I have seen quite a few people talk about paying for portfolio/stock advice recently, and I'd like to talk about it. I want to clarify, I'm NOT talking about financial advisors, those can be helpful if you are filthy rich, and are trying to decrease the volatility of your portfolio, or if you sold too many naked calls on AAPL and now your broker Tony is sitting outside of your apartment with a crowbar, and you don't know what to do.
So how are profits generated in the market? One way is to be in the market, enjoying the benefits of money inflow into the system over time. People who employ this method don't care about advice on the internet, besides what index portfolio to put all of their money into.
There are 2 other ways: market inefficiencies and luck. I won't talk about luck, since luck, on average, won't help you beat the market.
Market inefficiencies are things like arbitrage (noticing that one asset is cheaper in one place than another) and price inefficiency (realizing that the market hasn't priced in a certain piece of information). There are probably other mechanisms, but for our example, it won't matter.
So what is the optimal strategy if someone found a strategy or piece of information that prints them money? (Un)surprisingly sharing strategy with outsiders will prevent the said strategy from working over time. Instead, choosing to leverage yourself to the tits and exploit it till it your strategy stops working is the optimal play. There is a paper I can't find, but remember reading, that researches published trading strategies that claim to generate alpha, only to discover that over time those strategies lose 90+% of their alpha after publishing. Closest I can find is this article you can peruse and check out their linked papers: (Link to article)
The point of the article is that published/known strategies tend to lose their alpha, and while they can still work, they won't generate as many profits as they used to. This makes sense when you consider that the more capital is piled on on a market inefficiency, the more that inefficiency gets corrected and loses its reward, or increases the risk of someone else trying to exploit your strategy.
For example, if a short-seller firm publishes a report that Elon Musk is actually a model X in disguise (With proof) and is planning to take over the world, they would take the short position BEFORE publishing. Every other person shorting the stock after would increase the original short-seller profits but would generate less and less profit themselves with each additional member joining.
So if someone does have a winning trading/investing strategy, selling it would attract more people, therefore reducing the efficiency of said strategy. The seller can enjoy part of the strategy and collect a premium for people willing to pay for it (But that strategy will stop printing eventually), or they can leverage themselves to the tits and collect ALL the alpha, with less decay and “Efficiency increase”. Of course, if you are paying for the advice, all you are doing is giving the money to a person who will already benefit from you taking the same position as them.
Now, this all assumes that said person DOES have a working strategy. Most hedge funds do not outperform the market. The stock market is such a complex informational system that beating it over long periods of time is nearly impossible unless you have inside information, or ways to “Know the future” like market makers with PFOF (Payment for order flow) do. In other words, being the house.
Now considering those hedge funds have PhDs and technology normal people wouldn't dream of – with which they still can barely/not outperform the market – a normal youtuber/schmuck/whoever definitely will not have enough power to consistently generate returns higher than the average rate of market growth. And if they do, they will know better than to sell it to you for less than they can make leveraging themselves. Which is a lot.
This of course applies to free advice too – if someone tells you “TSLA is overpriced!”, chances are the big boys and whales have done millions of computations to determine the truthness of that exact statement. They can still be right, but statistically speaking over time you will still lose money following that advice. But at least you are not paying some schmuck to tell it to you, pretending to be smart.
Thanks for coming to my TED talk, and of course go all in on GME/BBBY/whatever, and don't forget to buy short-term options on TSLA as is tradition. You can trust my advice coz I'm smart and typed all the text above, so it can't go tits up.
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