The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: smedleyb on June 27, 2012, 04:35:46 PM
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Wanna get rich? Perhaps it's time to start thinking outside the Efficient Market Hypothesis box, folks. But don't take it from me:
How badly did the economics profession, academics and market pros alike, fail? Classic economic belief systems could not appropriately anticipate in advance or even identify in real time what was happening with the Residential RE/Housing market. They failed to see the Great Recession coming or even the market collapse.
The basis for this failure was the erroneous belief that “efficient markets formed by people holding rational expectations could explain virtually all economic activity.”
That thesis has now been thoroughly discredited. It is still taught in colleges and business schools, which is why I find most MBAs not worth hiring. Frequently, they can be worse than clueless — they are steeped in the bad ideas of long dead economists, and in my profession, that is not a formula for making money.
http://www.ritholtz.com/blog/2011/06/shiller-more-expectations-theory-less-efficient-market-hypothesis/
“It’s the theories adopted by both the regulators and the market participants that proved to be false,” Soros, 80, said in an October 2010 interview released today by the Financial Crisis Inquiry Commission on its website. “It’s the efficient- market hypothesis and the rational expectations theory.”
http://www.bloomberg.com/news/2011-02-11/soros-says-financial-crisis-was-fueled-by-flawed-market-theories.html
And for the Buffett fanboys and girls around here who think he has their backs:
Buffett starts the article with a rebuttal of a popular academic opinion that Graham and Dodd's approach ("look for values with a significant margin of safety relative to [stock] prices")[2] had been made obsolete by improvements in market analysis and information technology. If the markets are efficient, then no one can beat the market in the long run; an apparent long-term success can happen by pure chance only. However, argues Buffett, if a substantial share of these long-term winners belong to a group of value investing adherents, and they operate independently of each other then their success is more than a lottery win; it is a triumph of the right strategy.[3]
http://en.wikipedia.org/wiki/The_Superinvestors_of_Graham-and-Doddsville
This is just a taste of the variant viewpoint -- obviously not held by certain prolific posters around these parts -- that the efficient market hypothesis is dead. Thus, it appears that analysis, research, and hard work allows an investor to gain a certain edge over blindly throwing money into general market funds which (a) charge fees (b) are by definition incapable of providing investors with outsized returns.
Of course, I will be asked to "prove" these statements, as if quoting venerable market players like Ritholtz, Soros, and Buffett is simply insufficient evidence.
And as always, never make an investment decision based on what you read on the internets; but a corollary to this rule is: never invest blindly committed to a certain investment ideology, especially one that has been so thoroughly discredited by some of the greatest investors of our age.
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But doesn't Buffet recommend that most investors should just buy index funds?
http://www.reuters.com/article/2007/05/07/berkshire-indexfunds-idUSN0628419820070507
Simply put, I ain't Warren.
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I'm automatically skeptical when people claim anything is "dead." Google "the death of equities" for a great example.
Absolutely it's overly simplistic to claim markets are efficient and actors are rational.
Markets certainly can be inefficient, and a savvy investor may be able to take advantage of that.
However history has shown that the vast, vast majority of people can't, and just straight up lose money doing this. Therefore it seems to me that the best way to take advantage of this knowledge is to not try to beat the experts. Try to lower your cost as much, own the market, and that will maximize gains and minimize work. That's what 97%+ of people out there should do.
If you're one of the rare 3%, that's fine, but that doesn't mean you should be convincing others to do the same. IMO.
As an aside, let's try to keep this thread insult/snark free.
Obviously some people will be insulted as their viewpoint gets challenged, but try to keep it civil and not get defensive and if someone is snarky try not to respond in kind. Cool?
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But doesn't Buffet recommend that most investors should just buy index funds?
http://www.reuters.com/article/2007/05/07/berkshire-indexfunds-idUSN0628419820070507
Simply put, I ain't Warren.
I too think most investors are fine with index funds. My intention is to simply create a thread in which to discuss the presuppositions and inalienable truths held by some posters who cling to the discredited idea that markets are always efficient and rational. You know, rather than get into these meta-market debates when the topic is "should I buy XYC," or "should I sell the "ABCDX" fund. I'm simply following Arabelspy's advice and creating a thread to discuss these matters in their own space, rather than hijack specific threads where the OP could give two craps about EMH, or the virtues of technical analysis, or the role of emotional trading in the process of price discovery.
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If you're one of the rare 3%, that's fine, but that doesn't mean you should be convincing others to do the same. IMO.
This, but also it is disadvantageous to share knowledge of market inefficiencies. The more people that are able to recognize inefficiencies, the faster they will be closed. It is in your financial best interest to keep such knowledge for yourself, unless you plan to market a book on the subject. I mean, why deal with all the flak from index-only-ers for no payoff?
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the presuppositions and inalienable truths held by some posters who cling to the discredited idea that markets are always efficient and rational.
Has anyone here actually expressed that belief? Personally, I've always thought any economic theory that ignores human irrationality is dumb. Arebelspy has stated the same multiple times. Who else are you referring to? If no one, then hey, we're all in agreement on that matter. Woo hoo!
It is in your financial best interest to keep such knowledge for yourself, unless you plan to market a book on the subject. I mean, why deal with all the flak from index-only-ers for no payoff?
ha, good point. I was also initially in the midst of writing a post asking smedleyb what his motivation was for continuing on this topic since it wasn't obvious to me (thankfully he answered the question in his follow-up post before I even asked), but I hadn't considered this aspect!
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If you're one of the rare 3%, that's fine, but that doesn't mean you should be convincing others to do the same. IMO.
This, but also it is disadvantageous to share knowledge of market inefficiencies. The more people that are able to recognize inefficiencies, the faster they will be closed. It is in your financial best interest to keep such knowledge for yourself, unless you plan to market a book on the subject. I mean, why deal with all the flak from index-only-ers for no payoff?
Because I think US equity markets are not fundamentally sound; that they are being propped up by trillions in monetary and fiscal stimulus which has produced an anemic sub 2% GDP growth rate, and I would consider myself a bad mustachian if I didn't advance my concerns to a group of folks who I think are awesome, helpful, and genuinely interested in radically improving their financial lives.
You think I share this knowledge anywhere else? You think imparting what little knowledge I've accumulated over the years might harm my own ability to exploit perceived inefficiencies? I could care less about that. But I know in my heart I could never live with myself if I just sat back and allowed everyone's FU money to be vaporized in the coming market storm.
And yes, there are storm clouds forming over the horizon. Doesn't mean it's on the agenda for today, or this week, or this year; but mark my words, all is not well on Wall Street.
But more importantly, the point is not to lament the coming day of reckoning, but rather to put ourselves in a position to profit from it. It's why I recommend building cash as an asset, even if you're losing 2%, and why I suggest to many posters to gently wade into the stock market rather than rush all in, especially now at these levels after the NDX and S&P have doubled off their lows.
In chaos, comes opportunity.
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Has anyone here actually expressed that belief? Personally, I've always thought any economic theory that ignores human irrationality is dumb. Arebelspy has stated the same multiple times. Who else are you referring to? If no one, then hey, we're all in agreement on that matter. Woo hoo!
My thought is a general one, not to do with Telefonica in particular.
Here goes, and no offense intended.
Do you know something everyone else doesn't know? If not, if you're basing your analysis on public information, what makes you think it isn't already factored into the price?[/b]
-- Arabelspy
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.
-- grantmeaname.
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But doesn't Buffet recommend that most investors should just buy index funds?
http://www.reuters.com/article/2007/05/07/berkshire-indexfunds-idUSN0628419820070507
Simply put, I ain't Warren.
I too think most investors are fine with index funds. My intention is to simply create a thread in which to discuss the presuppositions and inalienable truths held by some posters who cling to the discredited idea that markets are always efficient and rational.
Yes, markets are inefficient and you've cited experts, including Buffet, to support that. I agree. But Buffet's advice to amateur investors is not to find these inefficiencies and exploit them. It's the opposite.
I can agree with the idea that markets are inefficient. Can you agree it's a bad idea for almost anyone to put into practice?
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Do you know something everyone else doesn't know? If not, if you're basing your analysis on public information, what makes you think it isn't already factored into the price?
I don't see how my quote here disagrees with anything I've posted in this thread.
Markets certainly can be inefficient, and a savvy investor may be able to take advantage of that.
However history has shown that the vast, vast majority of people can't, and just straight up lose money doing this. Therefore it seems to me that the best way to take advantage of this knowledge is to not try to beat the experts. Try to lower your cost as much, own the market, and that will maximize gains and minimize work. That's what 97%+ of people out there should do.
If you're one of the rare 3%, that's fine, but that doesn't mean you should be convincing others to do the same. IMO.
This statement is still 100% true. As is the one above.
You may know something others don't, based on your technical analysis. You may not. You may only think you do. You may be one of the rare few. You probably aren't.
But again, if you don't know something others don't, then you aren't even speculating, you're straight up gambling.
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But doesn't Buffet recommend that most investors should just buy index funds?
http://www.reuters.com/article/2007/05/07/berkshire-indexfunds-idUSN0628419820070507
Simply put, I ain't Warren.
I too think most investors are fine with index funds. My intention is to simply create a thread in which to discuss the presuppositions and inalienable truths held by some posters who cling to the discredited idea that markets are always efficient and rational.
Yes, markets are inefficient and you've cited experts, including Buffet, to support that. I agree. But Buffet's advice to amateur investors is not to find these inefficiencies and exploit them. It's the opposite.
I can agree with the idea that markets are inefficient. Can you agree it's a bad idea for almost anyone to put into practice?
Absolutely agree. Like I said in that very quote: "I too think most investors are fine with index funds."
But that's because I think most investors are lazy about their finances. I don't see how somebody who busts their ass to save a few bucks can turn around and entrust a total stranger with their net worth without bothering to educate themselves on the nuances, complexities, and extreme risk which comes with equity investing. I know people who are geniuses at what they do, but they nonchalantly hand over multiple hundreds of thousands over to Wall Street. Really? Fuck those crooks. Seriously.
If MMM is a FI DIY, then delving deeper into the intricacies of the market is a natural corollary to that endeavor. I mean, we tile our own bathrooms, cook our own food, fix our own bikes, mend our own shirts, but we can't replicate what some Harvard hack with a newly minted MBA is doing just a few years removed from grad school with our precious retirement dollars?
And of course Buffett shills for the fund industry. Who do you think drives his precious blue chips higher year after year? -- Billy Bob Johnson, avid MMM reader and market prognosticator from South Dakota, or Winston Chase III, MBA fund boy with several billion IRA dollars at his disposal at Superfund Index Corporation?
Okay, that last bit about the Oracle of Omaha was definitely snide!
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But investing in index funds isn't akin to handing your money over to a stranger...investing in a managed fund would be.
"but we can't replicate what some Harvard hack with a newly minted MBA is doing just a few years removed from grad school with our precious retirement dollars?"
I think the point is that we don't want to replicate the Harvard grad's work, because the majority of the funds those guys manage don't beat the market. It's also hard to say it's unmustachian to invest in index funds when the blog's writer advocates for the opposite. Yes, it's mustachian to DIY home repair...doesn't necessarily mean I should build my own microwave. DIY something doesn't mean DIY everything.
Finally, I don't see how discrediting Buffet works at this point. You cited him to build your argument.
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You may know something others don't, based on your technical analysis. You may not. You may only think you do. You may be one of the rare few. You probably aren't.
But again, if you don't know something others don't, then you aren't even speculating, you're straight up gambling.
Let me turn the tables a bit and ask you a question: what makes you think Las Vegas real estate is a buy? I mean, we're talking about a city that is built around one industry -- gambling -- but that industry is becoming highly competitive to the point that Asia is exploding and gambling revenue is becoming much more fractured in this country as municipalities scramble to boost revenues. Could Vegas be experiencing a secular decline akin to what Detroit -- another city built on one industry -- experienced in the 70's on? Is buying real estate in Vegas like buying a home in Detroit back in 1980, which entails collapsing prices and rents over time? And mind you, that's before we get into the water issues that could easily render that city uninhabitable in the near future. Do you know something about the long term prospects of Vegas real estate that enables you to buy at today's depressed prices with confidence?
You and I do the same thing, but you're betting Vegas is not in a deep secular decline -- you may be right, you may not be; and I'm betting that stocks will experience a 20-40% haircut over the next 36 months -- I may be right, I may be wrong. In the end we're both attempting to exploit a perceived inefficiency in markets we think we know and understand.
(And just to clarify, I got nothing against Vegas. Love the city, love the area, and I hope the Detroit analogy fails to hold up. I want you to prosper and do well.)
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Let me turn the tables a bit and ask you a question: what makes you think Las Vegas real estate is a buy? I mean, we're talking about a city that is built around one industry -- gambling -- but that industry is becoming highly competitive to the point that Asia is exploding and gambling revenue is becoming much more fractured in this country as municipalities scramble to boost revenues. Could Vegas be experiencing a secular decline akin to what Detroit -- another city built on one industry -- experienced in the 70's on? Is buying real estate in Vegas like buying a home in Detroit back in 1980, which entails collapsing prices and rents over time? And mind you, that's before we get into the water issues that could easily render that city uninhabitable in the near future. Do you know something about the long term prospects of Vegas real estate that enables you to buy at today's depressed prices with confidence?
That's a fair question.
I'll assume you realize the benefits of investing in positive cash flow properties (plus potential appreciation, depreciation, equity paydown, and mortgage interest writeoff), so I won't go into why real estate specifically is a buy right now.
Why Vegas specifically? Cause that's where I live, and by my analysis it'll make me money. There are several other places in the US I'd also be buying real estate right now, and several places I wouldn't touch.
You and I do the same thing, but you're betting Vegas is not in a deep secular decline -- you may be right, you may not be; and I'm betting that stocks will experience a 20-40% haircut over the next 36 months -- I may be right, I may be wrong. In the end we're both attempting to exploit a perceived inefficiency in markets we think we know and understand.
It's probably closer than I'd like to admit. However there are a few differences. Real estate is backed by physical assets, so the chance of it going to zero is almost nil. It kicks off significant cash (one could compare to dividends). One big difference though: I can borrow to purchase it at historically low rates. Sure, one can borrow to buy stock, but I have no risk of a margin call, and am making money even if the house value goes down, and someone else is paying off that borrowed amount for me. If I could get a stock backed by a physical asset, get leverage on it, have no chance of a margin call, and have someone paying for that stock for me, and get tax benefits for owning it, I'd be all over that.
That being said, I am timing a market. And I have less issue with someone trying to time broad trends. If you think the market will get a 20-40% haircut in the next 3 years, okay. I'd actually say that's more likely than not. Harvesting profits and moving to cash can be fine. It's market timing, but if it works for you, more power to you.
Real estate moves pretty slowly, in broad trends. It's still just as hard to call a bottom (or top), but you can tell when it's over or under valued. I.e. buying a house in 06 would be cash flow negative? Don't buy. Then you're hoping it goes up, and lose money if it doesn't.
Likewise, if you see at stock at 100 P/E, you can tell it's overvalued. Similarly, one at a projected 5 P/E (probably) is undervalued (some rare exceptions aside). If you think the S&P is historically high, you may want to harvest profits and increase the cash portion of your AA.
I actually have no problem with an informed investor doing that within a part of their investing plan.
Betting on individual stocks is different than betting on broad trends, however.
And again, I can't support promoting that to people asking basic investing questions. That should be after investing 5 or 10+ years, and actually understanding their investments.
I guess one problem I have with your arguments you keep making is that you say "oh well learning about it is better than paying someone these huge fees" as if that's what we're telling people to do. No, we're saying the opposite, DIY and index fund. If you want to try to dabble with timing the market and individual stocks at some point, okay. But start there. And then you toss out a strawman like "well they should learn about timing individual stocks right away rather than paying 3% to someone" ... huh? All of us agree they shouldn't do that. So can you stop tossing that out there, as if someone claimed it should happen?
(And just to clarify, I got nothing against Vegas. Love the city, love the area, and I hope the Detroit analogy fails to hold up. I want you to prosper and do well.)
Thank you, and likewise.
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I mean, we tile our own bathrooms, cook our own food, fix our own bikes, mend our own shirts, but we can't replicate what some Harvard hack with a newly minted MBA is doing just a few years removed from grad school with our precious retirement dollars?
Well, that Harvard hack is probably losing money, so sure, we could probably replicate that if we wanted to. I'm sure you understand how index funds work, but with your talk of "crooks" like that, and your mentions of 2-3% expense ratios, it makes me wonder what you're actually talking about.
Anyhow, I'd say that now it seems then that the main disagreement here is one of degree. We all generally think that it's possible to beat the market over the long term, you just believe that it's fairly easy to do with a little bit of work, while those of us on the other side think it's outside of our abilities, even if we were not limited by time and interest.
Even though I think really highly of my own intelligence, for some reason a long time ago I became pretty confident that I did not have the intelligence, skill, and perhaps most importantly, emotional control to beat the market. I never even tried to. Maybe that's dumb and I underestimate myself. But now, whenever I start to think that maybe I could if I gave it a shot, I remind myself of this:
A couple years I interviewed for a job at a company doing high-speed algorithmic trading. They had incredibly fast computers running incredibly optimized software so they could apply their incredibly sophisticated trading philosophies within microseconds when new information was received. Most of the informational input to their algorithms was delivered electronically from external sources, but some still came the old-fashioned way, via telephone. One piece of data they received once a week via a conference call or something, and it was always a 3 digit number (a commodity price or something). They determined that having a guy listen to that number and type it into a computer as fast as he could was still too slow. So they got three guys, and assigned them each a single digit to listen for and type into 3 different keyboards. But that was still prone to error, so they got nine guys, three for each digit, and treated their inputs as "votes", in case one of the guys hit the wrong key in his haste. And still, the ability of their software to react in microseconds was too slow, so they were starting to move to hardware-based solutions to bring the reaction time down to nanoseconds.
FFFFFFFUUUUUUCKKK. I ain't got no chance against that!
And I understand that raw speed is only one angle to take to exploit inefficiency, but if one company is spending such enormous amounts of effort to cover that angle, I'm sure there are other companies spending an equal amount of effort to cover every other possible angle. The only remaining way that I can imagine that I could exploit inefficiency is if I was able to hold myself apart from a mass delusion that all these other guys would temporarily suffer under. But if people could easily hold themselves apart from mass-delusion, there would be no mass delusions!
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Well, that Harvard hack is probably losing money, so sure, we could probably replicate that if we wanted to. I'm sure you understand how index funds work, but with your talk of "crooks" like that, and your mentions of 2-3% expense ratios, it makes me wonder what you're actually talking about.
Taken from another thread, posted by joer1212:
After much thought, I had just decided that I would include BRSIX into my Roth IRA, but when I went to purchase this fund at Vanguard I found out that the expense ratio had increased to 0.92% (from 0.75% a few years ago).
Not only that, there is a management fee of 0.50% on top of this, plus a "redemption" fee of 2%.
This is disgusting, and completely unacceptable.
I decided to do without this fund. In fact, I will do without a micro-cap fund at all until a true, low-cost micro-cap fund becomes available. Are you listening, Vanguard?
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Well, that Harvard hack is probably losing money, so sure, we could probably replicate that if we wanted to. I'm sure you understand how index funds work, but with your talk of "crooks" like that, and your mentions of 2-3% expense ratios, it makes me wonder what you're actually talking about.
Taken from another thread, posted by joer1212:
After much thought, I had just decided that I would include BRSIX into my Roth IRA, but when I went to purchase this fund at Vanguard I found out that the expense ratio had increased to 0.92% (from 0.75% a few years ago).
Not only that, there is a management fee of 0.50% on top of this, plus a "redemption" fee of 2%.
This is disgusting, and completely unacceptable.
I decided to do without this fund. In fact, I will do without a micro-cap fund at all until a true, low-cost micro-cap fund becomes available. Are you listening, Vanguard?
..okay? And he specifically didn't invest because of the high expense ratio. As all of us would have advised.
I missed the part where you quoted all of us telling him those fees were reasonable and he should suck it up and pay them.
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Relevant to this thread, over on the ERE forum there's a topic about predictions about the DOW.
http://forum.earlyretirementextreme.com/topic.php?id=554
It was started a year ago and bumped up this week.
Jacob, someone whom many of us here respect quite a bit, said at the time:
Over 13000 and stay there for 0-500 days. Then it'll drop to under 10000 faster than most people can say "sell".
He listed some reasoning for it.
This week he posted:
Under 10k I said a year ago ... and I was wrong. And this is why I don't go short but only go defensive ... because I was right about the first part.
He may be right that it will go under 10k, but have the wrong timing. But when you're speculating, timing is everything.
As the saying goes: "The market can stay irrational longer than I can stay solvent."
You may think you're right. You may even be right, about what it should do. But if the market doesn't agree, you lose.
So while you may be able to make a decent prediction, you don't know the future and even if you do know what will happen, you likely don't know when it will happen. Some rare few may be able to get close.
But most are just wrong. Especially when they start trying to time individual stocks.
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Well, that Harvard hack is probably losing money, so sure, we could probably replicate that if we wanted to. I'm sure you understand how index funds work, but with your talk of "crooks" like that, and your mentions of 2-3% expense ratios, it makes me wonder what you're actually talking about.
Taken from another thread, posted by joer1212:
After much thought, I had just decided that I would include BRSIX into my Roth IRA, but when I went to purchase this fund at Vanguard I found out that the expense ratio had increased to 0.92% (from 0.75% a few years ago).
Not only that, there is a management fee of 0.50% on top of this, plus a "redemption" fee of 2%.
This is disgusting, and completely unacceptable.
I decided to do without this fund. In fact, I will do without a micro-cap fund at all until a true, low-cost micro-cap fund becomes available. Are you listening, Vanguard?
..okay? And he specifically didn't invest because of the high expense ratio. As all of us would have advised.
I missed the part where you quoted all of us telling him those fees were reasonable and he should suck it up and pay them.
I thought Skyrefuge was saying that such high fees don't really exist. I was trying to show they do.
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Relevant to this thread, over on the ERE forum there's a topic about predictions about the DOW.
http://forum.earlyretirementextreme.com/topic.php?id=554
It was started a year ago and bumped up this week.
Jacob, someone whom many of us here respect quite a bit, said at the time:
Over 13000 and stay there for 0-500 days. Then it'll drop to under 10000 faster than most people can say "sell".
He listed some reasoning for it.
This week he posted:
Under 10k I said a year ago ... and I was wrong. And this is why I don't go short but only go defensive ... because I was right about the first part.
He may be right that it will go under 10k, but have the wrong timing. But when you're speculating, timing is everything.
As the saying goes: "The market can stay irrational longer than I can stay solvent."
You may think you're right. You may even be right, about what it should do. But if the market doesn't agree, you lose.
So while you may be able to make a decent prediction, you don't know the future and even if you do know what will happen, you likely don't know when it will happen. Some rare few may be able to get close.
But most are just wrong. Especially when they start trying to time individual stocks.
This is fine and dandy, but let me make one huge point of clarification: arguing against the notion that markets are fundamentally "efficient" and "rational" does not necessarily entail "I thus have the power to absolutely time the market perfectly." This is rather your own straw man that you've brought to the table. Nowhere did I claim to have some special insight into the proper "times" to buy and sell. But I think assimilating the notion of time into an investment decision is vital. For example, bottoms don't always mean "buy now." Sometimes asset prices bounce along the bottom for years before a big bull move, leading to opportunities lost elsewhere.
Like somebody once said, you can pick the time, or you can pick the price, but you ain't getting both.
Also, anyone who bases their market prognostications on the DJIA is a rank amateur!
S&P baby, S&P -- with a touch of NDX and BKX thrown in for flavor.
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It has nothing to do with market efficiency.
If you accept that over a short period of time, stock markets can go up or down ~40% in a given year, but over a long time, economic growth happens and the value of owning distributed capital will pay probably 7% compounded, this might be enough. But coupled with the debt market, aka bonds, you can get ~5+% RRR with a lot lower volatility too.
This can sustain FI and and safe withdrawal rate. Worst case is cashflow yield from the market.
That's investment.
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This is fine and dandy, but let me make one huge point of clarification: arguing against the notion that markets are fundamentally "efficient" and "rational" does not necessarily entail "I thus have the power to absolutely time the market perfectly." This is rather your own straw man that you've brought to the table. Nowhere did I claim to have some special insight into the proper "times" to buy and sell.
Maybe it's me, but you sure seemed to be claiming some special insight when talking with confidence about the right time to buy in those other threads.
I agree, I do not have the power to time the markets perfectly.
So I'd rather dollar cost average, rebalance, and let MPT take me there via the economic growth Mr Mark is referencing.
Maybe I can scrape better than that 7% by buying at certain times and selling at certain times. Or maybe I'm like the vast majority of investors, both professional and amateurs, and underperform that. The latter is much more likely, so I'm happy with just getting the market returns and not speculating.
To each his own, and good luck to both of us.
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It has nothing to do with market efficiency.
If you accept that over a short period of time, stock markets can go up or down ~40% in a given year, but over a long time, economic growth happens and the value of owning distributed capital will pay probably 7% compounded, this might be enough. But coupled with the debt market, aka bonds, you can get ~5+% RRR with a lot lower volatility too.
This can sustain FI and and safe withdrawal rate. Worst case is cashflow yield from the market.
That's investment.
Bonds will be the worst investment for the next 20 years, just as they've been the best for the past 20.
Markets don't always go up. The Nikkei is a fraction of what it was 23 years ago, and Japan is no economic slouch.
I wonder how many readers MMM would have had in March 2009? My point being, everybody pinning their hopes on FI through the automatic investment style espoused by most of mainstream financial media are in for a rude ride until the economic imbalances are wrung out of the system and a genuine economic expansion -- one generated through investment from savings rather than through debt and deficit fueled economic shenanigans -- takes root.
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No, not that . I take it as given markets may go up and down.
But a balanced asset allocation ensures 'sell high' and 'buy low' tend to happen automatically.
I don't have to call the market, or try to guess the future. I'm like a bookie, I win long term no matter what. And beat most investors.
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It has nothing to do with market efficiency.
If you accept that over a short period of time, stock markets can go up or down ~40% in a given year, but over a long time, economic growth happens and the value of owning distributed capital will pay probably 7% compounded, this might be enough. But coupled with the debt market, aka bonds, you can get ~5+% RRR with a lot lower volatility too.
This can sustain FI and and safe withdrawal rate. Worst case is cashflow yield from the market.
That's investment.
Bonds will be the worst investment for the next 20 years, just as they've been the best for the past 20.
Markets don't always go up. The Nikkei is a fraction of what it was 23 years ago, and Japan is no economic slouch.
I wonder how many readers MMM would have had in March 2009? My point being, everybody pinning their hopes on FI through the automatic investment style espoused by most of mainstream financial media are in for a rude ride until the economic imbalances are wrung out of the system and a genuine economic expansion -- one generated through investment from savings rather than through debt and deficit fueled economic shenanigans -- takes root.
You may be right on some, most, or even all of that. You may even be close on timing.
I do think we're in a deleveraging period.
However I also don't think a bull run is out of the question. I just don't know for sure.
I've also thought interest rates would rise in 2010. And 2011. And 2012. And darn it, they just aren't rising.
And again, trying to track and guess broad trends is a far cry from trying to time individual stock purchases. You seem to base arguments off broad economic indicators, but claim you can guess when a stock is undervalued as well.
If so, you should have no trouble being FIRE'd very soon. I'm just more skeptical. Not that it's not possible. It's just very unlikely.
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No, not that . I take it as given markets may go up and down.
But a balanced asset allocation ensures 'sell high' and 'buy low' tend to happen automatically.
I don't have to call the market, or try to guess the future. I'm like a bookie, I win long term no matter what. And beat most investors.
No you're not the bookie; Wall Street is.
What if your asset allocation is all wrong? What if bonds and stocks decline simultaneously? What if the age of the long decline of index funds is upon us -- a situation created by (a) a heavily indebted youth with scant job prospects and thus no income to invest, and (b) an aged and retired baby boomer generation looking to cash out their IRA money?
What if things are really different this time?
The point is you don't know, anymore than I know for certain that XYZ will pop 2 points tomorrow.
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Smedleyb,
A big problem i have with your approach is that, in the past, it demonstrably doesn't work as an investment strategy. My time frame is 40++ years, effectively infinite. Time and time and time again, the approach you seem to advocate as a way to invest one's stash is just not even close to being capable of delivering a sustainable return. My way does, even in the past decade.
If you want to discuss ways to speculate, and explore hard to calculate RRR investments, OK. But lets not say its a reliable way to accumulate one's core FI Stash capital. If you can show a repudiation of Modern Portfolio theory and boggle-headed implementation, go for it.
Speculation can have a place in a portfolio, even a Mustashian one. Calculated risk can lead to great rewards. And lets discuss Mustashian ways to speculate. But can we be clear this is not about speculating one's way out of debt or a low saving rate.
MMM offers a way out that is independent of the throw of a dice, or pretty much anything out of our own control, like the geopolitical global markets. Focus on what you can control. Investing and what to do with your savings are relatively easy problems.
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I do think we're in a deleveraging period.
However I also don't think a bull run is out of the question. I just don't know for sure.
I've also thought interest rates would rise in 2010. And 2011. And 2012. And darn it, they just aren't rising.
And again, trying to track and guess broad trends is a far cry from trying to time individual stock purchases. You seem to base arguments off broad economic indicators, but claim you can guess when a stock is undervalued as well.
If so, you should have no trouble being FIRE'd very soon. I'm just more skeptical. Not that it's not possible. It's just very unlikely.
If we are in a deleveraging period, why is total leverage higher today than 2008?
A bull run presupposes a broad economic expansion and strong job growth; I put the odds of those happening at around 15% over the next 5 years.
Bonds have stayed strong due to imbalances out of Europe and a flight of capital to safe instruments, i.e., the 10 year bond. Mish Shedlock has been all over this phenomenon since forever.
In fact, I feel much more comfortable timing individual stocks than entire markets. But every investment decision incorporates an assimilation of several primary variables: Marco-economic forces, company/market fundamentals, investor psychology, and technical analysis. I look at all of them before formulating an investment thesis, and the weight given to each varies as well (for example, don't short a market -- no matter how overvalued and unsound it may be, or how bad the chart looks, or how crappy profit picture is -- if the government unleashes, say, 15 trillion to prop up the markets).
