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FRC 2010 Investment Shenanigans

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  • Oh, I see why you people think you are so smart. You think you are smart because you used all $200,000 of your purchasing power, instead of just the $100,00 in cash.

    I have always been fully aware of this. It was not a mystery. And let me also tell you why you are wrong if you think not using this full purchasing power means I am not playing optimally.

    That other $100,000 in purchasing power is a LOAN. Even worse, it's a loan with 6% interest! Using that money is what is known as buying on margin. When you buy on margin you take a vastly increased amount of risk for a decreased reward.

    Let's say I buy some stock on margin, and it goes up. Great, but I make less money on that than if I had used cash because I have to still pay 6% interest. If I buy on margin, and it goes down, now I am FUCKED because I have to pay the 6% interest on top of the losses.

    Using your margin does allow you to increase the potential rewards. If I had invested all $200,000 in NFLX, I would have even more money now, yes, but not double because of the interest. If it had gone down, I would have been devastated.

    Don't make false assumptions that you think people don't know the rules. We are all fully aware of our ability to buy on margin, and have chosen not to. You do not know some secrets we do not, (except in physics where you know many things we do not).

    If you didn't notice, I didn't even invest 100% of my cash in NFLX. I kept $20,000 or so in cash. I've got an entire year of investing ahead of me. Putting myself in a position where one bad move ends the game is silly. You need to take risks in order to win the game, but excessive risk is not necessary so early in the game. If I were way behind late in the game, I would then perhaps take a larger risk, as it may be the only chance of winning.
  • Sure, it's 6%, but that's 6% per year. You're exaggerating.
  • Sure, it's 6%, but that's 6% per year. You're exaggerating.
    You have to think in percentages. Let's say you use $100,000 of margin money. Then you suffer a 10% loss, so $90,000 left. You pay the 6% of $100,000, not 6% of $90,000. So now you' lost 10% and then you lose 6.6% more. In other words, a stock going down %10 is effectively going down 16.6%. Individual numbers may vary.

    There's a reason that only some of you are doing this. It's not because the rest of us are not aware.
  • Did I miss that you could take out 200,000 dollars (100,000 is your money and 100,000 is a loan???) I was wondering how some people have so much stock.
  • Did I miss that you could take out 200,000 dollars (100,000 is your money and 100,000 is a loan???) I was wondering how some people have so much stock.
    Yes, YOU missed it. I did not. make sure that's actually what you want to do before you do it.
  • edited January 2010
    Yes, YOU missed it. I did not. make sure that's actually what you want to do before you do it.
    Yea, I play for second place, that always wins in acquire...... OH wait. (which I bought for 50% off so we'll have to play it!)
    Post edited by Cremlian on
  • edited January 2010
    Well, more accurately, if you've got $100,000 + $100,000 in margin and suffer a 10% loss over one year, you lose $20000 and another $6000 and that becomes a 26% loss. If you gain 10% over one year, you gain $20000 but lose $6000, which becomes a 14% gain.
    However, the stock market has, on average, an upward trend, and this trend is greater than 6%. Sure, it's possible that it will go down, or grow less this year, but saying that one bad move could end the game is definitely an exaggeration.

    This game has 27 players at the moment and the objective is to win. This isn't real life, where you would act to keep risk down - if you end the game with a big profit at $150k, but someone else beats you with $200k, you still lost.
    Post edited by lackofcheese on
  • This game has 27 players at the moment and the objective is towin. This isn't real life, where you would act to keep risk down - it doesn't matter if you end the game with $150k if someone else beats you with $200k, you still lost.
    And who has the most right now? Who is not buying anything on margin right now? I rest my case.

    Also, your idea of when to take risks of which size is way off.

    If you are saving for retirement you want to take risks early because you will get a bigger return over many many years, most likely. Then you reduce risk near the end so you don't suddenly lose your entire retirement when you're about to quit. Even so, the amount of risk we are talking about here is small since you are probably invested in all mutual funds, which are spread across many stocks.

