Author Topic: Wait for the Market Correction?  (Read 18982 times)

The Mobile Mustachian

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Wait for the Market Correction?
« on: March 08, 2014, 04:13:33 PM »
Hello all,

I've transferred my 2014 IRA funds into my account, but am hesitant to start buying index funds (VTI) given the fact that we are at the height of the market. I have typically waited until I see at least a 10% market correction occur before making any investments. Do you think that this is a sound strategy or I should just use dollar cost averaging or just invest the whole amount and move on?

Thanks for your feedback

Lans Holman

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Re: Wait for the Market Correction?
« Reply #1 on: March 08, 2014, 04:21:11 PM »
The general consensus around here is pretty strongly anti- market timing and there are already a ton of threads about why.  However, as the father of the gods I suppose it's just possible you have some insight the rest of us lack.  Maybe the Oracle is giving you some good inside information?
« Last Edit: March 08, 2014, 04:25:57 PM by Lans Holman »

rayt168

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Re: Wait for the Market Correction?
« Reply #2 on: March 08, 2014, 04:23:13 PM »
Zeus,

I am in a similar position and I am using dollar cost averaging on a weekly basis.  I just feel a little better doing it this way although most articles I have read state that investing the whole amount is the best approach.   

MrCash

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Re: Wait for the Market Correction?
« Reply #3 on: March 08, 2014, 04:24:00 PM »
Hello all,

I've transferred my 2014 IRA funds into my account, but am hesitant to start buying index funds (VTI) given the fact that we are at the height of the market. I have typically waited until I see at least a 10% market correction occur before making any investments. Do you think that this is a sound strategy or I should just use dollar cost averaging or just invest the whole amount and move on?

Thanks for your feedback

Waiting to invest is market timing and it would probably be better for you to do the lump sum or the dollar cost averaging now.  Plus if you wait, you'll miss out on dividends now.  For VTI, the next round of dividends will be this month (March), so if you invest soon you might be able to get in on the action.

The choice between lump sum and dollar cost averaging is one you'll have to make.  There is a good bit of research out there on this subject.  I would suggest you do a lump sum now and then start regular contributions on top of what you already have.

warfreak2

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Re: Wait for the Market Correction?
« Reply #4 on: March 08, 2014, 04:48:22 PM »
For VTI, the next round of dividends will be this month (March), so if you invest soon you might be able to get in on the action.
That isn't how dividends work; the stock price the day before the dividend and the day after will differ by whatever the market expected the dividend to be. If you buy halfway through the year, then you receive on average half of the dividend for the year. Otherwise everyone would just buy stocks the day before the dividend and sell them the day after.

To put it a different way, you don't make money on the stock market (in the short term) by predicting something (for example, a dividend payout) that everyone else also predicts.
« Last Edit: March 09, 2014, 04:50:37 AM by warfreak2 »

MrCash

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Re: Wait for the Market Correction?
« Reply #5 on: March 08, 2014, 05:04:30 PM »
For VTI, the next round of dividends will be this month (March), so if you invest soon you might be able to get in on the action.
That isn't how dividends work; the stock price the day before the dividend and the day after will differ by whatever the market expected the divided to be. If you buy halfway through the year, then you receive on average half of the dividend for the year. Otherwise everyone would just buy stocks the day before the dividend and sell them the day after.

To put it a different way, you don't make money on the stock market (in the short term) by predicting something (for example, a dividend payout) that everyone else also predicts.

I'm not talking about short term gains, I'm assuming that he will be investing for the long term.  This is also a fund, not a single stock.  So its value is subject to more variables than that of a single stock. 

If you buy halfway through the year, then you receive on average half of the dividend for the year.

Exactly.  Which is why he should buy now rather than later.  Buying now means he gets a larger dividend payout on average.  If he waits until halfway through the year, then yes, he will receive on average half of the dividend for the year.

KingCoin

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Re: Wait for the Market Correction?
« Reply #6 on: March 08, 2014, 06:07:38 PM »
Exactly.  Which is why he should buy now rather than later.  Buying now means he gets a larger dividend payout on average.  If he waits until halfway through the year, then yes, he will receive on average half of the dividend for the year.

Right, but's that's just an argument that investing in assets with a yield is superior to investing in cash. Whether the dividend payout is tomorrow or ten months from now is wholly irrelevant to the investment decision (your advice seemed to imply that the timing of the upcoming dividend should somehow weigh on the decision).

Left

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Re: Wait for the Market Correction?
« Reply #7 on: March 08, 2014, 06:13:31 PM »
I've come to the conclusion that timing the market doesn't make sense to me when I'm buying to "hold", it only took me a year to learn this with my heart and not just brain >.>

Namely, if I put in $10,000 to invest, whether it is $15,000 or $5,000 tomorrow because of market changes, it doesn't matter to me. Why? Because no matter what the account says it is worth, ALL of it is unrealized gains and losses. Meaning that until I sell the investments, my $10,000 that I put in is essentially worth $0 because I'm not able to use it. And since I get to choose when to sell it, I just have to wait until it is worth more than I put in and at that time I'll be fine. So if you are not planning on needing the money soon, so what if market corrects/drops in the next month(s)? Just wait for it to go back up and you'll be set and have more than you put in.

The waiting until it is worth more than I put in is what I see as the problem people have. Some don't expect the market to do better than other investments, or that it won't go back up in the future when they need it. But I can't see the market NOT being higher than today after 10 years. If anything, it could be flat and I wouldn't make anything and would lose to inflation, in which case it was same as if I placed the money in the bank where it gained nothing as well. Or I could have bought a rental but that may or may not have done any better either.
« Last Edit: March 08, 2014, 06:18:30 PM by eyem »

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Re: Wait for the Market Correction?
« Reply #8 on: March 08, 2014, 06:18:11 PM »
I was in a similar position January 2013.  You didn't know it, but last January was the top of the market. Or so I thought. So I sat on tons of cash in Vanguard all year waiting for the market correction. Guess who lost out on all of the big gains in 2013? uh huh. So now I DCA. Once I set it up, I never even think about it anymore. And I am investing for the long term so I don't care what the market does in the short term, except if there is a big dip, I'll buy even more.