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Smedleyb,
A big problem i have with your approach is that, in the past, it demonstrably doesn't work as an investment strategy. My time frame is 40++ years, effectively infinite. Time and time and time again, the approach you seem to advocate as a way to invest one's stash is just not even close to being capable of delivering a sustainable return. My way does, even in the past decade.
If you want to discuss ways to speculate, and explore hard to calculate RRR investments, OK. But lets not say its a reliable way to accumulate one's core FI Stash capital. If you can show a repudiation of Modern Portfolio theory and boggle-headed implementation, go for it.
Speculation can have a place in a portfolio, even a Mustashian one. Calculated risk can lead to great rewards. And lets discuss Mustashian ways to speculate. But can we be clear this is not about speculating one's way out of debt or a low saving rate.
MMM offers a way out that is independent of the throw of a dice, or pretty much anything out of our own control, like the geopolitical global markets. Focus on what you can control. Investing and what to do with your savings are relatively easy problems.
I have repeatedly emphasized that one should only invest money one is prepared to lose. Even in the FB thread I argued that the trade I had in mind involved 5% of my trading account, which is a fraction of my liquid accounts, which is a fraction of my total asset picture. I don't seem to be recommending "going all in" or "backing up the truck" on any particular trade.
And I agree, "calculated risk can lead to great rewards." I mean, isn't that partly why we buy stocks, for the allure of the 10 bagger?
I'll say this: everyone I know who invests has made much more money -- considerably more -- buying individual stocks rather than entire indexes. Oh, and these people are rich enough to be FI, even if they all pretty much still work. In my case, index investing didn't bring me to the threshold of FI, stock picking did. Techs in 98-2000, metals in 2005-2007, and cash in 2007-2009, banks in 2009, but jack shit since. lol!
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And you're repeatedly wrong in that advice. I invest money to never loose. That's why it's not speculating.
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You know, you have (in passing) put your finger right on the nub of the problem with your approach.
Thus, it appears that analysis, research, and hard work...
Yes, folks, that research & analysis stuff is hard work for most of us. Unpleasant work, too. So why should I, or most people, spend my time doing that hard, unpleasant work when any number of mutual fund managers are willing to do it for me, charging a quite modest fee for the service?
I'll certainly agree that the "efficient market" hypothesis has been disproven, which is why much of my money goes into value investing funds rather than index funds. But either way, I'm not the one doing the hard work.
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You know, you have (in passing) put your finger right on the nub of the problem with your approach.
Thus, it appears that analysis, research, and hard work...
Yes, folks, that research & analysis stuff is hard work for most of us. Unpleasant work, too. So why should I, or most people, spend my time doing that hard, unpleasant work when any number of mutual fund managers are willing to do it for me, charging a quite modest fee for the service?
I'll certainly agree that the "efficient market" hypothesis has been disproven, which is why much of my money goes into value investing funds rather than index funds. But either way, I'm not the one doing the hard work.
Using that logic, why not pay someone to cook your meals, wash your clothes, scrub your toilets, and mow your lawn while you're at it?
And that's kind of the nub of the problem with automatic fund investing for me: people do everything right with their personal finances, up until the point they hand over their nest egg to these firms without doing the proper research, analysis, and hard work to ascertain if their money is being properly invested. Even if most people decide to put all their money into funds -- again, I've stated repeatedly that funds are the proper vehicle for most to play the market -- they have an obligation to themselves and their families to understand the Wall Street machine and the nature of equities.
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And you're repeatedly wrong in that advice. I invest money to never loose. That's why it's not speculating.
You see, that's where you're wrong -- you're not describing "investing, " you've just defined "winning."
Furthermore, investing and speculating are essentially similar activities, albeit with the latter being differentiated by an increase in the degree of risk posed by the investment. Speculating requires more risk, but investing requires risk too. I don't know why you think you can never lose. The history of capital markets is littered with the corpses of individuals chasing "the sure thing."
Wanna get rich? Maybe it's time to embrace more risk. Why buy an S&P 500 index fund when 80% of the companies in it are just so-so, yet that other 20% drive the majority of the growth? Why not set your sights on figuring out who falls into that 20% and just buy a basket of those companies?
My intention in the thread is to discredit the idea that investors can't gain an edge though studying the stock universe to exploit obvious inefficiencies. Nobody said it was gonna be easy, but we should no longer think it's impossible either.
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Of course, I will be asked to "prove" these statements, as if quoting venerable market players like Ritholtz, Soros, and Buffett is simply insufficient evidence.
Yes, you will be asked to support your argument. Yes, it is insufficient. Appeal to authority is a logical fallacy. Moreover, of your links, not one has any meaningful support. The Bloomberg post about Soros is all of three sentences long, and that quote is the only one about the EMH, and it lacks substantiation or any form of support; the rest of the blurb deals with the Lehman brothers collapse. The Shiller/Ritholtz post states that the EMH is wrong and that it has been wrong, but doesn't support that with any actual evidence-- if it had really been "thoroughly discredited", don't you think that the author would have posted some of that damning information instead of just telling us that it was discredited? And finally, Buffett's piece is not a challenge to EMH but a self-serving pat on the back to nine of his value-investing buddies who have done well, despite the fact that he certainly knows more than nine people who practice the technique. Even if your appeal to authority weren't fallacious, your authorities either 1) aren't saying what you've said they are, or 2) are spouting unsupported opinions just like you. If I told you the markets had to be efficient because Jack Bogle said they were, and then linked Jack Bogle sharing his unsupported opinion, you wouldn't call that proof of the EMH. Why should we do the same?
My intention is to simply create a thread in which to discuss the presuppositions and inalienable truths held by some posters who cling to the discredited idea that markets are always efficient and rational.
The straw man argument is a logical fallacy. Inalienable does not mean what you think it means. Presuppositions are only implicit assumptions; further, my support of the EMH is not an assumption but a logical extension of economic data. Lastly, you mischaracterize my argument, and the idea has only been discredited by opinions, by your own admission in your feeble, fallacious appeal to authority above. I argued that there are no significant and systematically exploitable inefficiencies based on publicly known information in the market which do not quickly correct themselves, which is weak EMH, different than the strong EMH that you consistently choose to attribute to me because it's an easy argument to attack.
But that's because I think most investors are lazy about their finances. I don't see how somebody who busts their ass to save a few bucks can turn around and entrust a total stranger with their net worth without bothering to educate themselves on the nuances, complexities, and extreme risk which comes with equity investing.
A core tenet of YMOYL, the FI movement as a whole, and Mustachianism in specific, is that reasoned consumption and care with money don't make life any worse than mindless consumption. I think 'ass-busting to save a few bucks' is an unfair characterization of the movement. You are also repeating but never substantiating that equity investing carries an extreme risk (Look here (https://forum.mrmoneymustache.com/investor-alley/telefonica-good-to-go-or-stay-away/msg15701/#msg15701) for your most recent sidestep of the discussion with an ad hominem. For the record, Argumentum ad hominem is a logical fallacy.) For the record, it's also a mischaracterization of my position that being informed about the actions of the market is a bad thing, an unnecessary thing, or even a trivial thing. Finally, index funds are not managed by people, and investing in an index fund does not rely on trust or strangers. I'll echo other posters in wondering if you truly understand what an index fund is, since you've misrepresented them over and over again now.
but we can't replicate what some Harvard hack with a newly minted MBA is doing just a few years removed from grad school with our precious retirement dollars? ... Winston Chase III, MBA fund boy with several billion IRA dollars at his disposal at Superfund Index Corporation?
You continue to make a logically unsupported attack against mutual fund managers. I repeat: "If the very best managers in the business, charging 3% expense ratios, can't consistently produce results better than the market movements as a whole, which you're arguing by calling them hacks, then why the hell do you think you can?" If the market has inefficiences that can be exploited based on intuition, investor skill, any financial methodology, your relationship with your God, or the color of tie that the fund manager is wearing, why aren't there mutual funds that consistently outperform their indices? If you can have enough skill to exploit these inefficiencies, why can't genius financial professionals with access to incredible software and hardware systems, stunning quantities of data, and decades of experience? Because they didn't read Phil Town's Rule #1 like Joe Daytrader? Either the mutual fund managers aren't hacks, or there are no significant and systematically exploitable inefficiencies based on publicly known information in the market which do not quickly correct themselves. Sound familiar?
I thought Skyrefuge was saying that
such high fees don't really exist. I was trying to show they do.
That fund has a net expense ratio of .76% (http://www.bridgewayfund.com/MF/fundinformation/ultrasmallcomarket/index.html). If there's another .5% management fee added to that, it's for the account. You only add the redemption fee when you go to sell the fund. You'd have to hold the fund for no longer than 15 months for the fee to be 3%, like you claimed, and much of that is unrelated to the fund itself. Moreover, that's an exceptionally expensive mutual fund. Crucially, it's not even an index fund. From the same link (http://www.bridgewayfund.com/MF/fundinformation/ultrasmallcomarket/index.html): "Our fundamental belief is that long-term, market-beating performance can be achieved through strict adherence to quantitative stock selection".
What if your asset allocation is all wrong?
The asset allocation can be mathematically evaluated with the set of tools falling under the broad umbrella of modern portfolio theory. Let me guess, you don't believe in it either. Moreover, how could an asset allocation be wrong? Are you arguing that in ten years we could look back and find a higher-yielding allocation strategy? Of course we could. That proves nothing. Even considering it in tandem with risk illustrates little in hindsight.
What if the age of the long decline of index funds is upon us -- a situation created by (a) a heavily indebted youth with scant job prospects and thus no income to invest, and (b) an aged and retired baby boomer generation looking to cash out their IRA money?
Characterizing youth as heavily indebted is inaccurate, as I've demonstrated all of a dozen times now. Job prospects are really not bad among college graduates, who I would say are more heavily into investing than high-school graduates, college dropouts, and high school dropouts. If they were, I'm sure you would have provided data to support your assertion. For example, in Ohio, all people aged 20-to-24 had an 11.9 percent unemployment rate according to Ohio Department of Job and Family Services (http://www.huffingtonpost.com/2012/04/22/job-market-college-graduates_n_1443738.html). Even among college graduates the average debt was about $15k (http://www.nytimes.com/2012/05/13/business/student-loans-weighing-down-a-generation-with-heavy-debt.html?pagewanted=all), and I've already demonstrated elsewhere that that value is totally manageable. Meanwhile, the average boomer has only $78k between all their 401ks and IRAs, according to a Center for Retirement Research study (http://www.stretcher.com/stories/12/12jun04j.cfm); likely, much of that money is in bonds and boomers heed the traditional advice of becoming more conservative as they approach retirement. Somehow, I don't see $40k of retirement-earmarked equities per boomer and $15k of student loans per college grad as a problem so colossal it'll sink the equities markets. More to the point, though, you've got these gloomy arguments that bear no relation to the actual economic facts of the nation.
I have repeatedly emphasized that one should only invest money one is prepared to lose.
You've repeatedly not substantiated this statement. I've repeatedly challenged it, and you've repeatedly run from the discussion to hide behind the observance that I'm younger than you. For the tenth time, there is no reason you can't have most of your net worth in equities if you are diversified. And there is no reason you should be convincing people to run and hide. Yes, you can have a losing year, and you could even have a losing five-year period. But it's not like your entire savings could just plummet to nothing because they're equities. That argument is inane and bears no relation to the actual reality of the economy, which is why you've repeatedly declined to double down on it by supporting it with evidence.
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Again, I stand with Soros, Ritholtz, and Buffert, as opposed to an inexperienced investor with no skin in the game.
And as a former philosophy major, I thank you for that stroll down the informal logic lane.
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And as a former philosophy major,
Appeal to Accomplishment fallacy (http://en.wikipedia.org/wiki/Appeal_to_accomplishment)
Sorry.. couldn't resist. ;)
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Again, I stand with Soros, Ritholtz, and Buffert, as opposed to an inexperienced investor with no skin in the game.
And as a former philosophy major, I thank you for that stroll down the informal logic lane.
Honestly dude, you can't ask for a reasonable discussion and when there is some, just ignore every single argument and dismiss them.
Why should anyone address your arguments if you won't address anyone else's?
You purport to want discussion, then refuse to have it.
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Appeal to Accomplishment fallacy (http://en.wikipedia.org/wiki/Appeal_to_accomplishment)
Sorry.. couldn't resist. ;)
It works better in size 12 and underlined. That's clearly the only part of my post he noticed besides my username.
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That's clearly the only part of my post he noticed besides my username.
Count yourself lucky. I've made 1200+ posts and he still can't get my username right, even when it's been pointed out to him that he's got it wrong. ;)
smedley, at this point it doesn't seem like we're going to go anywhere. You're pretty entrenched in what you believe. Those of us who feel differently, likewise.
Based on the last few posts between you and Tim, I just don't see this thread resolving at all, or even being helpful anymore.
Would you like to add more, or are we done here?
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Again, I stand with Soros, Ritholtz, and Buffert, as opposed to an inexperienced investor with no skin in the game.
And as a former philosophy major, I thank you for that stroll down the informal logic lane.
Honestly dude, you can't ask for a reasonable discussion and when there is some, just ignore every single argument and dismiss them.
Why should anyone address your arguments if you won't address anyone else's?
You purport to want discussion, then refuse to have it.
Funny, when I wanted to debate you about what you said in another thread, after you referred to my thought process as nonsense, I got this:
I have no comment other than to reiterate my earlier stance.
Quote from: arebelspy on June 26, 2012, 04:40:15 PM
no one should take investment advice from anyone giving it away free online (myself included).
So I get it -- it's cool when you just repeat what you say, in order to make a point; but when I do it, I'm just uncool.
But in the spirit of honest discussion, I'll circle back to her treatise at some point -- even if I feel like I've gone over the stuff repeatedly -- but unfortunately I gotta work and can only respond in bits at a time.
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This whole thing just seems personal and petty. Just my $0.02.
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smedleyb, arebelspy, and grantmeaname...
I've enjoyed watching this thread as well as the few previous threads preceding it.
I just thought I would point out that, to an outsider of the discussion, there doesn't appear to be a fundamental difference between your investment philosophy. Instead, it seems to be more a matter of degree.
Maybe it would make sense to work on a list of agreed upon sentiments vs those you disagree on to keep the discussion going in a focused and productive direction?
What you seem to agree on:
Most investors lack the knowledge, patience, etc to warrant putting any more than a trivial amount of their networth into market timing and individual stock trading.
Even if they only invest in index funds, it is still useful for every investor to have a good understanding of the funds they are selecting, stock fundamentals, and the forces at play in the market
Markets are not always efficient
It is possible for investors with the right knowledge, patience, etc to beat market returns consistently
What you seem to disagree on:
The level of rarity of the necessary knowledge, patience, etc to make individual stock picking and/or market timing a good strategy for any particular individual investor to attempt
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Hey smedleyb,
Just a suggestion for you. If you feel the obligation to help ppl preserve their hard earned money and you think you are so smart about investing... apply for a fund manager or a stock picking job. I work at an asset management company.. We have seats on the 7th floor where our portfolio top dogs are, come and apply for one.. you can make millions and help me to make millions in my 401K...
Do something tangible if you think you are so smart about investing...Go to wall street and try to change it or something... typing away on internet yipping here and there to some random folks seems to be a waste of time dude..
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This has been a great thread that was triggered by the discussions in another thread that got of topic somewhat and there too people made their opinions and had drawn a line in the sand. https://forum.mrmoneymustache.com/investor-alley/telefonica-good-to-go-or-stay-away/msg15752/#msg15752 (https://forum.mrmoneymustache.com/investor-alley/telefonica-good-to-go-or-stay-away/msg15752/#msg15752)
It has been hard to keep up with the speed of responses.
John - your summary is fairly accurate about their agreements and disagreements.
I am sure I can quote a bunch of posters above but the short story is that I do think that individuals can beat the market over time but only if they are educated, informed and willing to take on more risk. While information is public there is still plenty of information that is not read or interpreted in different ways. Also keep in mind that professional managers have difficulty beating the market simply because their assets under management become way to big and their analysis starts being passed to recent grads or whatever (Buffett is struggling with this issue, I am sure he could still find a $50MM company that would produce outsized returns but the fact is that it wouldn't even move the dial a fraction so he can't focus on those types of deals)
If you want to invest in individual stocks you need to have a solid understanding of financial and trend analysis, as well as willingness to understand sectors and industry drivers/trends. You also need to have the rright emotional demeanor and risk tolerance. I tend to believe that the majortity of people don't have the these abilities, and then those that do don't have the willingness to do the work involved. Bottom line then almost everyone should go the index route.
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Hey smedleyb,
Just a suggestion for you. If you feel the obligation to help ppl preserve their hard earned money and you think you are so smart about investing... apply for a fund manager or a stock picking job. I work at an asset management company.. We have seats on the 7th floor where our portfolio top dogs are, come and apply for one.. you can make millions and help me to make millions in my 401K...
Do something tangible if you think you are so smart about investing...Go to wall street and try to change it or something... typing away on internet yipping here and there to some random folks seems to be a waste of time dude..
This.
While I think your intentions are good and your opinions honest, I just don't find them convincing.
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Hey smedleyb,
Just a suggestion for you. If you feel the obligation to help ppl preserve their hard earned money and you think you are so smart about investing... apply for a fund manager or a stock picking job. I work at an asset management company.. We have seats on the 7th floor where our portfolio top dogs are, come and apply for one.. you can make millions and help me to make millions in my 401K...
Do something tangible if you think you are so smart about investing...Go to wall street and try to change it or something... typing away on internet yipping here and there to some random folks seems to be a waste of time dude..
This.
While I think your intentions are good and your opinions honest, I just don't find them convincing.
I am just being sarcastic...
Too many people sit around and yip away and thinking they are so good at something.. in reality, if they are really good, they should have already done it and prove to the world that world is wrong
So my real intention is that if smedleyb can lay out his trades, those actually got executed, month after month, show us what he has actually done, show us that he has made money using his thought process... that'd be more convincing..
Action always speaks louder than words. I'd like to see some real action..
BTW, trying to be one of our fund managers is climbing mount Everest... only a few can do... so I am just being sarcastic ...
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While I think your intentions are good and your opinions honest, I just don't find them convincing.
I am just being sarcastic...
Too many people sit around and yip away and thinking they are so good at something.. in reality, if they are really good, they should have already done it and prove to the world that world is wrong
So my real intention is that if smedleyb can lay out his trades, those actually got executed, month after month, show us what he has actually done, show us that he has made money using his thought process... that'd be more convincing..
Action always speaks louder than words. I'd like to see some real action..
BTW, trying to be one of our fund managers is climbing mount Everest... only a few can do... so I am just being sarcastic ...
[/quote]
I'm sorry, my comment was supposed to be to smedleyb, not you. I should have been more clear, I was seconding your idea.
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For the record, the name's Grant, hence the pun. Tim (http://en.wikipedia.org/wiki/Tim_the_Enchanter) was a Monty Python reference, I think.
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I'm sorry, my comment was supposed to be to smedleyb, not you. I should have been more clear, I was seconding your idea.
LOL. My bad of reading it wrong. Thx James
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Using that logic, why not pay someone to cook your meals, wash your clothes, scrub your toilets, and mow your lawn while you're at it?
Many people do just that. I don't myself, because I actually enjoy cooking and gardening, and the clothes washing and toilet scrubbing require trivial amounts of time.
But let's look at some numbers. Say I have, in round numbers, $250K invested in mutual funds. Adding up the expense ratios for the various funds gives an average of about 0.7%, so I pay about $1850/yr for management. Suppose that I managed my investments myself. I might easily spend a couple hundred hours a year researching individual stocks, watching their movements to pick times to trade, etc. So my return on doing my own investment research - assuming I could trade for free, and could do as good a job of stock-picking as the fund managers - would be around $9.50/hr. Since I can make over 5x that much per hour doing work that - believe it or not - I actually enjoy, that does not seem like an optimal use of my time.
...they have an obligation to themselves and their families to understand the Wall Street machine and the nature of equities.
Sure. Just as it makes sense to know how a car works, for instance. But that doesn't mean that the average person should go out and build their own car.
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This has been a great thread that was triggered by the discussions in another thread that got of topic somewhat and there too people made their opinions and had drawn a line in the sand. https://forum.mrmoneymustache.com/investor-alley/telefonica-good-to-go-or-stay-away/msg15752/#msg15752 (https://forum.mrmoneymustache.com/investor-alley/telefonica-good-to-go-or-stay-away/msg15752/#msg15752)
It has been hard to keep up with the speed of responses.
John - your summary is fairly accurate about their agreements and disagreements.
I am sure I can quote a bunch of posters above but the short story is that I do think that individuals can beat the market over time but only if they are educated, informed and willing to take on more risk. While information is public there is still plenty of information that is not read or interpreted in different ways. Also keep in mind that professional managers have difficulty beating the market simply because their assets under management become way to big and their analysis starts being passed to recent grads or whatever (Buffett is struggling with this issue, I am sure he could still find a $50MM company that would produce outsized returns but the fact is that it wouldn't even move the dial a fraction so he can't focus on those types of deals)
If you want to invest in individual stocks you need to have a solid understanding of financial and trend analysis, as well as willingness to understand sectors and industry drivers/trends. You also need to have the rright emotional demeanor and risk tolerance. I tend to believe that the majortity of people don't have the these abilities, and then those that do don't have the willingness to do the work involved. Bottom line then almost everyone should go the index route.
Yes, it has been fun!
I think a huge point of disagreement between myself and the proponents of EMH is the use of technical or trend analysis in formulating an investment thesis. The fact is charts are public, available for everyone to see, and provide clues as to the future behavior of stocks. It's an inductive practice, mixed with a bit of artistic interpretation, but I'm blow away by how reliable it is. Of course misreadings of charts, levels, and moving averages is common -- it's hardly deductive science. But it's way more accurate than not, and has been a cornerstone of my investment process.
Another point of disagreement between myself and some posters is the idea that selling assets to raise cash is somehow anathema to the mustachian goal of FI. I realize MMM keeps very little cash on hand and plows everything back into stocks, rentals, etc; but my mode of though encourages high levels of cash (at least 50% in long term accounts) in order to (a) buffer ones portfolio against the volatility of the past decade, and (b) reserve some artillery for when the current cyclical bull runs its course and the market sells off again -- which I strongly believe it will since last time I checked you don't remedy a debt problem by issuing trillions more in debt, which is our brilliant leaders' response to the financial panic.
When you have as much as I do in life -- and I put the monetary things at the bottom of the list -- it's impossible to not be optimistic about the future. In fact, ,my children inspire me everyday to do better, be better, and share as much as possible with those around me.
James, I'm not trying to convince anybody of anything. I've been battling Arebelspy (look dude, I spelled it right!) and Grant since forever regarding my position on the stock market. That will never change. Yet I see the market as fraught with risk, corruption (flash crash, anybody?) and outright manipulation (the President's Plunge Protection Team, half myth, half real). Individual investors need to protect themselves through education. I honestly think this is a place where we can exchange ideas about the risks (and the rewards) inherent in the market. I don't think Vanguard, Fidelity, or Schwab really give a fuck about the majority of us, what, with our little portfolios and our big dreams.
But around here, people do give a fuck. I give a fuck.
John Galt, nice synopsis and thanks for the breakdown (even if I think it needs a little tweaking, as I think there's more disagreement than meets the eye).
Mechanic baird, I know you think you're funny, but seriously, bring something worthy to the table, or just back off. I'm capable of slinging insults too, but in the spirit of reconciliation, dialogue, and understanding, I'm willing to look the other way. As far as a trading journal goes, it's not a bad idea and similar to what Arebelspy suggested to me.
Grant, I apologize for attacking your lack of investment experience or your current portfolio status. That's irrelevant to the topic at hand. If you wish to gain some insight into the ways in which EMH breaks down under scrutiny, read Soros' "Alchemy of Finance." I don't expect you to back down at all -- it's what I like about you, really. You're a smart fucking thinker with great arguments and a keen mind. That's not empty praise, but a sincere observation. Debating you can only sharpen my own understanding of my own investment process.
Finally, Arebelspy, sorry putting you in the position of having to shut down 3 threads simultaneously. I'll be on my best behavior going forward but I refuse to back down from my convictions about investing. I'm passionate about warning people of the major structural imbalances still facing our economy, Europe's economy, the growing isolationism and nationalism pervading the globe, social unrest, the surge in structural unemployment in this country, the huge divide between the have's and have nots, etc. Yet for every dollar I've made shorting markets, I've made 100 going long. I too desire to see a future in which we all prosper and reach our financial goals, for us and our children.
(ps: Grant, I'd love to debate those salient points you laid out above; and I promise I will very soon).
peace.
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Thanks smedley.
That post gained you a lot of respect in my mind. I still don't agree with you on a lot of stuff, but I like your passion.
I know it'll get heated at times (myself included). Long as we try to keep the personal insults down, from both sides, and not bleed into other threads, it's all good.
We're all Mustachian. We're all human. We certainly have more in common than different. We're just passionate about our differences. ;)
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I think a huge point of disagreement between myself and the proponents of EMH is the use of technical or trend analysis in formulating an investment thesis. The fact is charts are public, available for everyone to see, and provide clues as to the future behavior of stocks. It's an inductive practice, mixed with a bit of artistic interpretation, but I'm blow away by how reliable it is. Of course misreadings of charts, levels, and moving averages is common -- it's hardly deductive science. But it's way more accurate than not, and has been a cornerstone of my investment process.
Another point of disagreement between myself and some posters is the idea that selling assets to raise cash is somehow anathema to the mustachian goal of FI. I realize MMM keeps very little cash on hand and plows everything back into stocks, rentals, etc; but my mode of though encourages high levels of cash (at least 50% in long term accounts) in order to (a) buffer ones portfolio against the volatility of the past decade, and (b) reserve some artillery for when the current cyclical bull runs its course and the market sells off again -- which I strongly believe it will since last time I checked you don't remedy a debt problem by issuing trillions more in debt, which is our brilliant leaders' response to the financial panic.
I'm not sure if you meant this post to be the place for this - but I think what could really benefit the community much more than the philosophical debate between whether or not the typical person should attempt to trade individual stocks and/or attempt market timing (interesting though I find it) would be to explain and discuss the various methods and their pros/cons of stock valuation and predicting market trends.
I think it was already mentioned earlier, but an investments trade log to show how those same methods turn into actual trades would really go great either as part of the same thread or on it's own.
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I think a huge point of disagreement between myself and the proponents of EMH is the use of technical or trend analysis in formulating an investment thesis. The fact is charts are public, available for everyone to see, and provide clues as to the future behavior of stocks. It's an inductive practice, mixed with a bit of artistic interpretation, but I'm blow away by how reliable it is. Of course misreadings of charts, levels, and moving averages is common -- it's hardly deductive science. But it's way more accurate than not, and has been a cornerstone of my investment process.
Another point of disagreement between myself and some posters is the idea that selling assets to raise cash is somehow anathema to the mustachian goal of FI. I realize MMM keeps very little cash on hand and plows everything back into stocks, rentals, etc; but my mode of though encourages high levels of cash (at least 50% in long term accounts) in order to (a) buffer ones portfolio against the volatility of the past decade, and (b) reserve some artillery for when the current cyclical bull runs its course and the market sells off again -- which I strongly believe it will since last time I checked you don't remedy a debt problem by issuing trillions more in debt, which is our brilliant leaders' response to the financial panic.
I'm not sure if you meant this post to be the place for this - but I think what could really benefit the community much more than the philosophical debate between whether or not the typical person should attempt to trade individual stocks and/or attempt market timing (interesting though I find it) would be to explain and discuss the various methods and their pros/cons of stock valuation and predicting market trends.
I think it was already mentioned earlier, but an investments trade log to show how those same methods turn into actual trades would really go great either as part of the same thread or on it's own.
I agree. I think delving deeper into your methods, rational, and history would provide better framework for the discussion. I feel our arguments and theories are well known and well documented, but yours are less well known and less well documented. in short, instead of saying we or others are wrong, simply show and discuss what you actually do. If you really want to convince me then let what you do stand on it's own logic and theory and start talking details and results.
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I'm not sure if you meant this post to be the place for this - but I think what could really benefit the community much more than the philosophical debate between whether or not the typical person should attempt to trade individual stocks and/or attempt market timing (interesting though I find it) would be to explain and discuss the various methods and their pros/cons of stock valuation and predicting market trends.
I think it was already mentioned earlier, but an investments trade log to show how those same methods turn into actual trades would really go great either as part of the same thread or on it's own.
Hey man, it's as good a place as any. :)
I detected a reverse head and shoulders bottom in the SPX in early June which coincided with a wave of pessimism regarding Europe's future on the eve of the Greek elections. The head was formed June 4 with the SPX touching 1267, and the neckline sat at roughly 1330. A measured move works to 1390.
The positive outcome in Greece was anticipated on the Friday before and they closed the SPX above the 1330 neckline. It seemed like smooth sailing to 1390 until...
On Tuesday June 19th the SPX topped out at 1365 and immediately crashed back through the 1330 neckline (which should have been support) touching 1310 last week. The rally on Wednesday caused the SPX to flirt with 1330 again, but it backed off this morning (after JPM announced some big trading losses), but jumped late in the day to flirt with that 1330 level again closing just a tad under at 1329.04. (1330 has now become resistance -- broken support becomes resistance; and conversely, broken resistance becomes support -- and both support and resistance levels get weaker with each test),
Interestingly, the charts now show a head and shoulders top, with the head at 1365 and the neckline at 1306-1310, which projects -- if the neckline (1310) is broken, to a measured move to 1250.
In short, any movement between 1310-1330 in the SPX is just noise(with a bearish bias); a convincing move above 1330 (say, to 1340) negates the H&S top and the bulls are back in control with 1390 in their sights. A break below 1310 (say, anything under 1300) means the H&S top is confirmed, unleashing the bears who will be gunning for 1250 in an effort to erase the SPX gains for the year.
The above represents the technical framework within which I'll attempt to understand the movement of the market over the next several weeks. But his is just one piece of the puzzle. Furthermore, groundbreaking news -- a war, a natural disaster, a huge earnings warning by a solid company -- can render these technical levels void in a flash. Technicals are just one force moving stocks.
Again, this is an experiment to share a vernacular that is foreign to most. But remember: there are so many technical based traders and trading programs that these chart formations, supports, and resistances, etc, become almost self-fulfilling prophesies. They are actionable levels because so many people are acting on them.
