Europe, Crisis, and Opportunity

[smedleyb]

As Europe teeters on the brink, I can't help but think of ways to take advantage of whatever dislocations/opportunities which may result as Europe gazes into its financial abyss and sees nothing but insolvency. 

Now don't get me wrong, I'm intimately connected to events over there, and see first hand the devastating effects the economic crisis is having on ordinary folk.  I take no pleasure in their misery.

However -- and it may be a bit unmustachian to discuss this -- I can't shake the feeling we've entered a new phase in the global leverage adjustment game which may bring about amazing long-term investment opportunities.  Greece might be small, but it's bigger than Lehman Brothers, and the stakes of it's survival impinge on the much larger EU.  In our interconnected world economy, problems across the pond can't be isolated and ignored.  We are not immune to their plight.

The massive sell-off in our markets on Friday -- and their failure to muster any sort of bounce into the close while trading below the important technical level of 1284 (200 day moving average) -- suggests to this seasoned market watcher that the potential exists for an epic sell off which will cut deeper and sink faster than anyone can imagine.  Yeah, yeah, it's impossible to time the market, etc.  I get it.  But let's not ignore what's before our eyes: this market is deteriorating quickly, and unless Europe produces its own fiscal bazooka soon, the worst may be still yet to come.  And I mean bad worst.

I say ready your cash and prepare to strike.

[gooki]

this market is deteriorating quickly, and unless Europe produces its own fiscal bazooka soon, the worst may be still yet to come.  And I mean bad worst.

When the US has to borrow more money again post election is when I'll be looking to throw additional cash into the US stock market (reduced US dollar currency value benefits me here).

I'm personally with our CEO on the economy, with the belief of the next five years will be a roller coaster of ups and downs but ultimately little growth in the stock market.

With that said I'm not throwing all my eggs into timing the market. Regular investment will be made, just bonus savings will be put into  market timed investments.

[ed]

Currently, the value of the euro is a function of the strength of the economies within its zone. If it should break up, we will presumably see "euro" deposits become guilders, deutchsmarks, punts, lira, and so on - at which point, 1 "new deutschmark" will presumably rise against world currencies, while the new punt or the new escudo slides. 

So, an arbitrage opportunity. A mustachian with cash in a "weak euro" country might consider joining the huge northward flow now exiting banks in Greece, Spain, and who knows where else.  Moving into a non-euro country creates a foreign exchange risk, but in this scenario, 1 weak euro buys 1 strong euro.  No breakup, you've still got your euro.  On the other hand, a breakup could increase your buying power by 70% relative to a "stay home" scenario.

The question is, where to?  It needs to be:

* A very well-capitalised bank with little exposure to, for example, empty and unsaleable Spanish apartments.
* A strong euro-zone economy.
* A bank happy to accept deposits from non-residents.

I'm interested in BCEE (Luxembourg), but there must be others... right?

[gooki]

Rabobank

[smedleyb]

The question is, where to?  It needs to be:

* A very well-capitalised bank with little exposure to, for example, empty and unsaleable Spanish apartments.
* A strong euro-zone economy.
* A bank happy to accept deposits from non-residents.

I'm interested in BCEE (Luxembourg), but there must be others... right?

(1)  I'm definitely interested in owning the best European banks/Euro bank fund when the crisis ends, but it's impossible to know who owns what at this point.  And it's not just the paper on Spanish apartments  which stinks up the Euro banks' balance sheets; toxic debt comes in many forms -- most critically it may come in the form of owning Spanish and Italian sovereign debt itself.

(2) There is no strong Eurozone economy among the weak -- there is no decoupling (given the structure of the economic crisis) between, say, Germany and Greece.  If one goes down, I'm afraid they all go down.  Goliath is no match for David.

(3) The ultimate beneficiaries of the panic may be state-side and Canadian banks who have scant exposure to the EU economies.

I think we are witnessing the beginning  of the end of the EU (but that journey may take years to unfold).  This is Europe, after all, and it's evident to me that in the end Europeans will look out, not for Europe, but for Germany, for France, for Portugal, etc.  The markets are desperately looking  to western leaders for a concerted and forceful response to the crisis.  The less they get the more the market drips lower (and remember how slow our government was to respond to our financial crisis, yet back then we all spoke the same language and shared the same national interests). 

