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Thread: why is it when the shit hits the fan...

  1. #26
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    Default Re: why is it when the shit hits the fan...

    Quote Originally Posted by salsa4ever View Post
    yeah, but I'll be dead before nirvana if we ever get there.


    I can't buy World500 and leave it for my great great great great grandchildren (I could but I don't want to). I want to maximize this lifetime's wealth. Specifically wealth that I can spend when I'm young >>> that which I can spend when I'm old 'cos I can do more right now.


    Also, the growth of companies have already been priced into the shares. What is required is not that mankind makes profits, or even that these profits are growing. IT HAS TO GROW AT A FASTER RATE THAN WHAT IS IMPLIED BY THE PARTICULAR SHARE (OR INDEX).


    In the short run at least it's a zero sum game. Someone with common sense would realize that we're not talking 100 year horizons here.
    OK, at least we are in the same page. i.e you agree that Stock Assets are not a Zero Sum game and the pie keeps growing usually with respect to GDP.

    Now, your argument about stocks being overpriced. Yes, some stocks are overpriced and some stocks are underpriced and if you diversify in a full market, it all evens out.

    Also, S&P500 itself is overpriced or underpriced at various time. If you Dollar Cost Average your investing every month, You'll be buying more shares when it is underpriced and less shares when it is overpriced and hence your cost itself evens out.

    Even if S&P500 is perfectly priced, you'd still get returns
    a) For taking market risks
    b) Time Value of Money (at least real world rates for lending your money to somebody)

    Average Joe is at an advantage because he is fully diversified. He is almost guaranteed to get the above returns if he plays the game for around 30 years.

    S&P500 has produced the best returns for any class of assets for any period > 20 years. I'm sure 90% of the audience here are at least 20 years away from retirement. Because of globalization, I'd make update it to World500

    You may not win a single coin toss or even one in five. But, if you toss a coin 100,000 times, you are almost guaranteed to win 50,000 times. That is the beauty of a diversified Market investment for a longer period. And the returns you get for those 50,000 wins are the best returns so far compared to any single asset class investments.

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    Default Re: why is it when the shit hits the fan...

    I would point out that whatever validity your argument has stems from the fact that Joe Sixpack buys an index fund or mutual funds instead of individual stocks. With an index fund or with mutual funds, in point of fact some stocks are being dropped / sold, and different stocks are being bought / added on a regular basis. This is the reason that the zero sum law is broken, because the index or mutual fund throws the 'losers' overboard before they hit bottom and adds rising new stars in their place. Obviously, current S&P component stocks like Countrywide Financial or E-Trade or Pulte Homes did not exist 20 years ago, and are not likely to still exist 20 year from now given their current financial states.

    This is very different situation than Joe Sixpack buying shares of a single company stock i.e. Citibank on a cost averaging basis, and continuing to buy more shares over time thus cost averaging his way to the stock's eventual bottom or demise.

    (snip)"But what bears even more traits of active management is the fact that these are only guidelines -- which the S&P Index Committee can, and often does, disregard. For example, turnover of the S&P's components soared in the 1990s. Only seven stocks were replaced in 1992, compared with 57 in 2000.

    One tech stock after another was added to the index, and several met neither the profitability requirements nor the seasoning requirements. Of course, these stocks didn't last long on the index and were removed when their market values collapsed. More recently, the index has latched onto one of the greatest real estate booms in American history; the committee started adding real estate investment trusts to the index for the first time in late 2001. There are now 14 REITs in the index.

    This is all reminiscent of the kind of "style drift" for which active mutual fund managers are often derided. Evidence of this tendency in the S&P 500 can be seen by measuring changes in the index's divisor. "(snip) from


    I would also point out that where an 'open ended' system exists like the S&P 500 or a mutual fund, the coin flip argument cannot be applied any more than the zero sum principle can be applied. The reason of course is that an index component committee or a fund manager is watching a whole bunch of different 'coins' both inside and outside of their 'portfolio' ... and is actively throwing out 'coins' that are currently averaging less than 50% heads from the 'portfolio' and adding new 'coins' that are averaging more than 50% heads in their place !!! Thus whatever gains or losses occur over time in an 'open ended' system like the S&P index or a mutual fund are the direct result of human decisionmaking. The coin flip argument is only applicable if a single 'coin' is flipped repeatedly i.e. following a single stock over time.

