throughout life, imho.

I'm a fundamental analysis guy, but for everyone like me, there is a technical analysis guy that can prove his methods as being profitable. Such is investing.

The problem ultimately being that average joe doesnt have a finance degree and wants to get on with their life, and finds it very hard to differentiate between all the different things on offer, peddled by the experts. Thus we end up with the various financial debacles there have been over here in the UK.

zanket:

The stock market is not a zero sum game. The goal of companies is to produce income for their owners.

While I am not 100% sure of what is going on behind the sceens of each trade I am almost positive that I can buy 100 shares and sell 100 shares of Ebay within seconds for a spread of no more than a penny. add that to a commission of $1 and you have a trading cost of $1 + $1 + $0.01 * 100shares/6500 = 3/6500 = %0.02

By zero-sum game, I mean that you can beat the market average only when someone else falls short of it. The average is the return you get for loaning out your money while you hold the stock. It takes no skill to get the average once you’ve bought a diversified portfolio, broad-market index fund or exchange traded fund (like SPY).

Whether you use fundamental analysis or technical analysis, if you try to exceed the market average you are assuming clairvoyance. Some people apparently have this skill, like Warren Buffet. If you don’t then even a cost of 0.02% for switching stock will delay your retirement compared to buy & hold. Also people who predict tend to have fewer stocks in their portfolio; after all, you can’t do good research on 500 stocks. That increases risk which does drag on long-term results. And if you’re American and the account is not tax-deferred (like a 401K), then you’ll get creamed by capital-gains taxes and the paperwork for that. So you should be really sure that you are clairvoyant before trying to beat the market average.

Be wary of those tight Nasdaq spreads. They’ve been wrist-slapped many times over the years for grossly widening the spreads on small orders. A few high-volume stocks do have small spreads, but even institutional investors have a hard time getting 0.1% costs on average for a one-way transaction. I doubt you are really getting 0.02% for a round-trip on EBAY. Consider buying & immediately selling once. If you’re right, then no harm done since the cost was small. If you’re wrong then you’ll have some valuable info.

Just as you do not drive from point A to point B blindfolded, an investment can be managed through business intelligence - ie, if you have enough knowledge about the product and its touch points, then you can predict not far ahead but slightly ahead of most people. Most money managers do not even pay any attention to technology disruptions, how the company is run and basic company information including which idiot suddenly became the sales vice president that can drive the company to the ground.

As a matter of fact, 80% of business analytic systems fail and that is within a company that is supposed to be using it for agility.

The stock market is one place you can do well blindfolded. Money managers who blindly buy every stock in the S&P 500 (top 500 companies) get the market average. Historically they’ve beaten 80% of the managers who took their blindfolds off and ran up costs by trying to predict future price changes without having the necessary clairvoyance. Really the joke’s on their customers, for the sighted managers often make 10 times more in salary than do the blindfolded managers.

I own a piece of Gartners chrystal ball

Buying stock is buying a piece of a company. You need to make sure the company has good management team in place, good organizational strategy, sound business model, good cashflow, high assets low debt, etc.... It takes a lot of research and inside knowledge. A well managed company with solid fundamental is going to grow. No crystal ball is required.


I know more successful traders who completely ignore most fundamental information for various reasons. (some of which have researched and tested that approach to some extent). One important factor to consider about it, is all solid fundamental information is in the past. Stock prices are based on the future perception of the company - ie the prediction has already been factored in the price.

But indeed, it is true that no crystal ball is required, you do not need to actively predict the future to make money on the market. However, it is a good idea to put everything in your favor. The way to do that is to trade with the trend. If you were to trade with a medium-long term trend (this includes going short in bear markets), you would have averaged far more than 7.5%, with LESS risk, minimal effort. By high and sell higher. Sell low and buy lower.

Zanket - Indeed, liquidity is important to consider - should the stock suddenly move strongly against your position, then you will want to get out as soon as possble, without being screwed by a large spread and overly volatile price movements. High liquidity can sometimes be an indicator that someone knows something about that particular stock. ;)

Trading with a trend is trying to actively predict the future. You are trying to predict how long the trend will last, for which you do need a reliable crystal ball or clairvoyance if the transaction costs will not degrade the performance of your portfolio below that of someone who simply buys & holds. “Buy high and sell higher” assumes that the stock price will go higher after you buy it. But sans predictive ability the odds of that happening are the same for every stock (something like 50.0001% in any given day), so there’s no reason to ever switch stocks.