    In a stock market game, you are buying individual stocks. You can buy mutual funds, but they probably won't have enough movement to win you the game. They're useful, but you have to make some risky individual stock-plays. Yes, the stock market goes up over time, but that is on a scale of multiple decades. On a one year, or even five year, scale stocks go up and down wildly.

    Since the game is one year, the key to winning is high risk plus longevity. You don't need to win huge right away, you just need to win more than everyone else. As long as you don't lose more than everyone else. Many people run the risk of basically being eliminated from competition very early. Much like poker, it's hard to beat someone who has more chips than you. Once you've lost money, it's harder to catch up.

    Pretty much every move you make will be high risk, because you are buying and selling individual stocks. The only reason to take on even more risk is if you have to. If the game is near the end, then you should probably "put it all on black" as that is your only chance of winning if you are behind. Otherwise, just get ahead when you can and hold the boat steady.
  • edited January 2010
    You're contradicting yourself when you say the key to winning is high risk, and yet you shouldn't take greater risk. Do you realise that 6% interest per annum is only 0.23% per fortnight? You've made 15% in a fortnight, but you could've made 30% - 0.23% = 29.67%.

    In any case, given your current lead, you shouldn't be using your margin, but everyone else should.
    Post edited by lackofcheese on
  • If you know how to play optimally, how come you don't have twice as much money as me?
    350 days left, If I may remind you. You're ahead for a day so far. You now have to repeat that for 350 days. Good luck.
  • Scott:
    When all of you dorks figure out what I'm talking about there is going to be some serious facepalmery and the obligatory swarm of "oh I knew that, but didn't do it because of /insert lame and fallacious excuse/"-mental ju-jitsu to alleviate cognitive dissonance.
    You just go ahead telling yourself that you played correctly. An annual interest rate of 6% is insignificant compared to the advantage you gain by playing with twice as much capital. And since this is a game there isn't even any risk associated with it, it simply multiplies everything you are doing by 1.94.

    Think about that. It's just a multiplier.

    If you say that you knew about this then you simply weren't playing the game as a game. You were going 100 when you could go 200, you were moving only half of your chess pieces (and all those other clever analogies I made).
  • edited January 2010
    Now to address some of your mental ju-jitsu:
    When you buy on margin you take a vastly increased amount of risk for a decreased increased reward.
    Seriously, have you ever traded in stocks? Do you understand leverage? If this were suboptimal, why are banks doing it?
    Don't make false assumptions that you think people don't know the rules. We are all fully aware of our ability to buy on margin, and have chosen not to.
    First off, Cremillian already said he didn't know, other players have whispered to me the same. Hands up everyone who knew about Margin trading, i.e. that you could buy stocks with $200000. Anyone? OK, hands up everyone who understood the insignificance of the annual interest rate combined with the absence of real financial risk. Also, I didn't assume people didn't know, I said it's either that or they are not playing correctly.
    Since the game is one year, the key to winning is high risk plus longevity. You don't need to win huge right away, you just need to win more than everyone else. As long as you don't lose more than everyone else. Many people run the risk of basically being eliminated from competition very early.
    You are still not thinking about this game correctly. You worry about the compounding effects of losing early on without thinking about the compounding effects of winning early on. If you gain a significant lead on other players early on in the game then you can simply win by making a compound portfolio of everybody else's portfolios (weighted by their standings) and it would be impossible for you to lose.