Vjklander

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Re: Wait for the Market Correction?
« Reply #9 on: March 08, 2014, 06:37:27 PM »
The current bull is driven 99.98% by the Fed and QEwhatever. As long as they only 'taper' there is no danger of a major correction. And again, because of the inane machinations of the Fed, there are no viable alternatives to the stock market. So just invest in good blue chips and hope for the best.

ThermionicScott

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Re: Wait for the Market Correction?
« Reply #10 on: March 08, 2014, 10:12:42 PM »
The current bull is driven 99.98% by the Fed and QEwhatever. As long as they only 'taper' there is no danger of a major correction. And again, because of the inane machinations of the Fed, there are no viable alternatives to the stock market. So just invest in good blue chips and hope for the best.

This is why it's best to be diversified between US stocks and international stocks, with some amount of bonds.  Bonds add stability to the portfolio, return more than cash, and if nothing else act as "dry powder" in the event of another stock market correction.  A proper asset allocation gives you the confidence to invest NOW, rather than waiting scared on the sidelines for "something" to happen.

RobertBirnie

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Re: Wait for the Market Correction?
« Reply #11 on: March 08, 2014, 11:15:53 PM »
A couple quotes for you:

p.148 of "A Random Walk Down WallStreet"

"Because there is a long-term uptrend in the stock market, it can be very risky to be in cash. An investor who frequently carries a large cash position to avoid periods of market decline is very likely to be out of the market during some periods where it rallies smartly. Professor H. Negat Seybun of the University of Michigan found that 95 percent of the significant market gains over the thirty-year period from the mid-1960s through the mid-1990s came on 90 of the roughly 7,500 trading days. If you happened to miss those 90 days, just over 1 percent of the total, the generous long-run stock market returns of the period would have been wiped out. The point is that market timers risk missing the infrequent large sprints that are the big contributors to performance."

p.171 of "A Random Walk Down WallStreet"
John Bogle, "In 30 years in this business, I do not know anybody who has done it successfully and consistently, nor anybody who knows anybody who has done it successfully and consistently. Indeed, my impression is that trying to do market timing is likely, not only not to add value to your investment program, but to be counterproductive."

There's another quote in there that I was looking for regarding I believe Alan Greenspan saying in the early 90s roughly "we're in a bubble, its only down from here" and then having the S&P triple the index before finally correcting in the early 2000's.

Or from Keynes: "Markets can remain irrational longer than you can remain solvent." :)

(if there's typo's its because I typed them by hand)

foobar

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Re: Wait for the Market Correction?
« Reply #12 on: March 09, 2014, 12:54:03 PM »
And receiving half the dividend is much better. Imagine a 100 dollar stock paying out 2 5 dollar divs. At the end of the year would you rather have:

A)90 dollars of stock and 10 dollars of divs
b) 95 dollars of stock and 5 dollars of divs.

Personally I prefer to pay taxes on 5 dollars rather than 10. Deferring taxes is almost always the right move. The exception would be if you have unused 0% capital tax space and no need to keep your income down.


For VTI, the next round of dividends will be this month (March), so if you invest soon you might be able to get in on the action.
That isn't how dividends work; the stock price the day before the dividend and the day after will differ by whatever the market expected the divided to be. If you buy halfway through the year, then you receive on average half of the dividend for the year. Otherwise everyone would just buy stocks the day before the dividend and sell them the day after.

To put it a different way, you don't make money on the stock market (in the short term) by predicting something (for example, a dividend payout) that everyone else also predicts.

I'm not talking about short term gains, I'm assuming that he will be investing for the long term.  This is also a fund, not a single stock.  So its value is subject to more variables than that of a single stock. 

If you buy halfway through the year, then you receive on average half of the dividend for the year.

Exactly.  Which is why he should buy now rather than later.  Buying now means he gets a larger dividend payout on average.  If he waits until halfway through the year, then yes, he will receive on average half of the dividend for the year.

warfreak2

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Re: Wait for the Market Correction?
« Reply #13 on: March 09, 2014, 01:01:24 PM »
No, the actual dividends you receive are the same, it's just that you're paying more for the stock because the person you're buying it from will lose out on the dividend.

If you pay more tax on dividends than you eventually will on the capital gains, you'd actually prefer to wait until after the dividend is paid out, to buy the stock for $5 less, rather than buying it at full price and then paying taxes on the $5 you get back as a dividend.

But I don't understand how this tax situation would come about, unless you actually intend to withdraw the dividends now rather than let them accumulate.

Tyler

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Re: Wait for the Market Correction?
« Reply #14 on: March 09, 2014, 01:21:34 PM »
Hello all,

I've transferred my 2014 IRA funds into my account, but am hesitant to start buying index funds (VTI) given the fact that we are at the height of the market. I have typically waited until I see at least a 10% market correction occur before making any investments. Do you think that this is a sound strategy or I should just use dollar cost averaging or just invest the whole amount and move on?

Thanks for your feedback

Do you believe that if the market corrects 10% that it cannot go down further?  And do you believe the market cannot go up another 10% before correcting?  If so, why?

