When Collaborative Day Trading Backfires BIG TIME!

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Nine years ago, the crowd-sourcing day trading experiment known as Quantopian was launched and it had $50 million worth of venture capital.

The premise was simple: People would submit their algorithmic day trading strategies and systems to the fund for rigorous backtesting by the company. The best strategies would be run by Quantopian’s hedge fund to build their capital and the creators would get a generous portion of the profits generated.

In other words… rather than rely on the big brains of the people on Wall Street, the fund wanted to tap into the “little guy” and see if outsiders could find something that the industry could not.

But after nine years, the company is no more. They just recently shut down because the platform as a whole is underperforming. Over 300,000 users submitted their own quant strategies – over 12 million submitted in total – and none of them have proven to be profitable enough as of this writing.

However, there are some VERY interesting details to note about this story:

Quantopian was backed by famous Wall Street trader Steve Cohen, who himself had $250 million under management by the firm before he stopped trading with then at the start of 2020. It also had financial support from venture capitalist Andreessen Horowitz, who himself has backed out.

CEO John Fawcett is nowhere to be seen with Quantopian. Today, you can find him worked for the popular day trading brokerage Robinhood.

ACE Capital Investments Karl Rogers said that Quantopian’s main problem was “getting people who just want to learn trading signals or people who don’t do this on a full-time basis and they’re competing with people who do this on a full-time basis.” In other words, people who do not dedicate their lives to doing this for a living and have serious skin in the game for being right.

QuantConnect, a rival platform to Quantopian, had a statement released from founder Jared Broad: “To find positive returns that beat the market and to have to find it in a very specific way makes the problem even harder.”

Veteran trader Mathew Burkitt also chimed in with the following quip, which I believe really sealed the deal for Quantopian: “If you needed surgery done in a hospital next week, would you let someone who’s just read books on medicine do it?” 

Ouch. Talk about a massive day trading experiment gone horribly wrong. The intentions were good, no doubt, but it simply wasn’t practical.

As much as day trading can be extremely profitable, it has a very bad habit of attracting lazy people who won’t do the grunt work of practicing and testing relentlessly until something works.

Perhaps we should leave quant strategies to the quants, and simply allow them to make the money for us instead.

What do YOU think about Quantopian shutting down? Is their entire premise of using user-submitted trading strategies a flawed concept to begin with? Reply to this newsletter and share your opinions with us!

With Stimulus Hopes Higher Than Ever, the Stock Market Rises

Yesterday’s markets were in a state of pure anticipation, hoping that Congress could finally sign off on a deal for the second stimulus package before their deadline of tonight at midnight before the government shuts down for the remainder of 2020.

Here are the most important numbers you need to know about:

  • Dow Jones: +0.5% (highest-ever closing level)
  • S&P 500: +0.6% (new intraday record)
  • NASDAQ: 0.8% (new intraday record)

KMM Financial’s managing director Dan Deming has this to say about congressional leaders inching closer to what will most likely be a $900 billion stimulus package, which does not include liability protections for small businesses:

“Stimulus is still the main driver in the market right now until they get something done, and it does appear there is some motivation on that front to get something done… market’s benefiting from that [enthusiasm].”

Meanwhile, we have technical analyst and well-known stock picker Tom DeMark saying that he has been obsessively “stubborn and obstinate about [the S&P 500 reaching] 3,907 since November.” This would mean a 5% increase in the major index within the next two weeks of trading activity, which is itself quite an ambitious target.

Anything can happen at this point, so let’s sit back and enjoy the fireworks!

Jobless Claims in the US Soar Up to 885,000

Here’s an interesting piece of data that surprisingly didn’t send the markets crashing down – or if they did, their worst effect was preventing even higher highs from being obtained…

According to official data, last week saw 885,000 people file for first-time unemployment benefits. The week before that we saw 862,000 jobless claims, representing a +23,000 increase within the course of seven days.

This matches up perfectly with the United States’ stunted job growth, which we learned about on the first week of December. From The Financial Times:

“A resurgence in coronavirus cases and fresh curbs imposed by some states have hurt the labour market rebound and are denting the broader US economy.

The US added just 245,000 jobs in November, and the unemployment rate is 6.7 per cent. Retail sales last month fell by the most in seven months at the start of the holiday shopping season, raising fears that consumer spending is slowing.”