[gently cowering behind desk in anticipation of verbal onslaught]
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I detected a reverse head and shoulders bottom in the SPX in early June...
Not, I hope, a verbal onslaught, but honest curiousity: how much time did you spend doing research, looking at charts, and so on in order to detect this?
It'd also be interesting to know how much time you spend on this on an ongoing basis, say hours per week, and what your return is, both as hourly wage and as ROI.
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I detected a reverse head and shoulders bottom in the SPX in early June...
Not, I hope, a verbal onslaught, but honest curiousity: how much time did you spend doing research, looking at charts, and so on in order to detect this?
It'd also be interesting to know how much time you spend on this on an ongoing basis, say hours per week, and what your return is, both as hourly wage and as ROI.
Jamesqf, the patterns become apparent almost immediately. And I don't spend much time, a few hours a week analyzing charts, reading news, etc. since I'm hardly what you would call an active day trader. I wait for solid risk/reward swing trades (which take 2-14 days to unfold) before committing capital (in my trading account, where I've been trying to consistently churn out small gains rather than swing for the home runs).
And just like that, Europe eases conditions for repayment by Spanish banks and their averages are exploding higher this morning; US futures point to a 20 point pop in the SPX at the open, which immediately negates the bearish H&S top as the SPX looks to open nicely above 1340. The positive news from Europe coupled with a bullish confirmation of the H&S bottom puts the bulls solidly in control. Unless they relentlessly pound the market at the open (sell the news), which I doubt they will, there is strong conviction on my part that the SPX will challenge 1390 over the coming days/weeks.
And to be honest, my inclination when that level (1390) is first approached will be to short the market, and probably aggressively. But a lot can happen between now and then.
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Can you give a little history of your experience with these techniques? When did you start researching and developing your strategy, and when did you start implementing it?
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I detected a reverse head and shoulders bottom in the SPX in early June...
Not, I hope, a verbal onslaught, but honest curiousity: how much time did you spend doing research, looking at charts, and so on in order to detect this?
It'd also be interesting to know how much time you spend on this on an ongoing basis, say hours per week, and what your return is, both as hourly wage and as ROI.
Jamesqf, the patterns become apparent almost immediately. And I don't spend much time, a few hours a week analyzing charts, reading news, etc. since I'm hardly what you would call an active day trader.
It seems to me, just on a theoretical level, that anything that becomes apparent that quickly is tough to make money on.
If you can see a pattern like that with very little time invested, shouldn't thousands of others be able to as well, or even tens of thousands or more? Not to mention professionals who spend 20 times per week what you do?
And if they can't see those patterns, assuming they exist... how come you can? And if they can see them, why wouldn't they all jump on the profit, and quickly eliminate the opportunity (thus giving us a great example of a soft efficient market)?
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Arebelspy, I don't wish to imply that its that simple, like "oh, H&S bottom, time to coin money!"
The market is rarely that generous.
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.
And trust me folks, I ain't trying to convert anyone, or profess to have all the answers. Just giving you a glimpse into my mental universe. I'll stay with and deal the criticism as we go.
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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?
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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?
Arebelspy - I think he's saying that because so many people are looking for these same trends, their collective actions almost ensure that the trend will play out.
But remember: there are so many technical based traders and trading programs that these chart formations, supports, and resistances, etc, become almost self-fulfilling prophesies. They are actionable levels because so many people are acting on them.
I guess my question would then be - how do you get your trade in fast enough to once those tipping points are hit to take advantage? Do you set your threshold to take place slightly before the standard so that you're in position ahead of time?
Also - does this maybe imply that these particular market inefficiencies are actually created because so many traders are looking for it?
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It's only a market inefficiency if it works. The fact that you've got a vocabulary that other people also use doesn't mean that technical analysis as a technique is effective, it means that other people believe that it's effective. If it doesn't consistently beat buy-and-hold investing after transaction costs, it doesn't work. It's never been demonstrated that technical analysis can do so.
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If you can see a pattern like that with very little time invested, shouldn't thousands of others be able to as well, or even tens of thousands or more? Not to mention professionals who spend 20 times per week what you do?
This discussion may be a bit over my head, so forgive me if this is naive, but...
The vast majority of the funds comprising the market are held by large entities (mutual and hedge funds) as opposed to individual investment accounts. Big guys can't move quickly, because they are buying and selling in such large quantities that their activity actually causes noticeable fluctuations in stock prices. Thus, they have to buy in slowly and sell off slowly. One doesn't need to know more than the big guys, one only needs to know what the big guy are doing and tag along. Even if thousands of other investors are doing the same thing, their holdings are so small comparatively that it doesn't matter. Only the movement of the big guys matters, so if you can recognize what they are doing, you can do the same thing but faster.
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If you can see a pattern like that with very little time invested, shouldn't thousands of others be able to as well, or even tens of thousands or more? Not to mention professionals who spend 20 times per week what you do?
This discussion may be a bit over my head, so forgive me if this is naive, but...
The vast majority of the funds comprising the market are held by large entities (mutual and hedge funds) as opposed to individual investment accounts. Big guys can't move quickly, because they are buying and selling in such large quantities that their activity actually causes noticeable fluctuations in stock prices. Thus, they have to buy in slowly and sell off slowly. One doesn't need to know more than the big guys, one only needs to know what the big guy are doing and tag along. Even if thousands of other investors are doing the same thing, their holdings are so small comparatively that it doesn't matter. Only the movement of the big guys matters, so if you can recognize what they are doing, you can do the same thing but faster.
That's a misconception.
I'm pretty sure since 84% of trading is high frequency trading (http://www.infowars.com/84-of-all-stock-trades-are-by-high-frequency-computers-only-16-by-humans/ - up from 60% in 2011: http://topics.nytimes.com/topics/reference/timestopics/subjects/h/high_frequency_algorithmic_trading/index.html) ... current trading moves fast enough to take advantage of and likely eliminate any of that possibility.
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That's a misconception.
I'm pretty sure since 84% of trading is high frequency trading (http://www.infowars.com/84-of-all-stock-trades-are-by-high-frequency-computers-only-16-by-humans/ - up from 60% in 2011: http://topics.nytimes.com/topics/reference/timestopics/subjects/h/high_frequency_algorithmic_trading/index.html) ... current trading moves fast enough to take advantage of and likely eliminate any of that possibility.
That's 84% of the trades, not 84% of the capital. If a manager wants to get into a large position, they still can't go all in in one fell swoop. HFT can take advantage of very small changes in price, getting in and out very very quickly, but that isn't exactly what I was referring to. It can takes days or weeks for a fund to get into a position without significantly affecting the price. That activity can be tracked and exploited.
Also, mutual fund managers are limited in what they are allowed to buy. Even if they could see disaster on the horizon, the best they can hope for is to lose less than their peers, they can't go all cash and wait for better buying opportunities.
Its just overly simplistic to say that since fund managers do what they do full time they must have every advantage over individuals. They have most of the advantages, but their size has its own limitations, both innate and regulatorily imposed.
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As a bogglehead, for want of a label, I love the day/ active traders. Without that churn I couldn't get away with low cost index and mutuals. Go for it.
:-)
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That's 84% of the trades, not 84% of the capital.
...okay? With all those constant trades going on, why does it matter if a hedge fund manager moves slowly over a week or two - those HFTs constantly going on will eliminate gaps more or less instantaneously as he does so.
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Jamesqf, the patterns become apparent almost immediately.
That is really what I would worry about, because the human brain is such an efficient pattern detector that it will detect patterns even when there is no pattern to detect. So perhaps you "reverse head and shoulders bottom" is indeed "very like a whale" :-)
Perhaps it's just down to temprament, but I would rather put my money in long-term investments: companies that have good P/E ratios, decent dividends, etc. To free myself from the labor of finding such companies myself, I pick mutual funds that follow such policies.
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As a bogglehead, for want of a label, I love the day/ active traders. Without that churn I couldn't get away with low cost index and mutuals. Go for it.
:-)
Glad to be of service! lol!
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That's 84% of the trades, not 84% of the capital. If a manager wants to get into a large position, they still can't go all in in one fell swoop. HFT can take advantage of very small changes in price, getting in and out very very quickly, but that isn't exactly what I was referring to. It can takes days or weeks for a fund to get into a position without significantly affecting the price. That activity can be tracked and exploited.
Also, mutual fund managers are limited in what they are allowed to buy. Even if they could see disaster on the horizon, the best they can hope for is to lose less than their peers, they can't go all cash and wait for better buying opportunities.
Its just overly simplistic to say that since fund managers do what they do full time they must have every advantage over individuals. They have most of the advantages, but their size has its own limitations, both innate and regulatorily imposed.
Solid post, AJ. I think one of the strengths of technical analysis is the way in which in filters out a lot of the day to day price noise in order to allow investors/speculators an opportunity to detect patterns of accumulation or distribution by the big funds.
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I guess my question would then be - how do you get your trade in fast enough to once those tipping points are hit to take advantage? Do you set your threshold to take place slightly before the standard so that you're in position ahead of time?
Also - does this maybe imply that these particular market inefficiencies are actually created because so many traders are looking for it?
I use these levels as zones and try to layer into the trades; say I think 1390 is the top of a move, I'll short a piece at 1385, maybe another at 1395. There's no hard and fast rule. Usually the market gives you a small window through which to execute the trade. I'm a nobody trading peanuts so it's not like what I do even registers in the universe of stocks.
As to your second point, I think we're looking at a classic chicken/egg scenario -- do levels work and trader follow them, or do traders all look at the same level which causes them to work? I've given up trying to figure out which comes first.
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Arebelspy,
Over the short term, there's an equal no. of buyers and sellers at a price. There can be big winners and losers, and you could say parts of Wall st act as the dealer in the middle, and take a cut.
Active trading can make you a lot of money if you guess right. The problem is no one can do it sustainably long term, and the competition is fierce. Fees will eat away at returns.
Long term, at best, its a suboptimal trading strategy. And most people loose money on it even in the short term.
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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.
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Arebelspy,
Over the short term, there's an equal no. of buyers and sellers at a price. There can be big winners and losers, and you could say parts of Wall st act as the dealer in the middle, and take a cut.
Active trading can make you a lot of money if you guess right. The problem is no one can do it sustainably long term, and the competition is fierce. Fees will eat away at returns.
Long term, at best, its a suboptimal trading strategy. And most people loose money on it even in the short term.
Mr. Mark, I think you know exactly what you're doing when it comes to your investment style. And you're right, commissions and "slippage" eat away at the scant profits most traders make. The average life a trader is pretty short. Most lose.
Truth be told I'm not really a trader. I can go weeks without feeling the need to do anything. The majority of my long term funds are in cash, and will be deployed "long-term" when the next phase of the global financial crisis plays out. And we will know when that phase is in play when the very thought of buying a stock seems utterly foolish, dumb, and a recipe for insolvency.
In short, the time to buy is when fear, uncertainty, and chaos rule the day -- in the press, at the office, during casual conversation with friends, etc.
I think we're 60-70% through what I perceive to be a primary bear market which started in 2000 and continues to this day (punctuated by cyclical bulls, like 2003-2007, 2009-present). There is no doubt in my mind that someday soon I'll be 100% long with little desire to make surgical moves in the market. My style today is a product of my desire to protect the vast majority of my capital for the day our economy begins to experience a legitimate economic expansion, one based on investment via savings, not consumption via debt expansion.
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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.
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My business is my job; markets are my passion.
The fact that I'm getting paid anything at all is just gravy.
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I suppose that would do it.
I make a terrible hourly rate playing poker - but really enjoy it so I keep at it anyways.
To each their own...
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Okay, so now that we've established:
Most people will lose money, and can't outperform the market.
If you theoretically could, it would take hours and hours, and your hourly rate is crap. (Thanks WhoIs for the analysis.)
So basically almost no one should do it, except for fun, and they should expect to lose money.
Mustachianism offers a way to maximize your time, rather than having to trade your time for stuff you don't want to do. Seems to me that index funds are much more Mustachian under that umbrella.
The very, very, very rare exception aside.
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My business is my job; markets are my passion.
The fact that I'm getting paid anything at all is just gravy.
Exactly my point! This is your hobby: even if you lose some money in the long run, you've had your enjoyment from it. But for me, and I think for most people, it is not enjoyable, so it's worth paying someone a small percentage to do the work for us, and probably better than we could ourselves.
It's the same as when I do my own car repairs,remodelling, etc. I may save money, or I might be better off financially if I paid someone and spent the time doing more programming, but the money isn't really the point. It's the enjoyment I derive from doing the work that's my primary reward.
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Okay, so now that we've established:
Most people will lose money, and can't outperform the market.
If you theoretically could, it would take hours and hours, and your hourly rate is crap. (Thanks WhoIs for the analysis.)
So basically almost no one should do it, except for fun, and they should expect to lose money.
Mustachianism offers a way to maximize your time, rather than having to trade your time for stuff you don't want to do. Seems to me that index funds are much more Mustachian under that umbrella.
The very, very, very rare exception aside.
I agree with much of this.
My own personal goal is simply to get rich by buying market sell-offs (declines of 20% or greater) over then next 5 years and begin accumulating for the next great bull market that will commence when we pay off our debts, save a little, and invest for the future. This country hasn't deleveraged by any means, unless one considers transferring private debt onto our public institutions a credible payment plan. Until then, I'm more than comfortable attempting to be more tactical with my money (i.e., trade more) while maintaining high levels of cash.
I believe that this is the appropriate strategy to employ in a secular bear market, which my technical and historical analysis of the market says we are in.
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I suppose that would do it.
I make a terrible hourly rate playing poker - but really enjoy it so I keep at it anyways.
To each their own...
I think Poker and trading are very similar. Unfortunately, in a bear market, all hold and no fold is a bad strategy.
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Wow! This is a long thread, but I feel a need to throw in my opinions in an effort to summarize.
Efficient Markets - The stock market is inefficient in the short run (months) and efficient in the long run (years).
There are two types of investors: passive and active. Passive investors generally invest in ETFs or Mutual Funds and don't particularly like investing as an activity.
Active investors like investing as an activity. There are two types of active investors: Technical and Fundamental. Technical investors approach investing by looking at market supply/demand and predicting the direction of a stock/market. Fundamental investors look at the company behind the stock and try to predict future profitability and price.
All of these approaches are legitimate and you have to use what works best for your personality, knowledge, and interest.
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Active investors like investing as an activity. There are two types of active investors: Technical and Fundamental. Technical investors approach investing by looking at market supply/demand and predicting the direction of a stock/market. Fundamental investors look at the company behind the stock and try to predict future profitability and price.
Is it possible to look at both? I mean, do a fundamental analysis to determine the right company to buy; do a technical analysis to determine the right time to buy?
Personally, I like to buy when both the fundamentals and technicals are in sync.
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All of these approaches are legitimate
Maybe. Some of us would argue that history and studies have shown the constant success of one of these, and the inability for almost anyone to succeed with the other.
The stock market is inefficient in the short run (months) and efficient in the long run (years).
Yes, but since most of us would claim we can't know what it will do in the short run, then trying to exploit those inefficiencies is akin to gambling. Thus we go for the long run where we are reasonably confident we can make money and historically have done so.
Again, there may be a rare few that are the exception to this, and doing so is not impossible. But for the average investor, it's extremely improbable and likely the path to losing money (or, at best, making some, but still underperforming what index funds would).
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Active investors like investing as an activity. There are two types of active investors: Technical and Fundamental. Technical investors approach investing by looking at market supply/demand and predicting the direction of a stock/market. Fundamental investors look at the company behind the stock and try to predict future profitability and price.
Is it possible to look at both? I mean, do a fundamental analysis to determine the right company to buy; do a technical analysis to determine the right time to buy?
Sure! I do a combination of index investing and fundamental investing in individual stocks.
All of these approaches are legitimate
Maybe. Some of us would argue that history and studies have shown the constant success of one of these, and the inability for almost anyone to succeed with the other.
However, there are two main problems with studies on investing:
1) Past behavior does not guarantee future behavior. For instance, I do some index investing, but I'm also part of the massive baby boomer generation. What happens when boomers start selling off investments to fund retirement? Mr. ERE made this same argument because index funds make no or very little distinction about the quality of the stocks they hold. Mr. ERE also argued that the world of the future (energy/oil crisis, pollution, globalization) is fundamentally different from the past.
2) There are always outliers of any type of investing. Are these people lucky or skillful? Who can say? Is Buffet lucky or skillful? Are successful hedge fund managers with a long track record lucky or skillful?
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1) Past behavior does not guarantee future behavior. For instance, I do some index investing, but I'm also part of the massive baby boomer generation. What happens when boomers start selling off investments to fund retirement? Mr. ERE made this same argument because index funds make no or very little distinction about the quality of the stocks they hold. Mr. ERE also argued that the world of the future (energy/oil crisis, pollution, globalization) is fundamentally different from the past.
Sure, but are you going to pick the strategy that has a track record that has lost lots of people lots of money and rarely, if ever, worked for anyone? Or are you going to pick the one that has worked quite well in the past?
The future may be fundamentally different (everyone is always claiming "it's different this time!" and it has yet to be), it may not, but why would you assume something that hasn't worked in the past is the best strategy going forward?
2) There are always outliers of any type of investing. Are these people lucky or skillful? Who can say? Is Buffet lucky or skillful? Are successful hedge fund managers with a long track record lucky or skillful?
Does it matter? If it doesn't work for almost anyone except for a very few outliers, we can debate if they're lucky or skillful, but isn't it enough to know that it's very unlikely to work for you? That you almost certainly won't be lucky or skillful enough to beat the market, since almost no one is?
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2) There are always outliers of any type of investing. Are these people lucky or skillful? Who can say? Is Buffet lucky or skillful? Are successful hedge fund managers with a long track record lucky or skillful?
Does it matter? If it doesn't work for almost anyone except for a very few outliers, we can debate if they're lucky or skillful, but isn't it enough to know that it's very unlikely to work for you? That you almost certainly won't be lucky or skillful enough to beat the market, since almost no one is?
Because if people like Buffet are skillful doesn't it make sense to invest with them even if they don't run index funds?
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Day trading is a losing proposition for most people.
If you need to invest during a bear market, value and dividend funds are the way to go.
During a bull market, buy the best managed growth companies and just sit on your hands.
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...the next great bull market that will commence when we pay off our debts, save a little, and invest for the future.
When? I suspect IF would be the more appropriate word here.
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...the next great bull market that will commence when we pay off our debts, save a little, and invest for the future.
When? I suspect IF would be the more appropriate word here.
Massive skepticism regarding the potential for another bull market is a necessary condition for the next bull market.
As far as when:
http://www.ritholtz.com/blog/2012/06/picture-guide-to-financial-markets-since-1800/
As you can see, the history of the stock market the past 100 years shows multiple bear phases lasting anywhere from 16-21 years. We are roughly 12-13 years into the current bear, thus one can imagine 4-5 more years of sideways to downward movement before the next bull rises from the ashes.
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...the next great bull market that will commence when we pay off our debts, save a little, and invest for the future.
When? I suspect IF would be the more appropriate word here.
Massive skepticism regarding the potential for another bull market is a necessary condition for the next bull market.
You misunderstand. I've no doubt there will be bull markets in the future. What I don't expect to see is for the US (either the government or a great majority of individuals) to pay off our debts, save a little, and invest for the future. If you're waiting for that to happen before investing, I expect you may pass away at an advanced age with a large pile of cash under your (perhaps figurative) matress.
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You misunderstand. I've no doubt there will be bull markets in the future. What I don't expect to see is for the US (either the government or a great majority of individuals) to pay off our debts, save a little, and invest for the future. If you're waiting for that to happen before investing, I expect you may pass away at an advanced age with a large pile of cash under your (perhaps figurative) matress.
Fair enough! lol.
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The same handful of totally unsubstantial statements keeps getting repeated here over and over again as if saying them enough will make it true. I stated at the beginning of the thread that the efficient market hypothesis means that consistently winning mutual fund managers can't exist. Maybe you disagree with that, but you can't totally ignore my argument, not refute the EMH, and then start talking about consistently winning mutual fund managers because it's been 20 posts since I last reminded you of that. If you won't counter my assertion that they can't exist, counter my assertion that they don't exist. Show me an actively managed mutual fund that outperforms an index fund with comparable risk characteristics after the expense ratio, and which has consistently done so over its history.
Baby boomers have about $40k of equities each according to my back-of-the-envelope estimate (https://forum.mrmoneymustache.com/investor-alley/efficient-markets-rip/msg15925/#msg15925). There are 76M boomers (http://en.wikipedia.org/wiki/Baby_boomer#Size_and_economic_impact) across 20 years, so you've got 3.5M boomers retiring a year with $140B of stock. Let me underline this. If every boomer that retired sold every single penny of their stocks on the day they retired, the market would take a hit of $140B in the average year. How significant is that? It's 1.16% of the NYSE, which had a market cap of $12T in May (http://www.world-exchanges.org/statistics/monthly-reports).
Index funds rebalance when companies drop off their benchmarks, which should be an insignificant penalty compared to their large total AUM (http://en.wikipedia.org/wiki/Index_fund#Index_composition_changes_reduce_return) (I'd chase that link further and get something more substantial, but I'm getting 404 errors left and right).
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The same handful of totally unsubstantial statements keeps getting repeated here over and over again as if saying them enough will make it true. I stated at the beginning of the thread that the efficient market hypothesis means that consistently winning mutual fund managers can't exist. Maybe you disagree with that, but you can't totally ignore my argument, not refute the EMH, and then start talking about consistently winning mutual fund managers because it's been 20 posts since I last reminded you of that. If you won't counter my assertion that they can't exist, counter my assertion that they don't exist. Show me an actively managed mutual fund that outperforms an index fund with comparable risk characteristics after the expense ratio, and which has consistently done so over its history.
Baby boomers have about $40k of equities each according to my back-of-the-envelope estimate (https://forum.mrmoneymustache.com/investor-alley/efficient-markets-rip/msg15925/#msg15925). There are 76M boomers (http://en.wikipedia.org/wiki/Baby_boomer#Size_and_economic_impact) across 20 years, so you've got 3.5M boomers retiring a year with $140B of stock. Let me underline this. If every boomer that retired sold every single penny of their stocks on the day they retired, the market would take a hit of $140B in the average year. How significant is that? It's 1.16% of the NYSE, which had a market cap of $12T in May (http://www.world-exchanges.org/statistics/monthly-reports).
Index funds rebalance when companies drop off their benchmarks, which should be an insignificant penalty compared to their large total AUM (http://en.wikipedia.org/wiki/Index_fund#Index_composition_changes_reduce_return) (I'd chase that link further and get something more substantial, but I'm getting 404 errors left and right).
Consistently winning traders do exist: Paul Tudor Jones, George Soros, David Tepper, Marty Schwartz, Warren Buffet -- there's plenty more.
Perhaps we need to differentiate between what's possible, and what's probable.
Furthermore, you keep referencing a little hypothetical I made above -- "what if boomers cash out their 401K's aggressively?" If you don't see a correlation between the great bull marekt of 1982-2000 (yes, I know, my highly subjective delineations of market epochs) and boomer 401K inflows -- I do -- then you might not see the reverse, or 401K outflows to support them in retirement. That' fine too. I'll continue to view the boomer retirement phenomenon (not contributing to 401Ks, rather pulling money out) as a major head-wind facing the stock markets going forward, and you can continue to view them as inisgnificant (hey, it's just 1% of DJIA total cap!).
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If you don't see a correlation between the great bull marekt of 1982-2000 (yes, I know, my highly subjective delineations of market epochs) and boomer 401K inflows -- I do -- then you might not see the reverse
I would attribute that boom more to the creation of 401k plans in the early 80s than to the influx of boomer contributions. Yes, a lot of boomers put money in the market, because it was made more advantageous for them to do so.
And I think the creation of the public internet and subsequent tech bubble might have contributed a bit, too.
Personally, I know an awful lot of retiring boomers and as of now they are mostly planning to stay heavy in stocks until the absolute last possible moment. The market is down and they're looking to ride the recovery (that you don't see) or even pass on those balances to their kids. It's purely anecdotal, I realize, but I don't see boomers fleeing the market anytime soon.
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"Major head-wind" does not entail "fleeing."
Boomers fed the bull for 20 years; going forward, they'll be more of a drag on the market.
Again, it was a marginal statement, a kind of hypothetical I posited to make another point; even so, I didn't think the crux of my statement was that controversial or so incorrect. I still don't.
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I would attribute that boom more to the creation of 401k plans in the early 80s than to the influx of boomer contributions. Yes, a lot of boomers put money in the market, because it was made more advantageous for them to do so.
I may be wrong, but wasn't a lot of the money going into 401K plans money that would otherwise have gone into company pension funds? Since those pension funds were investing in stocks &c anyway, the major difference was that the stocks were now held in portable 401Ks.
So I would expect not too great an effect from boomers selling parts of their 401K holdings, as they'll be purchased by younger people for their 401K plans.
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Consistently winning traders do exist: Paul Tudor Jones, George Soros, David Tepper, Marty Schwartz, Warren Buffet -- there's plenty more.
That's right, good point! And their actively managed mutual funds do so well! Just type "MUTF:George Soros" into Google Finance and you'll see his incredible market-beating consistency. No, wait a minute, you specifically avoided my challenge by not naming a single actively managed mutual fund that outperforms an index fund with similar risk characteristics after expenses are factored in. Turns out George Soros isn't a mutual fund at all. Who knew?
Furthermore, you keep referencing a little hypothetical I made above -- "what if boomers cash out their 401K's aggressively?" If you don't see a correlation between the great bull marekt of 1982-2000 (yes, I know, my highly subjective delineations of market epochs) and boomer 401K inflows -- I do -- then you might not see the reverse, or 401K outflows to support them in retirement. That' fine too. I'll continue to view the boomer retirement phenomenon (not contributing to 401Ks, rather pulling money out) as a major head-wind facing the stock markets going forward, and you can continue to view them as inisgnificant (hey, it's just 1% of DJIA total cap!).
I wasn't referring to you, because you haven't mentioned it since much higher up. Rjack was making the same assertion despite the fact that neither of you has challenged my argument that it's mathematically irrelevant. Yes, I see the correlation, but correlation does not imply causation. Moreover, for the increase to have been caused by boomer buy-in, you'd have to show that the 401k bump was significant even after the concomitant pension decline was subtracted out (as Jamesqf also noticed). Otherwise it's a completely specious argument. Also, it's a percent of the entire NYSE, not the companies listed on the Dow.
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Consistently winning traders do exist: Paul Tudor Jones, George Soros, David Tepper, Marty Schwartz, Warren Buffet -- there's plenty more.
That's right, good point! And their actively managed mutual funds do so well! Just type "MUTF:George Soros" into Google Finance and you'll see his incredible market-beating consistency. No, wait a minute, you specifically avoided my challenge by not naming a single actively managed mutual fund that outperforms an index fund with similar risk characteristics after expenses are factored in. Turns out George Soros isn't a mutual fund at all. Who knew?
The distinction between "active fund manager" and "hedge fund manager" is based on compensation, nothing more. The fund managers who can beat the market ultimately run their own hedge funds.
Bill Miller at Legg Mason ran LMTVX and beat the market for 15 years straight up until 2005.
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SPX sitting comfortably above 1330-1340 support as we speak. I mentioned last week 1390-1400 as the top of the measured move on the H&S bottom, and we seem to be inching our way toward that level. Yet yesterday, ISM came in at 49.5 suggesting manufacturing is now contracting. On other fundamental fronts:
(1) pre-announcements by P&G and Fedex suggest widespread corporate earnings deterioration is upon us;
(2) sales and EPS estimates are contracting as most analysts are just now taking down their growth rates;
(3) margins are being pressured as imput costs rise (since sales growth estimates are outstripping EPS growth);
(4) much of this deterioration is fueled by a collapsing Europe and anemic Asian growth economies; with S&P 500 companies deriving 50% of their profits overseas, it's difficult to see how the market can sustain it's current levels/valuation.
I can't help but feel the window of calm we are in will be shut rather quickly as the realization sets in that corporate earnings are about to be pummeled over the next 12 months. I'm positioning my accounts for what I perceive to be the nascent stages of a bear move that will knock the averages down at least 25-30% over the next 12 months.
That, and my pet monkey just threw a dart which landed on "Short Stocks Soon."
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There's no way you could convince me that it has similar risk characteristics to the rest of the market. It went from $78 to $18 in 2008, losing 76% when the S&P 500 lost only 55% (http://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=maximized&chdeh=0&chfdeh=0&chdet=1341326006078&chddm=502826&cmpto=INDEXSP:.INX&cmptdms=0&q=MUTF:LMVTX&). From the same page, Morningstart classifies it as high-risk and low-return, giving it a 1-star rating. I'm not impressed. If it's taking on outsize risks and plummeting harder than the market on downturns, of course it's also growing faster when the market moves in the other direction. You could dismiss that by saying that only the new guy took on those risks, but Yahoo's older historical data (http://finance.yahoo.com/echarts?s=LMVTX+Interactive#symbol=lmvtx;range=my;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined;) reveals that the fund lost 53% in the dotcom bust.
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Because the question is realy about passive (index) or active (individual stocks) investing I feel that investment management fees should be left out of the equation with regards to identifying mutual fund managers, hedge funds, or pension funds that consistently beat the market. The reason is if these investors quit and did it for their own account there wouldn't be the fees and also if a person believes that they can get a better return investing in individual stocks then they would not incur the management fees because they would not be investing in actively managed funds and because there are so many options for low cost or even free trades that it is a non-factor.
The main stream press basically says that 80% of active managers don't beat the market in any given year especially after factoring in fees, which is fine and may be correct for a single year. But what about over time - some of those managers may not beat the market in a given year but may trounce it in a given year as well. So another part of the analysis has to be looking at it over various timeframes - what if an active investor didn't beat the market one year but in the prior five years beat it significantly.
Of course I think it is impossible to identify good managers so you are just adding to the uncertainty, for this I feel it makes no sense investing in active funds. Either I have the time, inteligence, and discipline to invest on my own or I invest in indexes - inbetween doesn't work.
Also as I said previously, some good managers are impacted by the fund's size and Buffett falls into this category - if you look at the holdings in most large funds they consist of large companies so they may as well be S&P 500 and that is probably one of the biggest reasons why active funds underperform. One exception to investing in active funds could be if the fund size is small and the manager is highly experienced in a specific sector (i.e. not broad based) - small means nimble. Private equity exists because small companies fall below the radar of large fund managers because they don't move the dial.
