Short-term robots and long-term investors in the stock market
Consider the price history to be the sum of short term movements and long term movements. If you hold a stock for a long time you will benefit (or lose) from its long term movement.  If a sufficiently large and very good short term trader existed he would tend to reduce short term volatility, eventually to nearly zero. At that point, the price would rise gently over the course of the day in line with the long term variation in price. Presumably robot traders will increase the time horizon of their trades when they have exhausted the gains they can make from short term trades. "....causes loses [sic] to others. Someone sells you a stock.  The seller receives cash.  You receive a stock certificate.  This doesn't imply a loss by either party especially if the seller sold the stock for more than his purchase price. A day trading robot can make money off of the price changes of a stock only if there are buyers and sellers of the stock at certain prices.  There are always two parties in any stock transaction: a buyer and a seller.  The day trading robot can make money off of an investment for 20 years and you could still make money if the investment goes up over the 20 years.  The day trading robot doesn't ""rob"" you of any profit."
"This simulation game uses actual historical S&P 500 data to test whether you can ""time the market."" You start with $10,000 invested, and it plays back 10 years of index values, in which time you can choose to sell (once), and if you do sell you can subsequently buy (once). Then you find out how you did relative to just holding what you started with.  If you play it enough times, you might eventually beat it once. I never did." "Generally investing in index-tracking funds in the long term poses relatively low risk (compared to ""short term investment"", aka speculation). No-one says differently. However, it is a higher risk than money-market/savings/bonds. The reason for that is that the return is not guaranteed and loss is not limited. Here volatility plays part, as well as general market conditions (although the volatility risk also affects bonds at some level as well). While long term trend may be upwards, short term trend may be significantly different. Take as an example year 2008 for S&P500. If, by any chance, you needed to liquidate your investment in November 2008 after investing in November 1998 - you might have ended up with 0 gain (or even loss). Had you waited just another year (or liquidated a year earlier) - the result would be significantly different. That's the volatility risk. You don't invest indefinitely, even when you invest long term. At some point you'll have to liquidate your investment. Higher volatility means that there's a higher chance of downward spike just at that point of time killing your gains, even if the general trend over the period around that point of time was upward (as it was for S&P500, for example, for the period 1998-2014, with the significant downward spikes in 2003 and 2008). If you invest in major indexes, these kinds of risks are hard to avoid (as they're all tied together). So you need to diversify between different kinds of investments (bonds vs stocks, as the books ""parrot""), and/or different markets (not only US, but also foreign)." "I think that pattern is impossible, since the attempt to apply the second half would seem to prevent executing the first. Could you rewrite that as ""After the stock rises to $X, start watching for a drop of $Y from peak price; if/when that happens, sell."" Or does that not do what you want? (I'm not going to comment on whether the proposed programmed trading makes sense. Trying to manage things at this level of detail has always struck me as glorified guesswork.)" "The professional financial advisors do have tools which will take a general description of a portfolio and run monte-carlo simulations based on the stock market's historical behavior. After about 100 simulation passes they can give a statistical statement about the probable returns, the risk involved in that strategy, and their confidence in these numbers.  Note that they do not just use the historical data or individual stocks. There's no way to guarantee that the same historical accidents would have occurred that made one company more successful than another, or that they will again. ""Past performance is no guarantee of future results""... but general trends and patterns can be roughly modelled. Which makes that a good fit for those of us buying index funds, less good for those who want to play at a greater level of detail in the hope of doing better. But that's sorta the point; to beat market rate of return with the same kind of statistical confidence takes a lot more work." "What exactly do you need explained?  Short term returns show ""fat tails"" in their distribution.  Long term returns converge towards a gaussian distribution.  