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Aug 6, 2015

Busting Market Myths | Truth or Skepticism

By:Mike Butler

Dylan & Tom are back for another episode of Truth Or Skepticism! In this segment, Dylan comes out firing with five trading & finance myths ranging from complexity being bad, to the deck being stacked against the little guy. Will they bust these myths or find truth to them? Tune into the segment here to find out! Here’s a quick preview below:

THE DECK IS STACKED AGAINST THE LITTLE GUY

What you want is good technology - good information flow is not as important.
— Tom Sosnoff

Dylan believes that the deck is stacked against the little guy because the larger players generally have a better information flow. Tom doesn’t believe information is as important as good technology. In the old days, the little guy would be forgotten because orders were manually routed. In today’s tech age, the little guy is in the same electronic queue. High frequency trading helps the little guy’s bid/ask spread as well.

COMPLEXITY ADDS RISK

I believe that complexity is a fraudulent representation of risk.
— Dylan Ratigan

Tom & Dylan discuss the notion that complexity adds risk. They dissect what complexity actually means, and compare the differing viewpoints - complexity of a position in an underlying vs. complexity of the variables that can affect a position. Tom argues that complexity is something that should be endorsed, not avoided.

Would you like it if I had the regulators tell you you couldn’t drive your stick sports car because it was too complex?
— Tom Sosnoff

VOLATILITY IS BAD

The thing that really appeals to me about volatility is that the human uncertainty of events always results in the overpricing of implied volatility.
— Dylan Ratigan

Tom & Dylan discuss volatility and compare it to real life. Children hopefully have a low volatility life, but as one graduates from different education systems and begins to branch out alone, that’s when the volatility starts. Tom & Dylan both agree that volatility is an opportunity, not a bad thing.

In the University sense, the expectation is that you graduate - there’s no volatility around that expectation. The volatility starts next!
— Tom Sosnoff

DIVERSIFICATION IS A STRATEGY

The only market wizards I’ve ever met are people with inside information.
— Dylan Ratigan

Dylan begs the question - are there market wizards out there? He goes on to explain that diversification in the traditional sense is very different than the tastytrade definition. Tom believes inversely correlated underlyings are the key to diversification, and blames the lack of diversification knowledge on both the financial service sector as well as the passive investor.

What drives me crazy is all of these idiotic, robotic advisors...and the reason that they say they’re necessary is for ‘competent diversification’ when, in fact, they know nothing about diversification.
— Tom Sosnoff

FEES ARE BETTER THAN COMMISSIONS

The top 8% of commission payers make the most money.
— Tom Sosnoff

Tom & Dylan both agree that when it comes down to it, if you pay a lot of commissions from trading a lot, you’re going to be better off than if you’re paying a ton of fees for someone else to manage your money. Tom reflects on his brokerage days and discusses how the people who paid the most commissions almost always made the most as well.

So if we look at the top 5 biggest fee payers, are they the biggest losers?
— Dylan Ratigan

To see earlier episodes of Truth or Skepticism with Dylan Ratigan, you can watch them here on the tastytrade archives!



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