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Because the question is realy about passive (index) or active (individual stocks) investing I feel that investment management fees should be left out of the equation with regards to identifying mutual fund managers, hedge funds, or pension funds that consistently beat the market. The reason is if these investors quit and did it for their own account there wouldn't be the fees and also if a person believes that they can get a better return investing in individual stocks then they would not incur the management fees because they would not be investing in actively managed funds and because there are so many options for low cost or even free trades that it is a non-factor.
The fees are the actual cost of doing business. The actively managed mutual fund is a service, and providing that service brings associated costs, which are borne by the investors. The fact that you personally could be a hobbyist doing things on a computer you already own at such a volume to avoid high transaction fees doesn't change the fact that actively managed mutual funds can't overcome the costs associated with providing their supposed advantages.
The main stream press basically says that 80% of active managers don't beat the market in any given year especially after factoring in fees, which is fine and may be correct for a single year. But what about over time - some of those managers may not beat the market in a given year but may trounce it in a given year as well. So another part of the analysis has to be looking at it over various timeframes - what if an active investor didn't beat the market one year but in the prior five years beat it significantly.
Again, let me reiterate that the mutual fund doesn't just have to return better than the market, but better than an index fund with a comparable risk ratio. Yes, LMVTX outperformed the S&P 500 when the market was growing, but it also underperformed it during busts.
The annual returns just get multiplied to get you the aggregate return of a longer period, so an active fund would have to outperform a comparable index fund during the fifth year more dramatically than the underperformance of all the other four years combined (multiplied) in order to outperform for the whole period.
Of course I think it is impossible to identify good managers so you are just adding to the uncertainty
Surely if it's possible to identify good stocks it's possible to identify good managers, right? How are these two any different?
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SPX sitting comfortably above 1330-1340 support as we speak. I mentioned last week 1390-1400 as the top of the measured move on the H&S bottom, and we seem to be inching our way toward that level. Yet yesterday, ISM came in at 49.5 suggesting manufacturing is now contracting. On other fundamental fronts:
(1) pre-announcements by P&G and Fedex suggest widespread corporate earnings deterioration is upon us;
(2) sales and EPS estimates are contracting as most analysts are just now taking down their growth rates;
(3) margins are being pressured as imput costs rise (since sales growth estimates are outstripping EPS growth);
(4) much of this deterioration is fueled by a collapsing Europe and anemic Asian growth economies; with S&P 500 companies deriving 50% of their profits overseas, it's difficult to see how the market can sustain it's current levels/valuation.
I can't help but feel the window of calm we are in will be shut rather quickly as the realization sets in that corporate earnings are about to be pummeled over the next 12 months. I'm positioning my accounts for what I perceive to be the nascent stages of a bear move that will knock the averages down at least 25-30% over the next 12 months.
Okay, so here's my question. What are you going to do about it? You say you're "positioning your accounts" - what exactly does that mean? Moving to cash, I'm assuming. Then what? Are you planning on shorting something specifically? Are you just gonna sit tight til we hit a perceived bottom, the buy a bunch of stocks? What specifically?
I mentioned making a thread where you document your trades. Now would be the perfect time.
Cause I agree with you, at some point the market will go down. It always does (and it always comes back up). So I'll be really annoyed if in six months it drops and you come back and bump this thread and say "see? I was right" ... or if it doesn't happen for a year, and you bump it at that point, or in 18 months.
If you make a vague prediction about it going down, then yes, of course you will be right at some point. That doesn't mean anything.
Start a thread saying I bought X, or I sold Y, and post trades as you do them (not after). And if it goes down reasonably, and you can call the bottom and such, that will be a different story than vague predictions.
That, and my pet monkey just threw a dart which landed on "Short Stocks Soon."
Hah! Snarky humor like this is so much more fun than angry ranting. Kudos.
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The fees are the actual cost of doing business. The actively managed mutual fund is a service, and providing that service brings associated costs, which are borne by the investors. The fact that you personally could be a hobbyist doing things on a computer you already own at such a volume to avoid high transaction fees doesn't change the fact that actively managed mutual funds can't overcome the costs associated with providing their supposed advantages.
Your missing the point...much of the back and forth, including several comments from you, are that individuals can't beat the market (which is usually defined by an index). Fund managers are by definition individuals so ignore the fact about the fees because I am not making the argument to invest with those guys just simply that there are individuals who can do it and extending it further by saying it is easier if you are smaller. I DON'T BELIEVE IN INVESTING IN ACTIVELY MANAGED FUNDS, but I do allocate a portion of my investments to individual stocks.
Again, let me reiterate that the mutual fund doesn't just have to return better than the market, but better than an index fund with a comparable risk ratio. Yes, LMVTX outperformed the S&P 500 when the market was growing, but it also underperformed it during busts.
The annual returns just get multiplied to get you the aggregate return of a longer period, so an active fund would have to outperform a comparable index fund during the fifth year more dramatically than the underperformance of all the other four years combined (multiplied) in order to outperform for the whole period.
I wasn't the one making a case for that fund so not sure you meant the comment for me, but you are right if a fund out performs in years 1-4 but not in 5 it could negate it and in 6 it could out/under perform again - the point is you need to factor in performance trends by the manager because over time certain ones can win (but again as they get bigger this gets less likely so by the time a trend is estabished it may be too late). By the way, look at holdings in that fund it proves my point that getting to big is the biggest issue for actively managed funds because small investments don't move the dial and that then leaves only large ones and then it starts to move like an index with more risk and high expenses.
Surely if it's possible to identify good stocks it's possible to identify good managers, right? How are these two any different?
They are different. There can be an abundance of information about individual companies, industries, and sectors, but very little information is available about fund managers, which can change styles or as they get bigger move further away from the raw data relying more on people under them.
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If you make a vague prediction about it going down, then yes, of course you will be right at some point. That doesn't mean anything.
Of course you realize this is the precise qualification to be a PHD trained economist:)
Start a thread saying I bought X, or I sold Y, and post trades as you do them (not after). And if it goes down reasonably, and you can call the bottom and such, that will be a different story than vague predictions.
This really is the only way to settle the issue although time needed to prove it out would not be great. Certainly he has made trades, good and bad, over the last 5-10 years that could be documented...although my guess is if he showed more good ones than bad ones posters would accuse him of not showing the full picture and wouldn't believe him anyway. So that really only leaves forward predictions - he is on record with one already (not that I understand it - I thought head and shoulders was a shampoo).
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Arebelspy, I'm using this thread right here and now to articulate my forecasts and I will happily walk you through my trades as I execute them.
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Arebelspy, I'm using this thread right here and now to articulate my forecasts and I will happily walk you through my trades as I execute them.
Cheers.
So in that spirit, what are your current holdings as of 7/3/12?
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Your missing the point...much of the back and forth, including several comments from you, are that individuals can't beat the market
The weak efficient market hypothesis excludes inefficiencies that are too small to exploit without being nullified by their transaction costs. I think that running an actively managed mutual fund's costs are transaction costs just as much as trading costs are. If a mutual fund was exceptionally managed and exploited the market's inefficiencies to the tune of 1.5% a year over market returns with a comparable risk profile but had a 1.51% expense ratio, it would violate the strong EMH but not the weak EMH. Does that make sense?
I wasn't the one making a case for that fund so not sure you meant the comment for me, but you are right if a fund out performs in years 1-4 but not in 5 it could negate it and in 6 it could out/under perform again - the point is you need to factor in performance trends by the manager because over time certain ones can win
I totally agree. In the absence of that data or even half a bright idea about where to find it, I was just trying to use the aforementioned fund as an example. I know you weren't the one who brought it up, and I guess I didn't write out enough of my admittedly jumpy thought process to make that clear.
(but again as they get bigger this gets less likely so by the time a trend is estabished it may be too late). By the way, look at holdings in that fund it proves my point that getting to big is the biggest issue for actively managed funds because small investments don't move the dial and that then leaves only large ones and then it starts to move like an index with more risk and high expenses.
I found a totally fascinating journal article yesterday about mutual fund performance by net asset value, fund family, asset type, and expense ratio. It had something interesting to say about this. Unfortunately, it hasn't turned up in 30 minutes of history digging.
They are different. There can be an abundance of information about individual companies, industries, and sectors, but very little information is available about fund managers, which can change styles or as they get bigger move further away from the raw data relying more on people under them.
Fair enough.
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Arebelspy, I'm using this thread right here and now to articulate my forecasts and I will happily walk you through my trades as I execute them.
Cheers.
So in that spirit, what are your current holdings as of 7/3/12?
Come on man, it's the holidays!
100% cash.
Although I will say this, and tooqk4u22 already touched on it: if I'm right, the disbelievers will chalk it up to luck or selective data reporting; if I'm wrong, the masses will pile on and chase me off these boards like some two-bit snake oil salesman.
But if even a few mustachians walk away some some deeper insight into the workings of the market, or have a better understanding of the differing viewpoints which inform peoples perceptions of stocks and of the forces that move them -- as if the debate between the random walkers and those who see a deep, inner logic to the market machine just spawned on some message board -- well then I think all of this is a worthwhile pursuit.
peace.
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I'm definitely interested in this. I hope we have the next Buffet in our midst.
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I'm definitely interested in this. I hope we have the next Buffet in our midst.
Why? Looking for some cheap insurance on your home, auto, or boat?
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What if the age of the long decline of index funds is upon us -- a situation created by (a) a heavily indebted youth with scant job prospects and thus no income to invest, and (b) an aged and retired baby boomer generation looking to cash out their IRA money?
Characterizing youth as heavily indebted is inaccurate, as I've demonstrated all of a dozen times now. Job prospects are really not bad among college graduates, who I would say are more heavily into investing than high-school graduates, college dropouts, and high school dropouts. If they were, I'm sure you would have provided data to support your assertion. For example, in Ohio, all people aged 20-to-24 had an 11.9 percent unemployment rate according to Ohio Department of Job and Family Services (http://www.huffingtonpost.com/2012/04/22/job-market-college-graduates_n_1443738.html). Even among college graduates the average debt was about $15k (http://www.nytimes.com/2012/05/13/business/student-loans-weighing-down-a-generation-with-heavy-debt.html?pagewanted=all), and I've already demonstrated elsewhere that that value is totally manageable. Meanwhile, the average boomer has only $78k between all their 401ks and IRAs, according to a Center for Retirement Research study (http://www.stretcher.com/stories/12/12jun04j.cfm); likely, much of that money is in bonds and boomers heed the traditional advice of becoming more conservative as they approach retirement. Somehow, I don't see $40k of retirement-earmarked equities per boomer and $15k of student loans per college grad as a problem so colossal it'll sink the equities markets. More to the point, though, you've got these gloomy arguments that bear no relation to the actual economic facts of the nation.
You're right, college grads are in great financial shape:
http://www.theatlantic.com/business/archive/2011/08/chart-of-the-day-student-loans-have-grown-511-since-1999/243821/
500% increase in debt load, in a dozen years?
But not to worry, employment prospects are excellent in Ohio, but maybe not every where else:
http://www.theatlantic.com/business/archive/2012/04/53-of-recent-college-grads-are-jobless-or-underemployed-how/256237/
No jobs, no payments, mucho defaults:
http://studentloanjustice.org/press%20release7-20-10.htm
Hopefully the debt gets paid by the time social security kicks in:
http://www.wptv.com/dpp/news/national/college-student-loans-follow-some-to-old-age-according-to-federal-reserve-bank-survey
And perhaps even Ohio is not immune to the student debt crisis:
Here at Ohio Northern, recent graduates with bachelor’s degrees are among the most indebted of any college in the country, and statewide, graduates of Ohio’s more than 200 colleges and universities carry some of the highest average debt in the country, according to data reported by the colleges and compiled by an educational advocacy group.
http://www.nytimes.com/2012/05/13/business/student-loans-weighing-down-a-generation-with-heavy-debt.html?_r=1&pagewanted=all
Nothing to see here folks, everything is under control.
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In weak-form efficiency, future prices cannot be predicted by analyzing prices from the past. Excess returns cannot be earned in the long run by using investment strategies based on historical share prices or other historical data. Technical analysis techniques will not be able to consistently produce excess returns, though some forms of fundamental analysis may still provide excess returns. Share prices exhibit no serial dependencies, meaning that there are no "patterns" to asset prices.
http://en.wikipedia.org/wiki/Efficient-market_hypothesis
The past is no predictor of the future; TA and fundamental analysis are useless in determining the movement of prices; there are, literally, no patterns or trends to asset prices. No bears, no bulls, just random movements.
Hmm:
In the last decade, the efficient market hypothesis, which had been near dogma since the early 1970s, has taken some serious body blows. First came the rise of the behavioral economists, like Richard H. Thaler at the University of Chicago and Robert J. Shiller at Yale, who convincingly showed that mass psychology, herd behavior and the like can have an enormous effect on stock prices — meaning that perhaps the market isn’t quite so efficient after all. Then came a bit more tangible proof: the dot-com bubble, quickly followed by the housing bubble. Quod erat demonstrandum.
"The incredibly inaccurate efficient market theory was believed in totality by many of our financial leaders, and believed in part by almost all. It left our economic and government establishment sitting by confidently, even as a lethally dangerous combination of asset bubbles, lax controls, pernicious incentives and wickedly complicated instruments led to our current plight."
http://www.nytimes.com/2009/06/06/business/06nocera.html?pagewanted=all
The failure of EMH to account for or diffuse the bubbles of the past decade has caused many large investors to abandon EMH in all its forms in favor of an approach that uses a multiplicity of techniques to locate and exploit investment opportunities. The debate between EMH and its detractors still rages, and it's unlikely to be settled here. But the point is for all investors (including yours truly) to recognize both sides rather than blindly cling to one side of the issue and disparage the other. The idea that markets are long term efficient and rational will not protect your nest-egg against the deleterious effects of bursting asset bubbles; the idea that one can unequivocally determine the outcome of investments (using psychology, technical or fundamental analysis) ignores the unpredictability of the future and is a recipe for financial disaster.
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smedleyb, do you worry about opportunity costs for being 100% cash?
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smedleyb, do you worry about opportunity costs for being 100% cash?
Absolutely.
But I worry much more about sitting fully invested through the next 30-50% decline and watching my "fuck you" money get whacked.
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smedleyb, do you worry about opportunity costs for being 100% cash?
I think it's because of opportunity that he wants to be 100% cash.
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Right -- I think the argument could be made to have some real cash around to take advantage of such a dip. I just hadn't heard of such an approch before, where the market conditions dictate pulling out of any investment besides cash. It seems like an argument against asset allocation.
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Right -- I think the argument could be made to have some real cash around to take advantage of such a dip. I just hadn't heard of such an approch before, where the market conditions dictate pulling out of any investment besides cash. It seems like an argument against asset allocation.
Well people who believe in market timing generally don't care about asset allocation.
It's real common among market timers. Or anyone who thinks there will be opportunities in the future.
I'm heavily in cash right now myself, waiting for some short sales to go through.
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I think the original breakthrough paper on asset allocation used 25% each of stock, bonds, cash and gold.
Holding some cash is fine, IMHO. But for my money, intermediate term bonds are close enough wrt stash allocation, vs pocket change.
And smed your play may well prove a winner. But by definition, I chose to invest >95% of my stash in low fee balanced AA, because then I think I can reasonably plan for long term real growth aligned with world GDP growth.
I am just not willing to speculate with FI stash.
And, to be fair, you've sometimes sort-of agreed with that cap.
Playing with active trading, technical analysis, timing, individual stocks, complex 3rd party instruments... it is for basically everyone a losers game.
And, much more insidiously, the lure is of the fast buck. The quick and easy way to FI. Screw this whole savings rate vs 5% stuff. I'm a trading god, and I'm capable of risking everything on my trades and instincts.
Sorry. That's what I call a rookie error.
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Mr. Mark, i agree with most of what you say and find your approach to AA to be spot on. If mustachians came up to me and asked which investment approach is best for the long term, I would unhesitatingly direct them to your posts and say "mimic that guy."
That said, I think that over next several years equities will be choppy with little upward progress (10%?). I've explained ad nauseum why I think the economy and ultimately the markets are in for some rough sledding until the excesses of debt get wrung out and the conditions for an authentic, organic expansion take root. If this was 2009, SPX 800 and I was screaming to people "sell, sell, sell," then I would be a fool. But we're at SPX 1400, it's 3 years into a cyclical bull, and I'm beginning to see the early signs of an economic and earnings peak -- which may or may not play out. But advantage of being small is I can get 100% long very quickly if my forecasts prove to be bunk.
But lets not forget what spawned this thread: being critiqued for attempting to ascertain if certain stocks are a buy or not ("you can't pick stocks; it's just gambling"), and also by recommending to some mustachians that cash is an asset too and that you don't need all your FI money invested 100% in stocks, bonds, gold, and RE all the time. Being mocked for saying Spanish stocks are a buy at IBEX 6,500 [and to the poster who attacked my comments on another thread, TEF is only down 4% from where I said buy, EWP is up 2%, and Banco Santander is up 10%] after the index had collapsed from 16,000 seems to me silly. Buy 'em when they hate 'em, always.
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You're right, college grads are in great financial shape:
I never argued that things were peachy and splendid, I argued that it wasn't a specific problem affecting the stock market, since even of that college-going fraction of the 9% (http://en.wikipedia.org/wiki/File:Uspop.svg) of Americans that are 20-24, the average debt is only $15k.
500% increase in debt load, in a dozen years?
In that time there's been a concomitant increase in enrollment on the order of 40% as well as a significant increase in time to degree. Even discounting those reasons why the statistic is misleading, I have to ask why that's a bad thing? Going to college still improves your earning potential much faster than it costs you money (unless you're a total moron like Kelsey Griffith and you borrow $120k, then are frustrated you can't pay it back waiting tables only 18 hours a week). Some of the rise can be attributed to for-profit universities, which I consider pretty much the scum of the earth, and I would agree that that's bad. And yes, graduation rates and the increasing time to completion do give me some worry. But the loans haven't even approached the point that they're counterproductive, when you consider their gigantic effect on earning potential over the entire working career.
But not to worry, employment prospects are excellent in Ohio, but maybe not every where else
53% of recent graduates are unemployed or underemployed? That's not horrifying. Journalism majors know going in that they're not going to end up with a job after four years. So do my peers in anthropology. You could say that it's a problem that people are allowed to study things that you don't think are economically worthy, but I don't think anyone would take that argument seriously. On top of those people, there are stay-at-home parents, all of the people waiting to break into a field who are making connections in their field with internships and volunteering, graduate students... I think you're using the underemployment statistic to represent a narrower stripe of people than it does, and even those people are there by choice.
No jobs, no payments, mucho defaults
That's a sensationalistic piece of shit website that perpetuates this myth of consumers being fleeced by big bad wall street because they either 1) aren't smart enough to understand what a loan is, or 2) aren't treated as real adults in our narrative of them. The NY Times article used this same language, and I wasn't a fan of it then, but this site is just filled to the seems with it. Look, if you believe that other people are people responsible for making their own decisions, you can't go around linking garbage like this. Besides, if their true default rate is "between 25 and 33 percent (perhaps even greater)", you know they're not a reputable source. Seriously, did you just search around for whichever website had the highest number?
Hopefully the debt gets paid by the time social security kicks in
The plural of 'anecdote' is not 'data'. The fact that they interviewed two different old people with loans does not make it a problem affecting the demographic as a whole.
And perhaps even Ohio is not immune to the student debt crisis
The reporter for the article was working in Ohio! Of course the students he interviewed were Ohioans, and of course the worst borrowers of those were the ones that went to small private liberal arts colleges! That's the same article I link to every week when we discuss student loans; of course I've read it. If you follow the link in the snippet you quoted (http://projectonstudentdebt.org/state_by_state-data.php), you'll see that 68% of Ohio students borrow an average of $27.7k, meaning the average graduate has $18.8k in debt, a whopping 20% more than the national average. And even with that hardly crushing debt load, as I posted a bit further up in the thread, things are just peachy here in Ohio! Look at the unemployment statistics I linked. There's a 11.9% unemployment rate among everyone in the demographic, and unemployment is lower among those with higher educational attainment, so I'm not surprised that less than 10% of graduates in that age group are unemployed (http://www.middletownjournal.com/news/middletown-news/college-grads-see-grim-prospects-in-job-search-1396438.html).
Nothing to see here folks, everything is under control.
I think I've thoroughly demonstrated that everything is under control. If not, wouldn't the factual data counter what I'm saying in some meaningful way instead of repeatedly contradicting your predictions of our doom at the hands of Stafford loans?
Edit: Typos.
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I think I've thoroughly demonstrated that everything is under control. If not, wouldn't the factual data counter what I'm saying in some meaningful way instead of repeatedly contradicting your predictions of our doom at the hands of Stafford loans?
The factual data show much greater debt levels for college graduates, coupled with deteriorating job prospects. How exactly have you refuted that claim?
And how is this piece of factual data incompatible with the claim that young workers will be in less of a position to contribute to 401Ks going forward?
I think the student loan crisis is in its incipient stages; we'll know better over the next 5 years how under control the situation actually is.
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I think what grant is showing is that the student loan "crisis" is overblown and nothing to wring your hands and worry about.
Is college debt up? Sure. Is unemployment up? Yup.
Is that debt crushing? Not at all. Can they still get jobs (which make the degree pay for itself)? Yes.
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I think what grant is showing is that the student loan "crisis" is overblown and nothing to wring your hands and worry about.
Is college debt up? Sure. Is unemployment up? Yup.
Is that debt crushing? Not at all. Can they still get jobs (which make the degree pay for itself)? Yes.
Exactly. The average loan balance is not so significant that it precludes 401k contributions. I've repeatedly demonstrated how insignificant it is, and I would be willing to run the numbers yet again if what we're arguing over is whether student loans are really expensive in absolute terms. Like I said, that increase is startling in relative terms, and I don't like some of the things that have contributed to that increase, but I don't think it's that significant in absolute terms.
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I think what grant is showing is that the student loan "crisis" is overblown and nothing to wring your hands and worry about.
Is college debt up? Sure. Is unemployment up? Yup.
Is that debt crushing? Not at all. Can they still get jobs (which make the degree pay for itself)? Yes.
I get that he thinks the crisis is "overblown." And I get that now you think the same.
They assured us in 2007 that sub-prime was contained too, before the wheels fell off the wagon.
Time will tell.
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I just argued that based on the evidence that the "crisis" is anything but. The actual numbers that describe the behavior of the 30 million people my age in this country support my assertion that while the changes are startling on a relative scale, they are not currently significant or crippling on an absolute scale.
If all you have to say back is that you're scared it'll be really bad because someone else made an argument about the subprime crisis that sounded the same to you, we're done here.
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I just argued that based on the evidence that the "crisis" is anything but. The actual numbers that describe the behavior of the 30 million people my age in this country support my assertion that while the changes are startling on a relative scale, they are not currently significant or crippling on an absolute scale.
If all you have to say back is that you're scared it'll be really bad because someone else made an argument about the subprime crisis that sounded the same to you, we're done here.
But I thought we were just getting started?:
The Huff post is concerned:
Slightly more than 80 percent of bankruptcy attorneys say the number of their potential clients with student loan debt have increased "significantly" or "somewhat" in the past three to four years,
http://www.huffingtonpost.com/2012/02/08/student-loan-debt-bankruptcy_n_1263348.html
Here's another, how do you say it?, sensationalist piece of shit:
"Student-loan debt has ballooned and may turn into a bubble," S&P said. "There are more defaults and downgrades for some student loan asset-backed securities."
http://articles.latimes.com/2012/feb/09/business/la-fi-student-debt-bubble-20120209
Let's allow the bankruptcy attorney's to chime in again:
SURVEY: 4 OUT 5 U.S. BANKRUPTCY ATTORNEYS REPORT MAJOR JUMP IN STUDENT LOAN
DEBTORS SEEKING HELP, FEARS GROW OF NEXT MORTGAGE-STYLE DEBT THREAT TO U.S.
http://www.nacba.org/Portals/0/Documents/Student%20Loan%20Debt/020712%20NACBA%20student%20loan%20news%20release.pdf
Oh wait, mortgage style debt threat! Let's repeat for emphasis:
If all you have to say back is that you're scared it'll be really bad because someone else made an argument about the subprime crisis that sounded the same to you, we're done here.
I guess I'm not the only one who sees the analogy to subprime.
Now we're done.
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It's odd that bankruptcy attorneys would weigh in on student loan debt, which isn't forgiven in bankruptcy.
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Is college debt up? Sure. Is unemployment up? Yup.
Is that debt crushing? Not at all. Can they still get jobs (which make the degree pay for itself)? Yes.
It'd be interesting to have data that's a little better than just a simple average loan debt. I mean, if you have Barry Obama borrowing say $150K to go to Harvard Law School, and me borrowing $10K to get a MS in Computer Engineering at the local state university... Well, that's an average $80K loan debt, but only one of us had problems paying. (Took me roughly two years :-))
The point is that while you can find a bunch of sob stories about people who borrowed lots of money to go to an Ivy League school to study English Lit or Comparative Basketweaving and now - surprise! - can't find a job that doesn't involve asking "Do you want fries with that?", you don't hear much about people who borrowed maybe $10-20K to get their BS in Engineering, then went to work the day after graduation at $50K+.
So we've got a student loan "crisis" that affects a small fraction of college students & recent graduates, which themselves are a small fraction of the population. Is that relatively small tail enough to wag the economic dog?
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I just argued that based on the evidence that the "crisis" is anything but. The actual numbers that describe the behavior of the 30 million people my age in this country support my assertion that while the changes are startling on a relative scale, they are not currently significant or crippling on an absolute scale.
If all you have to say back is that you're scared it'll be really bad because someone else made an argument about the subprime crisis that sounded the same to you, we're done here.
But I thought we were just getting started?:
The Huff post is concerned:
Slightly more than 80 percent of bankruptcy attorneys say the number of their potential clients with student loan debt have increased "significantly" or "somewhat" in the past three to four years,
http://www.huffingtonpost.com/2012/02/08/student-loan-debt-bankruptcy_n_1263348.html
Here's another, how do you say it?, sensationalist piece of shit:
"Student-loan debt has ballooned and may turn into a bubble," S&P said. "There are more defaults and downgrades for some student loan asset-backed securities."
http://articles.latimes.com/2012/feb/09/business/la-fi-student-debt-bubble-20120209
Let's allow the bankruptcy attorney's to chime in again:
SURVEY: 4 OUT 5 U.S. BANKRUPTCY ATTORNEYS REPORT MAJOR JUMP IN STUDENT LOAN
DEBTORS SEEKING HELP, FEARS GROW OF NEXT MORTGAGE-STYLE DEBT THREAT TO U.S.
http://www.nacba.org/Portals/0/Documents/Student%20Loan%20Debt/020712%20NACBA%20student%20loan%20news%20release.pdf
Oh wait, mortgage style debt threat! Let's repeat for emphasis:
If all you have to say back is that you're scared it'll be really bad because someone else made an argument about the subprime crisis that sounded the same to you, we're done here.
I guess I'm not the only one who sees the analogy to subprime.
Now we're done.
I think we're getting into the weeds over a statement that doesn't seem to be the fundamental issue at hand?
My own personal goal is simply to get rich by buying market sell-offs (declines of 20% or greater) over then next 5 years and begin accumulating for the next great bull market that will commence when we pay off our debts, save a little, and invest for the future. This country hasn't deleveraged by any means, unless one considers transferring private debt onto our public institutions a credible payment plan. Until then, I'm more than comfortable attempting to be more tactical with my money (i.e., trade more) while maintaining high levels of cash.
I believe that this is the appropriate strategy to employ in a secular bear market, which my technical and historical analysis of the market says we are in.
The key thing smedleyb appears to be arguing is that the US as a nation has not stopped spending beyond it's means and, until that happens, we'll continue seeing long-term flat growth at best to significant declines at worst. This is why he is arguing against the conventional efficient market theory advice of dollar cost averaging buy and hold.
If I have that right, I think arguing over one specific type of debt won't get us anywhere, even if there was a chance that you two would come to an agreement. It seems it would be more productive to talk about the real heart of the argument rather than a tangent like this.
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The Huff post is concerned:
Slightly more than 80 percent of bankruptcy attorneys say the number of their potential clients with student loan debt have increased "significantly" or "somewhat" in the past three to four years,
...
All this post did was confirm the first part of what I said:
Is college debt up? Sure. Is unemployment up? Yup.
Is that debt crushing? Not at all. Can they still get jobs (which make the degree pay for itself)? Yes.
It doesn't refute the second part.
If I have that right, I think arguing over one specific type of debt won't get us anywhere, even if there was a chance that you two would come to an agreement. It seems it would be more productive to talk about the real heart of the argument rather than a tangent like this.
The point of this thread seems to be to argue about any sort of disagreements anyone has with smedley over the state of the U.S., the markets, trading theories, buying individual stocks vs. index funds, etc. etc.
Based on some hints in other posts I'm sure at some point there will be an attack on Buffet and discussion about that.
It'll wander. I don't think it'll stick to what you think of as "the heart of the argument." Sorry. :)
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The key thing smedleyb appears to be arguing is that the US as a nation has not stopped spending beyond it's means and, until that happens, we'll continue seeing long-term flat growth and best to significant declines. This is why he is arguing against the conventional efficient market theory advice of dollar cost averaging buy and hold.
If I have that right, I think arguing over one specific type of debt won't get us anywhere, even if there was a chance that you two would come to an agreement. It seems it would be more productive to talk about the real heart of the argument rather than a tangent like this.
The biggest knock against EMH -- weak or strong -- is the belief that market inefficiencies get resolved quickly and are thus not exploitable by the average public.
Yet the tech bubble took years to unfold (Greenspan warned against "irrational exuberance" in 1996) as did the housing bubble. The cumulative imbalances did not appear and disappear overnight. They were a long time in the making. So much for efficiency and rationality.
And yes, I think buy and hold is the wrong strategy to employ in the current bear market. I advise higher levels of cash. I didn't know I was being so controversial until I encountered some postesr around here. I've tried to be more diplomatic since.
And I agree what you're saying about the "student debt crisis," or lack thereof -- hey, we're just exchanging ideas. If areblespy wants to spin that discussion into a separate thread, then fine. But you're right, it's just a tangent.