Trying to predict the market will drive you batty.  IMHO, the goal you should shoot for is to pick an investment strategy that you will stick with even when the market inevitably drops 10% (or more). 

starguru

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Re: Wait for the Market Correction?
« Reply #15 on: March 09, 2014, 02:12:23 PM »
Just last month or so the DJIA was below 16k.  I thought the correction was happening.  I received my ESPP and was waiting for it to correct further.  By the time I got my money in it was back above 16k.  Point being, you can't time this shit. And if you do it once, you got lucky.  Luckily I get some healthy distributions of RSUs every few months, and ESPP twice a year.    I plan on just selling the stock and putting it in indexes as I get em.  Im done guessing, and if I just invest it as i get it its like cost averaging.  My time horizon is >10 years so I just need to get over it and pull the trigger.
« Last Edit: March 09, 2014, 02:13:54 PM by starguru »

hodedofome

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Re: Wait for the Market Correction?
« Reply #16 on: March 11, 2014, 10:34:59 AM »
Would you feel worse if you got left behind in a bull market that never let you in, or you buy in now and the bear market starts the day after you buy? What is going to lead you to make a dumb decision?

A dumb decision is the market leaves you behind, THEN you decide you can't take it any longer and buy in 20% higher than it is now, only to see it crash. OR you buy in now, the market crashes, and THEN you decide to sell because you can't take it any longer. These are both really bad decisions, so which one do you think you'll be more susceptible to do?

One way is to buy in half now, and buy in the other half during that 10% correction you were waiting for, whenever that happens. And yes, it WILL happen. But nobody knows when.

FWIW, there have been plenty of guys that have made money for a long time through market timing, though you won't hear about them in any of Bogle's books.

I'll just mention this here. There have been a few 20+ year periods in US history where investors made no money. There have been plenty of markets around the world that were down for longer. Some markets went to zero. The future is unknowable and anything can happen. George Soros, John Bogle, Obama and Warren Buffet all have no idea. How would you invest if that is true?

ender

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Re: Wait for the Market Correction?
« Reply #17 on: March 11, 2014, 06:07:20 PM »
I'll just mention this here. There have been a few 20+ year periods in US history where investors made no money. There have been plenty of markets around the world that were down for longer. Some markets went to zero. The future is unknowable and anything can happen. George Soros, John Bogle, Obama and Warren Buffet all have no idea. How would you invest if that is true?

I guess I'd rather go with what was the best strategy for decades than try something new hoping I'm the one who will figure it out differently, when even those paid to do so can't ;)

Will

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Re: Wait for the Market Correction?
« Reply #18 on: March 11, 2014, 08:27:19 PM »

One way is to buy in half now, and buy in the other half during that 10% correction you were waiting for, whenever that happens. And yes, it WILL happen. But nobody knows when.

FWIW, there have been plenty of guys that have made money for a long time through market timing, though you won't hear about them in any of Bogle's books.


So wait around in a rising market, which could potentially go up 20 or 30%, so when it goes down 10% you'll have proven what?

Who are some of these guys who have made money for a long time through market timing?  I haven't heard about them anywhere except your post.

hodedofome

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Re: Wait for the Market Correction?
« Reply #19 on: March 12, 2014, 08:04:22 AM »

So wait around in a rising market, which could potentially go up 20 or 30%, so when it goes down 10% you'll have proven what?

Who are some of these guys who have made money for a long time through market timing?  I haven't heard about them anywhere except your post.

It depends on which risk you are most uncomfortable with. Upside risk vs downside risk.

Market timers in history that outperformed would be Jesse Livermore (although he reportedly was manic, somehow lost all his money and blew his brains out), Nicholas Darvas, William O'Neil (I've heard returns of over 50% in his lifetime), Ed Seykota (returns of over 60% in his lifetime), Paul Tudor Jones (20%+ in his lifetime), Michael Marcus, Bruce Kovner, everyone on this list: http://www.trendfollowing.com/performance/ , John Henry (current owner of Red Sox), David Harding, George Soros, Steven Cohen (30%+ in his lifetime), Jim Simons (35%+ in his lifetime), David Shaw, Peter Brandt (40%+ for over 30 years), even Warren Buffett if you consider that he holds cash in overvalued periods and then invests heavily after the market has dropped significantly. There's plenty of others but hopefully this list gives you an idea that it's not all luck.

You don't hear much about these guys unless you are in the industry. Almost all of them ran or continue to run hedge funds which are out of reach for most individuals. The really good traders are not in the mutual fund industry, they can make much more money in the hedge fund industry, as well as have more flexibility.

ThermionicScott

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Re: Wait for the Market Correction?
« Reply #20 on: March 12, 2014, 08:47:32 AM »
Gamblers always talk more about their wins than their losses.  ;^)

hodedofome

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Re: Wait for the Market Correction?
« Reply #21 on: March 12, 2014, 09:02:07 AM »
A lot of the guys I just listed typically have more losses than wins. For instance, Peter Brandt has about a 30% win rate. But his wins are so much larger than his losses, that his system has positive expectancy. I started trading a system back in September that currently has only 40% wins but is up over 13% since that time because the winning trades are larger than the losing trades.

To me, most gambling is betting money when the odds are against you. Good trading/professional gambling is only betting money when the odds are in your favor. There's a world of difference.

Outperforming the market is incredibly difficult, but it is not impossible. There's plenty of examples of people that have done it. Luck is involved but it is not enough to explain all of it.

MrCash

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Re: Wait for the Market Correction?
« Reply #22 on: March 12, 2014, 09:42:54 AM »
A lot of the guys I just listed typically have more losses than wins. For instance, Peter Brandt has about a 30% win rate. But his wins are so much larger than his losses, that his system has positive expectancy. I started trading a system back in September that currently has only 40% wins but is up over 13% since that time because the winning trades are larger than the losing trades.

To me, most gambling is betting money when the odds are against you. Good trading/professional gambling is only betting money when the odds are in your favor. There's a world of difference.