And as if now, it’s increasingly apparent that only two things can hopefully reverse this trend: The second stimulus package, and the newly approved COVID-19 vaccines being both safe and effective for the general population.

$65 Million Paid Out by Robinhood for Fraud

Famous day trading brokerage Robinhood was recently ordered to pay $65 million in civil penalties to the Securities Exchange Commission (SEC) after they wrote a report about how they mishandled their customer’s trades.

From the report issued by the SEC:

“Between 2015 and late 2018, Robinhood made misleading statements and omissions in customer communications, including in FAQ pages on its website, about its largest revenue source when describing how it made money — namely, payments from trading firms in exchange for Robinhood sending its customer orders to those firms for execution, also known as ‘payment for order flow.

One of Robinhood’s selling points to customers was that trading was ‘commission free,’ but due in large part to its unusually high payment for order flow rates, Robinhood customers’ orders were executed at prices that were inferior to other brokers’ prices.”

The big smoking gun was that after accounting for customers not having to pay any commission fees, Robinhood supposedly deprived them of $34.1 million. Robinhood immediately paid out the fine without making any statements that would confirm or deny the accusations made by the SEC.

I can’t help but wonder who’s really at fault here. Robinhood for making a platform that gameifies day trading, experiences constant server crashes, and attracts newbies who don’t know what they’re doing… or the investors themselves for treating the topic of investing like an ordinary day of playing slots at the local casino.

When Bitcoin Goes Up, So Do a Bunch of Other Cryptocurrency Companiesa

Bitcoin appears to be the fundamental “vital” marker for the entire cryptocurrency as a whole. Sure, there are other coins and assets for helping investors grow their capital in this sector, but everybody comes back to Bitcoin at the end of the day.

As of Tuesday morning, Bitcoin was at a new all-time high of ~$23,200. Over a period of 24 hours, it managed to increase its value by 11% and experts predict it could make total gains of 25% by the end of the week.

This resulted in numerous cryptocurrency companies and those related to cryptocurrency seeing a subsequent increase in value during yesterday’s trading session:

  • Grayscale Bitcoin Trust: +9.45%
  • Marathon Patent Group: +15.07%
  • Square: +1.61%
  • PayPal: +2.31%
  • Canaan: +11.84%

The Motley Fool wrote about why this happened in recent times, citing increased interest from mainstream payment platforms such as Square and PayPal, along with interest from major institutions such as big banks and hedge funds. You can’t blame them, as a market cap of $425 billion is something you don’t exactly ignore.

But they also highlighted another factor worth paying attention to:

Fears of currency devaluation is a big one. Many bitcoin investors believe that the massive amounts of stimulus being injected into economies around the world (read: money being printed), will lead to high inflation. Since there is a finite supply of bitcoin in existence, it is thought of as a naturally inflation-resistant asset, similar to gold.”

Which leads me to my question for you: What do YOU think is going to happen to Bitcoin by the end of 2020? Will it keep all of its marvelous gains, or will it crash back down its lower levels? Reply to this newsletter and share your predictions with us!

You Don’t Have to Be Rich to FEEL Rich!

Tom Corley is a well-known author in the personal finance space who penned the book Rich Habits: The Daily Success Habits of Wealthy Individuals.

In this book, he interviewed 233 millionaires who had assets of at least $3.2 million and made at least $160,000 in gross annual income. What he found most remarkable was that you don’t have to be in either of these two positions to be wealthy.

In fact, if you look at the lives of these individuals, they are surprisingly unremarkable:

  • Clothes were purchased from goodwill
  • The cars they purchased were high-quality, but they were used and off-lease (i.e. all paid off in one lump sum)
  • Practice “wealthy frugality”: Buying the highest-quality products and services at the lowest price (NOT the same thing as buying the lowest-cost item regardless of quality)

Even more interesting is their mindset towards investing, which allows them to do so consistently over several decades:

“Every time I save $1,000 by being frugal, I look at it as saving $5,000, which is what I believe that $1,000 will be worth in about 15 years. I think like that about all of my spending. If I can save $1,000, I’m really creating $5,000 in future wealth.” 

What a great way to approach an otherwise boring subject! The money you have today may not seem like a lot, but in the future it can add up to an awful lot if you tap into the power of compounded investing.

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