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ORIGINAL: P31W

OK I found this at answers.com

"Investment Dictionary: Zero-Sum Game

A situation in which one participant's gains result only from another participant's equivalent losses. The net change in total wealth among participants is zero; the wealth is just shifted from one to another.

Investopedia Says:
Options and future contracts are examples of zero-sum games (excluding costs). For every person who gains on a contract, there is a counter-party who loses. Gambling is also an example of a zero-sum game.

A stock market, however, is not a zero-sum game because wealth can be created in a stock market."

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ORIGINAL: rainbowtvp

Stocks: You can pick your stocks based on the likely profits of the company. This is not at all random.

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ORIGINAL: Random

But don't stock prices follow a random walk?

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ORIGINAL: P31W

From a tax stand point how do they differ?

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ORIGINAL: P31W

When you win a lottery the winnings are taxed right them correct?

Are there ways to not realize the earning in the stock market and be able to continue to earn money that rightfully belongs to Uncle Sam?

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ORIGINAL: blessedinnyc

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ORIGINAL: Random

But don't stock prices follow a random walk?

Well, if stock prices followed a perfectly random walk, stock returns would roughly follow a normal distribution.

However, this isn't the case. Instead, we get some kurtosis in the distribution, and that basically means that stuff that's four standard deviation out is a whole lot more likely than we'd otherwise expect. So in other words, if the normal distribution is purely random, then stock returns aren't. About twice every decade, we get some large move that, according to the normal curve, would be expected to happen once every 500 years.

In other words, if you ever meet someone buying or selling options who's convinced that stock prices follow a purely random walk, it may be a good idea to buy some deep out-of-the-money puts or deep-out-of-the-money calls from him; he'll sell 'em to you cheap.

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ORIGINAL: Random

I am well aware of the fat tail problem (aka Black Swans). However, if one believes in the strong form of the efficient market hypothesis, and invests in anything other than index funds, isn't that a form of gambling?

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ORIGINAL: Random

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ORIGINAL: blessedinnyc

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ORIGINAL: Random

But don't stock prices follow a random walk?

Well, if stock prices followed a perfectly random walk, stock returns would roughly follow a normal distribution.

However, this isn't the case. Instead, we get some kurtosis in the distribution, and that basically means that stuff that's four standard deviation out is a whole lot more likely than we'd otherwise expect. So in other words, if the normal distribution is purely random, then stock returns aren't. About twice every decade, we get some large move that, according to the normal curve, would be expected to happen once every 500 years.

In other words, if you ever meet someone buying or selling options who's convinced that stock prices follow a purely random walk, it may be a good idea to buy some deep out-of-the-money puts or deep-out-of-the-money calls from him; he'll sell 'em to you cheap.

I am well aware of the fat tail problem (aka Black Swans). However, if one believes in the strong form of the efficient market hypothesis, and invests in anything other than index funds, isn't that a form of gambling?

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ORIGINAL: blessedinnyc

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ORIGINAL: Random

I am well aware of the fat tail problem (aka Black Swans). However, if one believes in the strong form of the efficient market hypothesis, and invests in anything other than index funds, isn't that a form of gambling?

Who determines what goes into the index?

Say I would like to one day move to a certain neighborhood and want to buy a 10% interest in every house on a given block- just in case the price of homes goes up. Three owners value their houses at $200K, but one guy, who has a really run-down house, is a little nuts and thinks his house is worth $10 million.

Am I gambling to tell that guy he's nuts and only invest in the three other houses?

The only bet you're taking by picking specific industries instead of investing in an index is that you're smarter than the market. Unfortunately, examples like the one I gave above aren't quite as obvious in the market, but if you are familiar with the industry and carefully read the annual reports, it's generally easy to figure out if you're buying a $65/share company for $60/share, instead. In general, REITs, utilities, and natural resource stocks are a little easier to understand and compare than other stocks, and there are often enough retail investors who don't read the annual report- or even enough institutional fund managers who don't keep tabs on the company sometimes- to provide for mispricings.

Five months ago, healthcare REITs were a perfect example. Because of the housing crisis, all forms of REITs started to look like terrible investments, and in particular, mutual funds were trying to get REIT holdings out of their portfolios. But it's pretty silly to be selling hospitals just because there's a problem in housing- especially when everything else in healthcare is doing fine. I bought into a healthcare REIT, made my 15% off the mispricing, and got out when people realized that hospitals were still a safe bet.

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ORIGINAL: bzirk
Wouldn't reading the annual reports and looking for undervalued stocks be anathema to the efficient market theory?

IMO, it's not gambling when someone is doing their homework about investing in a business versus trying to beat the market by watching various curves.

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ORIGINAL: bzirk

You're right that there is a gray in belief of emt. I guess I'm so black and white that it's a burden to deal with the gray. Especially when it comes to money. I guess I'm tending more and more toward died in the wool value investing. It's what makes sense to my simple mind.

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LOL. I think I know about half of your Meyers-Briggs profile, now.

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ORIGINAL: blessedinnyc

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ORIGINAL: bzirk

You're right that there is a gray in belief of emt. I guess I'm so black and white that it's a burden to deal with the gray. Especially when it comes to money. I guess I'm tending more and more toward died in the wool value investing. It's what makes sense to my simple mind.

LOL. I think I know about half of your Meyers-Briggs profile, now. I always see things in shades of gray and always try to look at things in context, which I'm sure drives many people crazy.

The good news is that it's likely that you're a whole lot more decisive about your investments than I am (and that you keep your desk a whole lot more organized than I keep mine). While I am hemming and hawing about buying that oil stock or REIT, you've already gone ahead and bought the company.

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ORIGINAL: P31W

OK so you people have gone OVER MY HEAD. You are talking book words rather than street words.

Let me ask you all a question that I "think" LOL is in line with what you are talking about.

I often hear people on this forum or TV or Radio programs say only buy into MF's or Index funds and don't buy single stocks. I cannot help but think that is "generic talk" much like the talk saying "don't use credit cards ever".

However in my RL the wealthies people I know buy stock in companies - not MF'. I cannot help but think those people know a thing or two about what they are doing. They encourage us to do the same.

I think that is pretty much what blessedinnyc is saying in post 40.