Outperforming the market is incredibly difficult, but it is not impossible. There's plenty of examples of people that have done it. Luck is involved but it is not enough to explain all of it.

With my trading on the side I have been outperforming the market for two and a half years now.  There's no guarantee that this will continue, but it is very possible to outperform the market.

Mr Mark

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Re: Wait for the Market Correction?
« Reply #23 on: March 12, 2014, 07:38:57 PM »
A lot of the guys I just listed typically have more losses than wins. For instance, Peter Brandt has about a 30% win rate. But his wins are so much larger than his losses, that his system has positive expectancy. I started trading a system back in September that currently has only 40% wins but is up over 13% since that time because the winning trades are larger than the losing trades.

To me, most gambling is betting money when the odds are against you. Good trading/professional gambling is only betting money when the odds are in your favor. There's a world of difference.

Outperforming the market is incredibly difficult, but it is not impossible. There's plenty of examples of people that have done it. Luck is involved but it is not enough to explain all of it.

With my trading on the side I have been outperforming the market for two and a half years now.  There's no guarantee that this will continue, but it is very possible to outperform the market.

in a broad bull market my cat can make money day trading. There is an almost certainty that it wont continue. And yes, one can beat the market for a short period especially when not playing with your entire financial future. 

KingCoin

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Re: Wait for the Market Correction?
« Reply #24 on: March 12, 2014, 08:24:04 PM »
A lot of the guys I just listed typically have more losses than wins. For instance, Peter Brandt has about a 30% win rate. But his wins are so much larger than his losses, that his system has positive expectancy. I started trading a system back in September that currently has only 40% wins but is up over 13% since that time because the winning trades are larger than the losing trades.

To me, most gambling is betting money when the odds are against you. Good trading/professional gambling is only betting money when the odds are in your favor. There's a world of difference.

Outperforming the market is incredibly difficult, but it is not impossible. There's plenty of examples of people that have done it. Luck is involved but it is not enough to explain all of it.

With my trading on the side I have been outperforming the market for two and a half years now.  There's no guarantee that this will continue, but it is very possible to outperform the market.

in a broad bull market my cat can make money day trading. There is an almost certainty that it wont continue. And yes, one can beat the market for a short period especially when not playing with your entire financial future.

Yes, especially since day traders tend to focus on high volatilty/high beta stocks which will almost assuredly outperform in an uptrending market.

Outperform consistently through a couple cycles and I'll tip my hat.

foobar

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Re: Wait for the Market Correction?
« Reply #25 on: March 12, 2014, 08:50:11 PM »
Check back in 20 years:)  The market has cycles and often favor one or another trading schemes.  Guys win big for 7 years  and then crash and burn. I still think the best way to make money is to start a newsletter. Actually start 50 and then in 5 years push hard the one that has averaged 15% for the past decade.:)


A lot of the guys I just listed typically have more losses than wins. For instance, Peter Brandt has about a 30% win rate. But his wins are so much larger than his losses, that his system has positive expectancy. I started trading a system back in September that currently has only 40% wins but is up over 13% since that time because the winning trades are larger than the losing trades.

To me, most gambling is betting money when the odds are against you. Good trading/professional gambling is only betting money when the odds are in your favor. There's a world of difference.

Outperforming the market is incredibly difficult, but it is not impossible. There's plenty of examples of people that have done it. Luck is involved but it is not enough to explain all of it.

With my trading on the side I have been outperforming the market for two and a half years now.  There's no guarantee that this will continue, but it is very possible to outperform the market.

RobertBirnie

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Re: Wait for the Market Correction?
« Reply #26 on: March 15, 2014, 11:37:06 PM »
Gamblers always talk more about their wins than their losses.  ;^)

This.

Left

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Re: Wait for the Market Correction?
« Reply #27 on: March 16, 2014, 03:17:09 PM »
hm, with the crimea thing, i guess stocks will drop a bit for the time being? Unless a "war" or something breaks out and the military money machine kicks in... though it's times like these that I find being in an index fund helpful since no one can predict what will happen next

hodedofome

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Re: Wait for the Market Correction?
« Reply #28 on: March 16, 2014, 04:17:27 PM »
As you said, nobody knows what will happen. The Russia thing could be over tomorrow or it could escalate. We also don't know how the market will react to the news. It could escalate and the market goes up. World events don't always affect market prices like you would expect. Individual stocks and index funds are highly correlated so they generally go up and down together. It's called equity risk and all equities have the same. Doesn't matter what stocks or funds you have, they are all going down in a bear market.

waltworks

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Re: Wait for the Market Correction?
« Reply #29 on: March 16, 2014, 04:33:43 PM »
The thing people often don't get is that if you take, say, a thousand people and have them try to beat the market by investing RANDOMLY, maybe half of them do just from luck in year one. You say, "big deal, half of them got lucky". Then the next year half of those folks who won in year one win again, and again after that and after 10 years you end up with a few people who have basically run the table, a few more who have more wins than losses, and then a bunch that lost money because they did no better than the market and paid more in transaction fees, or who just plain did worse.

The lesson here is NOT that there are people who have beat the market, even over pretty long time periods - it's that we'd EXPECT that result, even if monkeys were doing the investing. It's easy to justify your successful investment decisions in hindsight but it's hard to avoid the conclusion that beating the market as a small investor is just luck, regardless of the "system" or "strategy" you employ.

There's a strong bias in the media and online for success stories, too - very few of the people who lost a little (or a lot) will bother to tell their story.

Long story short: don't try to beat the market unless you're doing it for fun and you don't need the money.