The authors think there's a connection between this and the ""long memory"" of volatility (i.e. that the autocorrelation of absolute volatilities also has a fat tail)." "Many investors don't invest for the short term and so a stock ""nose-diving"" in the short run will not affect their long term strategy so they will simply hold on to it until it recovers. Additionally funds that track an index have to hold on to the constituents of that index no matter what happens to its value over the period (within trading limits). Both of these kinds of investors will be able to lend stock in a company out and not trigger a forced buy-in on a short term change. If the underlying long-term health of the company changes or it is removed from indices it is likely that this will change, however. Employee stock plans and other investors who are linked directly to the company or who have a vested interest in the company other than in a financial way will also be unwilling (or unable) to sell on a down turn in the company. They will similarly be able to lend their stock in the short term." This has been made clearly many times in this thread and others, and by myself. I refuse to go around in circles so I will not repeat myself after this: long term investors need to be able to liquidate their assets. Since long term investors by definition trade infrequently, short term speculators are NECESSARY to perform this function. Your argument at times has been that you don't need ULTRA short term speculators, and mine is that the ULTRA sort term speculators have not been shown to do anything negative to long term investors so banning them is reactionary. Short term speculators DO make money out of long term investors and that is by design - they are the very reason markets exist; otherwise people would stick to direct investment! Put your money in a  big company automating their workforce and in 20 years you'll see above historical returns year over year.   Interest rates have some short term impact but long term technological improvements will be dramatic. "Consider this thought experiment: Take 10 million people and give them each $3,000. Every day they each   purchase a random stock with all of their money. The next day they   flip a coin and if it's heads they do nothing, and if it's tails they   sell it and purchase another random stock. Repeat everyday for 5   years. After 5 years, you'll probably have many people that lost all of their money due to the fees they paid for each trade they made. A lot of people will have lost a little or won a little. Some people will have doubled or tripled their money, or even better. A very small number of people will have made ""millions"". Some of those small number of people that made millions will likely go on to write books and sell seminars on how to make money in the stock market." "I always liked the answer that in the short term, the market is a voting machine and in the long term the market is a weighing machine. People can ""vote"" a stock up or down in the short term.   In the long term, typically, the intrinsic value of a company will be reflected in the price. It's a rule of thumb, not perfect, but it is generally true. I think it's from an old investing book that talks about ""Mr. Market"".   Maybe it's from one of Warren Buffet's annual letters.    Anyone know? :)" "The quantity are going to get booty raped when the cycle turns. The unprecedented bull run has lead to their models being skewed which is bad news for the quants who are the ""programmer funds"" you reference. I'm just an analyst and I use python regularly for my job, but I don't think AI can replace expertise." "A lot of people have already explained that your assumptions are the issue, but I'll throw in my 2¢. There are a lot of people who do the opposite of long term investing.  It's called high frequency trading.  I'd recommend reading the Wikipedia article for more info, but very basically, high frequency traders use programs to determine which stocks to buy and which ones to sell. An example program might be ""buy if the stock is increasing and sell if I've held it more than 1 second.""" nice work! really enjoyed looking through your website. do you see any possible application of Machine Learning (specifically tensorflow) to this? I was thinking about building a trading bot that uses data from various APIs as a strategy just as an experiment but I'm wondering what your insights are. check out this rebuttal to the TechCrunch article from Leigh Drogen: http://www.leighdrogen.com/wealthfront-betterment-sigfig-and-a-bankrupt-investing-philosophy/  It's not so much the software piece he takes aim at but what he calls a broken philosophy. Saving money off fees and automating the investing process to prevent behavioral biases is all good but it's not a solution. "This is the best tl;dr I could make, [original](https://www.arpinvestments.com/arl/are-robots-disruptive-or-could-they-be-the-saving-grace-for-ageing-societies) reduced by 96%. (I'm a bot) ***** &gt; The cost disadvantage of using robots is still significant, but robots will almost certainly catch up eventually.  &gt; A shrinking workforce will force robots to be installed if we want to keep industry alive, partly because we won&amp;#039;t have enough people to fill the manufacturing floors, and partly because those who are left will be too expensive to do the job.  &gt; Yes, robots are indeed disruptive, but they could very well prove the saving grace for a number of otherwise doomed economies.   ***** [**Extended Summary**](http://np.reddit.com/r/autotldr/comments/77q42u/are_robots_disruptive_or_could_they_be_the_saving/) | [FAQ](http://np.reddit.com/r/autotldr/comments/31b9fm/faq_autotldr_bot/ ""Version 1.65, ~232204 tl;drs so far."") | [Feedback](http://np.reddit.com/message/compose?to=%23autotldr ""PM's and comments are monitored, constructive feedback is welcome."") | *Top* *keywords*: **robot**^#1 **job**^#2 **workforce**^#3 **industry**^#4 **million**^#5"