    As proof, you should total up the PRESENT value of all of the stocks that were S&P components in say 1973. The result will scare you.

    ~
    Last edited by Melonie; 11-24-2007 at 12:11 AM.

  3. #28
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    Default Re: why is it when the shit hits the fan...

    Quote Originally Posted by Melonie View Post
    I would point out that whatever validity your argument has stems from the fact that Joe Sixpack buys an index fund or mutual funds instead of individual stocks. With an index fund or with mutual funds, in point of fact some stocks are being dropped / sold, and different stocks are being bought / added on a regular basis. This is the reason that the zero sum law is broken, because the index or mutual fund throws the 'losers' overboard before they hit bottom and adds rising new stars in their place. Obviously, current S&P component stocks like Countrywide Financial or E-Trade or Pulte Homes did not exist 20 years ago, and are not likely to still exist 20 year from now given their current financial states.

    This is very different situation than Joe Sixpack buying shares of a single company stock i.e. Citibank on a cost averaging basis, and continuing to buy more shares over time thus cost averaging his way to the stock's eventual bottom or demise.

    (snip)"But what bears even more traits of active management is the fact that these are only guidelines -- which the S&P Index Committee can, and often does, disregard. For example, turnover of the S&P's components soared in the 1990s. Only seven stocks were replaced in 1992, compared with 57 in 2000.

    One tech stock after another was added to the index, and several met neither the profitability requirements nor the seasoning requirements. Of course, these stocks didn't last long on the index and were removed when their market values collapsed. More recently, the index has latched onto one of the greatest real estate booms in American history; the committee started adding real estate investment trusts to the index for the first time in late 2001. There are now 14 REITs in the index.

    This is all reminiscent of the kind of "style drift" for which active mutual fund managers are often derided. Evidence of this tendency in the S&P 500 can be seen by measuring changes in the index's divisor. "(snip) from http://biz.yahoo.com/ts/070424/10352204.html?.v=2


    I would also point out that where an 'open ended' system exists like the S&P 500 or a mutual fund, the coin flip argument cannot be applied any more than the zero sum principle can be applied. The reason of course is that an index component committee or a fund manager is watching a whole bunch of different 'coins' both inside and outside of their 'portfolio' ... and is actively throwing out 'coins' that are currently averaging less than 50% heads from the 'portfolio' and adding new 'coins' that are averaging more than 50% heads in their place !!! Thus whatever gains or losses occur over time in an 'open ended' system like the S&P index or a mutual fund are the direct result of human decisionmaking. The coin flip argument is only applicable if a single 'coin' is flipped repeatedly i.e. following a single stock over time.

    As proof, you should total up the PRESENT value of all of the stocks that were S&P components in say 1973. The result will scare you.

    ~
    Actually the scary part is "Using wrong logic in your investment decisions"
    The above is equivalent to saying

    Did you look at the Yankees Team in the 1990s? None of the players from the 1920s are present. It is scary that the Yankees have to kick players out of their team who are no longer useful to the team.

    Every year the World throws up great new companies which you have to invest in. That is the part of growing.

    If you have to invest in a new company, you have to kick somebody out.

    If you can't kick out loser companies, how will you invest in the next Microsoft, Google, Apple?

    30 years from now Half of todays 500 companies would have gone kaput correctly replaced by the ones which have better future.

    Even New York Yankees or Boston Red Sox have to replace today's winners at some point.

    The beauty of Indexing is "Average Joe doesn't have to worry about selection".

    He will grow with the World's prosperity. Indexing in World500 is the best way to grow with the world and participate in the World's prosperity. Any other strategy(Gold, Real Estate, Oil) you are taking a huge risk of putting all your eggs in one basket.