-W

Check back in 20 years:)  The market has cycles and often favor one or another trading schemes.  Guys win big for 7 years  and then crash and burn. I still think the best way to make money is to start a newsletter. Actually start 50 and then in 5 years push hard the one that has averaged 15% for the past decade.:)


A lot of the guys I just listed typically have more losses than wins. For instance, Peter Brandt has about a 30% win rate. But his wins are so much larger than his losses, that his system has positive expectancy. I started trading a system back in September that currently has only 40% wins but is up over 13% since that time because the winning trades are larger than the losing trades.

To me, most gambling is betting money when the odds are against you. Good trading/professional gambling is only betting money when the odds are in your favor. There's a world of difference.

Outperforming the market is incredibly difficult, but it is not impossible. There's plenty of examples of people that have done it. Luck is involved but it is not enough to explain all of it.

With my trading on the side I have been outperforming the market for two and a half years now.  There's no guarantee that this will continue, but it is very possible to outperform the market.

hodedofome

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Re: Wait for the Market Correction?
« Reply #30 on: March 16, 2014, 07:48:48 PM »
For 10 years and less I agree a lot of the performance is attributable to luck and randomness. But for the guys that have been beating the market for 20, 30, 40 years or more, using strategies similar to each other and taking advantage of inefficient markets and inefficient human behavior... I think a rational person would have to say that's not luck.

I remember Charlie Munger mentioning that a Nobel prize winning economist who preaches the efficient market hypothesis has been a major investor with them for decades. So he wins accolades and admiration for beliefs he doesn't even live by. With the evidence shown by recent behavior economics research it is clear that markets and participants are not always rational and there are ways to exploit that. But it takes a very emotionally controlled person with a clear methodology to do it. It is not easy and most people will not do the work required to achieve it.


Left

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Re: Wait for the Market Correction?
« Reply #31 on: March 16, 2014, 07:59:46 PM »
except... the people that beat it has other people (lots of people, computers, resources) to compile and analyze all that information... you think someone sitting at home with a computer can replicate their work?

Cheddar Stacker

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Re: Wait for the Market Correction?
« Reply #32 on: March 16, 2014, 08:02:06 PM »
...However, as the father of the gods I suppose it's just possible you have some insight the rest of us lack. 

Strong play here Lans, surprised no one else gave you props for this. Nice work.

hodedofome

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Re: Wait for the Market Correction?
« Reply #33 on: March 17, 2014, 07:32:05 AM »
except... the people that beat it has other people (lots of people, computers, resources) to compile and analyze all that information... you think someone sitting at home with a computer can replicate their work?

Peter Brandt has done over 40% a year for over 30 years as an individual trader with no analysts, he is a 100% chart pattern technical trader. Ed Seykota has done over 60% a year for 40 years as an individual trader with no analysts, he is a 100% technical trader. Same with Nicholas Darvas back in the day. Yes, it is a great advantage to have a bunch of analysts working for you and being experts in their particular area (Steven Cohen comes to mind) but it is not essential to success. There are advantages to being an individual trader/investor like typically having a smaller account so that you can take advantage of small-cap stocks that the big guys can't touch, not having investors to tend to, not having the normal employee distractions that come from running a business, etc.

KingCoin

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Re: Wait for the Market Correction?
« Reply #34 on: March 17, 2014, 07:48:56 AM »
except... the people that beat it has other people (lots of people, computers, resources) to compile and analyze all that information... you think someone sitting at home with a computer can replicate their work?

Peter Brandt has done over 40% a year for over 30 years as an individual trader with no analysts, he is a 100% chart pattern technical trader. Ed Seykota has done over 60% a year for 40 years as an individual trader with no analysts, he is a 100% technical trader. Same with Nicholas Darvas back in the day. Yes, it is a great advantage to have a bunch of analysts working for you and being experts in their particular area (Steven Cohen comes to mind) but it is not essential to success. There are advantages to being an individual trader/investor like typically having a smaller account so that you can take advantage of small-cap stocks that the big guys can't touch, not having investors to tend to, not having the normal employee distractions that come from running a business, etc.

Have any of these numbers been verified? Often they're "big fish stories" propagated or encouraged by various "gurus". If Ed Seykota was really putting up 60% returns for over 40 years, he should be the richest man in the world by far. We all know how Steve Cohen has been beating the market. I have a ton of respect for guys like Jim Simons whose performance is both real and incredible.

I'd also note that for the quantitatively minded, beating the market is far far more difficult than it was 20 years ago. Staples like trading momentum in commodities no longer works. The competition is fierce, and any hope at finding an exploitable edge in the liquid securities market is a bit of a pipe dream in my opinion.

I agree that small-cap securities are the best hope for the small investor to find an edge.
« Last Edit: March 17, 2014, 08:21:59 AM by KingCoin »

foobar

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Re: Wait for the Market Correction?
« Reply #35 on: March 17, 2014, 08:10:44 AM »
So Ed Seykota is a multibillionaire? After all 60% for 40 years turns 1 dollar into 146 million. Surely he stated with at least a 10 spot.:)


except... the people that beat it has other people (lots of people, computers, resources) to compile and analyze all that information... you think someone sitting at home with a computer can replicate their work?

Peter Brandt has done over 40% a year for over 30 years as an individual trader with no analysts, he is a 100% chart pattern technical trader. Ed Seykota has done over 60% a year for 40 years as an individual trader with no analysts, he is a 100% technical trader. Same with Nicholas Darvas back in the day. Yes, it is a great advantage to have a bunch of analysts working for you and being experts in their particular area (Steven Cohen comes to mind) but it is not essential to success. There are advantages to being an individual trader/investor like typically having a smaller account so that you can take advantage of small-cap stocks that the big guys can't touch, not having investors to tend to, not having the normal employee distractions that come from running a business, etc.

waltworks

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Re: Wait for the Market Correction?
« Reply #36 on: March 17, 2014, 08:18:03 AM »
Horseshit. Mr. Seykota, assuming he started with $10k, is now worth $913 BILLION?

