OT: who needs amusement parks when you can ride the stock market :)

[Smiley]

Yeah,
I kind of gave up on trying to figure sh*t out. I sold all my BP stock and looking at it today you'd think those fools were not in for a long legal battle and costs that can't be measured. Its a gamble playing the market and who's the expert you listen to anymore, anybody remember Abby Josphen Cohen from Goldman Sachs who's was a proclaimed expert, where is she now.

[johnnymossville]

The Stock Market should be renamed a Casino already. It's ok to play as long as you know going in it's just a game and that The House always wins in the end. I'm sure the game has always been rigged, but it seems more openly rigged these days doesn't it?

[MattTuck]

Where were you guys when the market was rallying 79% off the lows?

Was it a casino then? or only when money is being lost?


Holding individual company stock is not advised from an investment theory perspective. Google "unsystematic risk", it is the kind of risk you take on when you own an individual company's stock. It is the kind of risk that says, "hey, this company may blow up an oil rig in the gulf of mexico and incur massive costs." You are not rewarded for taking unsystematic risk, ie. old law that says more risk = more return, does not apply here. (google capital asset pricing model for more on this). That is because you can eliminate most unsystematic risk by diversifying (holding a well diversified portfolio of between 20-60+ stocks at a minimum).

Happy to discuss more offline if people are interested. I'm not an investment adviser, but I don't put much stock in them either.

[ergott]

Once again, a topic that is just begging to get locked. These never go well. :mad:

I'm sure people will tell me not to look, but that's not the point. These threads end up bad and then people harbor negative feelings because of it.

Then again, what do I know.
:beer:

[Smiley]

its funny Eric what a TRILLION Dollars of reserve funds will do to jack up a stock market :)
These threads don't need to be locked up its simple economics and my retirement as well as everybody here is tied up in some kind of market fund. Funny though how volitile they have become.

[SoCalSteve]

I'm in agreement with Eric on this one...

If this starts to "awry", it will get closed.

Politics, stock market, US and/or World economics are fodder for these threads going places where we dont really want them to go.

Please keep it civil and on point.

Thank you!

[MattTuck]

The body of research on the stock market is quite robust. I understand that it may be a "hot button" topic, but it is atleast well documented, well researched and as result, lends itself well to debate based on facts.

While recent volatility in 2008, and last week may seem like things are changing, I'm not sure how it stacks up against historical volatility, and I don't have the time to run the analysis this morning. (someone has probably already done it, anyway) My sense however, is that the volatility of the mid 2000's was VERY low by historical comparisons. Using the appropriate frame of reference is important to put current observations in context. In other words, is this a divergence from, or a return to, normality?

[zap]

snipped

its funny Eric what a TRILLION Dollars of reserve funds will do to jack up a stock market :)


I'm amused how the markets reacted today.

:) , thanks for these threads. Brings life too what has become a rather boring forum of late.

[johnnymossville]

its funny Eric what a TRILLION Dollars of reserve funds....

The conspiracy theorist in me thinks the Trillion came out of the 1000 stock market point drop the other day. The EU just this morning promised the Trillion in bailout funds for Greece and the rest of Europe.

I'm betting the Fed is printing a Trillion as we speak to make up for it. :p

[1centaur]

One of the failings of technical analysis (using graphs to call buy and sell points) is that it does contemplate the potential for the causes of patterns to change. If the players and the circumstances are broadly similar, then maybe graphs help illustrate how humans repeat history (things getting overbought or oversold, for example, based on emotion rather than facts).

Long-term volatility comparisons are going to be flawed because the nature of investment markets have changed over 20 years. The existence of derivatives, high frequency trading, trading algorithms and more on both sell and buy sides, with lots of liquidity available to the buy side from global sources little constrained by traditional investment mandate guidelines, means many more buyers and sellers are "putting on a trade" rather than investing. Humans don't make significant investment decisions 20 times a week, let alone 20 times a minute (second?), but machines can. Some of these factors were in play in the mid-2000s but nothing had upset the apple cart. Now many things have upset the apple cart, and with an almost unlimited ability to "do something" "express an investment idea" "take a position," that's exactly what's happening. Volatility seems bound to be higher than it was, even if VIX only captures half that equation well.