    Your approach of waiting until late in the game to take risks is like a race driver driving slow and safe thinking he'll catch up during the last lap. Your slow and steady approach works for real money or if you're simply trying to win a lot of money by yourself. In a game with multiple players and only one winner, it is the wrong strategy.
    Post edited by Dr. Timo on
  • edited January 2010
    You just go ahead telling yourself that you played correctly. An annual interest rate of 6% is insignificant compared to the advantage you gain by playing with twice as much capital. And since this is agamethere isn't even any risk associated with it,it simply multiplies everything you are doing by 1.94.
    That's not quite true. More precisely, if your stocks gain Z% over one year, your overall gain becomes (2Z-6)%. Consequently, the ratio in gain is (2Z-6)/Z = 2 - 6/Z, which only corresponds to a multiplier of 1.94 when Z = 100%.
    Posted By: AprecheWhen you buy on margin you take a vastly increased amount of risk for adecreasedincreasedreward.
    I believe that Scott was talking about risk/return on a margin dollar versus risk/return on a non-margin dollar; in that sense he is right.
    Post edited by lackofcheese on
  • edited January 2010
    You just go ahead telling yourself that you played correctly. An annual interest rate of 6% is insignificant compared to the advantage you gain by playing with twice as much capital. And since this is agamethere isn't even any risk associated with it,it simply multiplies everything you are doing by 1.94.
    That's not quite true. More precisely, if your stocks gain Z% over one year, your overall gain becomes (2Z-6)%. Consequently, the ratio in gain is (2Z-6)/Z = 2 - 6/Z, which only corresponds to a multiplier of 1.94 when Z = 100%.
    Indeed, I should have just said ~2 instead of doing hasty math. Your formula also shows the insignificance of the annual interest in a game like this. Scott managed to get a 15% return in two weeks by waiting for a "Captain Obvious" move. If one manages that once every two weeks then Z~=3700% and the annual interest becomes a rounding error. If he'd go all in every time that would be 91700% (getting ~30% every two weeks). Even if you say that 10% every four weeks is more realistic (meaning you pick a stock that is guaranteed to rise 5%, once a month) Z>300% still making the interest rate insignificant.
    When you buy on margin you take a vastly increased amount of risk for adecreasedincreasedreward.
    I believe that Scott was talking about risk/return on a margin dollar versus risk/return on a non-margin dollar; in that sense he is right.
    Oh, he means diminishing returns. Well, not that much diminishing if you do the math. Also the notion of risk is false, because in a game with lots of people, not using all of your margin also carries risk. It is that risk which I assume Scott (and maybe others) don't understand.

    Think about playing this game against 10000 people all of which are using their all of their margin. Just by chance there is going to be a few who make just the right picks, and even if you make the same right picks, you'll lose. In fact, you'll likely lose if even if you make better picks because your picks have to be twice as good, which is hard to do.

    Not using margin when playing by yourself is a valid strategy of avoiding additional risk for "diminishing returns".

    Not using margin in a multiplayer game means you're betting on being twice as good as the best player using margin. But if you're betting on that, why not go all in anyway?
    Post edited by Dr. Timo on
  • Ok, let me use some real numbers to prove my point.

    You invest $100,000 cash. Stock goes up by %10 in one day and you sell. You now have $110,000 cash. If you had invested all $200,000 you would have slightly less than $120,000 afterward, because of the interest.

    Now let's say your stock went down %10. If you had only invested $100,000, you would be left with $90,000 in cash. If you had invested $200,000, you would be left with slightly less than $80,000.

    Do you double down every time when you play Black Jack? Because that's what you are doing when you buy stock on margin. In fact, it's worse because you have less than double reward and more than double risk.

    Also, the amount of money you can borrow on margin is equal to the amount you have in cash and stock. If you have $80,000, the game only lets you borrow $80,000 more. If you have $200,000 in cash/stock, you can borrow $200,000 more. So even though I didn't invest on margin, my buying power increased significantly. I took less risk than you, and I have more purchasing power.

    Momentum is a huge factor. If you have more money, you have more ability to get more money. If you have less money, it becomes much more difficult to catch up because you can't buy as many shares. Even if you copy the leader exactly, they will just get further and further away from you. Therefore, a loss in this game is far more damaging than the same size gain is beneficial.

    Think of it like a board game, say like Puerto Rico. In the early game, you have very few doubloons. Doubloons are incredibly valuable early in the game, so misspending on the first few turns is devastating. Later in the game misspending is not so bad, as doubloons are more plentiful and less valuable. The same applies here. A big loss early is much more devastating due to the momentum factor. Doubling your risk immediately, not necessarily the greatest idea.