Ultimately, this is a thread about opportunity -- ideas on how to invest in the context of a crumbling Europe.   There's many mustachians sitting on new found riches since they dispensed with the frivolities of consumerism in the quest to get rich.   I don't know about you but I like cheap markets.  I like to buy things on sale.

[vwDavid]

Subscribed. Finally good MMM EU investing topics!

[Bank]

I wouldn't touch European financials.  There are a lot of tangled inter-bank arrangements there, on top of the direct sovereign exposure.  IMHO, if things get really bad, inter-bank credit will dry up as banks try to figure out who's solvent and who's not.  And that won't be good for anyone, even the ones with enough capital.  I would expect U.S. financials to get dinged too, and they've been working pretty hard to dump or hedge away their European exposure.

Of course, the wild card here is the ECB and how much they can/will do.  Plus sovereign political action/inaction.  Plus probably another 6 things we can't even foresee.  I'm still buying foreign index funds because I don't want to miss out on a sale, but to place a directional bet in a situation that in flux.... eeeks!

[ed]

Why try a pick banks that will be winning market share in the aftermath? We know what the research shows - stock picking will under-perform the dollar-cost-averaged purchase of index-tracking funds.  My problem is that I do need to keep some cash as cash, and since I live in one of the  more stretched Eurozone countries, that cash needs to take the form of euros - I could have a dollar account, but that would mean taking on extra exchange-rate risk. Too exciting!

Given I need to maintain a euro deposit  somewhere, I have to live with the risk of future capital controls and the risk of a currency breakup, and the risk of a sudden change in a the solvency of the bank holding the deposits.  My thinking is that this means I need one - or, better, several - very well-capitalised banks located in states with very low debt-to-gdp (hence BCEE in the Luxembourg).  Presumably there are other euro-zone Mustachians trying to solve this problem?

[smedleyb]

Why try a pick banks that will be winning market share in the aftermath? We know what the research shows - stock picking will under-perform the dollar-cost-averaged purchase of index-tracking funds.

Not during bear markets, which we've been in since 2000.  Buy and hold is the worst strategy to employ.  I'm not saying that to be inflammatory, I say it because it's true.  Stock/sector bets will always outperform buy/hold strategies when the overall market is sideways to down.

[grantmeaname]

So what you're saying is that there are categorically no individual stocks or sectors that underperform the market in any period that the market isn't rising?

[smedleyb]

So what you're saying is that there are categorically no individual stocks or sectors that underperform the market in any period that the market isn't rising?

Now why would I say that?

[grantmeaname]

Stock/sector bets will always outperform buy/hold strategies when the overall market is sideways to down.

How else would you read that?

[smedleyb]

Stock/sector bets will always outperform buy/hold strategies when the overall market is sideways to down.

How else would you read that?

I'm saying that to make headway with your money in a bear market, you need to be a more discriminating investor.  Read up on the trends, ; locate the cyclical bull markets within the general bear market e.g., commodities from 2004-2008, banks in 2009, etc. 

The truth is the S&P is today exactly where it was 13 years ago.  A whole lot of sound and fury signifying nothing -- save the growing chorus of frustrated buy and holders who have seen their returns stagnate.

I've witnessed two massive market crashes in my day -- 2000-2003, and 2007-2009.  I managed to escape the first with my account intact.  I avoided the second by being 100% cash at the time because the guys I read like Mish Shedlock and Bill Fleckenstein and many others were all over the commodity rally and financial collapse years before they unfolded.   Yeah, I was a market prepper!  I make the effort to learn and understand what the brightest minds in the investing world are thinking and, more importantly, why they are thinking it.   I let my opinion grow in the space of that conversation/analysis.  The knowledge I have acquired makes it impossible for me to give the all clear sign to investors to plow their money into this market.  When trillions in stimulus are needed to maintain these anemic GDP growth rates, when real unemployment hovers near 20%, when Europe just sucks, and when the debt bubble was met head on with even more debt, I cringe at the thought of how this ultimately plays out.