I won't lie: I think the biggest flaw in MMM's approach to FI is his failure to account for the tremendous volatility and risk inherent in equity investment. History is littered with markets that top out and never come back: Dutch Tulips and the Nikkei comes to mind. Do I think the same fate awaits us here in America? Fuck no. But I'm not ready to sound the "all clear" signal when so much of my brain, heart, and gut tells me we're not through this thing just yet. 15 trillion thrown at this economy and just 1.9% GDP growth? Europe at the brink? Absolute debt levels higher than ever?
Let's not invest with our heads buried in the sand. Attack me for being wrong. But don't attack me for trying to tell the truth as I see it.
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The point of this thread seems to be to argue about any sort of disagreements anyone has with smedley over the state of the U.S., the markets, trading theories, buying individual stocks vs. index funds, etc. etc.
Based on some hints in other posts I'm sure at some point there will be an attack on Buffet and discussion about that.
It'll wander. I don't think it'll stick to what you think of as "the heart of the argument." Sorry. :)
I think the point of this thread is to have a healthy discussion about the stock market. To be honest most of the dialogue is pretty honest, balanced, and respectful. And that's they way I intend to keep it.
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The key thing smedleyb appears to be arguing is that the US as a nation has not stopped spending beyond it's means and, until that happens, we'll continue seeing long-term flat growth and best to significant declines. This is why he is arguing against the conventional efficient market theory advice of dollar cost averaging buy and hold.
If I have that right, I think arguing over one specific type of debt won't get us anywhere, even if there was a chance that you two would come to an agreement. It seems it would be more productive to talk about the real heart of the argument rather than a tangent like this.
The biggest knock against EMH -- weak or strong -- is the belief that market inefficiencies get resolved quickly and are thus not exploitable by the average public.
Yet the tech bubble took years to unfold (Greenspan warned against "irrational exuberance" in 1996) as did the housing bubble. The cumulative imbalances did not appear and disappear overnight. They were a long time in the making. So much for efficiency and rationality.
And yes, I think buy and hold is the wrong strategy to employ in the current bear market. I advise higher levels of cash. I didn't know I was being so controversial until I encountered some postesr around here. I've tried to be more diplomatic since.
And I agree what you're saying about the "student debt crisis," or lack thereof -- hey, we're just exchanging ideas. If areblespy wants to spin that discussion into a separate thread, then fine. But you're right, it's just a tangent.
I won't lie: I think the biggest flaw in MMM's approach to FI is his failure to account for the tremendous volatility and risk inherent in equity investment. History is littered with markets that top out and never come back: Dutch Tulips and the Nikkei comes to mind. Do I think the same fate awaits us here in America? Fuck no. But I'm not ready to sound the "all clear" signal when so much of my brain, heart, and gut tells me we're not through this thing just yet. 15 trillion thrown at this economy and just 1.9% GDP growth? Europe at the brink? Absolute debt levels higher than ever?
Let's not invest with our heads buried in the sand. Attack me for being wrong. But don't attack me for trying to tell the truth as I see it.
This is the part of the discussion I'm really interested in. Mainly because I really want buy and hold to be the right strategy (mainly because short term market/individual stock timing is not something I'm interested in) but share many of the same doubts you do about the mid-term growth prospects for the economy.
I guess my real question then is - what is your advice for someone who does not want to regularly think about the market. Is it to just stay out right now? If that's the case, how does someone not interested in following the market know when to get back in? I don't want to stick my head in the sand entirely - but I don't really want to look out more than a few times a year...
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The point of this thread seems to be to argue about any sort of disagreements anyone has with smedley over the state of the U.S., the markets, trading theories, buying individual stocks vs. index funds, etc. etc.
Based on some hints in other posts I'm sure at some point there will be an attack on Buffet and discussion about that.
It'll wander. I don't think it'll stick to what you think of as "the heart of the argument." Sorry. :)
I think the point of this thread is to have a healthy discussion about the stock market. To be honest most of the dialogue is pretty honest, balanced, and respectful. And that's they way I intend to keep it.
You're right - and I should probably stop trying to refocus it as it's not my post... but it does get old reading long posts with lots of quotes and links between two intelligent people who seem destined to disagree on nearly anything they discuss in regards to the market. At some point I just feel like it's better to agree to disagree on that particular conclusion and move on...
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If you concede that most people can't do better than the market, and you think the market is going to be stagnant or near enough, what could you recommend as a solution for the masses? Unless there's some flaw in my logic, that's a case of things not adding up such that there could be any solution (besides "keep working").
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Yet the tech bubble took years to unfold (Greenspan warned against "irrational exuberance" in 1996)
And how would one have done shorting the market in 1996, 1997, 1998, 999?
As it has been said, the market can stay irrational longer than I can stay solvent.
And I agree what you're saying about the "student debt crisis," or lack thereof -- hey, we're just exchanging ideas. If areblespy wants to spin that discussion into a separate thread, then fine. But you're right, it's just a tangent.
I completely agree with just exchanging ideas, but I think due to the fact that "the market" is tied into so many things (student loan debt, boomers retiring, national and global economies, etc.) I think we'll run across many tangents in the exchanging ideas part. I think that's a good thing, rather than trying to strictly stay "on topic" (and decide what exactly that entails).
I won't lie: I think the biggest flaw in MMM's approach to FI is his failure to account for the tremendous volatility and risk inherent in equity investment.
And I disagree. I think there is MUCH more risk in trying to time markets and buying and selling individual stocks. In MMM's philosophy he is investing for the long term, which historically has worked. In alternate types of trading, many, many people have lost money. That to me is a much bigger flaw in an FI plan built on timing the markets and technical trading.
Attack me for being wrong. But don't attack me for trying to tell the truth as I see it.
I think that's what we're doing. ;)
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but it does get old reading long posts with lots of quotes and links between two intelligent people who seem destined to disagree on nearly anything they discuss in regards to the market.
Ah, see I disagree. I enjoy the long posts with links and quotes, as it makes me think and consider two very different viewpoints.
And many of the things smedely has said has made me stop and think.
But we can agree to disagree on that, instead of debating it and linking and quoting. ;)
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I think that's what we're doing. ;)
Touche!
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If you concede that most people can't do better than the market, and you think the market is going to be stagnant or near enough, what could you recommend as a solution for the masses? Unless there's some flaw in my logic, that's a case of things not adding up such that there could be any solution (besides "keep working").
My ideal portfolio for most Mustachians today:
Index and dividend funds (less volatile), some bonds (which you should be ready to ditch at a moment's notice), at least 25% cash, a little gold, and a whole lot of patience.
When the economic backdrop imoroves: growth and emerging market funds, no bonds (I think a bond collapse will be the impetus for the next bull market rally), 5-10% cash, no gold, about 5-10% in a basket of best managed growth companies.
edit: and I do concede the difficulty in stock picking and market timing for most investors.
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Decent suggestions, if a bit conservative.
Keep in mind that studies have shown cash strategies to be inferior in returns - in essence the cost of keeping that money in cash to buy on dips outweighs getting the stocks cheaper and you actually make less money than just investing it. YMMV, and obviously a crash may change that, if you could predict exactly when such a thing could happen (and not be so early the market ignores you for years and you lose a lot).
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If you concede that most people can't do better than the market, and you think the market is going to be stagnant or near enough, what could you recommend as a solution for the masses? Unless there's some flaw in my logic, that's a case of things not adding up such that there could be any solution (besides "keep working").
My ideal portfolio for most Mustachians today:
Index and dividend funds (less volatile), some bonds (which you should be ready to ditch at a moment's notice), at least 25% cash, a little gold, and a whole lot of patience.
When the economic backdrop imoroves: growth and emerging market funds, no bonds (I think a bond collapse will be the impetus for the next bull market rally), 5-10% cash, no gold, about 5-10% in a basket of best managed growth companies.
Are there any fairly simple signs to look for to tell that the economic backdrop has improved?
You say to be ready to ditch bonds at a moment's notice - what would be the trigger?
In essence, how would the average Mustachian know when the time is right? I have a degree in economics and have no problem admitting that I have little confidence in my ability to predict the timing on these types of shift well enough to capitalize on them.
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Attack me for being wrong. But don't attack me for trying to tell the truth as I see it.
Not only do I welcome the vociferous bears, I encourage them to preach their gospel from the hilltops. The market needs that constant negativity to keep it in balance, even in cases when it contradicts the historical record.
Whether or not now is one of those times isn't really relevant.
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Are there any fairly simple signs to look for to tell that the economic backdrop has improved?
You say to be ready to ditch bonds at a moment's notice - what would be the trigger?
In essence, how would the average Mustachian know when the time is right? I have a degree in economics and have no problem admitting that I have little confidence in my ability to predict the timing on these types of shift well enough to capitalize on them.
John, I think the single biggest "tell" that the economic backdrop has improved hinges on the ability of our political and business leaders to bite the bullet and begin to seriously deal with their addiction to debt:
http://www.huffingtonpost.com/2012/07/10/scranton-city-workers-minimum-wage_n_1661488.html
Rather than float a bond to deal with budgetary gaps, the mayor of Scranton cut wages in lieu of a tax increase. While this sort of behavior is devastating short term to many workers, it's also quite positive long term as it signals a willingness to deal with budgetary issues rather than shove them into the background by borrowing our way out of a hole -- which is, of course, impossible to do. You can't borrow your way to prosperity.
Transferring private debts onto the public balance sheet is not a viable payment plan. But this is exactly the strategy employed by our leaders -- you know, the same ones who never saw the financial crisis coming, but whom we entrust to lead us out of this morass (cue Einstein's definition of insanity). I believe the "bond collapse" will commence as investors begin to question the solvency of our government and start clamoring for greater levels of compensation to hold US debt. I think the arrival of that moment can be measured in months, not years.
Market note: a couple weeks ago I said that the SPX breaking over 1340 was bullish and my technical work showed that the market has some room to run to SPX 1390. Well, while the SPX did touch 1375 last week, but has since sold off and is currently bouncing around this important 1340 level as we speak. 1340 now represents support for the market, and it's critical that it hold here if the bulls stand a chance.
But I'll say this: the news flow (especially earnings) has been outright negative, which is not surprising since 50% of S&P profits are derived overseas and Europe is an economic mess. My sense is that these levels don't hold. The strategy before was to unleash shorts at or near 1390, but maybe that level doesn't come into play. Plan B is to see how the market acts around 1330-1340, and if it breaks (drops below 1320), the strategy will be to short the first bounce back to 1340 (markets almost always seem to retest broken support levels after they break, and these retests represent the best trading set-ups IMO).
So for all the mustachians waiting with baited breath for my next move, there it is! lol.
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I think the single biggest "tell" that the economic backdrop has improved hinges on the ability of our political and business leaders to bite the bullet and begin to seriously deal with their addiction to debt
I agree, and think we're nowhere close (a few small town anecdotes aside). On a national level, the politicians continue to kick the can down the road with no serious fiscal reform.
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Borrower and spend - it is the American way at all levels. Consumers have paused a bit because no lender will give them more money. If only that were the case for the governement.
The longer it goes on the harder it will be to take the medicine but most developed countries are in the same boat. We are the best looking horse in the glue factory.
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Borrower and spend - it is the American way at all levels. Consumers have paused a bit because no lender will give them more money. If only that were the case for the governement.
The longer it goes on the harder it will be to take the medicine but most developed countries are in the same boat. We are the best looking horse in the glue factory.
Perfect analogy! lol.
Hence the strong US dollar (DXY) and the 10 year US bond yield cracking below 1.5%. The US (and Germany) represent safe zones in a tumultuous global economy. Are sub 1% 10 year yields on the horizon? Amazing, and insane, given the debt loads being generated especially by our government to spark life into a sagging economy. Something's gotta give. I suspect bonds are entering a "blow-off" phase. Time will tell.
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Smedley, I like that you've taken the fight to your signature. However:
EMH been thoroughly discredited.
Support your argument. You know, like in this gigantic thread that YOU CREATED about the topic. Look, you're already here. Just go ahead, start posting evidence or responding to any of my dozen specific invitations above.
Also, needs moar verb.
It is still taught in colleges and business schools, which is why I find most MBAs not worth hiring. Frequently, they can be worse than clueless — they are steeped in the bad ideas of long dead economists, and in my profession, that is not a formula for making money.
EMH emerged in academia in the 1960s. Of the three players mentioned, one died three years ago (http://en.wikipedia.org/wiki/Efficient-market_hypothesis), one died thirty years ago (http://en.wikipedia.org/wiki/Alfred_Cowles), and one is alive and younger than all of my grandparents (http://en.wikipedia.org/wiki/Eugene_Fama). "Long dead" may not be the best word choice.
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Explain again why I have to "prove" EMH is a bankrupt theory given its complete and utter failure to diffuse, predict, or quickly rectify the Tech and Housing bubbles?
Or why the critique of EMH I gave above on July 4 is just another example of me "avoiding your dozen or so invitations?"
The quote, BTW, is from Barry Ritholz from"The Big Picture" blog. I had to trim it here and there to make it fit. And I would happily provide you with a "moar" verb if I knew what that was exactly. But then again, I've found when dialogue breaks down on anonymous message boards, grammatical and spelling slurs tend to fill the void.
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"EMH been thoroughly discredited" doesn't seem like an incomplete sentence to you? It's the only sentence quoted above that comment, so I don't know what you're confused about.
I didn't ask for proof, I asked you to support your argument.
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One problem I have with Smed's assertion is that EMH has nothing to do with asset allocation,. Asset allocation is not based on efficient market hypothesis except on a 50++ year horizon. It doesn't impact investment decisions.
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One problem I have with Smed's assertion is that EMH has nothing to do with asset allocation,. Asset allocation is not based on efficient market hypothesis except on a 50++ year horizon. It doesn't impact investment decisions.
Odd, because I think asset allocation is the most critical element in any successful investment portfolio.
I think my primary assertions revolves around a couple of points: arguing for the "uncanny" accuracy of technical analysis; attempting to show the usefulness of delimiting the history of the stock market into various bull and bear epochs; demonstrating that human psychology impacts markets and that this behavior (greed, irrationality) can be described and predicted (within degrees); the benefit of hard work, research, and education in cranking up investment returns over time (even if it means -- and for most it should and does mean -- proper allocation of assets in the the portfolio).
As always, my 100% cash position is never an invitation to other Mustachians to do the same. My intermediate term bearishness should not overshadow my long term bullishness (I think the next bull puts 1982-2000 to shame). I think higher than average cash levels is an option available to all investors in the market we've be given, and arguing this point does not entail that I'm some raging perma-bear or advising investors to run away from the market and bury their cash, silver, and tulip bulbs in a glass jar under the basement. I think it's possible to discuss the potential trajectory of stocks or markets without feeling like I'm imposing a false pattern or narrative on purely chaotic, random events.
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the benefit of hard work, research, and education in cranking up investment returns over time
Hard work, research, and education should happen so you know WHAT to invest in (in a broad, general, AA sense), HOW to invest (in a vehicle sense).. but not necessarily WHAT to invest (in a particular sense) nor WHEN to invest.
Otherwise, If you're right, it leads to returns which equate to a terrible hourly wage. If you're wrong, it costs you money.
As always, my 100% cash position is never an invitation to other Mustachians to do the same. My intermediate term bearishness should not overshadow my long term bullishness (I think the next bull puts 1982-2000 to shame). I think higher than average cash levels is an option available to all investors in the market we've be given, and arguing this point does not entail that I'm some raging perma-bear or advising investors to run away from the market and bury their cash, silver, and tulip bulbs in a glass jar under the basement. I think it's possible to discuss the potential trajectory of stocks or markets without feeling like I'm imposing a false pattern or narrative on purely chaotic, random events.
I donno. This is nothing personal, but I hear a lot of permabears say stuff about how they're really optimistic about the future, etc. etc. but that right now it's terrible.
The problem is that it's always right now, and for them it's always terrible.
There will always be some crisis for them that makes things bad right now (peak oil, tech bubble, housing bubble, QE1&2, Euro crisis, etc. etc.) and though they claim it's just the particular set of circumstances right now that makes them bearish, they seem to always be bearish because there's always something negative in the world happening (or the media will spin stuff as negative, at the very least).
So you may in your heart believe that you aren't always bearish... but you may want to consider and probe that belief to find if it's really true.
And again, I don't know you, so it may or may not be true of you. But it seems like that's the case for a lot of people with similar beliefs to you.
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Market note: a couple weeks ago I said that the SPX breaking over 1340 was bullish and my technical work showed that the market has some room to run to SPX 1390. Well, while the SPX did touch 1375 last week, but has since sold off and is currently bouncing around this important 1340 level as we speak. 1340 now represents support for the market, and it's critical that it hold here if the bulls stand a chance.
But I'll say this: the news flow (especially earnings) has been outright negative, which is not surprising since 50% of S&P profits are derived overseas and Europe is an economic mess. My sense is that these levels don't hold. The strategy before was to unleash shorts at or near 1390, but maybe that level doesn't come into play. Plan B is to see how the market acts around 1330-1340, and if it breaks (drops below 1320), the strategy will be to short the first bounce back to 1340 (markets almost always seem to retest broken support levels after they break, and these retests represent the best trading set-ups IMO).
Well, it appears market held that 1330-1340 level and today we find the SPX flirting with the July 3rd high (1375). While the situation looked bleak July 12th the market snapped back sharply and -- following JPM's earnings release the next day and the less than expected loss due to "rogue" trading -- has set it's sights on what I perceive to be the next, logical destination -- SPX 1390-1400. Barring any earth shattering news (say, out of Europe, China, etc) my technicals point to this area as a major resistance point, and the plan still is to short the market when it gets there, which should be soon at this rate...
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the benefit of hard work, research, and education in cranking up investment returns over time
Hard work, research, and education should happen so you know WHAT to invest in (in a broad, general, AA sense), HOW to invest (in a vehicle sense).. but not necessarily WHAT to invest (in a particular sense) nor WHEN to invest.
WHAT to invest in: Las Vegas real estate.
WHEN to invest: several years after the housing bubble; during historically low (and getting lower by the day) interest rates.
I see the parallel. Do you?
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Odd, because I think asset allocation is the most critical element in any successful investment portfolio.
He's not saying it's unimportant, he's saying one's rejection or acceptance of modern portfolio theory and one's desire for a diversified asset allocation does not have to run parallel to one's rejection or acceptance of the efficient market hypothesis. MPT assumes efficient markets but its significance to the layman does not depend on the veracity of this assumption.
I think my primary assertions revolves around a couple of points: arguing for the "uncanny" accuracy of technical analysis
This does not contradict weak-form EMH unless you can demonstrate that it can be leveraged to produce risk-adjusted greater than market returns after transaction costs, the same challenge I've issued you nearly a dozen times now. Moreover, you've never demonstrated it's uncannily accurate, or even that it's accurate at all. You've only made predictions, and then retroactively revised all of your incorrect predictions so that they're correct again. You've only referred to yourself as uncannily accurate without ever demonstrating uncanny accuracy.
attempting to show the usefulness of delimiting the history of the stock market into various bull and bear epochs
This does not contradict weak-form EMH.
demonstrating that human psychology impacts markets and that this behavior (greed, irrationality) can be described and predicted (within degrees)
This does not contradict weak-form EMH unless you can demonstrate that it can be leveraged to produce risk-adjusted greater than market returns after transaction costs, the same challenge I've issued you nearly a dozen times now (heard that before anywhere?)
the benefit of hard work, research, and education in cranking up investment returns over time
This could contradict weak form EMH, but you've yet to demonstrate it.
I think it's possible to discuss the potential trajectory of stocks or markets without feeling like I'm imposing a false pattern or narrative on purely chaotic, random events.
Me too. You're back to the same mischaracterization of my position that you started before this thread was even begun. History may not repeat but it rhymes, eh?
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I donno. This is nothing personal, but I hear a lot of permabears say stuff about how they're really optimistic about the future, etc. etc. but that right now it's terrible.
The problem is that it's always right now, and for them it's always terrible.
There will always be some crisis for them that makes things bad right now (peak oil, tech bubble, housing bubble, QE1&2, Euro crisis, etc. etc.) and though they claim it's just the particular set of circumstances right now that makes them bearish, they seem to always be bearish because there's always something negative in the world happening (or the media will spin stuff as negative, at the very least).
So you may in your heart believe that you aren't always bearish... but you may want to consider and probe that belief to find if it's really true.
And again, I don't know you, so it may or may not be true of you. But it seems like that's the case for a lot of people with similar beliefs to you.
I donno, seems entirely personal, given my numerous statements I've made that I'm long term bullish on the USA. If your only way to comprehend my remarks is by lumping me in with the inflationistas, dooms day preppers, and messianic fools doting our air and radio waves, then so be it.
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I see the parallel. Do you?
Yes.
I donno, seems entirely personal, given my numerous statements I've made that I'm long term bullish on the USA.
You can take it personally if you want.
I was merely pointing out that a lot of the permabears claim to be long term bullish, and it's hard to see that they are, and I gave examples as to why. I was hoping you'd actually reflect on the post, rather than dismiss it out of hand, but okay.
Think about what circumstances would shift you from bear to bull mode, despite the fact that there will always be some "crisis".
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Grant, I'm up over 2,000% in the last 14 years buying nothing but stocks. It's all the evidence I need. Perhaps I'm gifted. Most likely I'm just stupid lucky, right?
The existence of guys like Soros, Tudor-Jones, and Buffett, their outsized returns, and their universal dismissal of EMH in either weak or strong form is sufficient for me to dismiss those ideas in the context of making money in the real world. If I can see far, it's because I'm standing on the shoulders of giants.
You want an academic rebuttal of a questionable academic concept (EMH)? I don't have the time, and more importantly, the academic jargon to attempt that. I can point you to the Grantham article I posted on July 4th, or Soros's "Alchemy of Finance," if you want a more detailed critique.
And funny, the only one proffering market forecasts is me, attempting to demonstrate my form of thinking in real time, knowing full well there's a cabal of posters waiting in the wings to rip me to shreds when my forecast goes astray (as many invariably do). It's kind of exciting! lol.
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Think about what circumstances would shift you from bear to bull mode, despite the fact that there will always be some "crisis".
Really? How often have I spoken of debt repayment/reorganization and investment via savings (as opposed to debt induced stimulus) as the key to rectifying the imbalances in our economy and laying the groundwork for the next bull? I count at least 5 posts in this thread alone where I explicitly state the conditions that would turn me decidedly bullish on the markets.
Indeed, I'm constantly bouncing the bullish and bearish viewpoints off of one another; before I execute a trade, my first thought is: "what can go wrong?" It's never: "how much money am I gonna make!"
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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.
JohnGalt had this excellent analysis earlier in the thread about if the time one spends to do this trading was worth it, and essentially concluded that it wasn't, unless your portfolio is huge (and you actually DO earn more than the market for sure).
This article I just read and posted about concludes the same thing: https://forum.mrmoneymustache.com/investor-alley/when-compounding-returns-isnt-that-important/
Just wanted to cross post here with JohnGalt's analysis, since they're quite related.
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Grant, I'm up over 2,000% in the last 14 years buying nothing but stocks. It's all the evidence I need. Perhaps I'm gifted. Most likely I'm just stupid lucky, right?
You have seen me show up a bit to help you out but this statement is one that warrants attention. That equates to about 24% CAGR and I start falling to the luck or bullshit. Maybe you bought Apple 14 years ago and held on to it - that could get you there but it is luck.
I guess if you have a track record like that and can substantiate it then it should put grant and arebelspy arguments to bed.
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Grant, I'm up over 2,000% in the last 14 years buying nothing but stocks.
I'm assuming that's your strict returns and you aren't counting capital added in as "returns," correct?
Often misguided people will add in money and then look at how much they have now versus then and claim it's all gains.
I give you more credit than that, but just want to confirm.
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Grant, I'm up over 2,000% in the last 14 years buying nothing but stocks. It's all the evidence I need. Perhaps I'm gifted. Most likely I'm just stupid lucky, right?
You have seen me show up a bit to help you out but this statement is one that warrants attention. That equates to about 24% CAGR and I start falling to the luck or bullshit. Maybe you bought Apple 14 years ago and held on to it - that could get you there but it is luck.
I guess if you have a track record like that and can substantiate it then it should put grant and arebelspy arguments to bed.
JDSU, QLGC 98-2000; PAAS, SSRI 2005-2007; and a whole not of nothin' in between!
Including down 10% in 2001-2002; down 12% 2009-2010; but back to all time portfolio highs as we speak.
And I didn't just stumble into my big trades. I found them.
edit: and all cash through second half 2007- present, which I consider to be a killer trade in itself (very little stress during financial panic, e.g.)
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How did you lose 12% if you were all cash?
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down 12% 2009-2010; but back to all time portfolio highs as we speak.
...
edit: and all cash through second half 2007- present
How did you lose 12% if you were all cash?
..and then gain it back to reach all time highs?
Psstt.. Currency trades don't count as being all cash. ;)
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Grant, I'm up over 2,000% in the last 14 years buying nothing but stocks.
I'm assuming that's your strict returns and you aren't counting capital added in as "returns," correct?
Often misguided people will add in money and then look at how much they have now versus then and claim it's all gains.
I give you more credit than that, but just want to confirm.
For sure: To give you and idea of the account (not real numbers):
1998 1K invested.
Sold in September 2000, 10K after taxes.
Between 2000-2005, mostly cash, a trade gone wrong (heavily long markets day before 9/11 -- panic and sold a couple days after markets reopened).
2005-2007, commodity bull, bought PAAS, SSRI, some other lesser metal names 10K became 20K (after selling in 2007and paying taxes).
Sitting at 20.5K today! (but again, 100% cash during panic; shorted market heavily in late 2009, got smoked, have battled back to old portfolio high since, mostly through shorting rallies).
Wages per hour? Probably not super great, but decent (given portfolio size).
Knowledge acquired through detailed study of markets over the years? Absolutely priceless!
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How did you lose 12% if you were all cash?
Usually all cash.
Buying SPY and QQQ puts, and then buying more when the trade went horribly wrong.
Still, after 10-12%, I stepped away for a couple of months to get my bearings (I was too negative in the aftermath of a crash I saw coming; thought I was smarter than the market, etc.)
edit: Okay, you got me -- I forgot where I buried it! lol.
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Why are you trading with such small numbers?
Also isn't that 4000%, rather than 2000?
Putting your CAGR at just over 30%?
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Why are you trading with such small numbers?
Also isn't that 4000%, rather than 2000?
Putting your CAGR at just over 30%?
No, you're right. I'll change that post right now.
Those numbers are proportional to my account growth, not the real numbers.
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Why are you trading with such small numbers?
Also isn't that 4000%, rather than 2000?
Putting your CAGR at just over 30%?
No, you're right. I'll change that post right now.
Those numbers are proportional to my account growth, not the real numbers.
Gotcha.
So have you hit FI? 1 to 20.5 in 14 years is 24.08 CAGR.
It's hard to imagine 14 years of 24% growth and not hitting FI (and sure, some losing years, but some homerun ones, such that it all averages to 24%/yr)...
Do you believe this is repeatable (by you, not necessarily by anyone else)?
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Basically you did well on three trades and lost on the others, selling out in 2007 and holding cash (usually) was a winner but then a loser from 2009 on (so did you win or lose since then). All in all the amounts in general are relatively small and combined with the other stuff results in a sample size that is insufficient to draw any conclusions, is it luck - not sure but kind of feels that way.
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All in all the amounts in general are relatively small
Well we don't know the amounts, as he's scaled them down for illustrative purposes. I'm thinking you'd have to be FI though with that sort of return, or else the amounts really are tiny.
I agree with the rest of your analysis, other than it feeling like luck. I'm more with the previous statement that it's hard to draw conclusions, mostly because it's based on just a few trades, rather than year in and year out performance.
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So have you hit FI? 1 to 20.5 in 14 years is 24.08 CAGR.
It's hard to imagine 14 years of 24% growth and not hitting FI (and sure, some losing years, but some homerun ones, such that it all averages to 24%/yr)...
Do you believe this is repeatable (by you, not necessarily by anyone else)?
Do not try this at home! lol.
After the tech bubble implosion, I kept my savings from work separate from my brokerage account. To this day that alternate savings account is roughly 50% of my brokerage account, so if you figure in that money (which has been all cash, all the time, with a couple good years in 2007-2008 when I was making a cool 5%) my rate of return is much lower overall.
Also, after recouping half my losses from 09-10 in mid 2010, I split up my brokerage account, putting 80% in with my cash savings, and the other 20% (or roughly 15% of my liquid assets) into a separate trading account. It's that account that I use to trade with (and I trade infrequently by "trading standards"), since I like the size of my "Fuck You Fund" and am more concerned with "not losing" it more so than growing it at this point (having two kids has lessened my appetite for risk, apparently).
As far as FI, it's the goal, and I see the light at the end of the tunnel. I've been a mustachian at heat my entire life, but got derailed a little the past several years. MMM inspired me to get back on the right path, and then to push myself a little further. My wife and I are starting to figure things out -- we both slipped, sometimes hard -- but that's water under the bridge. We're excited about the future, in no small part to the positive energy I -- and ultimately she -- gets from this community. The goal is 5 years from now (with the proper lifestyle adjustments), but I suspect we might push it to 7-8 years to bank the kids' college money (but maybe that's just me, the workaholic, being scared of what FI entails for my life).
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Basically you did well on three trades and lost on the others, selling out in 2007 and holding cash (usually) was a winner but then a loser from 2009 on (so did you win or lose since then). All in all the amounts in general are relatively small and combined with the other stuff results in a sample size that is insufficient to draw any conclusions, is it luck - not sure but kind of feels that way.
When lightning strikes 3 times, it's hard to assign that outcome to luck. I'd like to think it was through research and hard work: JDSU, QLGC were amazing companies with great prospects in 1998; the commodity bull was being pushed aggressively by some smart cookies I follow as early as 2003-2004, I jumped on late (2005) but still made the jump; the financial crisis of 2008-2009 was on the wall by late 2006, etc. The information was out there if you knew where and how to look for it.
I've been on the whole mostly cash for 12 years. I realize bear cycles last around 16-20 years. I'm personally entering the "accumulation" phase of the tail end of this current bear cycle. You think you folks are a hard sell? Imagine preaching the end of the financial universe as we know it to friends, family, and colleagues in 2007-2008. Little did I know how wrong I was, because that universe is still kicking it today...