-Walt

Peter Brandt has done over 40% a year for over 30 years as an individual trader with no analysts, he is a 100% chart pattern technical trader. Ed Seykota has done over 60% a year for 40 years as an individual trader with no analysts, he is a 100% technical trader. Same with Nicholas Darvas back in the day. Yes, it is a great advantage to have a bunch of analysts working for you and being experts in their particular area (Steven Cohen comes to mind) but it is not essential to success. There are advantages to being an individual trader/investor like typically having a smaller account so that you can take advantage of small-cap stocks that the big guys can't touch, not having investors to tend to, not having the normal employee distractions that come from running a business, etc.
« Last Edit: March 17, 2014, 08:19:53 AM by waltworks »

hodedofome

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Re: Wait for the Market Correction?
« Reply #37 on: March 17, 2014, 08:20:30 AM »
Yes I agree that with numbers like that, if Ed was compounding them he'd be the richest guy in the world. But traders typically don't compound all their returns. They spend their profits. I've heard Ed's net worth is in the hundreds of millions. He's a pretty private guy and doesn't discuss it much. When he lived on Lake Tahoe, it was not a humble dwelling by any means.

The only published/audited performance of his was his model account that was one of his early investors. He took $5k and turned it into $15 million in 12 years AFTER redemptions along the way.

Mark Cook was doing silly returns during the days of those investment championships. It was stuff like 500-800% profits in 1 year, tracked by the folks running the competition. But he'd always take out his profits and buy farmland since he was a farmer.

Peter Brandt's performance has been audited and I believe it's on his website.

Honestly though, IMO nobody can touch George Soros' performance with the amount of money he has traded and the length of time he's done it. When other long term outperformers have pulled back their risk (Buffett, Paul Tudor Jones, etc) Soros just keeps on going full tilt.
« Last Edit: March 17, 2014, 08:23:19 AM by hodedofome »

waltworks

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Re: Wait for the Market Correction?
« Reply #38 on: March 17, 2014, 09:11:01 AM »
Ok, look at it this way, then:
-Say the total value of the stock market is a trillion bucks.
-Say I start out with a million to invest.
-I'll make 60% returns and reinvest all the proceeds.
-Stock market will increase in value by 9% annually (everyone else involved is reinvesting all their proceeds as well)

-At year one, I own a tiny fraction of the market.
-At year 19, I own 1/10 of 1%.
-At year 31, I own 10%
-At year 37, I own 100%. Yes, I now own all of every publicly traded company. All of it.

-W

hodedofome

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Re: Wait for the Market Correction?
« Reply #39 on: March 17, 2014, 09:29:46 AM »
That is true if you compound your returns every year. However, like I said most traders don't keep all their profits in the market. They take them out each year to live off of, buy nice things, give money away etc. So if you start with $1 million, and you have a good year and make 50%, you might take out $250k for living expenses the next year. So after redemptions you only compounded 25%, not 50%. If trading is your only source of income, even if you made 100% on average over your lifetime, you still may not be a billionaire because you spent a lot of your profits each year.

warfreak2

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Re: Wait for the Market Correction?
« Reply #40 on: March 18, 2014, 03:48:03 PM »
I have no idea whether the next 10% will be up or down, but I am pretty confident that now is not the time to start a buy and hold strategy with a large lump sum.
If there's an expectancy that a lot of companies will start doing badly soon, the stock prices should already reflect this today. What do you know that everyone else trading those stocks doesn't know?

KingCoin

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Re: Wait for the Market Correction?
« Reply #41 on: March 18, 2014, 03:56:53 PM »
That is true if you compound your returns every year. However, like I said most traders don't keep all their profits in the market. They take them out each year to live off of, buy nice things, give money away etc. So if you start with $1 million, and you have a good year and make 50%, you might take out $250k for living expenses the next year. So after redemptions you only compounded 25%, not 50%. If trading is your only source of income, even if you made 100% on average over your lifetime, you still may not be a billionaire because you spent a lot of your profits each year.

Even more compellingly, many (most?) strategies aren't scalable to massive size. Producing a 60% return on $1 million is a very different matter than producing a 60% return on $1 billion. Edge tends to evaporate with scale. So it's possible these guys produce high returns on a static pool (say $50 million) without really being able to reinvest the gains.
« Last Edit: March 18, 2014, 05:48:02 PM by KingCoin »

foobar

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Re: Wait for the Market Correction?
« Reply #42 on: March 18, 2014, 06:50:04 PM »
So between 1983 and 2000, you would be willing to sit out of the market because it was at all time highs? The market spends a heck of a lot of time at all times highs. Thats the nature of the beast.

You can try to come up with any metric you want to time it. I remember people talking about the elevated PE ratios in 1993 and how the 10 year bull market was long and a crash was coming. They were right. 7 years and 300% later.  I must admit I would feel a lot better with lower PE and higher interest rates. But that isn't the world I have. I have to guess am I going to get more money in 10 years by investing now or keeping my money in cash until some time in the future. That is tricky. The market could go up another 100% before have a 30% correction over the next 3 years. Or we could have a 30% correction tomorrow. In the first case, I feel bad investing. In the second, I feel smart for not investing.

I have no idea whether the next 10% will be up or down, but I am pretty confident that now is not the time to start a buy and hold strategy with a large lump sum.
If there's an expectancy that a lot of companies will start doing badly soon, the stock prices should already reflect this today. What do you know that everyone else trading those stocks doesn't know?
I know not to buy high and get trapped into complacently thinking of holding forever as a way to justify jumping in after missing market moves that are consistent with avg length of bull mkt, avg mkt return from trough to peak, etc.