I say let's have a conversation.  Hold nothing sacred.  "The more I learn, the less I know."  Nowhere is this Socratic nugget more relevant -- and more true -- than in the capital markets at the turn of the 21st century.   

 

[Bank]

I'm saying that to make headway with your money in a bear market, you need to be a more discriminating investor.  Read up on the trends, ; locate the cyclical bull markets within the general bear market e.g., commodities from 2004-2008, banks in 2009, etc. 

The truth is the S&P is today exactly where it was 13 years ago.  A whole lot of sound and fury signifying nothing -- save the growing chorus of frustrated buy and holders who have seen their returns stagnate.

Or you could have dollar-cost averaged into this same market using index funds and you would be up nicely.

[grantmeaname]

I'm saying that to make headway with your money in a bear market, you need to be a more discriminating investor.  Read up on the trends, ; locate the cyclical bull markets within the general bear market e.g., commodities from 2004-2008, banks in 2009, etc.

You are saying that you know that you can beat the market based on publicly available knowledge by knowing which stocks are going to outperform the market, right? The impossibility of that is a nugget I hold pretty sacred.

[smedleyb]

I'm saying that to make headway with your money in a bear market, you need to be a more discriminating investor.  Read up on the trends, ; locate the cyclical bull markets within the general bear market e.g., commodities from 2004-2008, banks in 2009, etc.

You are saying that you know that you can beat the market based on publicly available knowledge by knowing which stocks are going to outperform the market, right? The impossibility of that is a nugget I hold pretty sacred.

Where -- in a post where I cast explicit doubt of the very possibility of "knowing" anything at all -- do I act like I know this, therefore I know that, etc. 

You do understand that investing is a game of probabilities?   Only a fool invests with blind certainty. 

[grantmeaname]

I feel like that's what you were saying in the part that I quoted. That's why I quoted it.

It looks like you're saying that you knew ahead of time that commodities would do well in 2004-2008 and banks would do well in 2009, and that further you knew that they would do so much better than the market expected them to that they were underpriced and so you managed to beat overall market returns by investing in them, which is saying that you knew about and exploited a significant market inefficiency that was based on publicly known information.

More generally, you're saying that by being a discriminating investor you can beat market returns. The fact that one's discrimination even comes into the discussion of investing returns suggests that you think investing is skill based, which means you think that there are significant market inefficiencies that are exploitable by an intelligent and skilled investory based on publicly known information. Again, that's violating a sacred truth for me.

[smedleyb]

I feel like that's what you were saying in the part that I quoted. That's why I quoted it.

It looks like you're saying that you knew ahead of time that commodities would do well in 2004-2008 and banks would do well in 2009, and that further you knew that they would do so much better than the market expected them to that they were underpriced and so you managed to beat overall market returns by investing in them, which is saying that you knew about and exploited a significant market inefficiency that was based on publicly known information.

More generally, you're saying that by being a discriminating investor you can beat market returns. The fact that one's discrimination even comes into the discussion of investing returns suggests that you think investing is skill based, which means you think that there are significant market inefficiencies that are exploitable by an intelligent and skilled investory based on publicly known information. Again, that's violating a sacred truth for me.

By all means you must invest in a way that's right for you.  My style involves much research, analysis (both fundamental and technical), as a well as a decent grasp of general marcoeconomic themes underlying the economy.  My style since 2000 has been to maintain high levels of cash and focus on specific stocks/sectors to invest in rather than some general market fund I put money in month after month without ever selling a bit of it.  I've been humbled by this market plenty to know that there are no certainties, no "sacred truths" as you put it, for me to hang my hat on.  But I've also been rewarded enough to see that you can gain an edge through hard work and research. 

[unitsinc]

This seems very appropriate.
Be prepared for a challenging read.

http://www.businessinsider.com/full-text-of-george-soros-speech-2012-6#comment-4fcd3e636bb3f76e6300000a

[smedleyb]

This seems very appropriate.
Be prepared for a challenging read.

http://www.businessinsider.com/full-text-of-george-soros-speech-2012-6#comment-4fcd3e636bb3f76e6300000a

I agree with Soros and his "three month window" argument.  Markets feel sold out, negativity is rampant, and much of what can go wrong in Europe is already priced in.   I think a calm is about the enter the markets which should provide a  price floor as the leaders of Europe work to produce a Paulsoneque financial bazooka of their own to combat the crisis.   Look out below if they cant.     

