Marginal investors and the sport of curling

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I have long compared professional investment advising to the sport of curling. The financial market is this heavy stone sliding down what seems like an inexorable path toward some destined end. But instead of the sport’s two sweepers trying as a team to influence the “curl,” or the direction of that stone, the capital markets employ tens of thousands of “sweepers” furiously trying to alter the curl, half of which are working against the other half at the same time.

The rest of us, as holders of debt and equity securities through our investment or retirement accounts, are usually sitting in the stands, heavily invested in the outcome of the game yet not entirely sure of what is happening on the rink.

Where will the market “stone” come to rest today? I’ve read a lot of the “science” of both curling and financial markets (all right, more the latter than the former), but I’m not yet convinced that any of these guys are accomplishing all that much, and it’s a fifty-fifty chance as to which of these players is me:

Source: YouTube

What is the “marginal investor”?

In these days of extreme market volatility, I take some comfort (repeat, some) in the concept of the marginal investor. The marginal investor is the person, institution, or computer at the ready to buy or sell a particular stock or bond right now. They are the ones “sweeping,” trying to influence the price through offers to buy or sell. while the overwhelming majority of us investors are sitting in the stands watching. And yet our own money is riding heavily on the outcome of this game, as we watch the value of our investments go up and down.

The critical question is when do any of us bench-sitters come down out of the stands to start our own “sweeping” as new marginal investors, ready ourselves to either buy or sell. One way to think of this is that the “true value” of any security you hold is the price at which you would cash out of it or trade it for something else. That price point is likely well below where the market is at today.

Just how big the marginal investor segment of market is relative to the “fans in the stands” is a difficult thing to measure. Billions of shares are traded on U.S. exchanges daily, but the largest percentage of these are likely the same shares, swept furiously around human day traders and, increasingly, by computer-driven, high volume trades and exchanges set up especially for that purpose.

Last December the Wall Street Journal estimated that 85% of trading is “on autopilot—controlled by machines, models, or passive investing formulas.” On the other hand, a 2017 estimate had 80% of market capitalization (that’s trading price times the total number of shares) being held by institutions (mutual funds, banks, etc.). A relatively small percentage of those shares and bonds turn over through trading in any given period, most riding instead the current price level of the markets set by these marginal investors.

What does the marginal investor mean to me?

Whenever I look at my investment balances, I have to tell myself this reality: much of that value is, and has always been, illusory. Indeed, that is why they are called unrealized gains and losses. They aren’t real unless I put myself “in the game.” From the moment any particular stock or mutual fund went into my IRA, for instance, its value’s rise and fall has been determined most directly by those marginal investors, as much as I have an illusion that the fundamentals of the underlying company and economy are supporting that value.

Think for a moment why you are not buying or selling today. What is your rationale? Here are some of my reasons:

Resignation.  The reality is that I’m just a gnat riding on the back of the mega-market. I could sell some stock and buy something else, but if I am selling on a “high,” then I am likely buying on a “high” as well. And the same goes for when the market is crashing.

Bad timing. If the Efficient Market Hypothesis is even a little bit correct (and I think it is a lot correct), all known information is already baked into the current prices, and I have an equal chance of being wrong as being right. Even if I think it is now time to shift my portfolio from stocks to bonds, for instance, my stock has likely already been down-priced, and the bonds up-priced by the “sweepers” who got there before me.

Risk-trading. Much of the time marginal investors are simultaneously buying and selling, moving up and down (theoretically at least) the CAPM line (the Capital Asset Pricing Model). Investors, in this view, are trying to make sure their holdings reside at the optimal spot for trading off risk and return (the blue line below), or are intentionally adjusting up or down their preferred risk levels on the black line. Swapping stock for bonds, for instance, is the intentional move of your portfolio to the left and accepting lower long-term expected returns as a trade-off for reducing your risk exposure.

Source: Investopedia

The marginal investors, the sweepers, are in essence creating that black line at this moment. However, if I’m not trading, I’m either not yet convinced, oblivious, or frozen by indecision.

Bayesian statistics. There is an interesting story of Nobel prize winning economist Harry Markowitz, the “father of Modern Portfolio Theory,” who upon retirement placed most of his financial holdings into a 50-50 diversified mix of stocks and bonds. His rationale, which is the starting point of the classic Bayesian prior probability, was that unless you have some wiser-than-market insight today, you have at best a 50% chance of being right as being wrong. This 50-50 mix is a position he called “minimizing regret.” [1]

At last report (April, 2019), Markowitz had moved back to all equities after the 2017 hurricanes, saying he would stay at that position (anticipating a re-building boom) until long-term tax-exempt bonds hit 4%. Is he still in that position? I have not been able to find out.

Faith in the historical data. I have written in the past about my favorite simulated data set for investment returns, which looked at the extreme of a “buy-and-hold, income averaging” strategy. If you were to buy the S&P 500 average every day (e.g., through a mutual fund) and held on to it for a long time through thick and thin, what would your average rate of return with dividends look like after inflation? It looks like this:

S&P 500 Returns
(Source: Zoni Nation)

Every green line represents a day’s purchase. Note the “multiplier” scale on the left is a logarithmic scale (on a normal scale this would be an exponential curve). The line down the center represents the average return, which doubles about every ten years. In other words, while on any given day your purchase could lose over half of its value, or alternatively far exceed a 7% return, over the long haul the 7% compounded return after inflation has been amazingly consistent for “riding the S&P average.”

So perhaps the markets will indeed survive Trump’s tweets, Brexit, and the next recession. Or maybe I’m just that curling sweeper falling flat on its face. Life is a probabilistic bet. Don’t take investment advice from some random blogger.


  1. Christian, Brian, and Tom Griffiths. Algorithms to Live by: What Computers Can Teach Us about Solving Human Problems. Henry Holt and Company, 2016.

2 thoughts on “Marginal investors and the sport of curling

  1. Bruce Lindgren

    See Michael Lewis’s book “Flash Boys: A Wall Street Revolt” for a description of how high-volume, computer-driven trading operations affect transactions in the stock market(s). The conclusion, of course, is that there are some “games” that most of us should not be playing.

  2. Pingback: What is the crypto bet, really? – When God Plays Dice

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