I wrote during the crisis about part of the problem being that too many people only saw their little corner of the investment world, so they were surprised when the house of cards tumbled. In a world long past long-only investing in stocks and bonds, that kind of specialization will only increase. Seeing the big picture is ever more difficult, and seeing the long-term picture on, say, the Euro can be a waste of time if everybody's happy to put on a shorter-term trade in the opposite direction. That's why it sometimes seems the expedient thing to do is what is called "risk-on, risk off" trading, or at least thinking. If one can get a feeling for when the market is starting to make a multi-month move towards or away from risk, there are many ways to profit or preserve capital. Blur your eyes and see the forest. And read, read, read the blogs, because they're way ahead of the press on investment reality these days.

[rugbysecondrow]

Long-term volatility comparisons are going to be flawed because the nature of investment markets have changed over 20 years. The existence of derivatives, high frequency trading, trading algorithms and more on both sell and buy sides, with lots of liquidity available to the buy side from global sources little constrained by traditional investment mandate guidelines, means many more buyers and sellers are "putting on a trade" rather than investing. Humans don't make significant investment decisions 20 times a week, let alone 20 times a minute (second?), but machines can. Some of these factors were in play in the mid-2000s but nothing had upset the apple cart. Now many things have upset the apple cart, and with an almost unlimited ability to "do something" "express an investment idea" "take a position," that's exactly what's happening. Volatility seems bound to be higher than it was, even if VIX only captures half that equation well.

I wrote during the crisis about part of the problem being that too many people only saw their little corner of the investment world, so they were surprised when the house of cards tumbled. In a world long past long-only investing in stocks and bonds, that kind of specialization will only increase. Seeing the big picture is ever more difficult, and seeing the long-term picture on, say, the Euro can be a waste of time if everybody's happy to put on a shorter-term trade in the opposite direction. That's why it sometimes seems the expedient thing to do is what is called "risk-on, risk off" trading, or at least thinking. If one can get a feeling for when the market is starting to make a multi-month move towards or away from risk, there are many ways to profit or preserve capital. Blur your eyes and see the forest. And read, read, read the blogs, because they're way ahead of the press on investment reality these days.

Does this mean that the programs and policy are mis-geared or mis-aligned with what the market has become. Specifically 401k, IRA, Roths, 529 plans etc. They are all geared more towards long term investing with limited flexibility, aren't they?
Good info.

[1centaur]

All those programs are examples of traditional, long-only investing styles. Whether you or a pro is making the investment decisions, most of the time the thinking will be to buy and hold stocks and bonds for the intermediate term based on traditional views on value/growth/safety.

Those that trade frequently effectively look for truth in what the market is telling them (or try to exploit anomalies before they close). The trouble is that as volume grows from traders rather than investors, traders start looking at everybody being like them and they are anchorless. They may look to chart patterns of the 1930s (this was ubiquitous in 2008/9) but they don't get that in the 1930s there were far fewer high volume high frequency traders. The rally of 2009 may have been a self-fulfilling prophecy rather than an efficient expression of consensus expectations. That's kind of dangerous to build a recovery on.

One of the truisms that academia has tried to impress upon investors is that the market "knows" the value of something; that's otherwise called an efficient market. When traditional investors see securities plummeting, as they did last week, they think something terrible must be happening that other people know about, or they think the market is fixed and all the smart guys are making money at their expense. Guess what - read Saturday's Wall Street Journal. The smart guys were still trying to figure out exactly what happened. They were just confused when it was happening.

All this trading means that it's more important than ever to root your investment decisions in long-term thinking and ignore the whipsawing action, except that this kind of higher volatility has implications for how much you might want to keep in reserves if you might need cash. I still believe true value will win in the end, but the path to get there may be tortuous and the signals sent by price movement misleading. The market does not "know," the market is reactive and reflexive, in Soros's terms; a huge % of the market does not have the goals that you have nor the time frame. It's really not a casino, it is a game of skill, or more precisely many games of skill played simultaneously. The advantage of the smaller investor is the longer time horizon. Can you imagine the pressure of trying to be significantly right each and every month? That's what a lot of hedge fund managers are trying to do, fearing they will lose their capital if they underperform for a very short period.