[vwDavid]

Wow, the comments of that article really hate on Soros. Honestly I didn't know the name till now...

[skyrefuge]

The truth is the S&P is today exactly where it was 13 years ago.  A whole lot of sound and fury signifying nothing -- save the growing chorus of frustrated buy and holders who have seen their returns stagnate.

Or you could have dollar-cost averaged into this same market using index funds and you would be up nicely.

Yup.  Sure, the S&P price is exactly where it was 13 years ago, but that's an irrelevant bit of information, unless you're just trying to deceptively cast your alternate investment strategy in a better light.  The price ignores two important things: dollar-cost averaging, and dividends.

To see the effect of dividend reinvestment, see this chart, which compares the Total Return (SPXTR) value vs. the Price-Only (INX) over 5 years.  The Price-Only value is down 11.78%, while the Total Return value is down only 1.61%.

Then, add in dollar-cost averaging.  I've been making regular investments in S&P 500 index funds from 5/12/2000 until today.  The S&P Price-Only value is actually down 7.3% between then and now.  Despite that, the combined effects of dollar-cost averaging and dividend reinvestment mean that my annualized return over that period has been 4.29%.  Still not matching historical returns, but definitely not "signifying nothing".  Yee-haw!

[smedleyb]

Over the weekend, Spain was offered 125 billion dollar bailout for it's insolvent banking system.

Today, the Spanish stock marked was down, and the yields on Spanish sovereign debt were up.

In other words, this was hardly the financial bazooka the markets have been looking for.  The chance remains that today was a fakeout move and Europe could ignite to the upside over the next week -- but today's reaction does not support that possibility, and the onus falls again on the bulls to prove that the Spanish bailout is the beginning of something significant and not a belated act of desperation by the EU.   

[smedleyb]

I agree with Soros and his "three month window" argument.  Markets feel sold out, negativity is rampant, and much of what can go wrong in Europe is already priced in.   I think a calm is about the enter the markets which should provide a  price floor as the leaders of Europe work to produce a Paulsoneque financial bazooka of their own to combat the crisis.   Look out below if they cant.   

It appears Europe did indeed enter a period of calm following the early June dip as most Euro indices are up anywhere from 5-10% over that time.  Piecemeal measures have been rolled out by European governments and by the ECB to stem the negative financial tide which has lead to temporary stabilization as leaders attempt this week to replace their temporary band-aids with something more substantive.

Either European leaders act in concert and forcefully this week to deal with the manifold issues surrounding their fragile financial constructs, or else we may very well enter the final and most lethal stage of the sell-off since the crisis began many months ago.  It's put up or shut up time for Europe as the health and stability of global stock and debt markets hang in the balance.

Hold on to your hats because this week promises to be a bumpy ride.

[JohnGalt]

I agree with Soros and his "three month window" argument.  Markets feel sold out, negativity is rampant, and much of what can go wrong in Europe is already priced in.   I think a calm is about the enter the markets which should provide a  price floor as the leaders of Europe work to produce a Paulsoneque financial bazooka of their own to combat the crisis.   Look out below if they cant.   

It appears Europe did indeed enter a period of calm following the early June dip as most Euro indices are up anywhere from 5-10% over that time.  Piecemeal measures have been rolled out by European governments and by the ECB to stem the negative financial tide which has lead to temporary stabilization as leaders attempt this week to replace their temporary band-aids with something more substantive.

Either European leaders act in concert and forcefully this week to deal with the manifold issues surrounding their fragile financial constructs, or else we may very well enter the final and most lethal stage of the sell-off since the crisis began many months ago.  It's put up or shut up time for Europe as the health and stability of global stock and debt markets hang in the balance.

Hold on to your hats because this week promises to be a bumpy ride.

Are you making any moves at this point?  Or still in wait and see mode?

If you're not making any moves - what would be your play if you thought they would figure out a more substantive response?  If you thought they wouldn't?

[smedleyb]

Definitely wait and see mode, John.

Lots of news this week: Fed tomorrow, Europe after that, ISM, employment data, etc.