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All in all the amounts in general are relatively small
Well we don't know the amounts, as he's scaled them down for illustrative purposes. I'm thinking you'd have to be FI though with that sort of return, or else the amounts really are tiny.
I agree with the rest of your analysis, other than it feeling like luck. I'm more with the previous statement that it's hard to draw conclusions, mostly because it's based on just a few trades, rather than year in and year out performance.
My bad, Missed the part about it being scaled down. Just was saying it feels lucky, but clearly not enough data to know.
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I like that to everyone in this thread but one person, a sample size of three is clearly insufficient to invalidate a major body of academic theory on its own.
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When lightning strikes 3 times, it's hard to assign that outcome to luck. I'd like to think it was through research and hard work: JDSU, QLGC were amazing companies with great prospects in 1998; the commodity bull was being pushed aggressively by some smart cookies I follow as early as 2003-2004, I jumped on late (2005) but still made the jump; the financial crisis of 2008-2009 was on the wall by late 2006, etc. The information was out there if you knew where and how to look for it.
Three times is not enough to say. So basically you bought stocks that went up with the internet bubble (by the way I had few of those as well) and two silver cos a couple of years after Buffett started accumulating silver in a big way and global debt drove up commodity prices. Still feels lucky but no way to tell one way or another (and that goes for you and me). Incidentally, if you are so perfect then why didn't you move to gold or more specifically if you were that good you would still be able to identify winners even in a down market.
I don't expect you to win every time but if you had more trades to back it up it would be more substantitve. But I will give you this, we may not know if you have lucky buys but you have done impeccabble job at timing your sells.
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I spy a right shoulder formation on the NDX at 2630-2635 and an intraday rollover. Scooping up a few QQQ puts here at 64.25, with a stop above today's highs (about 30 cents above these levels).
And folks, as always, do not attempt this at home. lol.
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I don't understand.. with 24% returns, can't you be FI with about 200k (or less)? That'd return 48k/yr for you. And sure, some years you eat into the principal with no trades, but other years you double or triple (apparently) what you have.
If this is reliable and repeatable.
I spy a right shoulder formation on the NDX at 2630-2635 and an intraday rollover. Scooping up a few QQQ puts here at 64.25, with a stop above today's highs (about 30 cents above these levels).
Please be more specific.
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When lightning strikes 3 times, it's hard to assign that outcome to luck. I'd like to think it was through research and hard work: JDSU, QLGC were amazing companies with great prospects in 1998; the commodity bull was being pushed aggressively by some smart cookies I follow as early as 2003-2004, I jumped on late (2005) but still made the jump; the financial crisis of 2008-2009 was on the wall by late 2006, etc. The information was out there if you knew where and how to look for it.
Three times is not enough to say. So basically you bought stocks that went up with the internet bubble (by the way I had few of those as well) and two silver cos a couple of years after Buffett started accumulating silver in a big way and global debt drove up commodity prices. Still feels lucky but no way to tell one way or another (and that goes for you and me). Incidentally, if you are so perfect then why didn't you move to gold or more specifically if you were that good you would still be able to identify winners even in a down market.
I don't expect you to win every time but if you had more trades to back it up it would be more substantitve. But I will give you this, we may not know if you have lucky buys but you have done impeccabble job at timing your sells.
But enough about me. How are you doing in the markets? And ideas, forecasts, allocation preferences?
What stocks did you ride up in the bubble?
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Please be more specific.
I bough at the money puts out a couple months, because I feel the NDX is putting in a multi-week right shoulder in a head and shoulder formation at NDX 2630-2635. Right now the NDX is at 2623, so if it manages to get over 2634 today (intraday high) I'll take the 30 cent loss and move on. I probably won't carry the trade overnight since there is always a chance the market gaps higher tomorrow morning and the SPX still has room to run to 1390-1400 IMO (another 2% higher) which is my primary technical framework.
Just lowered my stop to 64.43, I think this trade may be a bit premature and I want to save my bearish energy for SPX 1390-1400.
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To be clear: you started this thread to talk about the theory. I started talking about the theory, and you said "I don't want to talk about the theory, I want to talk about my wild success". Despite its irrelevance, we followed you there and tried to discuss your "wild success", and now you don't want to talk about your trading career, you want to talk about everyone else's.
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To be clear: you started this thread to talk about the theory. I started talking about the theory, and you said "I don't want to talk about the theory, I want to talk about my wild success". Despite its irrelevance, we followed you there and tried to discuss your "wild success", and now you don't want to talk about your trading career, you want to talk about everyone else's.
No, you misunderstand me. I just don't want to talk to you.
Buying VXX (volatility ETF). Legging into some shorts here -- nothing crazy. Lifted on those QQQ puts. A little slippage and a little commish to drive everyone else's investment costs down. You're welcome.
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But enough about me. How are you doing in the markets? And ideas, forecasts, allocation preferences?
What stocks did you ride up in the bubble?
Well actually this is all about you because I am not the one that claimed I was better than everyone or normally accepted investment theories. I feel like you are putting me in a position to jump all over you in grant kind of way.
That said I had the unfortunate timing (like many others here) to begin accumulating wealth as the most recent bubble went up and then down - I had a little funds prior to tech bubble and made some good trades but the amounts were insignificant. So really my investment history aligns perfectly with the lost decade. My 401k is fully invested and I reallocated at various points so I did better than the broader market but it still got clobbered with everything else - I didn't sell and it came back so no it is what it is. Like you I felt a bubble was in play and sat on a cash so good call there then as the market started unravelling and things looked better a invested a portion (maybe 20%) of cash holdings in index funds but was early and they fell further so doubled down but on the way up I sold early and put back in cash - made 5% + whatever dividends it paid - not bad for the hold period but kick myself for not staying invested. Then market bottomed out and began investing in some individual stocks and most were up and some in a big way, but one stock kind of negated the whole thing and I am basically breakeven but with good divends yield.
So basically while I think the it is possible to beat index fund investing with a decent asset allocation my personal history does not show it. Then again the buy and hold strategy (in my 401k) vs. my trade and cash strategy (non-retirement) returns turned out to be very similar because I didn't have the downs and there was a period there where the ING account was paying 4%. But if that is the case then the former wins when factoring in increased risk and effort.
Right now I have mixed feelings - feels like a terrific time to invest but there are so many issues and not really comfortable with taking the leap so I buy decent companies periodically based on certain financial metrics and stock valuations. Bonds - you have to be crazy to have anything in bonds right now (except short term but they pay nothing). Rentals would be great but they don't work in my area unless you want to buy stuff in depressed parts of the city - I don't want to be a slumlord, but if they did that is where I would go heavy right now as it would give above average cash return, tax benefits, and inflation protection.
I hate sitting on cash but still think it is the right call now.
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I don't understand.. with 24% returns, can't you be FI with about 200k (or less)? That'd return 48k/yr for you. And sure, some years you eat into the principal with no trades, but other years you double or triple (apparently) what you have.
If this is reliable and repeatable.
I'm guessing by ignoring this you are saying your returns are not reliable and repeatable?
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I don't understand.. with 24% returns, can't you be FI with about 200k (or less)? That'd return 48k/yr for you. And sure, some years you eat into the principal with no trades, but other years you double or triple (apparently) what you have.
If this is reliable and repeatable.
I'm guessing by ignoring this you are saying your returns are not reliable and repeatable?
Why are questioning if it is reliable and repeatable....simply do some analyis and buy three stocks during a 14 year period and get 24%.
How could you not beleive in this:).
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I don't understand.. with 24% returns, can't you be FI with about 200k (or less)? That'd return 48k/yr for you. And sure, some years you eat into the principal with no trades, but other years you double or triple (apparently) what you have.
If this is reliable and repeatable.
I'm guessing by ignoring this you are saying your returns are not reliable and repeatable?
Ignoring what? Responding to the ludicrous notion that I can achieve 24% returns forever?
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I'm guessing by ignoring this you are saying your returns are not reliable and repeatable?
Ignoring what? Responding to the ludicrous notion that I can achieve 24% returns forever?
Okay, so duplicating your previous success is not only not repeatable, but the mere idea is "ludicrous."
What's the point of posting about it then?
And doesn't that equate it to just being lucky?
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Buying VXX (volatility ETF). Legging into some shorts here -- nothing crazy. Lifted on those QQQ puts. A little slippage and a little commish to drive everyone else's investment costs down. You're welcome.
VXX popping 2% into the close. 14-16 on the VIX tends to mark a short term bottoms. Holding this puppy for now.
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Okay, so duplicating your previous success is not only not repeatable, but the mere idea is "ludicrous."
What's the point of posting about it then?
And doesn't that equate it to just being lucky?
Hillarious and I think we can now confirm that conclusion regardless of the small sample size.
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Okay, so duplicating your previous success is not only not repeatable, but the mere idea is "ludicrous."
What's the point of posting about it then?
And doesn't that equate it to just being lucky?
Is cutting loses quickly and letting your winners ride luck, or sound money management?
Does the concept of "money management technique" mean anything to you in the context of investing?
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1 to 20.5 in 14 years is 24.08 CAGR.
It's interesting to see that that 24.08 CAGR is overwhelmingly powered by the 2-3 year period from 1998-2000, where smedleyb had a 900% growth in 3 years, or a 115% CAGR. In the 12 years since then, it's been "only" a further 105% growth, for a much more modest (but still market-beating) 6.16% CAGR.
Looking at a 10 year chart of JDSU is fucking ridiculous! When you zoom out to that level, the mountain between 1999 and 2001 is so huge that it renders any fluctuation on either side of that mountain utterly invisible. Between March of 1999 and March of 2000, it went from $95 to $1120, a 1091% CAGR. Insane.
Anyway, thanks for sharing some details, that was insightful. If I had personally achieved a 900% growth in 3 years relatively early in my investing life, I would surely have a much stronger belief in my market-beating abilities than I actually do. Right or wrong, it would be difficult to prevent an experience like that from shaping your viewpoint for years to come.
It's also been interesting and valuable for me to watch the mechanics of technical analysis play out in real time, as it was an area I was entirely unfamiliar with. It was difficult to follow exactly, but I generally got the feeling that most of the tentative predictions didn't pan out, with new predictions constantly replacing old ones. Then again, I guess you didn't feel strongly about any of those predictions to actually make any trades based on them (yet). It all seems like putting way too much weight on the human proclivity for pattern-recognition, seeing patterns in anything. If such patterns do actually exist and are exploitable, a purely algorithmic, computer-based approach would seem to be far more effective, because it would eliminate that mountain of human bias and operate much faster and more accurately.
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1 to 20.5 in 14 years is 24.08 CAGR.
It's interesting to see that that 24.08 CAGR is overwhelmingly powered by the 2-3 year period from 1998-2000, where smedleyb had a 900% growth in 3 years, or a 115% CAGR. In the 12 years since then, it's been "only" a further 105% growth, for a much more modest (but still market-beating) 6.16% CAGR.
Looking at a 10 year chart of JDSU is fucking ridiculous! When you zoom out to that level, the mountain between 1999 and 2001 is so huge that it renders any fluctuation on either side of that mountain utterly invisible. Between March of 1999 and March of 2000, it went from $95 to $1120, a 1091% CAGR. Insane.
Anyway, thanks for sharing some details, that was insightful. If I had personally achieved a 900% growth in 3 years relatively early in my investing life, I would surely have a much stronger belief in my market-beating abilities than I actually do. Right or wrong, it would be to prevent an experience like that from shaping your viewpoint.
It's also been interesting and valuable for me to watch the mechanics of technical analysis play out in real time, as it was an area I was entirely unfamiliar with. It was difficult to follow exactly, but I generally got the feeling that most of the tentative predictions didn't pan out, with new predictions constantly replacing old ones. Then again, I guess you didn't feel strongly about any of those predictions to actually make any trades based on them (yet). It all seems like putting way too much weight on the human proclivity for pattern-recognition, seeing patterns in anything. If such patterns do actually exist and are exploitable, a purely algorithmic, computer-based approach would seem to be far more effective, because it would eliminate that mountain of human bias and operate much faster and more accurately.
First, thank your for the balanced post.
Second, revealing the mechanics of TA is precisely my intention; right or wrong, big money throughout Wall Street thinks like this, regardless of what we on this board may think of it. TA is a real like phenomenon that influences price movements and vice-versa. One can rail against the theoretical underpinning of that endeavor -- that does not diminish the fact that in the real world of Wall Street billions of dollars in stock are bought and sold based on solely technical factors and nothing else.
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Yeah, it was tough for me to follow the technical analysis stuff as well but there is some truth to it, but it you are trading on psychology and not fundamentals and to me that is more like gambling even if there are patterns.
I do believe in regression to the mean, not sure if that would qualify as technical analysis, but if you look at any chart about anything if it is out of whack too high or too low it will go back at some point.
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Is cutting loses quickly and letting your winners ride luck, or sound money management?
Sure, it could be the latter. But if so, wouldn't it be repeatable and reliable?
Does the concept of "money management technique" mean anything to you in the context of investing?
It generally means more to me in the context of gambling, but it has some applications to investing.
But what does that have to do with your results being repeatable or not?
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Is cutting loses quickly and letting your winners ride luck, or sound money management?
Sure, it could be the latter. But if so, wouldn't it be repeatable and reliable?
Does the concept of "money management technique" mean anything to you in the context of investing?
It generally means more to me in the context of gambling, but it has some applications to investing.
But what does that have to do with your results being repeatable or not?
I mean, you do realize that the ability to consistently generate 24% returns would make me -- a billionaire?
Also, what do you mean "money management has some applications to investing?" What do you perceive these applications to be? Do you yourself apply these techniques -- whatever they are in your eyes -- to your own investments?
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I mean, you do realize that the ability to consistently generate 24% returns would make me -- a billionaire?
So I repeat:
Okay, so duplicating your previous success is not only not repeatable, but the mere idea is "ludicrous." (And apparently you aren't a billionaire from it.)
What's the point of posting about it then?
You haven't answered this.
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I mean, you do realize that the ability to consistently generate 24% returns would make me -- a billionaire?
So I repeat:
Okay, so duplicating your previous success is not only not repeatable, but the mere idea is "ludicrous." (And apparently you aren't a billionaire from it.)
What's the point of posting about it then?
You haven't answered this.
To demonstrate that through hard work, research, and analysis, one can gain an edge on the market, anticipate it's next move, and potentially profit from it?;
To show that my outsized returns throughout the years has been an equal mix of skill and luck?;
In order to contextualize my current 100% cash position, and to dispel the idea that I'm some kind of perma-bear (since I've made nearly all my money being long)?;
To highlight that while I'm cautious on stocks intermediate-term (do not find the risk/reward favorable at these levels), I think the growing chorus of negativity surrounding stocks (and the bond collapse I envision down the road) will generate the greatest bull market of all time?;
In order to demonstrate to other readers that the ideas espoused by the two most prolific posters on these boards represent their opinion and not some sacred, unwavering truths?
Look, you don't have to understand TA; you don't need to think about the historical context of price to earnings ratios and their relation to stock prices; there is little necessity to grasping the impact of investor psychology on price movements; and please, just ignore the fact that these markets today are anything but "free" and at the mercy of extraneous forces known as "central banks;" none of this should be of any interest to anyone who is comfortable allocating their capital according to their adviser's recommendations.
But to those who find these topics interesting, if not fascinating [raises hand], then, well, I hardly see how everything that has been said so far is incompatible with a site which prides itself on being "an advanced personal finance resource," couched here in the "investor alley" forum, under the banner of "Efficient Markets, RIP."
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To demonstrate that through hard work, research, and analysis, one can gain an edge on the market, anticipate it's next move, and potentially profit from it?;
So then why can't your results be duplicated?
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To demonstrate that through hard work, research, and analysis, one can gain an edge on the market, anticipate it's next move, and potentially profit from it?;
So then why can't your results be duplicated?
Not only can they, but they will. Maybe not by me -- I'll never take the risks I took in the past (using 100% margin at times), but somebody, somewhere will be able to duplicate these results. Like somebody said above, history doesn't repeat itself, but if often rhymes:
http://blog.redfin.com/lasvegas/2011/11/case-shiller-vegas-hits-60-off-peak-home-pricing.html
http://en.wikipedia.org/wiki/File:Tulip_price_index1.svg
The point to effective speculation is to understand your market, manage your risk, and identify your edge. Without those, you're just the next sucker at the table. And nobody wants to be that, right?
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Not only can they, but they will. Maybe not by me -- I'll never take the risks I took in the past (using 100% margin at times), but somebody, somewhere will be able to duplicate these results.
If they can't be duplicated by you, but just "someone somewhere" then it's purely luck.
The law of large numbers says that with enough people gambling and buying lotto tickets, someone will win at some point.
So of course your results will be duplicated, but merely by random happenstance.
If you are saying even you can't duplicate that success... what exactly are you studying all this stuff for?
The point to effective speculation is to understand your market, manage your risk, and identify your edge.
Is it effective if it happens once, is not repeatable (except to someone else, at some point, simply due to the law of large numbers)? Or is it luck?
If it was actually "effective speculation" ... wouldn't it be repeatable? Wouldn't understanding your market, managing your risk, and identifying your edge mean you could do it again and again?
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Not only can they, but they will. Maybe not by me -- I'll never take the risks I took in the past (using 100% margin at times), but somebody, somewhere will be able to duplicate these results.
If they can't be duplicated by you, but just "someone somewhere" then it's purely luck.
The law of large numbers says that with enough people gambling and buying lotto tickets, someone will win at some point.
So of course your results will be duplicated, but merely by random happenstance.
If you are saying even you can't duplicate that success... what exactly are you studying all this stuff for?
The point to effective speculation is to understand your market, manage your risk, and identify your edge.
Is it effective if it happens once, is not repeatable (except to someone else, at some point, simply due to the law of large numbers)? Or is it luck?
If it was actually "effective speculation" ... wouldn't it be repeatable? Wouldn't understanding your market, managing your risk, and identifying your edge mean you could do it again and again?
Beating the market over time by a few percentage points is one thing; attempting to quadruple the market's average long-term returns consistently year after year is a feat entirely of a different order and magnitude. Like Skyrefuge showed above, most of my "gains" came at the beginning, skewing the long term average. Returns have been entirely more modest since -- yet my Fuck You Fund is large enough that capital preservation far outweighs risk taking at this point, hence the point that my past returns will seem outsized relative to future gains.
In the end, I just find it ironic that a real estate speculator is chastising a stock speculator for not only speculating, but for refusing to commit to the idea that future speculative activities will be as fruitful as past speculative activities. I might not repeat the past, but I sure as hell ain't gonna give it all back -- precisely because I realize giving it all back is a very real possibility if I lose my discipline in the markets and start gambling away my hard earned gains...
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Grant already did a fairly lengthy post on the difference between real estate speculation and stock speculation. I can dig it up if you forgot.
precisely because I realize giving it all back is a very real possibility if I lose my discipline in the markets and start gambling away my hard earned gains...
Right, sure. If you lose your discipline and start gambling, you could lose it all. We both agree on that.
What I'm asking is.. if this works, why couldn't you duplicate it if you keep your discipline? If it was achieved through hard work, studying and learning the markets, and discipline, then it should be repeatable.
If you aren't willing to do it because it's too risky and you don't want to risk losing, then it is essentially akin to gambling and you got lucky earlier. Otherwise the risk would mostly be removed, and you'd be comfortable taking those risks. Clearly you aren't, so there must be more of a risk element than you're willing to admit.
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To demonstrate that through hard work, research, and analysis, one can gain an edge on the market, anticipate it's next move, and potentially profit from it?;
Is that your plan? Go right ahead.
To show that my outsized returns throughout the years has been an equal mix of skill and luck?;
All you've shown is that you received outsized returns. In the process you've revealed that you managed to make one good trade, then using leverage realized a six percent return over 12 subsequent years. This exceeds market returns, but if (as by your own admission) it's not repeatable, then your slightly above average performance is nothing but a natural consequence of the law or large numbers and survivorship bias.
In order to contextualize my current 100% cash position, and to dispel the idea that I'm some kind of perma-bear (since I've made nearly all my money being long)?;
I don't think arebelspy was suggesting that you're a perma-bear so much as providing a litmus test that any bear can use to assess whether they're a perma-bear or not.
In order to demonstrate to other readers that the ideas espoused by the two most prolific posters on these boards represent their opinion and not some sacred, unwavering truths?
If you were interested in doing that, you would have risen to any of my myriad challenges to demonstrate a way to exploit an inefficiency in the market in order to receive greater than market returns with comparable risk characteristics, or even demonstrated how such an opportunity could exist. Yet you've without fail shrugged off this challenge every opportunity I've given you. Could it be that the emperor has clothes after all?
Look, you don't have to understand TA; you don't need to think about the historical context of price to earnings ratios and their relation to stock prices; there is little necessity to grasping the impact of investor psychology on price movements; and please, just ignore the fact that these markets today are anything but "free" and at the mercy of extraneous forces known as "central banks;" none of this should be of any interest to anyone who is comfortable allocating their capital according to their adviser's recommendations.
But to those who find these topics interesting, if not fascinating [raises hand], then, well, I hardly see how everything that has been said so far is incompatible with a site which prides itself on being "an advanced personal finance resource," couched here in the "investor alley" forum, under the banner of "Efficient Markets, RIP."
Disagreeing with your interpretation of a topic is not the same as failing to understand it. Now, on the whole, I'm fascinated, but every time I try and engage you you either assign me a Soros circle-jerk memoir, ad hom me out of the thread, or quietly shrink away. If you want to talk, let's.
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Indeed, let's talk:
In weak-form efficiency, future prices cannot be predicted by analyzing prices from the past. Excess returns cannot be earned in the long run by using investment strategies based on historical share prices or other historical data. Technical analysis techniques will not be able to consistently produce excess returns, though some forms of fundamental analysis may still provide excess returns. Share prices exhibit no serial dependencies, meaning that there are no "patterns" to asset prices. This implies that future price movements are determined entirely by information not contained in the price series. Hence, prices must follow a random walk. This 'soft' EMH does not require that prices remain at or near equilibrium, but only that market participants not be able to systematically profit from market 'inefficiencies'.
Grant, do you subscribe to this conception of weak EMH? (p.s.: I'm attempting to use this definition as a touchstone for further debate, nothing more).
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Grant already did a fairly lengthy post on the difference between real estate speculation and stock speculation. I can dig it up if you forgot.
precisely because I realize giving it all back is a very real possibility if I lose my discipline in the markets and start gambling away my hard earned gains...
Right, sure. If you lose your discipline and start gambling, you could lose it all. We both agree on that.
What I'm asking is.. if this works, why couldn't you duplicate it if you keep your discipline? If it was achieved through hard work, studying and learning the markets, and discipline, then it should be repeatable.
If you aren't willing to do it because it's too risky and you don't want to risk losing, then it is essentially akin to gambling and you got lucky earlier. Otherwise the risk would mostly be removed, and you'd be comfortable taking those risks. Clearly you aren't, so there must be more of a risk element than you're willing to admit.
You're attempting to reduce human behavior (and what are markets if not an amalgamation of humans buying and selling) to an epistemological model better suited to describe scientific phenomenon rather than human endeavors like speculation. Repeatability, deduction, and reduction to universal laws is an arbitrary condition you've placed on my conception of the markets in order to undermine those views. But human behavior -- and hence markets -- are not the same as natural phenomenon. As psychology and sociology show, while individual cases may vary, there exits behaviors which, while not universally predictable, do settle into certain defined patterns that can be inductively estimated.
Furthermore, by conceding that there exists a basic distinction between "disciplined investing" and gambling, you've basically agreed with the primary thrust of everything that I've been attempting to say -- namely, that the difference between the smart educated investor and the gambler is that the latter has no conception of risk control, money management techniques, or an appreciation of advantageous risk/reward situations (derived from closely analyzing fundamental, technical, and psychological conditions), whereas the disciplined trader cuts loses, adheres to risk control (doesn't bet everything on one trade, e.g.) and waits for the risk/reward to be solidly tilted in his or her favor before committing capital to the markets.
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while individual cases may vary, there exits behaviors which, while not universally predictable, do settle into certain defined patterns that can be inductively estimated.
If they fall into these patterns, why can't your success be repeated?
Furthermore, by conceding that there exists a basic distinction between "disciplined investing" and gambling, you've basically agreed with the primary thrust of everything that I've been attempting to say -- namely, that the difference between the smart educated investor and the gambler is that the latter has no conception of risk control, money management techniques, or an appreciation of advantageous risk/reward situations (derived from closely analyzing fundamental, technical, and psychological conditions), whereas the disciplined trader cuts loses, adheres to risk control (doesn't bet everything on one trade, e.g.) and waits for the risk/reward to be solidly tilted in his or her favor before committing capital to the markets.
1) I'll concede plenty of points to discuss an idea and see where it leads us. That doesn't mean I agree with a particular point, just that I don't feel like arguing it, or I want to accept it as a premise to see what would happen if it were the case.
2) I don't think that necessarily is a difference. There are gamblers that have a conception of risk control, money management, appreciation of risk/reward situations, etc.
3) Even if one is a "disciplined trader" and has all those qualities, they could still be gambling. Plenty of people do it, and lose money. And even if they aren't gambling persay, but basing it on analysis they feel is solid, they could be wrong. And history has shown they basically always are!
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You're attempting to reduce human behavior (and what are markets if not an amalgamation of humans buying and selling) to an epistemological model better suited to describe scientific phenomenon rather than human endeavors like speculation. Repeatability, deduction, and reduction to universal laws is an arbitrary condition you've placed on my conception of the markets in order to undermine those views. But human behavior -- and hence markets -- are not the same as natural phenomenon. As psychology and sociology show, while individual cases may vary, there exits behaviors which, while not universally predictable, do settle into certain defined patterns that can be inductively estimated.
Okay, after rereading this, here is my response: fine, human behavior changes, so markets are changing, etc. etc.
But if one could analyze all of that properly, and make correct speculative decisions, they should be able to repeat it.
Even with psychology, changing behaviors, and the waxing and waning of the moon support, resistance and pivot points all constantly in flux, if the solid analysis works, it shouldn't just work the one time.
The same strategy may not work again. One may need to start over and revise. But if the method of studying and analyzing works, then even with it being a constantly changing human endeavor the results should be repeatable. Otherwise it's not skill, but luck.
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In weak-form efficiency, future prices cannot be predicted by analyzing prices from the past. Excess returns cannot be earned in the long run by using investment strategies based on historical share prices or other historical data. Technical analysis techniques will not be able to consistently produce excess returns, though some forms of fundamental analysis may still provide excess returns. Share prices exhibit no serial dependencies, meaning that there are no "patterns" to asset prices. This implies that future price movements are determined entirely by information not contained in the price series. Hence, prices must follow a random walk. This 'soft' EMH does not require that prices remain at or near equilibrium, but only that market participants not be able to systematically profit from market 'inefficiencies'.
My definition of weak-form EMH comes from a functional or utilitarian place rather than an ideological one. As I've said before, it's not that inefficiencies cannot exist, but that inefficiencies large enough to be exploitable after transaction costs can't exist. I don't make that distinction just to raise the other side of the argument's standard of proof. I make that distinction because we're only talking about what matters to the investor. It's not that technical analysis is completely bunk, it's that it's completely toothless. There may be truth to it (I won't speculate either way, here), but I've never seen evidence that technical analysis can produce risk-adjusted better than market returns after transaction costs. Likewise, serial dependencies may exist, but they're not exploitable, and no fundamental analysis methodology can consistently outperform the market on a risk-adjusted basis unless it depends on insider knowledge. The posted definition alternates between absolute statements ("cannot be predicted") and functional statements ("not able to systematically profit"). I agree with the second category of statements but am not comfortable with the first category's absolutism. Does that make sense?
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Sold VXX after 3% pop, offsetting small QQQ loss yesterday and then some.
Saving my ammo for SPX 1390-1400, which is coming up fast (plan to initiate short via SPY puts)
Grant, thank you for the detailed response.
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Sold VXX after 3% pop, offsetting small QQQ loss yesterday and then some.
Saving my ammo for SPX 1390-1400, which is coming up fast (plan to initiate short via SPY puts)
Futures point to huge drop at the open, SPX futes indicated down 20 points.
After touching SPX 1380, my feeling is SPX 1390-1400 is not attainable given the spreading European contagion. I think many will look back at this time frame and wonder why they ever thought the US would be spared in this spreading global economic slowdown and European market collapse.
My multi-month SPX target is 950-1000, or roughly 25% lower than where we are today.
Caveat emptor.
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I think many will look back at this time frame and wonder why they ever thought the US would be spared in this spreading global economic slowdown and European market collapse.
I agree. If people think we will be unaffected, they're wrong.
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My multi-month SPX target is 950-1000, or roughly 25% lower than where we are today.
So are you shorting it now or just waiting? How do you plan to monetize this gut feeling?
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My multi-month SPX target is 950-1000, or roughly 25% lower than where we are today.
So are you shorting it now or just waiting? How do you plan to monetize this gut feeling?
Since when is objectively measurable economic facts (Europe on the brink of depression, slowing global economy, including the US with sagging retail sales data and contracting ISM) a manifestation of my personal "gut feelings?" When these markets get whacked over the next 12 months, we'll look back and see the writing on the wall and say "of course the market was due to sell off hard." Usually the markets discount future information and reflect that data in the current prices -- this is clearly not one of those times.
And I think my posts above lay out my plan of attack. Am I upset that I sold my (rather large) VXX long the other day for a decent 3% gain only to watch it explode 15% higher the next several sessions? A little, but personal obligations forced me to take a step away from the markets last week. Besides, there will be plenty other opportunities to make money.
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If it was meant as an insult, I would have been much snarkier. I don't mean 'gut feeling' derisively, I was actually using it to descriptively refer to your statement about SPX. Let me reword. My question is: if your hunch is that sometime in the next handful of months SPX will settle into the 950-1000 range, what are you doing about it now? Are you shorting it until that point is realized, starting immediately?
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I posted this on July 11th, and the technical framework it lays out is still valid today:
Market note: a couple weeks ago I said that the SPX breaking over 1340 was bullish and my technical work showed that the market has some room to run to SPX 1390. Well, while the SPX did touch 1375 last week, but has since sold off and is currently bouncing around this important 1340 level as we speak. 1340 now represents support for the market, and it's critical that it hold here if the bulls stand a chance.
