Author Topic: Before the Crash: Increasing Cash Holdings  (Read 19337 times)


  • Pencil Stache
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Re: Before the Crash: Increasing Cash Holdings
« Reply #50 on: April 25, 2015, 08:35:10 AM »
So I know enough to know that I should not try to time the market and just buy and hold despite what is going on in the market. That being said is there any benefit for stocking aside a larger (still less than 5% of the overall portfolio, but more than I do now since I am 100% equity stocks) to dump into the market if another bear comes around? My net income is so low after accounting for my savings/investments, that to have a considerable amount I need to start saving for it now. I'm a big Random Walk fan, so I know market timing is risky and does not have much success, but I can keep cash in my 457 in a 1.90% interest account. So it should keep up with inflation in the short term. Just wanted to know what mustachians think, all I hear about in market news is how the Bull is tired and the Bear is coming soon.

Look buddy, you are 26 and have found this information. Depending on how much you save and invest you are bound to be a millionaire! Why try market timing when you already know how to be successful? You are talking about gambling against house odds when you already know how to win the game. The pension is good information but it does not change statistics.


  • Handlebar Stache
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Re: Before the Crash: Increasing Cash Holdings
« Reply #51 on: April 26, 2015, 05:45:24 AM »
By this point, I think I've convinced myself that you can't use market performance to contradict the efficient market hypothesis.

Sorry to continue spinning the ouroborosian loop, but I think you're still just drawing the tautological conclusion that you can't use market performance to contradict market performance.

In essence, the efficient market hypothesis is the idea that market prices are always "correct" -- that the market never "misprices" stocks, because all material information is immediately incorporated into the market price (where "all material information" and "immediately" both vary in degree with the strength of the version of the EMH you happen to be using).

In order for the EMH to have any meaning beyond empty tautology (and in order for it to actually be the hotly contested "hypothesis" it is, rather than an unassailable logical truth), it has to be possible (in theory, if not in practice) for a company to have an intrinsic value capable (again, in theory, if not in practice) of diverging from its market value.  I see incidents like Mississippi Mud's LEXG example (which sounds like it came pretty close to being a real-world BGC story) as evidence contradicting the EMH.

Again, I think the substance behind our difference in semantics is really the same.  I agree with the substantive point you are making, which, I think, is the same as what I said way upthread:

Sol's statement (and our two follow-up posts) stated that even if zero inefficiencies exist, irrational investor behavior (or, depending on how you look at it, the rational investor behavior of trying to predict the actions of all the other possibly rational, possibly irrational market participants) can explain market gyrations without needing to resort to the argument that some level of inefficiency exists in the market.

But to illustrate the issue I have with the semantics of your later argument, let's compare the stock market to Wiktionary, the public online dictionary collaboratively written and edited by the people who use it (i.e., the dictionary version of Wikipedia).  Like the stock market, Wiktionary can be thought of as a "market" composed of large numbers of rational participants who are constantly analyzing and reacting to relevant information and incorporating that information into itself.  To me, your argument is equivalent to saying that Wiktionary cannot be wrong -- if Wiktionary reports the definition of "screwdriver" to be "a tool with a heavy head, set crosswise on a handle, used for driving nails," then that is what the word "screwdriver" means.

After all, there is no proper English -- words have only the meanings we give them, so whatever meaning the dictionary reader-writers assign to a word has to be correct, right?  To tighten the analogy, if the "market" has "valued" the word "screwdriver" at our current understanding of the word "hammer," then that makes it true.  Except that "screwdriver" does not mean "hammer" if the general usage has not changed among the English-speaking public, in the same way that LEXG or BGC are not worth $200M or $10M if generally accepted measures of intrinsic value have not changed.  So, to restate what I said initially, I think you're not really defending the EMH in your last few posts in this thread -- you're just making the (somewhat related) observation that "market value" may be a better standard of valuation than "intrinsic value."


  • Handlebar Stache
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Re: Before the Crash: Increasing Cash Holdings
« Reply #52 on: April 26, 2015, 09:28:43 AM »
you can have asset bubbles where all the stocks go up together without a real 'reason' to support it.  These events have shown to be tied closer to emotions and greed rather than data and logic.
I think emotions and greed are perfectly good reasons to explain asset bubbles, rather than saying "there is no reason, it's just emotions and greed".

I meant 'economical reasons.' 

Apple's valuation is supported by their earnings & cash on hand.  I'm not even an Apple fan.  Just looking at the valuations their current price is fully supported by the fundamentals.  Based on earnings they are actually valued pretty well compared to the rest of the market.  Their P/E ratio is actually lower than the S&P 500 and a whole lot lower than the tech sector.  So when you say the valuation is sky high I assume you mean their market cap.  Yes they are huge.  They are also the most profitable company in the world.  I think the reason their price/earnings is lower than the rest of the market is that people realize Apple has a lot more downside than it has upside.  It has room to grow, there are new markets opening up, there are new products it can create.... but if the iPhone lost popularity Apple has a very long drop.  I would actually use Apple as an argument for EMH in practice.  I would also like to point out that you are implying you can see when a company isn't valued right.  This would imply you aren't 100% on board with EMH yourself. ;) 

You also can pick out a period where valuations hit very high levels while you are in it, you just can't really trade on it.  The market could keep going up.  The high valuations(bubble) could be there for a very long time.  This high could be a new norm... which is what some people were saying in the late 90s as an excuse for the high valuations.  Now I can't say what I would have done in the 90s because I wasn't investing then, but 08 is an example I can speak to.  I think it was fairly common knowledge there was a housing bubble in 06/07.  No one knew it would hit banking like it did, but people knew there was a housing bubble.  At least I and everyone I was talking to recognized it.  You also had no idea when this thing would pop.  You couldn't really trade on that information.  So the markets were efficient in that respect.  Now when the market dropped off a cliff I felt it was an obvious buying oppurtunity.  I constantly wished I had more money to put in at this low point.  It even made me more frugal.  Working in investments at the time clients also understood it was a great buying oppurtunity.  Even the people who were scared knew it was a good buying oppurtunity, but they were afraid it would go even lower in the meantime.  The people who thought long term bought, and the people who thought short term sold.  Logical patient investors looking at the same information were making better decisions than greedy emotional investors.  It reminds me of the old saying, "during a market crash stocks are returned to their rightful owners." 

I believe EMH is true for the experienced rational investors.  We are trading based on all the information currently available.  However there are periods where people with no experience jump in and starting bidding up prices.  They aren't looking at the information available other than the past returns.  Then when there is a crash they jump back out.  Its hard to trade when valuations are very high because you don't know how long they will stay there. 

It might just be we are describing the same thing differently...  Yes the markets are working with all the available information so they are efficient in that respect, but not all investors are rational investors.