My plan is to short any spike up to 1400 over the next couple days (via Oct Spy puts), but I'm attempting to keep my head (and trading account) clear in order to pounce on any "false" euphoria that may emerge the next couple of days.

Then again, a powerful and concerted move by the ECB and state central banks could be a game changer going forward.  I assign a low probability to that outcome (30%), but it's significant enough to keep me honest and in a temporary holding pattern.

[smedleyb]

Again, I wish to emphasize that the point of this thread is to not "game" the day to day fluctuations spawned by erratic and unpredictable European news flow, but rather to focus on potential dislocations that may emerge in their markets (I think we're already in the middle of a major dislocation) and the possible ways to invest for the long-term.  I'm not a fan of buying individual stocks (since I don't analyze Euro companies) but think there is definitely some great values emerging that one could play through mutual/index funds or ETF's like EWP (the Spanish ETF which, I think, will handily outperform the SPY over the next 5 years).

Also, monitoring Europe should provide clues as to the next major market move here in the United States.  If Europe sinks, it's reasonable to think the S&P gets hit too given that almost half its profits are derived overseas.  Alternatively, if Draghi unleashes his own fiscal bazooka, the markets could just as easily melt up.

But either way, European -- and, by extension, global -- markets are at the most critical juncture of the year, IMO. 

[Mr Mark]

Why try a pick banks that will be winning market share in the aftermath? We know what the research shows - stock picking will under-perform the dollar-cost-averaged purchase of index-tracking funds.

Not during bear markets, which we've been in since 2000.  Buy and hold is the worst strategy to employ.  I'm not saying that to be inflammatory, I say it because it's true.  Stock/sector bets will always outperform buy/hold strategies when the overall market is sideways to down.

To new investors,this is interesting.While the sp500 index was flat, this ignores dividends.

10k in an auto-balanced stock-bond fund like VWELX  returned an annualised 7% from June 2002, becoming 20k. YTD it's up over 5%.

[grantmeaname]

And it's only flat if you compare to the absolute peak of the dot-com bubble, which I've pointed out before, only to be answered by gratuitous ad hominem.

[smedleyb]

And it's only flat if you compare to the absolute peak of the dot-com bubble, which I've pointed out before, only to be answered by gratuitous ad hominem.

Did somebody say bubble?:

JOHN CASSIDY: Many people would argue that, in this case, the inefficiency was primarily in the credit markets, not the stock market — that there was a credit bubble that inflated and ultimately burst.
EUGENE FAMA: I don't even know what that means. People who get credit have to get it from somewhere. Does a credit bubble mean that people save too much during that period? I don't know what a credit bubble means. I don't even know what a bubble means. These words have become popular. I don't think they have any meaning.
CASSIDY: I guess most people would define a bubble as an extended period during which asset prices depart quite significantly from economic fundamentals.
FAMA: That's what I would think it is, but that means that somebody must have made a lot of money betting on that, if you could identify it. It's easy to say prices went down, it must have been a bubble, after the fact. I think most bubbles are twenty-twenty hindsight. Now after the fact you always find people who said before the fact that prices are too high. People are always saying that prices are too high. When they turn out to be right, we anoint them. When they turn out to be wrong, we ignore them. They are typically right and wrong about half the time.
CASSIDY: Are you saying that bubbles can't exist?
FAMA: They have to be predictable phenomena. I don't think any of this was particularly predictable.…
Well, (it's easy) to say after the fact that things were wrong. But at the time those buying them [subprime-mortgage-backed securities] didn't think they were wrong. It isn't as if they were naïve investors, or anything.

http://mises.org/daily/4056

For those not familiar with this debate, Fama is the father of the "Efficient Market Hypothesis" which Grant subscribes too, and which he uses to critique all my market/stock forecasts as being nothing more than pure guesses since, of course, the market is nothing more than a random walk. 

And yes, using the March 2000 tech top as the starting point in demarcating what I consider to be our current bear market, I am making a subjective determination.   Guilty as charged. 

   

[smedleyb]

To new investors,this is interesting.While the sp500 index was flat, this ignores dividends.