[BengeBoy]

I cashed in all of my brokerage accounts last week and bought a bunch of Handlebra. I'm trying to corner the world market in high-end handlebar tape.

I'll let you know how it goes.

[MattTuck]

One of the truisms that academia has tried to impress upon investors is that the market "knows" the value of something; that's otherwise called an efficient market.

I agree with the bulk of your post, but this phrasing is not accurate. Efficient markets (we'll leave weak, semi-strong and strong distinctions aside) incorporate all public information in a price. I don't know any experts who would say that efficient markets know the true price. The market provides a price finding mechanism that results in a best guess given the current information available.

Still, there are issues of behavioral finance (a relatively new area of study) that provide many reasons to believe that markets are not totally efficient.


I do agree with you totally that long term holding of well diversified portfolios (especially low fee index funds) provide the best shot at good returns, and an easily accessible way for the "regular joe" to be in the market.

[1centaur]

I'm not sure if it's semantics, but the point of the efficient markets hypothesis (which I think is BS) is that an investor can't profitably apply public knowledge (weak form) of characteristics/information to derive a fair value other than what already exists because the market price already reflects that knowledge. This is what I mean by the market knowing the value - otherwise the phrase is meaningless because there is no truth there is only price. Having sat around on trading desks on the buy and sell sides, I am sure that traders look at price and believe it's telling them what the market believes the value is - they are very suspicious of analysis that says it's worth something other than the price because they have such faith in the wisdom of crowds. So for me, true price=fair value=best guess in the EMH. Having been one of those disbelieved analysts, and having watched people make investment decisions, I have no doubt the EMH is wrong.

I am not necessarily saying that LT holding of indices is the best way to get good returns for joe average. Entry price to the index is key, as is the definition of LT. Flat equity returns over 10 years is not a great argument for indexing. I think average joes might do better paying attention to risk on/risk off and try to trend follow over 2-3 year periods by following the news. Essentially, being out of the market (in T-bills) when everything looks expensive to a lot of pundits and buying stock indices when everybody is panicked would have been a good way to invest over the last quarter century. If someone does not have the discipline to do that, I'd almost rather they were in bonds (until the stock market is say 30%+ off its highs) and earning a coupon than risking zero returns over a decade. That is, until inflation starts picking up :(

[Ahneida Ride]

I cashed in all of my brokerage accounts last week and bought a bunch of Handlebra. I'm trying to corner the world market in high-end handlebar tape.

I'll let you know how it goes.

HandleBra will NOT self dilute.

--------

Are the markets efficient ... ? I say no. Stochastic based models are bound
to fail.

[mflaherty37]

The nerving part is that the 10 year trailing earnings have been historically high the last 20 years. I have heard some noise about possible explanations for this, but it seems intuitive that as volitality returns it will force the ratio lower. It is hard to buy and hold knowing that historically, at this level the market returns 6% per annum over the next decade. On the other hand, you have 5 fingers.

[Rueda Tropical]

John Mauldin who's political views are opposite mine (he's an ultra conservative Republican) but who writes a very intelligent financial letter worth reading hosted an article by Micheal Lewitt in his most recent letter. Lewitt recommended the following:

Compensation reform to better align the interests of Wall Street executives with those of society at large.
Requiring private equity firms and hedge funds to be registered with regulators.
Taxing private equity partners' carried interests at ordinary tax rates instead of capital gains tax rates, and prohibiting private equity firms from going public.
Sharply reducing the leverage of financial institutions (including hedge funds).
Banning off-balance sheet vehicles such as Structured Investment Vehicles.
Reining in quantitative trading strategies.
Reinstituting the downtick rule with respect to short selling stocks.

Derivatives reform, with a preference for an outright ban on naked credit default swaps or, recognizing that such a ban is politically unrealistic, calling for such contracts to be listed on exchanges and requiring substantial capital commitments by their participants.
A Tax on Speculation that would apply to the types of speculative activities that have so badly damaged the American economy, including naked credit default swaps, leveraged buyout, quantitative stock trading strategies and other stock and bond transactions.

The central banks put the shorts on notice that with the (central banks) ability to print money that they can overwhelm whatever leverage the shorts can bring to bear and crush them. All well and good to prevent another "bank run". But if we don't get reform soon there will come a time when the stop gap measure of printing more money will no longer work.

