I probably wasn't clear with my original statement. I said the stock market used to be a "predictive market of future earnings". What I meant more precisely was that the stock market used to be a market where people would make prediction about future earnings about companies. If you thought a company was doing well, you would buy and hold it, a la Warren Buffett. Some people traded order flow and other things, but the vast majority traded it as if it was a proxy for future earnings growth.
Over the years, that has changed. Once the internet hit and day traders became more common, it became more and more about buying stocks that will go up and selling stocks that will go down. I think people forget that even during the 90s, commissions for buying and selling stock were in the hundreds of dollars, not $8.95 like today. It was expensive for retail investors to buy and sell stock.
The time period for holding stocks has decreased sharply since then, where a few years ago rebate traders would buy and sell stock to just get the rebate from the exchanges, and now to where HFT eat the lunch of those same manual rebate traders.
The vast majority of trading done on the markets today is not done based on the quality of the company or the quality of the earnings, but based on how the stock will trade. Sure, there's still institutional trading, and I'm sure plenty of quant models make use of things like earnings growth, etc. And yes, things like news and fundamentals do cause prices to go up and down. But the vast majority of daily trading, 75% of volume, is done by trading entities that don't care about fundamentals, and only care about miniscule movements in the stock price. This is why I use volume as evidence, because it demonstrates that most trading done isn't done because of the predictive nature of the stock market for future earnings, but because of the extremely short term predictive nature of the stock price itself.
That's why I said that it's less about predicting future earnings grow and more about making nickels every 10 ms. C trading 500MM shares a day is like people rolling dice every millisecond in the alley way and exchanging money upon every roll. The other example that I was searching for but couldn't recall was when GM went bankrupt and the stock was still trading over $1. This was purely trading activity even though the "future earnings" of the stock was 0.
It's become a casino where probability theory dominate and less about "I drink Coke so I should buy KO".
BTW, I'm not saying this is good or bad. I just believe this is how the markets are. The same thing happened when daytraders entered the markets during the dotcom boom. I do believe gaming the system, trying to "break" the markets with quote stuffing, etc, is wrong, but fundamentally I believe that the nature of the markets have changed, and anyone who wants to get involved in it should understand the nature of the change. Anyone who thinks that they should keep their money in mutual funds and let the mutual fund companies sip 2-5% every year for doing worse than the markets, and then also exposing yourself to market crashes every 7-10 years, I believe, are fools.
I said the stock market used to be a "predictive market of future earnings". What I meant more precisely was that the stock market used to be a market where people would make prediction about future earnings about companies.
These two statements are not even discussing the same thing.
One statement discusses the practical computational power of a system. The other statement discusses the motivations of a majority of the people participating in that system.
Historically there have been people trading off various schemes other than fundamental value forever, whether they be the public rushing into the bubble before the 1929 crash, or the chart-trading technical traders who have been around since at least the 1980s. And dont forget the people manipulating and cornering the market. None of this is new...
Over the years, that has changed. Once the internet hit and day traders became more common, it became more and more about buying stocks that will go up and selling stocks that will go down. I think people forget that even during the 90s, commissions for buying and selling stock were in the hundreds of dollars, not $8.95 like today. It was expensive for retail investors to buy and sell stock.
The time period for holding stocks has decreased sharply since then, where a few years ago rebate traders would buy and sell stock to just get the rebate from the exchanges, and now to where HFT eat the lunch of those same manual rebate traders.
The vast majority of trading done on the markets today is not done based on the quality of the company or the quality of the earnings, but based on how the stock will trade. Sure, there's still institutional trading, and I'm sure plenty of quant models make use of things like earnings growth, etc. And yes, things like news and fundamentals do cause prices to go up and down. But the vast majority of daily trading, 75% of volume, is done by trading entities that don't care about fundamentals, and only care about miniscule movements in the stock price. This is why I use volume as evidence, because it demonstrates that most trading done isn't done because of the predictive nature of the stock market for future earnings, but because of the extremely short term predictive nature of the stock price itself.
That's why I said that it's less about predicting future earnings grow and more about making nickels every 10 ms. C trading 500MM shares a day is like people rolling dice every millisecond in the alley way and exchanging money upon every roll. The other example that I was searching for but couldn't recall was when GM went bankrupt and the stock was still trading over $1. This was purely trading activity even though the "future earnings" of the stock was 0.
It's become a casino where probability theory dominate and less about "I drink Coke so I should buy KO".
BTW, I'm not saying this is good or bad. I just believe this is how the markets are. The same thing happened when daytraders entered the markets during the dotcom boom. I do believe gaming the system, trying to "break" the markets with quote stuffing, etc, is wrong, but fundamentally I believe that the nature of the markets have changed, and anyone who wants to get involved in it should understand the nature of the change. Anyone who thinks that they should keep their money in mutual funds and let the mutual fund companies sip 2-5% every year for doing worse than the markets, and then also exposing yourself to market crashes every 7-10 years, I believe, are fools.