I also know not to ignore danger levels of various valuation metrics.

My favorite is Total Mkt Cap / GNP - a very highly mean-reverting measure.  Check out the historical levels and corresponding 3/5/7/10 yr returns - pretty strong case for becoming concerned about prospective equity market returns going forward.

foobar

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Re: Wait for the Market Correction?
« Reply #43 on: March 19, 2014, 09:08:59 AM »
And what does that tell us exactly? Are stocks going to underperform for the next 10 years by only going up 5% a year? The market is going to crash 75% before say down for a decade and then have  a big rally? You can always find some number to support your view. The questions is are they actionable. If you truly believe that the market is going to correct, there are ton of options to make money off that. The fact that few people talk about them suggests to me that most people don't have a lot of faith in their predications.

For what it is worth, where does Warren suggest putting his money? S&P 500 fund. He might be predicting a 5% return over the next decade but he also thinks that will out perform other investments.

So between 1983 and 2000, you would be willing to sit out of the market because it was at all time highs? The market spends a heck of a lot of time at all times highs. Thats the nature of the beast.

You can try to come up with any metric you want to time it. I remember people talking about the elevated PE ratios in 1993 and how the 10 year bull market was long and a crash was coming. They were right. 7 years and 300% later.  I must admit I would feel a lot better with lower PE and higher interest rates. But that isn't the world I have. I have to guess am I going to get more money in 10 years by investing now or keeping my money in cash until some time in the future. That is tricky. The market could go up another 100% before have a 30% correction over the next 3 years. Or we could have a 30% correction tomorrow. In the first case, I feel bad investing. In the second, I feel smart for not investing.

I have no idea whether the next 10% will be up or down, but I am pretty confident that now is not the time to start a buy and hold strategy with a large lump sum.
If there's an expectancy that a lot of companies will start doing badly soon, the stock prices should already reflect this today. What do you know that everyone else trading those stocks doesn't know?
I know not to buy high and get trapped into complacently thinking of holding forever as a way to justify jumping in after missing market moves that are consistent with avg length of bull mkt, avg mkt return from trough to peak, etc.

I also know not to ignore danger levels of various valuation metrics.

My favorite is Total Mkt Cap / GNP - a very highly mean-reverting measure.  Check out the historical levels and corresponding 3/5/7/10 yr returns - pretty strong case for becoming concerned about prospective equity market returns going forward.
It has nothing to do with all-time highs and everything to do with this:
http://www.businessinsider.com/warren-buffett-on-profit-margins-1999-2014-3

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Re: Wait for the Market Correction?
« Reply #44 on: March 19, 2014, 09:48:47 AM »
Here's my strategy - and it has worked very well, with higher than average returns:

1. As soon as I have money, I pop it in the stock market. Cash is weak. I don't care of the market is high - it could go higher, it could go lower - I am a firm believer that in the long-run, it all works out to make me money.

2. When the market is low, cut costs and increase income as much as possible so that I can shovel even more cash into the stock market.

But don't hold on to cash waiting for the low market. Generate more income during a low market. Invest whenever you have the money.

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Re: Wait for the Market Correction?
« Reply #45 on: March 19, 2014, 10:15:49 AM »
I'm with CPA Cat. I am grateful for my relative ignorance in the details of the stock market. I wouldn't even know where to start with some of the arguments you guys are having. Therefore I do what the sane people tell me to do:

Don't spend so much, put your spare money in low-cost index funds. Keep doing it and stop looking it every 5 days (still working on this one. I'm new, judge me) If you've a lot of spare money at once (thanks mum), you can spread it out a bit if you like, but your money is there for 30/40 years, so don't sweat too much. The odds are, you're gonna end up better than where you started. You are not clever or clairvoyant enough to time the market. Get your head down and use that time and energy to cut costs or earn money.

For now, I'm sticking with that.

foobar

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Re: Wait for the Market Correction?
« Reply #46 on: March 19, 2014, 03:42:53 PM »
Nothing like writing a put on a 40 dollar stock at 30 dollars and seeing it drop to 20 and being forced to pay a 50% premium for it:)

But hey if you timed 2000-2002 and 2007-2009 right and got in and out of stocks at the right times, more power to you.


Here's my strategy - and it has worked very well, with higher than average returns:

1. As soon as I have money, I pop it in the stock market. Cash is weak. I don't care of the market is high - it could go higher, it could go lower - I am a firm believer that in the long-run, it all works out to make me money.

2. When the market is low, cut costs and increase income as much as possible so that I can shovel even more cash into the stock market.

But don't hold on to cash waiting for the low market. Generate more income during a low market. Invest whenever you have the money.
DCA is a fine strategy for most investors who are committed to buy(ing) and hold(ing)

In practice, few are able to discipline themselves to both buy low and not sell low (buying high and selling high are relatively easier)

No one said anything about having to be in cash, but here is a sophisticated approach if one is concerned about 0% rates: open a margin account and sell out of the money puts on an index etf at a strike price you think the market could potentially get to but you deem would be a screaming buy.  Sell the puts unleveraged and collect the premium to offset the opportunity cost of being in cash.  If at expiry the stock is at your predetermined level or lower you will have purchased at a level that you think is compelling value less the premium you collect.  If the market keeps flying high due to investors becoming confident and piling in thinking 'buy and hold forever' (which typically happens at the tail end of bull markets) you would have collected a (typically) bond-like yield from the put sale proceeds.