You can always examine the past to find simple trading strategies that would have significantly beaten the market average. But these strategies have no predictive value; that is, they don’t hold true in the future. For example, I once analyzed several years of winning lottery numbers. The number 9 came up 3 times more often than the least frequent number. But it was literally just luck of the draw. Statistical methods will tell you whether a pattern or strategy is likely just luck or has some merit. There have been very few trading strategies that showed merit, and even those were not profitable after transaction costs.

you do not need to actively predict the future to make money on the market.

It is very simple. Due to the nature of the stock market, trending occurs over a time frame. By actively predicting, I mean you consciously decide if the stock is going to go up. If it goes down (significantly, ie not due to noise in the price - time frame is an important factor), you simply sell it without any extra thought and if it goes up you hold it without any extra thought. It does not matter if it magically goes up straight after you sell it. You were not relying on being right more than 50% of the time.
I agree that when you buy a stock, you are making very loose prediction "this may have a good chance of going up". But if it does not, you simply move on. The idea is that you cut your losses sooner than your wins. This way, due to the trending nature of stocks, you will win more than you lose and thus consistently make money. So you rely on the trending nature, rather than actively predicting if a stock will go up or down.

The lottery is completely different - the stock market has a trend bias due to human psychology. If you can't decide if a stock is trending or not, then simply don't buy it.

You will find that these studies that claim that the market does not have any bias, are conducted by close minded economists. Open minded scientists have realized that the markets do have a bias - this bias is human nature.

If it goes down (significantly, ie not due to noise in the price - time frame is an important factor), you simply sell it without any extra thought and if it goes up you hold it without any extra thought.

If you cannot predict the future price movements beyond 50% then the transaction costs in selling and re-buying will degrade your performance below that of a buy & hold strategy.

It does not matter if it magically goes up straight after you sell it. You were not relying on being right more than 50% of the time.

Yes you were. The only way that strategy does better than buy & hold is if you are right more than half of the time.

The idea is that you cut your losses sooner than your wins. This way, due to the trending nature of stocks, you will win more than you lose and thus consistently make money.

No, after transaction costs you will lose more than you win this way, unless you are right more than half of the time. Obviously if you are right only half of the time then you will break even before transaction costs regardless of what your trading strategy is.

So you rely on the trending nature, rather than actively predicting if a stock will go up or down.

So you rely on the trend continuing in the future, rather than predicting a price movement? A trend is a price movement.

You will find that these studies that claim that the market does not have any bias, are conducted by close minded economists. Open minded scientists have realized that the markets do have a bias - this bias is human nature.

Most Wall Street pros are believers in the almost pure randomness of the financial markets. They can’t let their customers believe that or else their incomes will plummet. So instead they perpetuate a myth. Ask yourself, if trends are predictable then why don’t the brokerages bet on them rather than just be the house for the bettors? There is a bias but it’s so slight that a retail customer (having relatively large transaction costs) has no hope of exploiting it. Some firms have become adept at exploiting what bias there is; it’s called statistical arbitrage. You need a big bank of computers, a cadre of math whizzes, virtually instant access to the markets, and lots of buying power to keep costs down. These people hope to be right 50.1% of the time. They make their money from the 0.1%.

Are you saying, human beings are highly unpredictable and therefore the buy and sell reflects that randomness? OR can we be able to capture the 50,000 variables in the decision process and plug into a computer that can track the Buy and Sell habits?

I wonder if the stock market is really a random event like a dice or has a pattern similar to weather which has certain predictability where variables move in a pattern.

Future price changes are so unpredictable because market participants are so predictable. It is a very safe bet that their quest for profit will immediately soak up any predictive opportunity in a stock; for example after a takeover announcement. The 50,000 variables are reflected in the price within minutes, not days or weeks. Afterwards there is no information left to make a viable prediction. Those engaged in statistical arbitrage attempt to beat their competitors to the punch by milliseconds.

The stock market is considered to be fractal in nature. As in major trends having minor trends within them. There are eddies of seeming predictability but they discontinue in the future so even those are random near as anyone can tell (well, except for rare individuals like Peter Lynch and Warren Buffet). Hundreds of millions of dollars have been spent trying--and failing--to find predictability. Here’s a recent article (http://www.cnn.com/2004/TECH/ptech/02/12/bus2.feat.buffett.ai/index.html) about the subject.

Hundreds of millions of dollars have been spent trying--and failing--to find predictability.

Yes, that is true...but in the wrong direction. Predictions need a different science than curve fitting the past. Most of the technologies that have been developed tries to find and approximate corelations or teaching a neural net. Several years ago, when I was designing an expert systems for a refinery, I did some serious research to find a technology akin to stock market prediction. One company even sent me a neural software that tracked the stock market since 1970. It tracked so well that I was ready to play the stock market. The fundamental basis was after the fact. So, I had to do my design the hard way. I think, my design can be scaled up to a more predictable environment like terrorist activities but to get to the stock market level - it will require a dynamic model that is beyond present computation and data aquisation level.