From the opposite side of the political spectrum Nassim Taleb has been warning of the dangers of leverage in a system as complex as current financial markets. He outlines Ten principles for a Black Swan-proof world here:
http://www.fooledbyrandomness.com/tenprinciples.pdf My favorite line: "Do not give children sticks of dynamite, even if they come with a warning . Complex derivatives need to be banned because nobody understands them and few are rational enough to know it."

All the conditions for more volatility and unexpected crashes still exist. The system is a disaster waiting to happen. Retail investors are like minnows trying to navigate a sea of sharks. As in a casino the deck is stacked against you.

[Rueda Tropical]

The nerving part is that the 10 year trailing earnings have been historically high the last 20 years. I have heard some noise about possible explanations for this, but it seems intuitive that as volitality returns it will force the ratio lower. It is hard to buy and hold knowing that historically, at this level the market returns 6% per annum over the next decade. On the other hand, you have 5 fingers.

As troublesome is the fact that we have never seen a bear market bottom until valuations hit bargain basement rates. That never really happened in the recent crash. So, was this a bear rally? Are we going to revisit the lows?

No central bank has ever succeeded in turning a bear into a bull -at least not until now. Bear markets end when the market has taken it's pound of flesh for the previous excesses. I don't think that has happened yet.

[1centaur]

I don't want to discombobulate the mods, so I won't say what I disagree with and only say that I agree with most of what Rueda put in the last two posts, in particular the disconcerting nature of a rebound in market value without really paying the piper. It seems not in concert with the universe, like if it was that simple we could do it every time. Rather, I think it's like a water balloon: squeeze it one place and it bulges out somewhere else. The Greek iceberg tip ("Acropolis Now" the greatest magazine cover ever) is probably that bulge. Austerity seems a lot easier to swallow when someone else has to do the swallowing.

[Pete Serotta]

DO not stop posting and you will not discombobulate the mods, :help: :help:

You can alway disconcert or confuse me, especially after a good red!!! :beer:

PETE



I don't want to discombobulate the mods, so I won't say what I disagree with and only say that I agree with most of what Rueda put in the last two posts, in particular the disconcerting nature of a rebound in market value without really paying the piper. It seems not in concert with the universe, like if it was that simple we could do it every time. Rather, I think it's like a water balloon: squeeze it one place and it bulges out somewhere else. The Greek iceberg tip ("Acropolis Now" the greatest magazine cover ever) is probably that bulge. Austerity seems a lot easier to swallow when someone else has to do the swallowing.

[Rueda Tropical]

Nouriel Roubini in a recent article: "crises once thought to occur only once or twice a century may hammer the global economy far more often."

Why?

"In practice we've seen that things that should have happened once every 100 years are occurring much more frequently and they're much more virulent," "The fiscal costs of these financial crises are becoming larger, larger and larger."

Roubini is concerned the "wall of liquidity" from central bankers around the globe is laying the foundation for the next crisis, citing evidence of potential bubbles in various asset classes. "When you can borrow everywhere in the world at zero rate, and you can take leverage, the risk of creating the next asset bubble -- dollar-funded carry trades, for example -- that significant risk is rising,"

It's one thing to inject liquidity to buy time and contain collateral damage IF you use the time to deal with the fundamental problems that caused the crisis. If you don't, you then are just making the next crisis bigger and worse. In that case it would have been better to just take your medicine and let the market deal with purging the irresponsible behavior if governments don't have the will to do it.

Yesterday, Lehman, today Greece. The crisis will keep on coming and eventually overwhelm the central banks.

[Ahneida Ride]

The conspiracy theorist in me thinks the Trillion came out of the 1000 stock market point drop the other day. The EU just this morning promised the Trillion in bailout funds for Greece and the rest of Europe.

I'm betting the Fed is printing a Trillion as we speak to make up for it. :p

actually, in excess in 98% of all non federal non reserve non-redeemable notes
are digital. Just numbers in a computer spreadsheet. Digital Doolers.

Problem is .... I ain't smart enuf to figure out how manzee zeros come
after da one in a Trillleeeon.