But I'll say this: the news flow (especially earnings) has been outright negative, which is not surprising since 50% of S&P profits are derived overseas and Europe is an economic mess. My sense is that these levels don't hold. The strategy before was to unleash shorts at or near 1390, but maybe that level doesn't come into play. Plan B is to see how the market acts around 1330-1340, and if it breaks (drops below 1320), the strategy will be to short the first bounce back to 1340 (markets almost always seem to retest broken support levels after they break, and these retests represent the best trading set-ups IMO).
So 1390-1400 is the "layup" short level, IMO. But see how the market keeps getting repelled as it approaches that level, and see how it keeps finding support between 1330-1340 (1337.56 is today's low). In TA, each test of support weakens it. I think 1330-1340 is toast soon enough, but I'm, sticking to the game plan from July 11th as represented by Plan A or Plan B, whichever comes first.
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If it was meant as an insult, I would have been much snarkier. I don't mean 'gut feeling' derisively, I was actually using it to descriptively refer to your statement about SPX. Let me reword. My question is: if your hunch is that sometime in the next handful of months SPX will settle into the 950-1000 range, what are you doing about it now? Are you shorting it until that point is realized, starting immediately?
What's funny is I'm the only one really saying anything about the market, while you've settled into the comfortable position of simply critiquing my statements. On top of that, when I'm right, I'm just lucky. When I'm wrong, I'm obviously a fool and a charlatan. Must be nice to criticize others about their market forecasts while never having to proffer one your own.
How about that VXX trade? A 15%move in an EFT in a couple of sessions is not too shabby, right? (never mind those QQQ puts I bought last Wed; could have sold those too for a 30% gain this morning, but got stopped out for a small loss -- such is the opportunity cost of disciplined trading).
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I was calmly asking you to explicitly state what you were doing because I thought part of it was unclear and I was trying to figure out what you meant by it. How you are so thin skinned that you take that as an insult and start up your cries of martyrdom, even after I explicitly state my intention and mindset in asking you, is totally beyond me.
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I posted this on July 11th, and the technical framework it lays out is still valid today:
Market note: a couple weeks ago I said that the SPX breaking over 1340 was bullish and my technical work showed that the market has some room to run to SPX 1390. Well, while the SPX did touch 1375 last week, but has since sold off and is currently bouncing around this important 1340 level as we speak. 1340 now represents support for the market, and it's critical that it hold here if the bulls stand a chance.
But I'll say this: the news flow (especially earnings) has been outright negative, which is not surprising since 50% of S&P profits are derived overseas and Europe is an economic mess. My sense is that these levels don't hold. The strategy before was to unleash shorts at or near 1390, but maybe that level doesn't come into play. Plan B is to see how the market acts around 1330-1340, and if it breaks (drops below 1320), the strategy will be to short the first bounce back to 1340 (markets almost always seem to retest broken support levels after they break, and these retests represent the best trading set-ups IMO).
So 1390-1400 is the "layup" short level, IMO. But see how the market keeps getting repelled as it approaches that level, and see how it keeps finding support between 1330-1340 (1337.56 is today's low). In TA, each test of support weakens it. I think 1330-1340 is toast soon enough, but I'm, sticking to the game plan from July 11th as represented by Plan A or Plan B, whichever comes first.
Read back through and find the words "sense", "seems", "maybe", "if"... I would call all the the above "speculation". Increased speculation is not bad or wrong, it simply carries higher amounts of risk. Hopefully your speculation pays off for you in greater returns.
Beating the market with the same amount of risk is what would interest me, otherwise it's not apples to apples. There are lots of ways to speculate with great potential to beat the market at higher risks. Would you agree about that difference?
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I was calmly asking you to explicitly state what you were doing because I thought part of it was unclear and I was trying to figure out what you meant by it. How you are so thin skinned that you take that as an insult and start up your cries of martyrdom, even after I explicitly state my intention and mindset in asking you, is totally beyond me.
There's the Grant we know and love. lol!
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I'm being totally serious here. I've never called you a charlatan or a fool, and I've never called you lucky on one of the trades you've been journaling the past month or so. If you've made your mind up that that's what the world thinks about you, fine, but your interpretation of things isn't borne out by the facts and it's verifiably false (https://forum.mrmoneymustache.com/search/).
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Read back through and find the words "sense", "seems", "maybe", "if"... I would call all the the above "speculation". Increased speculation is not bad or wrong, it simply carries higher amounts of risk. Hopefully your speculation pays off for you in greater returns.
These words are no accident. TA is equal part objective observation and subjective interpretation.
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These words are no accident. TA is equal part objective observation and subjective interpretation.
Then why the hell are you mad I called it acting on a hunch?
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These words are no accident. TA is equal part objective observation and subjective interpretation.
Then why the hell are you mad I called it acting on a hunch?
Because "hunch" is just another word for "gut feeling" which is another word for "guessing" which is a far cry from what I'm doing with my capital.
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No, gut feeling and hunches are intuition, which is the same thing as "subjective interpretation". Like, literally the exact same thing.
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No, gut feeling and hunches are intuition, which is the same thing as "subjective interpretation". Like, literally the exact same thing.
You're absolutely right. Half "gut feeling," half "objective observation." Like I said, half art, half science.
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And just like that, the SPX rips the bears a new one as it chugs mercilessly up to the 1390-1400 zone I've been writing about as my preferred level to short. I just took a break from work to find it tickling the underbelly of 1390 (1388.42 to be exact); since I prefer to enjoy my weekends risk free, I'm likely gonna hold off on any shorts today unless this puppy ramps another 10 SPX points into the close; then I'll probably layer into 1/3 or 1/2 my desired max short position.
(Oh, and kudos to the numerous Mustachians who avoided/warned against the Facecrook IPO by having the good sense to see through the hype. With declining year over year revenue and earnings growth, and with the stock currently languishing between 22-24 bucks, it's obvious the $38 IPO price was nothing more than another royal screw job by Wall Street).
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And just like that, the SPX rips the bears a new one as it chugs mercilessly up to the 1390-1400 zone I've been writing about as my preferred level to short.
I was wondering if we were going to hear from you, given the recent run, and whether or not you were going to follow through with your previous plans. Sounds like not quite yet.
How often do you actually place such bets? My impression from reading this thread so far is that you've got all kinds of ideas about what to do if the market behaves in a certain way, but it never seems to quite hit your trigger levels so I'm assuming you've been sitting on 100% cash through this entire thread. Is that correct?
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And just like that, the SPX rips the bears a new one as it chugs mercilessly up to the 1390-1400 zone I've been writing about as my preferred level to short.
I was wondering if we were going to hear from you, given the recent run, and whether or not you were going to follow through with your previous plans. Sounds like not quite yet.
How often do you actually place such bets? My impression from reading this thread so far is that you've got all kinds of ideas about what to do if the market behaves in a certain way, but it never seems to quite hit your trigger levels so I'm assuming you've been sitting on 100% cash through this entire thread. Is that correct?
Just to give some proper perspective Sol: my trading account represents about 15% of my liquid assets. I trade pretty infrequently (although I've made a couple small trades over the course of this week).
My primary brokerage account and my and my wife's IRA money is all cash, but I have every intention of putting all the IRA money to work over the next couple years if/when the markets come for sale; my primary brokerage account will stay mostly in cash unless prices really break down.
That said, I think day trading is a loser's game (the more I trade, the more I lose). But this 1400 SPX level has been on my radar for weeks. Also, I'm not saying the market is topping out here; I'm just saying I plan to short it for a trade which could last hours or even weeks -- I don't know yet.
Again, just a real time demonstration of an idea I've been cultivating for weeks; I'm not professing to be an awesome trader or anything like that -- this market has kicked my ass plenty over the years so I stay humble every time I put money to work. Along these lines, my first thought if/when I pull the short trigger is: "how much can I lose, and what is my cut-and-run level?" If I make money in the end, well then I'll gratefully take what the market giveth.
Looks like things will close out right around 1390, but I'm content to wait until Monday-Tuesday to place my bets. There should be some follow through (to the upside) to start the week, at which point I intend to let the bear out of it's cave!
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Market note: see how the past two sell-offs in the SPX were confined to the 1330-1340 level that I discussed above as representing resistance in late May and early June, but which has functioned as support throughout July (once the market broached that level to the upside -- in charting past resistance when overcome becomes future support).
Uncanny shit, really.
edit: it's worth noting (although I've been avoiding this to keep things simple) that the SPX has been in a nice uptrending channel the past two months -- what we refer to in TA as a series of higher highs, and a succession of higher lows, and today's rally brings the SPX near the top of that trend channel.
Furthermore, the SPX is approaching it's multi-year high of 1420 which it touched in April.
All this -- in addition to the horizontal resistance/support level of 1330-1340 and head and shoulders measured move to 1390-1400 -- creates a powerful nexus of resistance levels that should keep the market in check for now.
The thing with technical analysis is to not be married to either the bull or bear position, but to allow the charts to speak for the market itself. Should the SPX claw and chew it's way through the multiple layers of resistance currently residing between 1390-1420 over the course of the next few weeks or months, I see the SPX working to 1575 (old, all-time high set in 2007) in time -- fully 10% higher than where we are today. In my estimation, for the market to break above 1420, we'd have to see a couple things happen:
(1) Europe prints, and prints hard
(2) bonds (10 year) sell off
(3) the dollar weakens
(4) economic data show more of a "bend, but not broken" environment out there.
Not a probably outcome, IMO, but definitely possible and one I'm always looking at as I form my investment strategy.
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Sure, it's uncanny, whatever. But you haven't demonstrated that it can be systematically profited from on a risk-adjusted basis.
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Also didn't he say that once it hit that level he would effectively be going all in (with his investment pot) on the short at that time - sounds like he is waning a bit.
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Also didn't he say that once it hit that level he would effectively be going all in (with his investment pot) on the short at that time - sounds like he is waning a bit.
I wane? Do tell...
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(Oh, and kudos to the numerous Mustachians who avoided/warned against the Facecrook IPO by having the good sense to see through the hype. With declining year over year revenue and earnings growth, and with the stock currently languishing between 22-24 bucks, it's obvious the $38 IPO price was nothing more than another royal screw job by Wall Street).
Yeah, I'm one of those. Notice though, I didn't short it. Because despite my thoughts that it was overvalued, the market might disagree. It happened to agree.
But due to that psychology involved that you're always talking about, others may be buying FB even when I personally think it's overvalued. Then I lose.
The only way to beat that? Investing in solid prospects over a long term. Then you can ignore the short term irrational fluctuations.
But trying to beat irrationality, just because you know you're right, doesn't work.
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(Oh, and kudos to the numerous Mustachians who avoided/warned against the Facecrook IPO by having the good sense to see through the hype. With declining year over year revenue and earnings growth, and with the stock currently languishing between 22-24 bucks, it's obvious the $38 IPO price was nothing more than another royal screw job by Wall Street).
Yeah, I'm one of those. Notice though, I didn't short it. Because despite my thoughts that it was overvalued, the market might disagree. It happened to agree.
But due to that psychology involved that you're always talking about, others may be buying FB even when I personally think it's overvalued. Then I lose.
The only way to beat that? Investing in solid prospects over a long term. Then you can ignore the short term irrational fluctuations.
But trying to beat irrationality, just because you know you're right, doesn't work.
You couldn't short it because you couldn't get a borrow the first day, nor buy puts. ;)
And you're probably right about the difficulty of systematically profiting form short term irrational fluctuations, but a keen grasp the manifold forces impacting stock prices can give you an edge in properly allocating your capital over the long term by finding the right sectors/markets to invest in while avoiding potentially overvalued ones, both in terms of price and time.
Technical analysis, human psychology, and corporate/economic fundamentals each impact stock prices to varying degrees. And sometimes -- I'm pretty sure this is one of those times, like, right now -- our markets fail to properly price in the future (and markets are, after all, discounting mechanisms.)
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Sure, it's uncanny, whatever. But you haven't demonstrated that it can be systematically profited from on a risk-adjusted basis.
Does the inability to systematically profit off it on a risk adjusted basis render the practice invalid or useless?
Technical analysis -- which is but one tool in my investment tool box -- is systematically rejected by weak EMH. I beg to differ with this conclusion, but I'm not attempting to impose my view on you or anybody else; I'm merely attempting to demonstrate it's use in a real-time market trade and let the reader decide if there is any value here or not.
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Useless, clearly.
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Useless, clearly.
Clearly one investor's garbage is another investor's treasure.
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Buying Facebook (FB) here at 20.36. Buying half a position. Entering a buy order at 19.90 for the other half.
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Buying Facebook (FB) here at 20.36. Buying half a position. Entering a buy order at 19.90 for the other half.
Any exit points in mind?
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Buying Facebook (FB) here at 20.36. Buying half a position. Entering a buy order at 19.90 for the other half.
Any exit points in mind?
Tentative stop below $18? Not sure yet...
This last move lower reeks of capitulation.
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It's going lower.
But I have the discipline not to bet on it.
(This is my analysis. It's based mostly on my gut feeling, along with recent readings about mobile advertising and Zynga issues. Those are already priced in, but I don't see them getting better. Ot, to put it another way, it's past the head and shoulders and moved on to the knees and toes.)
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I posted this on July 11th, and the technical framework it lays out is still valid today:
Market note: a couple weeks ago I said that the SPX breaking over 1340 was bullish and my technical work showed that the market has some room to run to SPX 1390. Well, while the SPX did touch 1375 last week, but has since sold off and is currently bouncing around this important 1340 level as we speak. 1340 now represents support for the market, and it's critical that it hold here if the bulls stand a chance.
But I'll say this: the news flow (especially earnings) has been outright negative, which is not surprising since 50% of S&P profits are derived overseas and Europe is an economic mess. My sense is that these levels don't hold. The strategy before was to unleash shorts at or near 1390, but maybe that level doesn't come into play. Plan B is to see how the market acts around 1330-1340, and if it breaks (drops below 1320), the strategy will be to short the first bounce back to 1340 (markets almost always seem to retest broken support levels after they break, and these retests represent the best trading set-ups IMO).
So 1390-1400 is the "layup" short level, IMO. But see how the market keeps getting repelled as it approaches that level, and see how it keeps finding support between 1330-1340 (1337.56 is today's low). In TA, each test of support weakens it. I think 1330-1340 is toast soon enough, but I'm, sticking to the game plan from July 11th as represented by Plan A or Plan B, whichever comes first.
And just like that, after touching SPX 1392 (right into the short zone I've been discussing for weeks), the market rips to to the downside by 3%.
Again, the goal is to demonstrate the use of technical analysis in real time.
That's all.
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It's going lower.
But I have the discipline not to bet on it.
(This is my analysis. It's based mostly on my gut feeling, along with recent readings about mobile advertising and Zynga issues. Those are already priced in, but I don't see them getting better. Ot, to put it another way, it's past the head and shoulders and moved on to the knees and toes.)
Probably.
But not before it goes higher.
Also, your definition of "discipline" bears no relation to the real world use of the concept of discipline as applied to the practice of trading.
So, like, if you said what you just said to the floor traders at Goldman, Morgan, or any other financial firm that actually buys and sells stocks for a living, you would be laughed right out of the room.
Not my opinion, but fact.
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Buying Facebook (FB) here at 20.36. Buying half a position. Entering a buy order at 19.90 for the other half.
19.91 is the day's low; still only have 1/2 of my trading position on.
Cancelling the second order and going into watch mode.
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Buying Facebook (FB) here at 20.36. Buying half a position. Entering a buy order at 19.90 for the other half.
19.91 is the day's low; still only have 1/2 of my trading position on.
Cancelling the second order and going into watch mode.
If you were willing to double your current position today at 19.90, but not 19.91... why would you not be willing to do so tomorrow? Is it going to change that fast? If it does change by a few percent, are you going to sell that fast?
One big reason why day trading doesn't work is both the costs involved in frequent trading as well as the tax liabilities incurred.
My prediction of it going lower is based on the next few weeks and months. Not on what it'll do today or tomorrow. I have no clue what it'll do in the next 48 hours.
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Buying Facebook (FB) here at 20.36. Buying half a position. Entering a buy order at 19.90 for the other half.
19.91 is the day's low; still only have 1/2 of my trading position on.
Cancelling the second order and going into watch mode.
If you were willing to double your current position today at 19.90, but not 19.91... why would you not be willing to do so tomorrow? Is it going to change that fast? If it does change by a few percent, are you going to sell that fast?
One big reason why day trading doesn't work is both the costs involved in frequent trading as well as the tax liabilities incurred.
My prediction of it going lower is based on the next few weeks and months. Not on what it'll do today or tomorrow. I have no clue what it'll do in the next 48 hours.
Pure tape reading instinct at work, nothing more.
You say it's going lower, I say it's going higher first.
Loser buys the other a beer!
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I posted this on July 11th, and the technical framework it lays out is still valid today:
Market note: a couple weeks ago I said that the SPX breaking over 1340 was bullish and my technical work showed that the market has some room to run to SPX 1390. Well, while the SPX did touch 1375 last week, but has since sold off and is currently bouncing around this important 1340 level as we speak. 1340 now represents support for the market, and it's critical that it hold here if the bulls stand a chance.
But I'll say this: the news flow (especially earnings) has been outright negative, which is not surprising since 50% of S&P profits are derived overseas and Europe is an economic mess. My sense is that these levels don't hold. The strategy before was to unleash shorts at or near 1390, but maybe that level doesn't come into play. Plan B is to see how the market acts around 1330-1340, and if it breaks (drops below 1320), the strategy will be to short the first bounce back to 1340 (markets almost always seem to retest broken support levels after they break, and these retests represent the best trading set-ups IMO).
So 1390-1400 is the "layup" short level, IMO. But see how the market keeps getting repelled as it approaches that level, and see how it keeps finding support between 1330-1340 (1337.56 is today's low). In TA, each test of support weakens it. I think 1330-1340 is toast soon enough, but I'm, sticking to the game plan from July 11th as represented by Plan A or Plan B, whichever comes first.
And just like that, after touching SPX 1392 (right into the short zone I've been discussing for weeks), the market rips to to the downside by 3%.
Again, the goal is to demonstrate the use of technical analysis in real time.
That's all.
On one hand it seems you were on the button, on the other you touched on different levels as the market moved and if you would have shorted at 1340 you still be in a losing trade.
But it is a starting point and the more you describe the more we can draw conclusions about your abilities and whether or not is repeatable. So yes the real time aspect is great for this.
I am still not convinced but open minded and interested in following, so keep it going.
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On one hand it seems you were on the button, on the other you touched on different levels as the market moved and if you would have shorted at 1340 you still be in a losing trade.
But it is a starting point and the more you describe the more we can draw conclusions about your abilities and whether or not is repeatable. So yes the real time aspect is great for this.
I am still not convinced but open minded and interested in following, so keep it going.
If you read closer, you'll see I said if the market breaks below 1320 (and thus negating the 1330-1340 support zone -- typically 10 SPX points below the band signals to me a break), then plan B was to short a reactive move back up to 1340 (in TA, the best time to short is on a retest of broken support level, in this case 1340; it never quite broke, hence no retest).
And I'm glad you're interested. Like I've been saying, we're just having a dialogue, not attempting to brain-wash anybody.
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If you were willing to double your current position today at 19.90, but not 19.91... why would you not be willing to do so tomorrow? Is it going to change that fast? If it does change by a few percent, are you going to sell that fast?
One big reason why day trading doesn't work is both the costs involved in frequent trading as well as the tax liabilities incurred.
My prediction of it going lower is based on the next few weeks and months. Not on what it'll do today or tomorrow. I have no clue what it'll do in the next 48 hours.
(Un)fortunately, this is the busiest week and weekend of the year for my business, so I need to prioritize. If I can't be available to manage my risk every 10-20 minutes, I cut back the size of the trade.
Doesn't mean I won't double down over the next day or two, just means not right now.
Still long from 20.30 (got a better fill than I originally thought).
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Pure tap reading instinct at work, nothing more.
You say it's going lower, I say it's going higher first.
Loser buys the other a beer!
It very well could go higher before lower. I have no idea what it'll do in the short term. I'm talking about a (slightly) longer time frame (though still what I would traditionally call a very short time frame). But even that I could be wrong.
Next time you're in Vegas, I'll buy you a drink regardless of what FB stock does.
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Facebook stock now less than $20...
Just sayin'..
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Facebook stock now less than $20...
Just sayin'..
The question is, have all the weak holders who bought at the $38 IPO price puked up the stock yet?
Yup. Right here and now.
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It's going lower.
But I have the discipline not to bet on it.
(This is my analysis. It's based mostly on my gut feeling, along with recent readings about mobile advertising and Zynga issues. Those are already priced in, but I don't see them getting better. Ot, to put it another way, it's past the head and shoulders and moved on to the knees and toes.)
Here is my gut feeling.. The social media stocks like Facebook, LinkedIn, whatever will go down to single digit.. Let's see who is right.. LOL This is fun!
BTW, smedleyb, I don't disagree with your investment approach (active management I think is the proper term). It does take a lot more work and it's not anybody's game... Given the current side step market trends, this might be a way to make some money, but takes a lot of work.
Since you are into TA, I do suggest you read Mike Stathis' work and his two books he published in 2006. Especially his investment book might gain you a lot more insights to make you a better TA trader. I find his work very fascinating. This is the guy who has 95% accuracy in market forecast based on independent thinking and ironically, you have seen the same thing.. that is the market will have a pretty big correction in the coming short years.. So I think you stand a pretty good chance in making some good money.
Good luck!
here is Mike's free article collection. majority are on his own site AVA Research and most are restricted access.
http://www.marketoracle.co.uk/UserInfo-Mike_Stathis.html
You can find his books on amazon.
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Here is my gut feeling.. The social media stocks like Facebook, LinkedIn, whatever will go down to single digit.. Let's see who is right.. LOL This is fun!
They may or may not sink that low; what I do know is that social media will grow much quicker than any other part of the economy over the next decade; anyone interested in growth or achieving above average market returns needs to look at the space for possible investment opportunities. Perhaps the leaders in the space have yet to emerge (twitter); perhaps they're already here (FB). At some point, it might make sense to buy a basket of these stocks and let them ride for the next 10 years.
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Here is my gut feeling.. The social media stocks like Facebook, LinkedIn, whatever will go down to single digit.. Let's see who is right.. LOL This is fun!
IIRC FB should be at $7 based on current earnings (though obviously forward projected P/E is different).
They may or may not sink that low; what I do know is that social media will grow much quicker than any other part of the economy over the next decade; anyone interested in growth or achieving above average market returns needs to look at the space for possible investment opportunities. Perhaps the leaders in the space have yet to emerge (twitter); perhaps they're already here (FB). At some point, it might make sense to buy a basket of these stocks and let them ride for the next 10 years.
Too bad there is no way to invest in "social media" - pick individual ones and you could lose big, even if "social media" does grow. For example, if you had thought social media would be big a few years ago, and you bought a bunch of MySpace stock (if that were possible). What if google+ is the next big thing? Or something not invented yet displaces twitter or FB? You can't just invest in the idea of "social media," so there's no real way to take advantage of your feeling.
Plus, even if you think it will grow over the next decade, that's irrelevant to what FB does in the next 48 hours, which is complete speculation (unlike the idea that it'll grow in the next decade, which could be based on other info).
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Buying Facebook (FB) here at 20.36. Buying half a position. Entering a buy order at 19.90 for the other half.
Selling entire position as it breaks over $22.00.
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Too bad there is no way to invest in "social media" - pick individual ones and you could lose big, even if "social media" does grow. For example, if you had thought social media would be big a few years ago, and you bought a bunch of MySpace stock (if that were possible). What if google+ is the next big thing? Or something not invented yet displaces twitter or FB? You can't just invest in the idea of "social media," so there's no real way to take advantage of your feeling.
Invest in my feeling?:
http://www.huffingtonpost.com/2011/09/01/growth-social-media-infographic_n_945256.html
Graph after graph showing the tremendous growth of social media sites over just the past several years; real, hard facts supporting my contention that social media is the wave of the future.
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Too bad there is no way to invest in "social media" - pick individual ones and you could lose big,
you can actually, buy social media ETF - SOCL
but be aware by buying SOCL, you are putting a lot of bets on FB, which I am sure will sink even lower.
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Too bad there is no way to invest in "social media" - pick individual ones and you could lose big, even if "social media" does grow. For example, if you had thought social media would be big a few years ago, and you bought a bunch of MySpace stock (if that were possible). What if google+ is the next big thing? Or something not invented yet displaces twitter or FB? You can't just invest in the idea of "social media," so there's no real way to take advantage of your feeling.
Invest in my feeling?:
http://www.huffingtonpost.com/2011/09/01/growth-social-media-infographic_n_945256.html
Graph after graph showing the tremendous growth of social media sites over just the past several years; real, hard facts supporting my contention that social media is the wave of the future.
You really should read this following article before you lose your undies on social media...maybe wait till the bubble bursts and wait for the real leaders to rise.. Nothing can deviate from the fundamentals for too long... dotcom bubble? hint hint.. and true leaders do rise from the ashes ... amazon anyone?
So please do yourself a favor, and read this piece.
http://www.avaresearch.com/avanew/articles/1093/Did-You-Profit-From-Shorting-Social-Media-Stocks-If-Not-You-Havent-Been-Paying-Attention..html
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And even if social media grows, that growth very well could be already calculated in current prices, so any slight under performing loses you money.
Also, it may grow, but not profitably so. Just because it becomes bigger doesn't mean it scales profit-wise.
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Mechanic, thanks for the link and I did read it.
Jewish insiders sold millions of shares of Facebook, Zynga, Groupon prior to the collapse in these stocks.
Meanwhile, insiders of LinkedIn have played yo-yo with shares, selling high, piling back in at the lows and repeating the cycle. But mark my words, there are only so many of these cycles available to these crooks. And at some point in the not so distant future, insiders will sell and not buy back shares. LinkedIn too will be much lower than it is today. That is a guarantee.
No qualms at all with the author's negative view of SM stocks over the near term -- short has been right for the most part (although I've been reading about plenty of sharp traders who got crushed shorting LNKD today -- up 20% on great earnings, and I think headed higher as shorts will continue to panic and cover). Definitely some qualms with his reference to "Jewish insiders." Not sure what that was all about...
But you're right -- I'm looking for the next Amazon, the next Google, the next Priceline in the social media space. I think we have a multi-year window to begin separating out the pretenders from the contenders. I think there will be many winners in this space.
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And even if social media grows, that growth very well could be already calculated in current prices, so any slight under performing loses you money.
Also, it may grow, but not profitably so. Just because it becomes bigger doesn't mean it scales profit-wise.
Is there a specific specific reason you think social media can't grow it's profits at a rate equal to if not greater than its revenues?
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Is there a specific specific reason you think social media can't grow it's profits at a rate equal to if not greater than its revenues?
Not in particular, other than the idea of their product being mostly based on a free service based on ads, which may or may not have a very profitable future.
The main point of my post is that you noted:
Graph after graph showing the tremendous growth of social media sites over just the past several years
And I was pointing out that fact doesn't necessarily translate to profits for the investor.
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Dipping my toe in the water with some Nov SPY puts. Nothing crazy, and I would describe my position as being roughly 5-10% of a normal short bet. But with 1400 here and now, and with 1420 being ultimate resistance, I feel compelled to act.
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a free service based on totally ineffective ads
FTFY.
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a free service based on totally ineffective ads
FTFY.
Been talking to GM, huh?
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Yeah, us generals are pals.
Or something.
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Oh, the irony of bashing social media on social media...
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I see nothing contradictory about it, although when you state it like that there is a superficial irony.
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Oh, the irony of bashing social media on social media...
Nobody said social media wasn't a viable form of communication - the question is whether or not it is economically viable.
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Oh, the irony of bashing social media on social media...
Nobody said social media wasn't a viable form of communication - the question is whether or not it is economically viable.
Right, because 100 billion dollar IPO's scream "not economically viable."
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Weren't you just smug like twenty posts ago about how you knew the stock was going to drop and it wasn't worth its asking price?
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Weren't you just smug like twenty posts ago about how you knew the stock was going to drop and it wasn't worth its asking price?
If they priced Facebook at $20, it would be at $40 today.
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Because the company would be automagically worth twice as much!
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Weren't you just smug like twenty posts ago about how you knew the stock was going to drop and it wasn't worth its asking price?
If they priced Facebook at $20, it would be at $40 today.
Nice idea SmedleyB! You may well be right.
Psychology and all.
If only they had taken expert advice...
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Weren't you just smug like twenty posts ago about how you knew the stock was going to drop and it wasn't worth its asking price?
If they priced Facebook at $20, it would be at $40 today.
Nice idea SmedleyB! You may well be right.
Psychology and all.
If only they had taken expert advice...
Morgan Stanley was the point man on the IPO but most of the big names got a piece. Gotta feed all the dogs I guess.
The scenario I'm describing (pricing it lower) is similar to the psychology which drives stocks higher after announcing a stock split; obviously no fundamental value has been created, but the stocks rally nonetheless.
More importantly, the more shareholders who get a favorable price at the outset, the less compelled they feel to sell since as the stock drifts higher and rewards the buyers rather than punishing them, they become more confident (profits tend to do that) and thus "strong holders."
My recent trade in FB was based on what is known as a 50% Fibonacci retracement level ( http://en.wikipedia.org/wiki/Fibonacci_retracement) which worked to $19 (low was 19.80 vs. IPO price of $38), but it also relied on the idea that the guys buying at $38 or higher became weak, scared holders and started puking it up at $19 and change. As you can see the stock is up nicely since then (10%) and might have another couple points in the tank. Granted I'm no longer involved since I caught a quick move, but I'm attempting to show the logic behind the entry point, which was a subtle mix of TA and behavioral psychology (and even "fundamental" since FB is the unquestioned king in the social media space and I think a valuable company).
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Dipping my toe in the water with some Nov SPY puts. Nothing crazy, and I would describe my position as being roughly 5-10% of a normal short bet. But with 1400 here and now, and with 1420 being ultimate resistance, I feel compelled to act.
Expanding short bet at SPX 1404, 25% short. Tentative stop above 1420.
edit: bank index (BKX) attempting to break out of near-term trading range (top of range 46.5, currently at 46.86), but running into multiple resistance points at 47 (downtrend line and lows from mid-April). In our financed based economy the financial stocks often hold clues as to the market's next move. Bonds selling off too, signaling a "risk on" menatlity. If I seem sheepish on my short side bet, it's because these other variables do not support a sustained downside move.