10k in an auto-balanced stock-bond fund like VWELX  returned an annualised 7% from June 2002, becoming 20k. YTD it's up over 5%.

In all fairness, we were talking stocks.  Bonds have been in a bull since the early 80's, and have performed fabulously since the tech bubble implosion.  It's easy to see why a balanced fund (stock and bond mix) would perform well.  Unfortunately, there was a ton of people who sat on their hands after the tech bubble burst, only to watch their "growth" and "aggressive growth" funds become a fraction of their original investment.  Hence the mantra "buy and homework," not "buy and hold." 

It's also worth mentioning that 2002 marks the low of the initial phase of the bear market, so it's reasonable to expect that its performance to date would be solid; much less so if one begins in 2000.

Finally, dividend and value funds are the best stock vehicles to own during a primary, secular bear market.  On the flip side, growth is a much better bet in a rising market (and by "rising" I mean breaking out into new highs).

It goes without saying Mr. Mark, but I'm glad you're funds are up over this time and I wish you continued success. 

[grantmeaname]

critique all my market/stock forecasts as being nothing more than pure guesses since, of course, the market is nothing more than a random walk.

That's the same mischaracterization you've been committing since we started this conversation a month and a half ago. I've made it very clear that that is a misrepresentation of my position.

[smedleyb]

critique all my market/stock forecasts as being nothing more than pure guesses since, of course, the market is nothing more than a random walk.

That's the same mischaracterization you've been committing since we started this conversation a month and a half ago. I've made it very clear that that is a misrepresentation of my position.

Okay, the inefficiencies of the market cannot be exploited in a systematic manner to produce greater than average market returns after fees on a risk-adjusted basis.  Or something like that.  I really do get it, even if my own investment experience has proven otherwise.

But do you get that the progenitor of the core theory you subscribe to does not believe in bubbles, bears, bulls, technical analysis, or the impact of emotion (greed/fear) on the movement of stock prices?  Basically, he dismisses as bunk everything I hold to be of primary value?

There's just no basis for a market conversation between you and I, which is not meant as a slight against you, just a statement of fact. 

 

[grantmeaname]

There's just no basis for a market conversation between you and I, which is not meant as a slight against you, just a statement of fact.

I think there is. I've been following the technical analysis conversation with interest, I've put your suggestions on my reading list, and talking with you has really made me think. I've learned about behavioral economics and fundamental analysis. I still don't think that they can consistently be exploited, but it doesn't mean I'm not curious or that they're not interesting.

[smedleyb]

There's just no basis for a market conversation between you and I, which is not meant as a slight against you, just a statement of fact.

I think there is. I've been following the technical analysis conversation with interest, I've put your suggestions on my reading list, and talking with you has really made me think. I've learned about behavioral economics and fundamental analysis. I still don't think that they can consistently be exploited, but it doesn't mean I'm not curious or that they're not interesting.

I think I can get 100% behind this statement.  I do realize that I'm probably wired a little differently than the vast majority of investors, which is why I've always supported your (and Mr. Mark's, and Arebelspy's, and the Boss') contention that mutual/index funds are the best vehicles for the vast majority of Mustachians to invest in the market.   I will never waver from that opinion.

It's been a hell of a conversation, and one I do look forward to continuing to have with you and the others for as long as possible.   

[arebelspy]

mutual/index funds are the best vehicles for the vast majority of Mustachians to invest in the market.   

Absolutely.

I'm wired different in that I love real estate.  I realize it's not for everyone. (Although I think many times more people have gotten rich using real estate than day trading, even percentage-wise.)

Most people should dollar cost average into index funds and never look at what the market is doing, and they'll grow rich over time, even with "lost decades". 

The vast, vast majority of people.

[James]

I really do get it, even if my own investment experience has proven otherwise.

That's like saying a really hot day proves global warming or a really cold one disproves it.  Your anecdotal experience cannot prove or disprove anything, but it definitely makes sense how it would strongly impact your opinion and choices.

I do think the conversation on the issue here has matured over time as the various positions have become more clear and better fleshed out.  Like Grant I'm interested in your theory and actual moves that you make, while continuing to be suspect of your confidence in the ability to profit from your analysis.

[smedleyb]

I really do get it, even if my own investment experience has proven otherwise.