People seem to forget that the average bear market (peak to trough) wipes out 50% of the previous bull market's gains (trough to peak).  Of course knowing when things are cheap and when they are rich takes a bit of analysis and discernment, and things can always get more extreme, but for an investor the extreme is even more of an opportunity to buy low and sell high - assuming one believes in mean reversion in the long run.

yahui168

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Re: Wait for the Market Correction?
« Reply #47 on: March 19, 2014, 04:40:51 PM »
Here's my strategy - and it has worked very well, with higher than average returns:

1. As soon as I have money, I pop it in the stock market. Cash is weak. I don't care of the market is high - it could go higher, it could go lower - I am a firm believer that in the long-run, it all works out to make me money.

2. When the market is low, cut costs and increase income as much as possible so that I can shovel even more cash into the stock market.

But don't hold on to cash waiting for the low market. Generate more income during a low market. Invest whenever you have the money.
DCA is a fine strategy for most investors who are committed to buy(ing) and hold(ing)

In practice, few are able to discipline themselves to both buy low and not sell low (buying high and selling high are relatively easier)

No one said anything about having to be in cash, but here is a sophisticated approach if one is concerned about 0% rates: open a margin account and sell out of the money puts on an index etf at a strike price you think the market could potentially get to but you deem would be a screaming buy.  Sell the puts unleveraged and collect the premium to offset the opportunity cost of being in cash.  If at expiry the stock is at your predetermined level or lower you will have purchased at a level that you think is compelling value less the premium you collect.  If the market keeps flying high due to investors becoming confident and piling in thinking 'buy and hold forever' (which typically happens at the tail end of bull markets) you would have collected a (typically) bond-like yield from the put sale proceeds.

People seem to forget that the average bear market (peak to trough) wipes out 50% of the previous bull market's gains (trough to peak).  Of course knowing when things are cheap and when they are rich takes a bit of analysis and discernment, and things can always get more extreme, but for an investor the extreme is even more of an opportunity to buy low and sell high - assuming one believes in mean reversion in the long run.

I don't see how an undisciplined (emotional) investor that cannot execute a buy and hold strategy will have the discipline to execute any other type of strategy. There's nothing magical about a straddle or collar that makes someone a better investor. The investor that doesn't have the disciple to buy and hold shouldn't go anywhere near the derivatives market (unless I'm on the other side of the trade of course).

foobar

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Re: Wait for the Market Correction?
« Reply #48 on: March 20, 2014, 10:03:01 AM »
Doesn't change anything. You are taking on risk in exchange for more money.  Just like any other investment out there.

I always wonder how many of the people that believe the market is overvalued are willing to put money  on it. There are a ton of investments options available to make you money if you think the market is overvalued but you rarely hear about people buying them.

Nothing like writing a put on a 40 dollar stock at 30 dollars and seeing it drop to 20 and being forced to pay a 50% premium for it:)

But hey if you timed 2000-2002 and 2007-2009 right and got in and out of stocks at the right times, more power to you.


Here's my strategy - and it has worked very well, with higher than average returns:

1. As soon as I have money, I pop it in the stock market. Cash is weak. I don't care of the market is high - it could go higher, it could go lower - I am a firm believer that in the long-run, it all works out to make me money.

2. When the market is low, cut costs and increase income as much as possible so that I can shovel even more cash into the stock market.

But don't hold on to cash waiting for the low market. Generate more income during a low market. Invest whenever you have the money.
DCA is a fine strategy for most investors who are committed to buy(ing) and hold(ing)

In practice, few are able to discipline themselves to both buy low and not sell low (buying high and selling high are relatively easier)

No one said anything about having to be in cash, but here is a sophisticated approach if one is concerned about 0% rates: open a margin account and sell out of the money puts on an index etf at a strike price you think the market could potentially get to but you deem would be a screaming buy.  Sell the puts unleveraged and collect the premium to offset the opportunity cost of being in cash.  If at expiry the stock is at your predetermined level or lower you will have purchased at a level that you think is compelling value less the premium you collect.  If the market keeps flying high due to investors becoming confident and piling in thinking 'buy and hold forever' (which typically happens at the tail end of bull markets) you would have collected a (typically) bond-like yield from the put sale proceeds.

People seem to forget that the average bear market (peak to trough) wipes out 50% of the previous bull market's gains (trough to peak).  Of course knowing when things are cheap and when they are rich takes a bit of analysis and discernment, and things can always get more extreme, but for an investor the extreme is even more of an opportunity to buy low and sell high - assuming one believes in mean reversion in the long run.
Index ETF, not individual stock

But I'm sure you realized that from the comment but were just playing devil's advocate

foobar

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Re: Wait for the Market Correction?
« Reply #49 on: March 20, 2014, 12:59:33 PM »
If you think the odds favor the market going down, why not put money on it? Why keep your cash on the sideline instead of investing it? You can evaluate probabilities and figure out what asset allocation makes sense for you.

Are stocks expensive? Thats what everyone said in 1994 (after PE ratios were high and interest rates were at 30 year lows).  We haven't been close to those levels in 20 years. 

There will be correction/crash some day. If it is in 1 month or 5  years is beyond me to guess.  And I have even less faith in being able to predicate if it is a 15% correction or a 30% bear market.


Your comment is a bit simplistic, as portfolio management is not about 'putting money on' a potential market decline; it is about considering all possible outcomes and probabilities associated with them.  Some of the best money managers are right only 30-40% of the time, but when they are wrong they lose much less than when their thesis proves correct.  Have you considered the potential asymmetries in the current market environment?

I don't need to bet on a market decline, I can simply shift my portfolio away from stocks which are currently expensive based on almost any reasonable measure of long-term sustainable earnings and returns.  Assuming that corporate profit margins at all-time highs are sustainable and paying a higher-than-normal price/earnings multiple on it seems to me a bad deal.  Of course buy & hold is always the most popular at the highs and least acceptable at the lows - so look around you and tell me where you think we are in the cycle.