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Dipping my toe in the water with some Nov SPY puts. Nothing crazy, and I would describe my position as being roughly 5-10% of a normal short bet. But with 1400 here and now, and with 1420 being ultimate resistance, I feel compelled to act.
Expanding short bet at SPX 1404, 25% short. Tentative stop above 1420.
edit: bank index (BKX) attempting to break out of near-term trading range (top of range 46.5, currently at 46.86), but running into multiple resistance points at 47 (downtrend line and lows from mid-April). In our financed based economy the financial stocks often hold clues as to the market's next move. Bonds selling off too, signaling a "risk on" menatlity. If I seem sheepish on my short side bet, it's because these other variables do not support a sustained downside move.
Since nothing much has changed since I wrote this, I'm lowering my stop on my sheepish SPX bet to just above yesterday's high (1408). The SPX is about 6 points away from that level, and it's right where my cost average from my short is (1402). Right now I have little confidence my trade is going to work, but I'm removing the emotional element by placing a stop above yesterday's high. If it triggers, I'm out of the trade regardless what my gut tells me (that it should be going down).
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Since nothing much has changed since I wrote this, I'm lowering my stop on my sheepish SPX bet to just above yesterday's high (1408). The SPX is about 6 points away from that level, and it's right where my cost average from my short is (1402). Right now I have little confidence my trade is going to work, but I'm removing the emotional element by placing a stop above yesterday's high. If it triggers, I'm out of the trade regardless what my gut tells me (that it should be going down).
The longer the SPX can stay above the 1400 level, the better the odds for a sustained move to 1425 and beyond. This phenomenon is know as basing above a resistance level (1390-1400); not to mention the averages are working off their overbought conditions by just trading sideways, and therefore gathering strength for their next move (little base camps to use when climbing a mountain).
I'm still involved, but even though I shorted right at these levels I'm slightly down due to the theta (decay in time value) of the SPY puts I own. Thankfully it's a small bet, with tight parameters (stop above SPX 1408), even if it looks more and more like a loser each passing day. I was even getting ready to sell the puts this morning at SPX 1390 ( I thought it was heading there this morning) but the market never really came close (1395.62 was the low) to hitting that number.
There's a glimmer of hope the bears might knock it down over the next several sessions but I'm not holding my breath.
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If it's predictable like that, why doesn't one just write a computer program to trade based on certain conditions (note: I am not referring to HFT)?
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If it's predictable like that, why doesn't one just write a computer program to trade based on certain conditions (note: I am not referring to HFT)?
They do:
http://en.wikipedia.org/wiki/Technical_analysis_software
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So why aren't there more people getting rich off of that?
And why don't a sufficient number of those reduce the opportunities?
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People don't get rich off TA because it makes Astrology look good. Most money made from Technical analysis is from chartists selling their books and systems to the gullible on how to do it...:)
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People don't get rich off TA because it makes Astrology look good. Most money made from Technical analysis is from chartists selling their books and systems to the gullible on how to do it...:)
TA is just one piece of the market puzzle. Investor psychology and company/sector/macro-economic fundamentals are the other two core pieces that every investor should factor into their market outlook and long-term investment allocation.
But yes, there is a large industry out there dedicated to selling traders techniques, systems, and strategies which are ultimately designed to separate wanna be traders from their dollars. But in that industry there do exist pockets of genuine people who seek to clarify the market mechanism to novice investors possessing a desire to understand Wall Street, not in order to profit from its short term gyrations, but for the sake of formulating and implementing long term investment strategies.
TA is a real force that moves stocks just as much as stocks move the charts. Nobody is saying anybody has to bow down at the altar of TA, but to dismiss it as irrelevant or as a bunch of superstitious BS is like an atheist pretending the world is devoid of theists because in his mind God is dead.
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I'm still involved, but even though I shorted right at these levels I'm slightly down due to the theta (decay in time value) of the SPY puts I own. Thankfully it's a small bet, with tight parameters (stop above SPX 1408), even if it looks more and more like a loser each passing day. I was even getting ready to sell the puts this morning at SPX 1390 ( I thought it was heading there this morning) but the market never really came close (1395.62 was the low) to hitting that number.
Note: stop triggered above 1408 this morning on small SPY put purchase for a small loss.
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People don't get rich off TA because it makes Astrology look good. Most money made from Technical analysis is from chartists selling their books and systems to the gullible on how to do it...:)
TA is just one piece of the market puzzle. Investor psychology and company/sector/macro-economic fundamentals are the other two core pieces that every investor should factor into their market outlook and long-term investment allocation.
Here is what I see why trading is so hard for average folks. You have to be good at:
- valuation
- behavioral finance
- macroeconomics
- risk management
And TA plays a huge part to assist.
97% of folks are gonna suck at it. Just like most of the engineers I encountered are not that great.
Investment is just as hard as all other skills to master. It takes years of dedication, studying, making mistakes and long hour of work to make one a great investor. I just don't see majority of the people would have either the time or the dedication to achieve it.
If you think you can put 2 hours a day aside and trade for 3 years make you a good investor, you are fooling yourself.
so for majority of the folks out there, your best bet is to dollar cost averaging into low cost funds that spread across different investment classes., hence asset allocation. When market takes a huge dip and got you wet your pants, you can pump in some extra dollars to lower your cost basis.. You may come out ahead one day.
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Although there's no evidence that putting work in makes it possible for you to beat the market.
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^^ No evidence and why don't the 3% of experts get hired by and help the large fund managers to always beat the market? The evidence is in it doesn't work!
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Note: stop triggered above 1408 this morning on small SPY put purchase for a small loss.
Fascinating how the SPX has traded around the 1400 level for the past 8 sessions or so. A level TA identified months ago as significant has proven its worth as the market has reached this point and has traded in the narrowest range for the longest period of time since February.
It's like the market was magnetized to this 1400 number and now that it's here it can't decide which way to break.
I confess I don't have an inkling of what the market wants to do next. So I'm comfortable being 100% cash for the time being.
I mean when Marc Cuban and Bill Gross both tell you that the market sucks, that it's rigged, and to expect anemic returns going forward, why stay invested at all?
But that's just me agreeing with them.
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Sell some puts. Make money in a flat market off others taking insurance.
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Sell some puts. Make money in a flat market off others taking insurance.
Covered call writing is the best strategy for extracting income in a sideways market, IMO.
And just like a moth to flame, reloading on some puts this morning (QQQ at 67.20). QQQ NOV paper to be precise. About equal position wise to the puts I sold yesterday. I can't shake the feeling a violent jolt downward is right around the corner. Pure intuition at work but contemplating placing a stop right above yesterday's highs just in case, although above NDX 2750 seems like the better cut and run level.
Keeping it small and tight for now. Small losses are bearable -- until death by a thousand paper cuts.
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I really hope all the readers understand that this sort of market timing 'investing' is speculation and is NOT Mustachian.
Your odds of beating the market long term is zero, and instead you'll be feeding wall street fees, while becoming disillusioned with the stock market as your bets loose, and thus becoming risk adverse and not investing in the stock market.
Vanguard. Asset allocation. Regular savings. Tax optimization.
Increasing saving rate. Lower spending. Reduce debt.
Ignore the market.
There is no need to gamble to achieve FI. Your odds are better at your local casino, either poker if you have skill, or craps if you don't.
Interesting as this discussion is, it is not representative of mustachian investing, and should come with large print health warnings.
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Absolutely, Mr Mark. Well said, and I 100% agree.
No one should be doing this at home, unless they want to lose money. (The rare exception due to the law of large numbers aside. Yes, sometimes people do win the lottery. No, that doesn't mean you should play.)
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I don't see how developing a set of tools to better understand the forces impacting markets -- historical cycles, psychological forces (greed, fear, and apathy), fundamental issues (balance sheets, management, income statements), technical analytical tools (charts move markets as much as markets move stocks), massive governmental stimulus -- is anti-mustachian.
Any one who bothers to read this thread -- and damn it's a long one, but good debates tend to last a while -- knows exactly what I'm all about. I've tried to stimulate discussion/dialogue and to give real-time examples of practices that may seem foreign to most.
Fundamentally, I vehemently disagree with Mr Mark and Arebelspy on several core issues: first, I think it's possible to see the stock market passing through various cycles which necessitates a different investment allocation depending where we are in the cycle. While "timing" the market on a daily basis is a fool's errand and should be attempted only with play money, "timing" the markets based on their short and long cycles is an entirely different animal and a vital tool for good investing.
Second, I believe that cash is an asset too, and that discouraging investors from maintaining high levels of cash is just bad financial advice given our current market, which includes: flash crashes; opaque HFT trading; trillions in governmental liquidity (which you and I must pay back); toxic debts; "too big to fail" banks; sovereign debt collapse, etc. These are the most rigged, artificially jacked up markets in history, so for me to say "yeah, just go ahead and pump your money into that index fund at these levels because over time you make money, etc," I need to suspend my better critical judgement.
Third, I think introducing technical, psychological, and fundamental analysis into our ability to discuss stocks is not an invitation to go hog wild buying and selling stocks based on this or that indicator, but rather an attempt to demonstrate that the market does possess an inner logic which -- while not fully obvious to mere mortal investors -- is capable of being talked about intelligently and described.
Or as Shakespeare put, there are more things in heaven and earth, than are dreamt of in any of our investment philosophies. Mustachians out there know this and don't need to be told what to do by any of us.
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I think the difference is that we see that of all of the people that "understand" market timing (TA, psychological forces, etc.), there hasn't been any evidence that this understanding has helped them beat the market at all, and indeed, a mountain of evidence to the contrary.
Thus it's a promise of false knowledge, an illusion, a mirage, at best.
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I think the difference is that we see that of all of the people that "understand" market timing (TA, psychological forces, etc.), there hasn't been any evidence that this understanding has helped them beat the market at all, and indeed, a mountain of evidence to the contrary.
Thus it's a promise of false knowledge, an illusion, a mirage, at best.
In that case, here's some more peddlers of false knowledge:
http://seekingalpha.com/article/168895-shiller-s-cyclically-adjusted-price-earning-ratio-as-long-term-timing-indicator
A timing method that achieves slightly greater gains over index investing at nearly half the level of volatility.
Schiller, of course, is the father of behavioral economics who argues that emotions and valuations have a much greater impact on asset prices than rational expectations do. He correctly forecast the market implosion of 2000 and was all over the housing bubble in 2006.
http://en.wikipedia.org/wiki/Robert_J._Shiller
In 1981 Shiller published an article in the American Economic Review titled "Do stock prices move too much to be justified by subsequent changes in dividends?" He challenged the efficient markets model, which at that time was the dominant view in the economics profession. Shiller argued that in a rational stock market, investors would base stock prices on the expected receipt of future dividends, discounted to a present value. He examined the performance of the U.S. stock market since the 1920s, and considered the kinds of expectations of future dividends and discount rates that could justify the wide range of variation experienced in the stock market. Shiller concluded that the volatility of the stock market was greater than could plausibly be explained by any rational view of the future.
I'm not saying anybody is right or wrong. I'm simply saying that these "illusions" and "mirages" you claim I possess are pretty widespread in both academia, and especially -- most definitely -- on Wall Street.
In other words, stop shooting the messenger.
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I think the difference is that we see that of all of the people that "understand" market timing (TA, psychological forces, etc.), there hasn't been any evidence that this understanding has helped them beat the market at all, and indeed, a mountain of evidence to the contrary.
Thus it's a promise of false knowledge, an illusion, a mirage, at best.
In that case, here's some more peddlers of false knowledge:
http://seekingalpha.com/article/168895-shiller-s-cyclically-adjusted-price-earning-ratio-as-long-term-timing-indicator
A timing method that achieves slightly greater gains over index investing at nearly half the level of volatility.
Schiller, of course, is the father of behavioral economics who argues that emotions and valuations have a much greater impact on asset prices than rational expectations do. He correctly forecast the market implosion of 2000 and was all over the housing bubble in 2006.
http://en.wikipedia.org/wiki/Robert_J._Shiller
In 1981 Shiller published an article in the American Economic Review titled "Do stock prices move too much to be justified by subsequent changes in dividends?" He challenged the efficient markets model, which at that time was the dominant view in the economics profession. Shiller argued that in a rational stock market, investors would base stock prices on the expected receipt of future dividends, discounted to a present value. He examined the performance of the U.S. stock market since the 1920s, and considered the kinds of expectations of future dividends and discount rates that could justify the wide range of variation experienced in the stock market. Shiller concluded that the volatility of the stock market was greater than could plausibly be explained by any rational view of the future.
I'm not saying anybody is right or wrong. I'm simply saying that these "illusions" and "mirages" you claim I possess are pretty widespread in both academia, and especially -- most definitely -- on Wall Street.
In other words, stop shooting the messenger.
I was actually meaning to ask you if you follow any of Shiller's work.
I'm 100% in arebelspy's camp on short term market timing. I think that's very difficult to do consistently, if it all. However long-term market timing makes all the sense in the world to me. Hold less equities when they're over-valued (compared to long-term historical trends) and more when they're under-valued. I can also easily get into a simple strategy that just has me checking the P/E10 ratio at the beginning of the year and setting my asset allocation based on that and then not visiting it again until the following year (or have reminders set up if the P/E10 crosses some threshold to go change the allocation).
That said... let's be honest here - the long-term timing aspect may be mixed in there - but the majority of what you're talking about here is the short-term timing that makes most of the MMM community uncomfortable.
To everyone else... Yes those warnings need to be there - but, at this point, it's very obvious to anyone reading through the entire thread that this is not the recommended approach for most people. Do we really need to keep posting these warnings? If someone is dumb enough to open up the last entry of a thread and just follow whatever is in there - I think they kind of deserve it if they get fucked over. Stupidity should have it's price...
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Or more false knowledge contained in this paper by economist Wade Pfau:
Abstract:
Valuation-based market timing demonstrates greater potential to improve risk-adjusted returns for conservative long-term investors than given credit by Fisher and Statman (2006). On a risk-adjusted basis, market-timing strategies provide comparable returns as a 100 percent stocks buy-and-hold strategy but with substantially less risk. Meanwhile, market timing provides comparable risks and the same average asset allocation as a 50/50 fixed allocation strategy, but with much higher returns. Also, defining market timing as either 100 percent stocks or 100 percent Treasury bills does not provide a hedge against the possibility that valuations may depart from their historical averages for extended periods.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1876225
Pfau's work is given positive mention in this article by MMM on the 4% rule:
http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/
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That said... let's be honest here - the long-term timing aspect may be mixed in there - but the majority of what you're talking about here is the short-term timing that makes most of the MMM community uncomfortable.
Trust me John, it makes me uncomfortable too given the audience. But let's be honest, it was suggested that I attempt a kind of trading diary in order to illustrate some of these TA and psychological concepts at work. It's what I attempted to do for a few weeks. But alas, the conversation always turns back into the same old theoretical back and forth.
If the illustration of real time TA is not useful for anybody, I understand that too and will happily shut it down. I keep a running journal of all my trades so it's not like I'm going above and beyond to express my trading ideas in this forum.
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That said... let's be honest here - the long-term timing aspect may be mixed in there - but the majority of what you're talking about here is the short-term timing that makes most of the MMM community uncomfortable.
Trust me John, it makes me uncomfortable too given the audience. But let's be honest, it was suggested that I attempt a kind of trading diary in order to illustrate some of these TA and psychological concepts at work. It's what I attempted to do for a few weeks. But alas, the conversation always turns back into the same old theoretical back and forth.
If the illustration of real time TA is not useful for anybody, I understand that too and will happily shut it down. I keep a running journal of all my trades so it's not like I'm going above and beyond to express my trading ideas in this forum.
Oh I'm completely on board with the trading diary - I'm pretty sure I was one of the one's making the suggestion. I was just trying to point out that Shiller and Pfau's work (I've read a few works from each and think there is a lot to what they've found) argue for long-term timing while most of the trading you've posted here is short-term timing. Two very different things - in my opinion.
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Oh I'm completely on board with the trading diary - I'm pretty sure I was one of the one's making the suggestion. I was just trying to point out that Shiller and Pfau's work (I've read a few works from each and think there is a lot to what they've found) argue for long-term timing while most of the trading you've posted here is short-term timing. Two very different things - in my opinion.
No disagreement here.
I would add that in order to cope with the shorter term volatility of swing trading, sound money management principles are required to make sure one is around to profit from tomorrow's opportunities. It's what separates the speculator from the gambler, IMO.
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You're telling me Shiller and Pfau day trade? I'll take that bet.
Long term market trends are different than what you are touting here. I highly doubt Shiller concerns himself with head and shoulders, knees and toes signals, or support and resistance points, etc.
Oh I'm completely on board with the trading diary - I'm pretty sure I was one of the one's making the suggestion. I was just trying to point out that Shiller and Pfau's work (I've read a few works from each and think there is a lot to what they've found) argue for long-term timing while most of the trading you've posted here is short-term timing. Two very different things - in my opinion.
No disagreement here.
If you agree what they do is different than what you are claiming works, why bring them up as examples of what you do working?
That's disingenuous, at best.
I would add that in order to cope with the shorter term volatility of swing trading, sound money management principles are required to make sure one is around to profit from tomorrow's opportunities. It's what separates the speculator from the gambler, IMO.
I've heard plenty of gamblers say the same thing, how what they are doing suddenly isn't gambling due to their money management.
You're still gambling on short term randomness, just using money management to make your bankroll (portfolio) last longer.
There is no proof that it is a successful strategy. There is no reason to believe it is +EV, so all you are doing is losing your money slower than if you were risking a larger percentage of your portfolio.
Once again, I say: "I think the difference is that we see that of all of the people that "understand" market timing (TA, psychological forces, etc.), there hasn't been any evidence that this understanding has helped them beat the market at all, and indeed, a mountain of evidence to the contrary."
Your response was that there's a widespread belief on Wall Street that it works, and I won't argue that. It doesn't suddenly make it work though, just because people believe it.
And your two cited things, long term trends versus short term trading, are two very different things. I'm betting you Shiller and Pfau's timeframe on most trades isn't measured in minutes, or hours, days, or even weeks, but years.
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You're telling me Shiller and Pfau day trade? I'll take that bet.
Long term market trends are different than what you are touting here. I highly doubt Shiller concerns himself with head and shoulders, knees and toes signals, or support and resistance points, etc. (A)
Oh I'm completely on board with the trading diary - I'm pretty sure I was one of the one's making the suggestion. I was just trying to point out that Shiller and Pfau's work (I've read a few works from each and think there is a lot to what they've found) argue for long-term timing while most of the trading you've posted here is short-term timing. Two very different things - in my opinion.
No disagreement here.
If you agree what they do is different than what you are claiming works, why bring them up as examples of what you do working?
That's disingenuous, at best.
I would add that in order to cope with the shorter term volatility of swing trading, sound money management principles are required to make sure one is around to profit from tomorrow's opportunities. It's what separates the speculator from the gambler, IMO.
I've heard plenty of gamblers say the same thing, how what they are doing suddenly isn't gambling due to their money management.
You're still gambling on short term randomness, just using money management to make your bankroll (portfolio) last longer.
There is no proof that it is a successful strategy. There is no reason to believe it is +EV, so all you are doing is losing your money slower than if you were risking a larger percentage of your portfolio.
Once again, I say: "I think the difference is that we see that of all of the people that "understand" market timing (TA, psychological forces, etc.), there hasn't been any evidence that this understanding has helped them beat the market at all, and indeed, a mountain of evidence to the contrary." (B)
Your response was that there's a widespread belief on Wall Street that it works, and I won't argue that. It doesn't suddenly make it work though, just because people believe it.
And your two cited things, long term trends versus short term trading, are two very different things. I'm betting you Shiller and Pfau's timeframe on most trades isn't measured in minutes, or hours, days, or even weeks, but years.
I love it when posters stop being diplomatic and let it all hang out. I mean, I never doubted Arebelspy had nothing but disdain for TA, but his constant belittling of TA formations (knees and toes?) reveals his true appreciation of the endeavor.
As far as what Shiller thinks about hard work, technical, fundamental, and psychological analysis, in the pursuit of successful stock investing:
(A):
Skousen: Traders say that Wall Street is not a stock market but a market of stocks, and that you can still make good money investing in individual stocks by using sound fundamental and technical analysis. You agree?
Shiller: That’s right. Warren Buffett is an example, and here at Yale, David Swenson. [Swenson manages the Yale pension fund, which has overperformed the market for 20 years.] I don’t want to exaggerate the possibility of making a lot of money in the stock market. It is a competitive business, and most money managers can’t beat the market. But there is a reward to sound, intelligent research.
http://www.investmentu.com/2006/September/20060921.html
(B)
In a paper published in the Journal of Finance, Dr. Andrew W. Lo, director MIT Laboratory for Financial Engineering, working with Harry Mamaysky and Jiang Wang found that "
Technical analysis, also known as "charting," has been a part of financial practice for many decades, but this discipline has not received the same level of academic scrutiny and acceptance as more traditional approaches such as fundamental analysis. One of the main obstacles is the highly subjective nature of technical analysis – the presence of geometric shapes in historical price charts is often in the eyes of the beholder. In this paper, we propose a systematic and automatic approach to technical pattern recognition using nonparametric kernel regression, and apply this method to a large number of U.S. stocks from 1962 to 1996 to evaluate the effectiveness of technical analysis. By comparing the unconditional empirical distribution of daily stock returns to the conditional distribution – conditioned on specific technical indicators such as head-and-shoulders or double-bottoms – we find that over the 31-year sample period, several technical indicators do provide incremental information and may have some practical value.[78]
http://en.wikipedia.org/wiki/Technical_analysis#cite_note-77
Now granted, from this observation it does not follow that a person armed with some charts, indicators, and moving averages can successfully kick the market's ass. Hardly. But it does lend credence to the notion that there is useful information revealed through technical analysis that an investor can use in approaching the question of when to buy or sell.
(Oh, and BTW Arebelspy, the fact that you've heard gamblers use the concept "money management" does not invalidate its use in the field of active stock trading. Your own personal anecdotes, while interesting, hardly offer conclusive proof one way or the other.)
Remember, the point of this thread is not to argue for the usefulness of day trading -- I think I've said many times over it's a loser's game for the vast majority who attempt it. The point is to demonstrate that through hard work, research, and analysis, one can gain an edge on the market, anticipate it's next move, and potentially profit from it. It's to explode the idea that markets are always efficient and rational mechanisms that don't allow the investor the space to reap the rewards of great investment ideas.
Nobody said it was easy, but let's also stop pretending it's impossible either, or a statistical anomaly when it does happen.
There's an entire world out there that looks at markets the way I do. That doesn't make my (or their) ideas right or unimpeachable, but it does show that this is not some personal financial mythology I've constructed to hoodwink the mustachian community, or get them to day trade their 'stache, or to avoid index funds, etc. It's simply offered as a counterpoint to your (and others') deeply held belief that market inefficiencies, if they exist at all, are unexploitable by a diligent investor.
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We doing quotes now? cool...
Warren Buffett openly recognizes the problem with technical analysis as evidenced by his statement, “I realized technical analysis didn’t work when I turned the charts upside down and didn’t get a different answer.” Legendary fund manager Peter Lynch adds, “Charts are great for predicting the past.” Most indicators are about as helpful as astrology
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I don't see your quotes as helping your case, at all.
Your A quote does nothing to add to day trading, or refute anything I've said. In fact, I agree with it. Now let's ask this question: in that quote, was Shiller talking about trading ith a timeframe of a day or two, or of a year or two? I'd wager the latter.
As for your quote B, a whole paper devoted to trying to help TA, and the best they come up with is it can offerr "incremental information" and "some practical value"? One can always look backwards and fit something, and that's the best they got.
Show me the records where all those TA day traders have had so much success.
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Arebelspy, while I do enjoy our back and forth banter, it's clear to me that we're both just talking past each other at this point. That's not meant as a criticism against you, but it does suggest that this particular conversational well has run dry. Let's just chalk it up to the complexity of the issues at hand, and nothing more.
KoalaBear, I would like to thank you as well for triggering a Eureka moment in my life.
Seriously dude, thank you.
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Arebelspy, while I do enjoy our back and forth banter, it's clear to me that we're both just talking past each other at this point.
I agree, and thanks for the discussion, I enjoy it.
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That said... let's be honest here - the long-term timing aspect may be mixed in there - but the majority of what you're talking about here is the short-term timing that makes most of the MMM community uncomfortable.
Trust me John, it makes me uncomfortable too given the audience. But let's be honest, it was suggested that I attempt a kind of trading diary in order to illustrate some of these TA and psychological concepts at work. It's what I attempted to do for a few weeks. But alas, the conversation always turns back into the same old theoretical back and forth.
If the illustration of real time TA is not useful for anybody, I understand that too and will happily shut it down. I keep a running journal of all my trades so it's not like I'm going above and beyond to express my trading ideas in this forum.
John,
Asset allocation would force you to 'sell' stocks and 'buy' bonds to rebalance to your allocations.
That's what's so nice - it automatically, over time, tends to make you sell on up trends and buy on down trends. Effectively long term market timing.
SmedleyB
OK. 100% cash is NOT an asset allocation. It's speculation.
Yes, the original AA paper had 25% cash. Not for me now, but at least it's a method. I guess I'll start a thread on how you can actually learn to make the dice in craps tend to fall away from random. No, really, you can!
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100% cash is NOT an asset allocation. It's speculation.
I actually don't have a problem being mostly (or all cash). Yes, it's speculation. But if it's done on a larger scale based on long term trends and value investing (and you think everything is overvalued?), I'm okay with one speculating.
If they're then putting that cash to use in day trading, and just gambling, obviously I'm not a fan of that.
I think going to cash should be a very, very rare event (like.. once or twice in a lifetime.. every few decades maybe). The problem with people who go 100% cash, in general, is they're such permabears (whether or not they're willing to admit it, usually not), they never actually change from that 100% cash position. And they miss the upswings and such while waiting for the sky to fall.
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Did Smedley delete his account, or was he always posting on a guest account?
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He wasn't always a guest. Hopefully he's not gone for good, but that's what it looks like.
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That's unfortunate. I hope he comes back at some point. I don't agree with many of his investing philosophies, but I respect his willingness to defend them, and appreciate the different viewpoint.
Maybe his leaving had something to do with the eureka moment he posted about in his last post, above.
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It's possible, but I read that with sarcasm when mentioned the eureka moment.
I will say that I found this all very interesting, but I'm not surprised if he really did leave. He was essentially told that he didn't belong here.
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He was essentially told that he didn't belong here.
I don't think that at all, and had a private discussion with him that leads me to believe otherwise as well.
I think, to phrase it more accurately, he was told that most of us disagree with his opinions. But that he was more than welcome to share them and defend them, though it may require a thick skin sometimes. He also got feedback about how several posters liked hearing his positions
KittyWrestler had a similar backlash, though for different reasons/beliefs. If you're going on and disagreeing with the majority of people in a location, you'll need to be prepared to face some resistance, but that doesn't mean you aren't welcome.
IMO, you may have seen it differently.
I hope it is not the case that he felt unwelcome personally (rather than just feeling that we disagreed with his investing philosophy). Either way, best of luck to him.
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I really hope all the readers understand that this sort of market timing 'investing' is speculation and is NOT Mustachian.
When I read this initially it seemed much more venomous. After re-reading it, it seemed much less of a jab towards Smedley. I stand corrected.
I hope he really did have some amazing epiphany and if off to become the next Warren Buffett.
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It's possible, but I read that with sarcasm when mentioned the eureka moment.
I did too. Rereading it I see it could've been taken either way.
Maybe he's off to be the next Jack Bogle. He could have an automatically managed mutual fund based on TA, maybe. Or maybe now he's a fundamental analysis kind of guy, idk.
There was a little venom (mea culpa), but I thought that we had an absolutely fantastic conversation throughout and I for one really learned a lot from it. Maybe he'll be back someday...
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It's possible, but I read that with sarcasm when mentioned the eureka moment.
I will say that I found this all very interesting, but I'm not surprised if he really did leave. He was essentially told that he didn't belong here.
I have seen a few people being pushed out because they were told they are better of somewhere else..He is not the first one.
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He's only the second one to leave, and the first left because she was an obvious troll and nobody was playing along anymore.
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He's only the second one to leave, and the first left because she was an obvious troll and nobody was playing along anymore.
I wondered what happened to her. I know she was getting torn up pretty badly. Never actually saw her saying she was leaving.
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He's only the second one to leave, and the first left because she was an obvious troll and nobody was playing along anymore.
I wondered what happened to her. I know she was getting torn up pretty badly. Never actually saw her saying she was leaving.
No, and that was the type of flameout that I'd have expected a big exit from. Always suspected Mr. or Mrs. MM had nuked the account, but idk either way.
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It's possible, but I read that with sarcasm when mentioned the eureka moment.
I will say that I found this all very interesting, but I'm not surprised if he really did leave. He was essentially told that he didn't belong here.
I disagree, he was repeatedly told by the vast majority of those he interacted with that he was welcome here, and welcome to share his thoughts, plans, activities, etc. I feel he was held the the same standard as anyone else here, and was treated fairly. It's very possible that his eureka moment was realizing he didn't belong here because of what he needed/wanted from a forum he participated in, and I hope he can find a forum where his opinions are truly appreciated and debated at the level he wants.
I think the overall message from the forum was clear, he was welcome but greatly disagreed with. That is a very hard place to be day after day. If he were to come back I would welcome that, I certainly believe him to be knowledgeable and honest in his beliefs and opinions.
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He's only the second one to leave, and the first left because she was an obvious troll and nobody was playing along anymore.
I wondered what happened to her. I know she was getting torn up pretty badly. Never actually saw her saying she was leaving.
No, and that was the type of flameout that I'd have expected a big exit from. Always suspected Mr. or Mrs. MM had nuked the account, but idk either way.
Mr. and Mrs. MM didn't nuke the account. She closed it.
We work together and she educated me about this website actually.
She just felt she has gone down the wrong path with folks here and there is no way to reverse it anymore. So she quit...
Since then, her savings rate has gone through the roof like 75% of so... I think she can pull the trigger anytime now with her size of investment. but she likes working with us so she is still here.. Great gal. I learned a lot from her...
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Glad to hear it mechanic, and good for her.