That's like saying a really hot day proves global warming or a really cold one disproves it.  Your anecdotal experience cannot prove or disprove anything, but it definitely makes sense how it would strongly impact your opinion and choices.

I do think the conversation on the issue here has matured over time as the various positions have become more clear and better fleshed out.  Like Grant I'm interested in your theory and actual moves that you make, while continuing to be suspect of your confidence in the ability to profit from your analysis.

James, here's a little secret:  today on Wall Street, billions of dollars of merchandise will be bought and sold by traders/fund managers who:

(a) employ technical analysis in order time their trades;

(b) employ behavioral psychology in order to time their trades;

(c) engage in fundamental analysis in order to time their trades;

They will do all these things, regardless of your or my perception of the utility/effectiveness of such endeavors. 

k?

[tooqk4u22]

And every day there is a winner and loser on each side of those trades.

[smedleyb]

And every day there is a winner and loser on each side of those trades.

Some would argue that the guy or gal with the chart, sentiment indicator, and the company income statement in hand stands a better chance of being on the winning end the trade than the guy who comes to the table blind. 

[tooqk4u22]

(a) employ technical analysis in order time their trades;

(b) employ behavioral psychology in order to time their trades;

(c) engage in fundamental analysis in order to time their trades;

They will do all these things, regardless of your or my perception of the utility/effectiveness of such endeavors. 

Sure they will do these things regardless of our collecitive perception of utility/effectiveness but that doesn't mean they are effective for them.  Most of wall street trades are employ a complex string of derivatives and take big positions to eke out a small gain with protected downside and even more than that they exploit microsecond inefficiencies in the trading platforms (the majority of trades are computerized and of the high velocity type).

I do think technical analysis can work for long term trades when things get way off normal in either direction but these in-and-out type of trades like you are suggesting not so much. And really the behavioral analysis is nothing more than the technical analysis. 

Fundamental analysis is the only real way to beat the market but again it is very hard, complex and the vast majority don't have the skills or time to do it.

[grantmeaname]

Some would argue that the guy or gal with the chart, sentiment indicator, and the company income statement in hand stands a better chance of being on the winning end the trade than the guy who comes to the table blind.

Others would point out that that statement is demonstrably false.

[smedleyb]

Some would argue that the guy or gal with the chart, sentiment indicator, and the company income statement in hand stands a better chance of being on the winning end the trade than the guy who comes to the table blind.

Others would point out that that statement is demonstrably false.

Is that the point billionaires like Buffet, Soros, and Tudor Jones vanish into thin air, having succumbed to the inexorable logic of a stuffy academic? 

[MrSaturday]

Some would argue that the guy or gal with the chart, sentiment indicator, and the company income statement in hand stands a better chance of being on the winning end the trade than the guy who comes to the table blind.

The guys and gals at JP Morgan probably would have argued that before they lost billions.

[arebelspy]

James, here's a little secret:  today on Wall Street, billions of dollars of merchandise will be bought and sold by traders/fund managers who:

(a) employ technical analysis in order time their trades;

(b) employ behavioral psychology in order to time their trades;

(c) engage in fundamental analysis in order to time their trades;

They will do all these things, regardless of your or my perception of the utility/effectiveness of such endeavors. 

k?

That's not a secret.  It's completely true, they will do that.

What's also not a secret is that it has been shown over and over that it doesn't give them an edge over the market over their fees, and that investing with those traders will cost an investor money.

Is that the point billionaires like Buffet, Soros, and Tudor Jones vanish into thin air, having succumbed to the inexorable logic of a stuffy academic?

He didn't say theoretically false.  He said actually false, demonstrated in the real world.

[englyn]

This is a really interesting thread.

A core assumption here and at MMM in general is that for most people index funds will beat managed funds because the fund management does not give them an edge over the market over their fees.
Can we extrapolate that excluding fees, they do have a significant edge? Significant meaning statistically, not implying size.
It appears that smedleyb is his own fund manager and, by much research and effort, has historically outperformed the market with his investments and will, with a high probability but not certainty, continue to do so.
The 'fees' charged to his account therefore are an investment of his personal time.