    If you want to invest in Google, you have to kick Chrysler out. That is how you invest in S&P 500. Otherwise it would be S&P 2378, not S&P 500

    Just because you repaint your house every 10 years doesn't mean your house has lost value

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    Default Re: why is it when the shit hits the fan...

    yeah well try and sell that logic to Cubs fans. Of course they may be a contrary indicator, since their last world series wins were during the 1930's depression !

  5. #30
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    Default Re: why is it when the shit hits the fan...

    Quote Originally Posted by salsa4ever View Post
    the US dollar actually *appreciates* against everything under the sun?

    It doesn't last very long, but I'm trying to get my head around it. Can someone offer a semi-logical explanation?
    The US dollar actually appreciated? Wow...never thought that would happen anytime soon.

    My employees will be happy to hear this. They work out of India and get paid in US dollars. So when the US dollar is worth more, that translates to more Rupees for them...and therefore higher income.

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    Default Re: why is it when the shit hits the fan...

    ^^^ if there are any signs of the US dollar actually appreciating i.e. exchange rate rising vs other major currencies, I certainly haven't seen a friggin trace of it !!!

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    Default Re: why is it when the shit hits the fan...

    Quote Originally Posted by Melonie View Post
    ^^^ another thing to consider is that investing is a 'zero sum' game i.e. for every winning investor there is also someone else on the other end of the trade that is a loser.


    If you believe that, then you don't understand how the stock market functions. All market trades are between the investor and the specialist. The stock market specialist, by the rules of the exchange, must buy from any seller of the stocks the specialist deals in. The specialist is then able to sell to any investor who wishes to buy. But, in the stock market there are never investor to investor trades. If you are believe what you say, then the specialists would, at best, have poor results, being the loser on at least 1/2 of all transactions. However, specialists do not have poor results. In fact, they outperform other investors. Why? Simple, they buy low, and sell high. As a stock decreases in price, the specialist has to buy more of it to maintain the market. Remember, the specialist is required to buy regardless of the availability of buyers in the market. When the stock starts to appreciate in price, the specialist is required to sell his inventory of shares so as to maintain a market for the stock. Thus, public stocks are not a zero sum game.

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    Default Re: why is it when the shit hits the fan...

    ^^^ you are technically correct ... thanks to the specialists / brokers every stock transaction involves some small degree of loss for the buyer and seller.

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    Default Re: why is it when the shit hits the fan...

    Quote Originally Posted by Melonie View Post
    ^^^ you are technically correct ... thanks to the specialists / brokers every stock transaction involves some small degree of loss for the buyer and seller.
    When you buy a stock you buy a piece of a business that generates cash.
    You can overpay for a stock but it is not a Zero Sum Game. If you don't understand this basic principle, you'll make wrong investment decisions

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    Default Re: why is it when the shit hits the fan...

    ^^^ again this point about zero sum is not about the stock being a 'piece of a business' that will provide capital gains and/or dividends over time that may or may not provide a profit for the owner. It is about the (generic) transaction between two parties, one selling stock shares of company X and the other buying shares of company X at the same particular point in time. Based on that particular moment, a range of scenarios that are possible ...

    The stock is 'overvalued', thus the seller wins by booking a fat cap gain and the buyer loses by paying too much

    The stock is 'distressed', thus the seller wins by cutting his losses and the buyer loses by buying in just as the stock will head for rock bottom

    The stock is a 'well kept secret', thus the seller loses by forgoing large future cap gains and the buyer wins by getting in on the 'ground floor'

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    Default Re: why is it when the shit hits the fan...

    Quote Originally Posted by Melonie View Post
    ^^^ again this point about zero sum is not about the stock being a 'piece of a business' that will provide capital gains and/or dividends over time that may or may not provide a profit for the owner. It is about the (generic) transaction between two parties, one selling stock shares of company X and the other buying shares of company X at the same particular point in time. Based on that particular moment, a range of scenarios that are possible ...