Good stuff. I worked on stock market prediction software for 5 years. I ruled out neural networks and traditional curve fitting early on, in favor of a combination of genetic algorithm and statistics. The hardest technical part was getting decent analysis speed from a standard PC. Database queries were way too slow; instead I did all data mining in memory. The software succeeds in predicting future price movements well beyond luck, but only to an extent that a brokerage house can profit. The hardest part of all has been getting potential customers to take my calls; they’ve been to hell & back trying to doing this, so they’re very skeptical.

If you already have a solution, record it in a certified media for a certain time and use it to market your service. No amount of software can predict at the point of instability or beyond. Only in stable zones.

Huh? What do you mean by certified media? Isn't a zone of instability unpredictable by definition?

How to make money when you are only right 50% of the time. Here, I bring up the old coin toss game - to play the game costs ~$1.00 but if you win, you get $1.10. Of course the coin has a 50% chance of landing on heads or tails, but since you are winning more money than it costs to play, then you make money over the long run.

[QUOTE=zanket]
Most Wall Street pros are believers in the almost pure randomness of the financial markets. They can’t let their customers believe that or else their incomes will plummet. So instead they perpetuate a myth. Ask yourself, if trends are predictable then why don’t the brokerages bet on them rather than just be the house for the bettors? QUOTE]

Here is the thing - the ones who have the discipline do make money from the market. But the big problem they face is of course liquidity.. But why not take in the easy money from brokerage at the same time?
Many institutions make a very large amount of money on forex where there is much greater liquidity...

How to make money when you are only right 50% of the time. Here, I bring up the old coin toss game - to play the game costs ~$1.00 but if you win, you get $1.10. Of course the coin has a 50% chance of landing on heads or tails, but since you are winning more money than it costs to play, then you make money over the long run.

If you lose $1 half the time and gain only 10 cents the other half, you will quickly lose money. The way the market analogously works: You put $1 in the pot. If you have no clairvoyance then you get either 90.9 cents or $1.10 back with 50/50 odds, before transaction costs and before the average 7.5% gain. Play that game with many dollars simultaneously and with any strategy; you'll spin your wheels in the long run. After transaction costs your losses will compound.

Many institutions make a very large amount of money on forex where there is much greater liquidity...

They don’t beat the average gain in the forex market without taking greater risk, unless they're clairvoyant.

LOL, that was a typo and a half I meant to say you win $2.10 - or $1.10 after subtracting the cost to play.

If there was a simple strategy that allowed no way to lose then there’d be billions of billionaires out there, don’t you think? The way the market really works is that, absent clairvoyance, you have an equal chance of getting an x% natural logarithmic gain or loss in the short term ignoring transaction costs. Suppose you got a 10% gain; that is, you got back 110% of the money that you put in (you add 1, the 100% you initially wagered). Put 1.1 into the Windows calculator. Press the ln button (natural logarithm). Press the +/- button to make the value negative. Check the inv (inverse, in this case the inverse of the ln function) checkbox. Press ln. The result is the percentage you had an equal chance of getting back. Subtract 1, the 100% you initially wagered. The result is the % loss that you had an equal chance of getting.

For any 10% gain you have an equal chance of a 9.1% loss. For a 100% gain you have an equal chance of a 50% loss. If you play a market that works this way then, absent clairvoyance, transaction costs are highly likely to degrade your performance below the market average. If you are not clairvoyant then your best bet is to buy many stocks (diversify) and don’t sell until you need the money. By diversifying and minimizing transaction costs you get the yield closest to the market average.

If there was a simple strategy that allowed no way to lose then there’d be billions of billionaires out there, don’t you think?

If I believed that, then I obviously wouldn't get it.
Yes, when investing on the stock market, you are taking a risk, with the expectation of a return. Now blindly buying and holding gives you absolutely no guarantees of any sort of profit or loss, even if you buy 500 stocks or whatever (500 is only a small percentage of all of the stocks out there - there is absolutely no guarantee that the stocks you buy will return 7.5% pa in the long term)
The difficulty when you have a very large amount of money, is that (for obvious reasons) you simply cannot expect the same percentage returns as you can with a smaller amount (obviously not too small, or brokerage will eat it up) of money.

