The recession, pt. 2

[deathking]

No matter how much knowledge you have about a company, industry or the stock market, you can be screwed by volatility that is driven by nothing more than one or two hedge funds short selling the stock for questionable reasons. I have extremely high level insider info on a $40 billion company and I refuse to invest my company because it can fluctuate 20-30% in a week for no business or industry reason.

Yes, the stock market as a whole is not a zero sum game as the market generally moves up over time. Individual trades however are akin to zero sum games and day trading jobs create little wealth in society. I have no problem with some speculation in the market, but hundreds of thousands of day trading jobs is just asking for trouble.

People who are day traders are not making trades based on the fundamentals of companies because they investment horizon is 3 months at most. They make trades based on rumors, gut instincts, arbitrage opportunities in the options market that the market has yet to correct etc...

During an interview I had for a day trader position I explained my detailed understanding of derivative and option strategies, corporate valuation, and how to analyze a company's financial ratios. The person interviewing me said they don't use any of those basic skills for investing because they don't care how the company is actually doing or how well it will do because they usually flip stocks within a one to two week period.

I really question your claim in your understanding of finances...

The volatility a stock, or the beta coefficient, is to measure the stocks' volatility against the MARKET volatility. It is driven by MANY things, including the size of the company, the number of stocks issued, the industry that the company is in, and the consistency of a company's performance.

Trading provides much value to the market. Read my previous post.

As for your "job interview", surely the interviewer gave you the interview based on the assumption you knew what the job entails? And for kicks, I'd like to heard some of your "detailed" derivative trading strategies.

[Eric is God]

I really question your claim in your understanding of finances...

The volatility a stock, or the beta coefficient, is to measure the stocks' volatility against the MARKET volatility. It is driven by MANY things, including the size of the company, the number of stocks issued, the industry that the company is in, and the consistency of a company's performance.

Trading provides much value to the market. Read my previous post.

As for your "job interview", surely the interviewer gave you the interview based on the assumption you knew what the job entails? And for kicks, I'd like to heard some of your "detailed" derivative trading strategies.

I completely agree that trading provides value to the market. There wouldn't be a stock market without significant trade volumes. I do have a problem with 2-3 million people short selling a stock in one company while buying it's competitor's stock on margin, all on the basis of some rumor started by traders themselves. It's these kinds of highly leveraged positions that increases a stock's volatility well above what it's beta should be.

In the 3 weeks before my company's 2nd quarter earnings were announced, the stock was driven from $73 to $87. Apparently some analysts thought the earnings were going to be above what my company guided at the beginning of the quarter, with nothing to back it up and herd mentality kicked in. Within 2 days of the earnings being announced, the stock went from $87 to $67 because earnings were only in line with company expectations and not well above. I personally think there was a slight over correction in the stock price (it should have returned to the low $70's, not high $60's), but the only reason a correction was necessary at all is due to massive speculator activity.

It's been close to 4 years since I had that interview, but like most job postings theirs was very vague on the details. Heck, even the job I eventually accepted at my current company had a posting that provided almost no information on what I would actually be doing lol.

I may not be right, but I have some idea of what I'm talking about. I'm 4-5 years removed from them, but these are the finance courses I took in my undergrad (the 400 levels are cross listed as grad courses):

BU353
Introduction to Risk Management and Insurance

BU383
Financial Management I

BU393
Financial Management II

BU423
Options, Futures and Swaps

BU463
Advanced Corporate Finance

BU473
Investment Management

I loved finance and was planning to go for my CFA and work at one of the major banks or investment companies, but I became so disillusioned with the entire industry after the tech bubble burst and the mass hysteria after 9-11. After graduating I turned down an offer to work at a hedge fund as the 2nd interview left me feeling dirty.

About the only things I remember from those days are the Capital Asset Pricing Model (CAPM), the Efficient Market Hypothesis (which is a very cruel joke), and the Black-Scholes Option Pricing Model.

I'd list the strategies I reeled off during my interview, but they left my head years ago. Most of them were just different option strategies used for various hedging positions. They all had fancy names and were just a way of showing the interviewer what I had learned at university.