    The stock is 'overvalued', thus the seller wins by booking a fat cap gain and the buyer loses by paying too much

    The stock is 'distressed', thus the seller wins by cutting his losses and the buyer loses by buying in just as the stock will head for rock bottom

    The stock is a 'well kept secret', thus the seller loses by forgoing large future cap gains and the buyer wins by getting in on the 'ground floor'
    If
    A Bought BRK.A at $10 and sold it after five years to B for $100
    B Bought BRK.A and sold it after five years to C for $500
    C Bought BRk.A and sold it after five years to D for $3000
    D Bought BRK.A and sold it after five years to E for $10000
    .
    .
    .
    .
    And so on so forth. Every person from A to Z has made money (with very good returns beating inflation and earning a decent return). Nobody lost money in the process. That is by definition not a Zero Sum Game.

    It is saying Bill Gates is a loser because he sold a lot of his initial Microsoft Shares. Bill Gates by anyones definition is not a loser.


    A Zero Sum Game is when a person makes a Positive returns at the expense of a person making a Negative return

    Speculations are Zero Sum Games. (Options/Futures/Derivatives). Betting is a Zero Sum Game. Las Vegas Crapshoot is a Zero Sum Game. Playing Poker with your friends is a Zero Sum Game

    Every person on this earth who invested in S&P 500 for more than 25 Years has earned Positive returns (beating inflation and getting an awesome return on capital). That is not a Zero Sum Game.

    Every person who have played Poker for 25 years hasn't earned a positive return. That is a Zero Sum Game

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    Default Re: why is it when the shit hits the fan...

    Quote Originally Posted by Melonie View Post
    ^^^ you are technically correct ... thanks to the specialists / brokers every stock transaction involves some small degree of loss for the buyer and seller.
    Ok, now you are just searching Melonie. Trades cost money. Just from a logistial standpoint. Otherwise, buyer and seller would be standing at the village market bartering clams for the right to own shares.

    The only area where zero-sum game might even make a small bit of sense is in options trading. Even then, one doesn't always have to excercise.

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    Default Re: why is it when the shit hits the fan...

    I'm not gonna try and get involved in this whole zero sum game thing.

    But I notice that in answer to the original question, there has not been an answer that suggests resistance levels. In all honesty, in the currency markets, even this is a pretty unlikely answer to why there are sudden changes in momentum, but in the world of an individual stock, this is quite possible.

    I also note that no answer has yet suggested something obvious like profit taking by the large amounts of hotmoney in the markets. As they realise their short term profit targets, many jump out causing large selling and then sell trying to make money on the downside too. So many of the hedge funds use similar computer trading models that there must be hundreds of funds doing near identical things at identical times.

    The trouble with any answer about currency market movements and specifically the movements of the US dollar, is that the market is so huge that it must be unlikely that there is any one individual reason as to why bounces happen - even those of the 'dead cat' variety.

    I would like to add that I admire your consistency xanfiles1. I disagree with just about everything you write - your methods are too simplistic for a professional to even begin to take seriously - but you clearly believe the message, and I admire you for that.

    Best wishes everyone,

    Stuart

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    Default Re: why is it when the shit hits the fan...

    Quote Originally Posted by StuartL View Post
    I would like to add that I admire your consistency xanfiles1. I disagree with just about everything you write - your methods are too simplistic for a professional

    Stuart
    Thank You for the compliment. There are two paths to simplicity,
    i) ignorance/naviety
    ii) Achieve Mastery and simplify everything

    Maybe I'm in bucket (i) or bucket(ii), you'll never know

    Investing is about simplifying and doing the same things repeatedly.
    The 'Smart Money' you and Melonie refer to makes things complicated for themselves
    Here's the kind of mess smart money often gets involved in. These are the people who media often dubs as the smartest financial people on earth

    http://en.wikipedia.org/wiki/Long-Te...tal_Management
    http://en.wikipedia.org/wiki/Victor_Niederhoffer

    Here are some people who try to make things as simple as possible

    http://en.wikipedia.org/wiki/Warren_Buffett
    http://en.wikipedia.org/wiki/Nassim_Taleb
    http://en.wikipedia.org/wiki/Richard_Feynman

    Hedge Funds, Private Equity returns will all revert to the mean. Do you want to guess which one is that? Yes, S&P 500. The guy who invents financial methodologies will always make money (just like the guy who invents any other product). And then the crowd follows and blindly imitates the original only to see their returns not even matching S&P 500

    Unless you have the smarts to invent new methodologies, a simple, disciplined approach of Asset Allocation will always beat you in the long run.