    Excessive buying on margin contributed greatly to the great crash of 1929. This isn't something you should just use all of automatically.
  • edited January 2010
    Ok, let me use some real numbers to prove my point. ...
    Have you even read lack's and my posts? You basically just reiterated what we have been saying all along.

    What you somehow willfully keep ignoring is how the rules of this game change the nature of risk and thus you draw the wrong conclusions from the math. Now, I've tried to explain this several times in as clear a manner as possible, so unless you somehow adress those issues I can't help you.
    Post edited by Dr. Timo on
  • Well the people buying and selling Berkshire Hathaway Inc stock are really moving up in the world.
  • I actually thought of one more way to illustrate my point, and that is the "Prisoners Dilemma" game. The stock game is very similar to that game with the exception of absolute outcomes being replaced by varying probabilities and using margin represents "telling" on the other inmates.

    If no one uses margin then it is optimal for you to also not use margin. If one person uses margin there is now a small probability that this will enable that person to gain a significant advantage early on leading to an easy win. The more people use margin the larger the probability grows that not using margin leaves you in an unwinnable situation.
  • More precisely, it's an iterated prisoner's dilemma (IPD), but the winning conditions break that model because the "payoff" only goes to one person - the winner. Consequently, the co-operative solution to the IPD, where everyone co-operates for the entire game and thus maximises the total winnings, cannot work.
  • edited January 2010
    More precisely, it's an iterated prisoner's dilemma (IPD), but the winning conditions break that model because the "payoff" only goes to one person - the winner. Consequently, the co-operative solution to the IPD, where everyone co-operates for the entire game and thus maximises the total winnings, cannot work.
    But the co-operative solution in this case minimizes financial risk (if you're playing with real money), so it is a valid solution for that choice of utility. In our case, of course, there is no real financial risk so the only correct solution is for everyone to use maximum amount of margin.
    Post edited by Dr. Timo on
  • But the co-operative solution in this case minimizes financial risk (if you're playing with real money), so it is a valid solution for that choice of utility. In our case, of course, there is no real financial risk so the only correct solution is for everyone to use maximum amount of margin.
    You go to a casino with a friend, and you both have $100 in chips. You to to play roulette. You put your $100 on red. He puts his $100 on black. Then he gets a $100 loan from the casino and also puts it on black. He doubles down. Are you stupid to not also double down? If he wins, he will have $300 after repaying the loan. If he loses he will be -$100, and the casino will break his knees. If you win, you will be at $200. If you lose, you'll just be at $0, knees intact.

    There's a time to double down, and a time not to. Which stocks you buy and sell at which times is what you need to concentrate on if you want to win.
  • You know, repeating you previous post with three zeroes less in the numbers really made me see your point.
  • You know, repeating you previous post with three zeroes less in the numbers really made me see your point.
    Glad to be of service.
  • IPD makes and appearance on xkcd
    image
  • edited February 2010
    Strip Agricola, fuck yeah!

    Also, Strip IPD makes a bit of sense. Keeping your clothes on = defecting, while taking them off is cooperating. I'm not quite sure whether the payoff matrix works out, though.
    Post edited by lackofcheese on
  • Incidentally, I haven't yet paid any interest on my investment.
  • Wait, we can't short stocks?
  • edited February 2010
    We can also, apparently, not make open or close orders, which makes playing with a time difference quite impossible.
    Post edited by Dr. Timo on
  • Wait, we can't short stocks?
    When you go to buy/sell a stock, there are various options including sell short and buy to cover. Is that what you're talking about?
  • We can also, apparently, not make open or close orders, which makes playing with a time difference quite impossible.
    Tell me about it. Pretty much my only option to win this game is to either use a psychic, and claim the in-game randi's million bucks, or just gamble on things and hope for the best.
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