So for those of us with an analytical mind (everyone on this thread), how much money would we need to have invested for the time investment in managing investments more complex than index funds to outperform in dollar terms our earnings at our jobs?

I know that's a how long is a piece of string question! But maybe an interesting one to discuss?

[JohnGalt]

So for those of us with an analytical mind (everyone on this thread), how much money would we need to have invested for the time investment in managing investments more complex than index funds to outperform in dollar terms our earnings at our jobs?

A lot...

I think you're missing the point of my question.  And I don't mean this as an attack, just genuinely curious why you think this isn't the case.

You say this:

Again, bullish over 1330, as SPX works its way to 1390 (maybe a touch higher).  Minor resistance at 1350 (downtrend line) and again at 1365.  These are the zones I'm focusing on.

If these are important zones, why can you pick up on that with only a few hours/week research, when those spending 20x that can't?  Or can they?  If so, why doesn't an efficient market quickly remove the opportunity?

Okay -- it's more than a few hours a week.  I was up til 2 AM last night studying my charts; I was up a 7 (before work) scanning headlines, preparing my game plan, attempting to locate opportunities; it's really a second job, truth be told. 

And yes, the greatest traders in the world know these zones/trends/patterns.  How quickly the opportunity is removed varies, but I've found the most glorious trade set ups allow you plenty of time to get on board.

This brings back up the question... is it worth it?  Which, of course, is primarily dependent upon three variables (as I see it).

Total amount you're trading with (using these methods):  P
Expected increase in yeild over more passive approaches:  r
Increase in time spent analyzing/trading over more passive approaches:  t

Your reward / time function then becomes   P*r/t

Using that and assuming 1,000 additional hours per year (part time job equivalent) for time here are the hourly rates recieved for every 1% increase in performance for different levels of P. 

$100,000 = $1/hour/1%
$250,000 = $2.5/hour/1%
$500,000 = $5/hour/1%
$1,000,000 = $10/hour/1%

Obviously if you spend less time these numbers change but even at 500 hours per year a 2% gain and a $500K portfolio, I'd be at $20/hr.
The opportunity cost will be different for everyone, but even that ( in my opinion top end) situation would probably not be worth it to me personally.  Especially given that the % gain is not guaranteed.  I can pick up part time consulting gigs for much better hourly rates than what I would gain spending a ton of time trying to gain a % or two on my current portfolio (for sure) and probably my FI portfolio as well.

I guess if you enjoy the analysis - maybe that should be factored in as a non monetary benefit too that would make it worth it.  I happen to very much not enjoy that side of things - even though (or maybe because?) I do statistics/modeling/forecasting for a living.

[arebelspy]

I know that's a how long is a piece of string question! But maybe an interesting one to discuss?

Sure.

To give it baseline figures, if a fund manager can't beat index funds after fees of 1-2%, that means he can't, with all his time, beat it by more than 1-2% without the fees included.

Given that, the numbers JohnGalt posted seem reasonable, and it's not worth doing except as a hobby.  You'll be getting less than minimum wage, typically.

...and that's with a GIVEN that you beat it.  You might not.  Almost none do.

[englyn]

Ah. Those figures sound about right.
I think I will stick to my job, it's better paying and I'm already trained for it!

[smedleyb]

James, here's a little secret:  today on Wall Street, billions of dollars of merchandise will be bought and sold by traders/fund managers who:

(a) employ technical analysis in order time their trades;

(b) employ behavioral psychology in order to time their trades;

(c) engage in fundamental analysis in order to time their trades;

They will do all these things, regardless of your or my perception of the utility/effectiveness of such endeavors. 

k?

That's not a secret.  It's completely true, they will do that.

What's also not a secret is that it has been shown over and over that it doesn't give them an edge over the market over their fees, and that investing with those traders will cost an investor money.

Is that the point billionaires like Buffet, Soros, and Tudor Jones vanish into thin air, having succumbed to the inexorable logic of a stuffy academic?

He didn't say theoretically false.  He said actually false, demonstrated in the real world.

From what I was able to determine, the studies I looked at determined that on average active fund managers underperformed (excluding fees) the indexes by less than a fraction of a percent over time.

The number I found was .4%.

In my reality that's called a push.