    Anyway everybody in this group ought to watch the following video. Just count the number of advanced methodologies (Options, Futures, VIX, Swaps) and sophisticated tools(Market Timing, Smart Money, ) he uses in his talks

    Believe me this is the best 90 minutes you'd ever spend in your life

    http://video.google.com/videoplay?do...arch&plindex=8

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    Default Re: why is it when the shit hits the fan...

    Investing is about simplifying and doing the same things repeatedly.
    The 'Smart Money' you and Melonie refer to makes things complicated for themselves
    I don't even know where to begin in regard to an intelligent response.

    These are the people who media often dubs as the smartest financial people on earth
    and for good reason !!!! The work of Black-Scholes re options projections resulted in an unprecedented amount of successful analyses and fantastic earnings.

    However, your attempt to equate the use of 'smart money' analysis with the failure of LTCM is, in all fairness, a case of apples and oranges. As the Wiki article clearly indicates, the failure of LTCM was the direct result of overreaching / greed, in that they attempted to diversify their investments into areas that had not been previously researched and tested once they had effectively saturated the markets in areas that HAD been previously researched and tested !

    PS after the 'bailout' LTCM investors still beat the S&P !!!


    As to the zero sum game ... give a read. It is basically summarized by the following quote ...

    "Trading is a zero sum game when measured in respect to underlying fundamental values. No trader can profit without another trader losing. People trade because they obtain external benefits from trading. These benefits include expected returns from holding securities, risk reduction from holding correlated assets and gambling entertainment.

    Three groups of stylized characteristic traders are examined. Winning traders trade for profit. Utilitarian traders trade because their external benefits of trading are greater than their losses. Futile traders expect to profit but for a variety of reasons their expectations are not realized.

    Winning traders make prices efficient and provide most liquidity. Utilitarian and futile traders effectively underwrite the winning traders' efforts." ...

    ... winning traders can only profit to the extent that other traders are willing to lose. Traders are willing to lose when they obtain external benefits from trading. The most important external benefits are expected returns from holding risky securities that represent deferred consumption. Hedging and gambling provide other external benefits. Markets would not exist without utilitarian traders. Their trading losses fund the winning traders who make prices efficient and provide liquidity."

    Lawrence E. Harris
    Chair in Finance, University of Southern California

    beyond this I'll drop the issue, and allow everybody who chooses to follow the 'herd' in thinking that the stock market is not a zero sum game to do so undisturbed.

    !
    Last edited by Melonie; 11-26-2007 at 02:32 PM.

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    Default Re: why is it when the shit hits the fan...

    The ZSG issue just a matter of perspective.

    If we looked at the market for physical shares only, then by definition there must be a greater number of long positions than short positions active (someone must own the shares). Given we can agree that the sharemarket as a whole has a tendency to go up at a rate faster than inflation over 10 year periods, then the net winners would seem to outnumber the net losers.

    When it comes to distributing the gains, yeah I agree it's a zero sum game. well it could well be a negative EV proposition at the end of all this when you factor in taxes etc. for joe sixpack with the profits being appropriated to the informed.

    This is why real estate is such a valuable investment tool. It's *RELATIVELY* sheltered from market manipulation. Especially if you diversify with respect to location (okay, it's easier for someone who has 3 citizenships).

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    Default Re: why is it when the shit hits the fan...

    Quote Originally Posted by Melonie View Post
    I don't even know where to begin in regard to an intelligent response.



    and for good reason !!!! The work of Black-Scholes re options projections resulted in an unprecedented amount of successful analyses and fantastic earnings.