I think you need to open your eyes to the full picture. In actuality, buy and hold (with no research) is trend trading, just that it is a big risk (you may lose money for 5+ years) for a small return. In my opinion, blindly buying and holding is just as much of a risk as shorter term trend trading. If risk isn't your thing, then why are you investing in the stock market anyway?

As you said, major trends have minor trends inside them. But instead of just blindly buying and holding, why not buy the stocks which are obviously trending (over a reasonable time frame) as result of an efficient liquid market?

Sure statisically speaking, it is possible that someone may simply be *lucky* on the stock market (obviously akin to winning the lottery - if you have a 1 in 10 million chance of winning and 10 million tickets are sold then it is likely that someone will win), but do you really think someone like Warren Buffett or Jesse Livermore etc were just plain *lucky*?

Now blindly buying and holding gives you absolutely no guarantees of any sort of profit or loss, even if you buy 500 stocks or whatever (500 is only a small percentage of all of the stocks out there - there is absolutely no guarantee that the stocks you buy will return 7.5% pa in the long term)

True. For buy & hold you get the market average, whatever it turns out to be. The yield on a 500-stock portfolio will insignificantly differ from the entire market; their yields will hover around each other over time. Only 30 or so stocks are necessary to approximate the market average; that’s the power of statistics. For example, compare the Dow (30 stocks) vs. S&P 500 vs. Nasdaq (1500 stocks) (http://finance.yahoo.com/q/bc?s=^GSPC&t=my&l=on&z=m&q=l&c=^IXIC,^DJI) since 1983. While blindly buying and holding offers no guarantee, it does give you the highest expected return/risk in the stock market if you are not clairvoyant. The reason you don't want to directly trade smaller-cap stocks (like those other than the S&P 500) is because the transaction costs to buy & sell them are higher. The easiest way to blindly buy & hold is to buy an S&P 500 exchange-traded fund like SPY.

The difficulty when you have a very large amount of money, is that (for obvious reasons) you simply cannot expect the same percentage returns as you can with a smaller amount (obviously not too small, or brokerage will eat it up) of money.

This is true with clairvoyance. Absent that, the long term average of a large portfolio will highly likely insignificantly differ from the long term average of a small portfolio, before transaction costs.

I think you need to open your eyes to the full picture. In actuality, buy and hold (with no research) is trend trading, just that it is a big risk (you may lose money for 5+ years) for a small return.

It’s not a small return if you can’t do better. It is trend trading (a very long term trend!) but optimizes your return/risk if you have no clairvoyance; so as a trading strategy it deserves its own category.

In my opinion, blindly buying and holding is just as much of a risk as shorter term trend trading.

True, both strategies offer equal risk on average. But I’ve shown that if you have no clairvoyance then short-term trading yields average returns lower than buy & hold, because of the former's higher transaction costs. There are 2 sides to the equation, return and risk.

If risk isn't your thing, then why are you investing in the stock market anyway?

The best investor maximizes return/risk (return divided by risk). He or she does not just shy away from risk. The best return/risk is a home loan as I pointed out in another thread in this forum. If you invest in the stock market in a non-tax-deferred account before you’ve paid off a mortgage, absent clairvoyance it is highly likely that you’ll retire later than sooner. You can maximize return/risk by increasing return or lowering risk. Buy & hold per se does not lower risk. It increases return by lowering transaction costs. Diversification lowers risk. It’s easier to diversify when you need not research the companies to predict their future and instead simply buy a whole lot of them (blindly buy & hold).

As you said, major trends have minor trends inside them. But instead of just blindly buying and holding, why not buy the stocks which are obviously trending (over a reasonable time frame) as result of an efficient liquid market?

Because they are not obviously trending, because the market is efficient. An efficient market does not have obvious trends; rather, it is unpredictable. The trends you see are random (unpredictable) in nature. You may see the same behavior repeated ten times this month, yet there’s only a 50% chance it will occur when you next expect it to.

Sure statisically speaking, it is possible that someone may simply be *lucky* on the stock market (obviously akin to winning the lottery - if you have a 1 in 10 million chance of winning and 10 million tickets are sold then it is likely that someone will win), but do you really think someone like Warren Buffett or Jesse Livermore etc were just plain *lucky*?

I specified Buffet as a clairvoyant investor. Even that’s arguable because he often buys 5+% of a company so he likely gets a seat on the board, from which he can direct the future of the company. A smart businessperson can definitely exceed the market average whereas a smart investor needs clairvoyance. Keep in mind that Buffet is close to a buy & hold investor. He typically holds his stocks for several years at least. And because he buys in volume he gets much lower transaction costs than you or I could. When transaction costs are zero you can be as short-term as you want; it won’t hurt you then.