    However, your attempt to equate the use of 'smart money' analysis with the failure of LTCM is, in all fairness, a case of apples and oranges. As the Wiki article clearly indicates, the failure of LTCM was the direct result of overreaching / greed, in that they attempted to diversify their investments into areas that had not been previously researched and tested once they had effectively saturated the markets in areas that HAD been previously researched and tested !

    PS after the 'bailout' LTCM investors still beat the S&P !!!


    As to the zero sum game ... give http://www.turtletrader.com/pdfs/zerosum.pdf a read. It is basically summarized by the following quote ...

    "Trading is a zero sum game when measured in respect to underlying fundamental values. No trader can profit without another trader losing. People trade because they obtain external benefits from trading. These benefits include expected returns from holding securities, risk reduction from holding correlated assets and gambling entertainment.

    Three groups of stylized characteristic traders are examined. Winning traders trade for profit. Utilitarian traders trade because their external benefits of trading are greater than their losses. Futile traders expect to profit but for a variety of reasons their expectations are not realized.

    Winning traders make prices efficient and provide most liquidity. Utilitarian and futile traders effectively underwrite the winning traders' efforts." ...

    ... winning traders can only profit to the extent that other traders are willing to lose. Traders are willing to lose when they obtain external benefits from trading. The most important external benefits are expected returns from holding risky securities that represent deferred consumption. Hedging and gambling provide other external benefits. Markets would not exist without utilitarian traders. Their trading losses fund the winning traders who make prices efficient and provide liquidity."

    Lawrence E. Harris
    Chair in Finance, University of Southern California

    beyond this I'll drop the issue, and allow everybody who chooses to follow the 'herd' in thinking that the stock market is not a zero sum game to do so undisturbed.

    !
    * Trading is not Investing
    * The best investment an Average Joe can make is Investing in World500 stocks. He is better off than 95% of these traders + Sleep Well. None of the articles that you post doesn't help an average investor. It'll only confuse them
    * People who *win* by trading also *die* by trading.
    * LTCM guys beat the S&P only to be crushed by another Black Swan event
    * Hedge Funds and Private Equity are reverting to S&P500 returns

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    Default Re: why is it when the shit hits the fan...

    Quote Originally Posted by Melonie View Post
    ^^^ you are technically correct ... thanks to the specialists / brokers every stock transaction involves some small degree of loss for the buyer and seller.
    Specialists are different from brokers. Specialists get no fee. They survive by buying low and selling high. Brokers do get a fee. Although, I cannot see how it is a "loss" to pay someone for an expertise that you do not have.

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    Default Re: why is it when the shit hits the fan...

    Quote Originally Posted by Melonie View Post
    Based on that particular moment, a range of scenarios that are possible ...

    The stock is 'overvalued', thus the seller wins by booking a fat cap gain and the buyer loses by paying too much

    The stock is 'distressed', thus the seller wins by cutting his losses and the buyer loses by buying in just as the stock will head for rock bottom

    The stock is a 'well kept secret', thus the seller loses by forgoing large future cap gains and the buyer wins by getting in on the 'ground floor'
    Or, the stock is fairly valued. The efficient markets hypothesis holds that at any given time the price of a stock reflects all the information available about an issue and it is fairly priced. Research shows that the EMH holds true for all cases except for the one where someone is trading with inside information Hence the legal and regulatory prohibitions against insider trading.

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    Default Re: why is it when the shit hits the fan...

    Quote Originally Posted by Zofia View Post
    Or, the stock is fairly valued. The efficient markets hypothesis holds that at any given time the price of a stock reflects all the information available about an issue and it is fairly priced. Research shows that the EMH holds true for all cases except for the one where someone is trading with inside information Hence the legal and regulatory prohibitions against insider trading.
    It's questionable whether the insider trading regulation is even moderately effective. It's getting better, but for every case that gets reported/investigated/publicized, there's many more that slip through the cracks.

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