stocks/shares/investments

[21cents]

Anyone here trade?

Discuss here

Iam thinking about grabbing some oil shares since the prices are gonna skyrocket this summer. Should be a decent short term gain.

[The Brave Little Toaster Oven]

I bought some cheap Krispy Kreme stock before their surge recently...its been nice :ols:

[gbear]

I will say the IMO I bought last year is doing nicely. I bought that one because the price was down, and I know we import more oil from Canada than anywhere else.

My DOW has been fantastic since I bought it about 18 months ago. It has more than tripled, and the main reason I invested in it is just now coming to fruition. They make the components for most batteries, including all the hybrid cars. Of course their development of an insect resistant corn so it doesn't need pesticides helps. I invest in $500 chunks, mainly for fun. I invest my bonuses as that was money I never expected or planned for anyway.

I've done pretty well with Pfizer, but I'm going to get out of it within a week or two. I just read There is No Me without You, and I just can't stand making money off big pharm now. I plan to donate the money made. I am that sick with it.

I've done fairly well with RES that I got from vectorvest (thanks to a previous stock thread asking where people got their info). The split helped there. I started with $400 about 3 months ago, and I've been selling their previous recomendation in favor of their newest. I'm at $650 on that one now.

I'm currently losing on Ford. I bought them at $16 when the news came out they had made money but not as much as predicted. they attributed that to lower sales than predicted in Europe, but the truth is they make their prediction if they don't decide to pay down more debt than required.

I've been moderately flat with Kraft, but that's my recession hedge, and I've lost 10% on ENTR which makes the part allowing for multiroom DVRs to comunicate. ENTR and F are my shoot the moon picks.

[Elessar78]

I don't buy individual stocks. Many reams of research prove that it's impossible for the vast majority of people to come out ahead buying and selling individual stocks through a market timing approach. There are exceptions but not many.

I don't see a problem with it if you're in it for speculative purposes, but as an "investment grade" method... there are better ways.

[Burgold]

I don't buy individual stocks. Many reams of research prove that it's impossible for the vast majority of people to come out ahead buying and selling individual stocks through a market timing approach. There are exceptions but not many.

I don't see a problem with it if you're in it for speculative purposes, but as an "investment grade" method... there are better ways.

I think it's relatively healthy for a small proportion of anyone's portfolio as long as they're willing to do the research (and can understand what they've researched). I've managed to consistently beat the market for about 8 years now (I think I only failed to one year), but I've also had my share of misses and some of them were pretty painful.

For most people, I'd say 10-20% should be in stocks and they should have a few fliers. Companies that they really like that have a boom/bust potential. I tend towards mostly value stocks, but you need to have a few that have the potential to change the world.

[Elessar78]

Well, that's what I was saying...

And the key is "they're willing to do the research"... and is it good, thorough research? Personally, I don't have the time.

So when you've had your misses, you've still come out ahead for the 8 years you've been doing it? That's pretty good.

10-20%? I'm up at 70% and I agree, me personally I'd put something south of 5% of my stocks in "high risk/high reward" stocks.

[gbear]

the change the world was my DOW and GE picks when I got it, and both hit...though I thought and still think of them as value picks too. It's just when I started, everything was still in crash mode.

Now my "I hope this is the way things are trending" picks are F and ENTR. I'm less sure of them than I was with GE and DOW, but I still rely on those to keep my portfolio in the green when I explain to my wife I didn't just leave that 20% of my short term savings known as my "Oh crap fund" in the moneymarket (where it makes next to nothing so long as interest rates are this low). For me, I am at the 15% in the shoot the moon group...and I'm ok with making the 20% I did last year (not great as many mutual funds beat it but decently positioned going forward).

[techboy]

I don't buy individual stocks. Many reams of research prove that it's impossible for the vast majority of people to come out ahead buying and selling individual stocks through a market timing approach. There are exceptions but not many.

You're mixing together the reams of research that indicate that stock picking is generally a losing proposition with the reams of research that indicate that market timing is generally a losing proposition, but you're making the smart choice. :)

Of course, just as 90% of drivers think they're above average, most people seem to think that when it comes to stocks, they live in Lake Woebegon. :ols:

In any case, I'd like to thank the market timers and stock pickers here for keeping the markets efficient and liquid, reducing my (occasional) trading costs and smoothing out my returns. :)



For most people, I'd say 10-20% should be in stocks and they should have a few fliers.

20% is about the minimum to be investing in stocks, even for the most risk adverse, according to most studies (a 20%/80% stock/bond portfolio actually has less volatility and better returns than a 100% bond portfolio, historically), but most people need a higher allocation than that to fund their retirement needs.

[skinsfan_1215]

I would highly recommend investing in Borders. Those stocks should be at least 70-80% of any portfolio.

[Corcaigh]

In any case, I'd like to thank the market timers and stock pickers here for keeping the markets efficient and liquid, reducing my (occasional) trading costs and smoothing out my returns. :)

.

+1 :ols:

[mojobo]

Look into Silver ETFs and gold/silver mining companies. Silver has been going up a lot recently so there might be a small sell off soon but that wont be too big or last too long.

[Elessar78]

I don't like the idea of precious metals as investment vehicles. It's "arbitrary" that the market assigns a value to them. I especially don't like them now unless I'm holding. Gold, for example, is/was on a twenty year high and people are going nuts buying the stuff at the high point?? It can/could go up but not as much as if bought during the times when it was worthless. It's very reactive type "investing".

I placed the word arbitrary in quotation marks because in days of yore there was a very specific and interesting reason that gold was chosen as the metal of choice for currency. Gold, Silver, and Platinum were the only three metals that are common enough (easily found) but not too easy (like iron) that are not radioactive. Platinum's melting point was too high to make it of any use back in the day. So Gold it was!

[Burgold]

Well, that's what I was saying...

And the key is "they're willing to do the research"... and is it good, thorough research? Personally, I don't have the time.

So when you've had your misses, you've still come out ahead for the 8 years you've been doing it? That's pretty good.

10-20%? I'm up at 70% and I agree, me personally I'd put something south of 5% of my stocks in "high risk/high reward" stocks.

Yeah, I think so. In ten years of investing my portfolio is worth four and a half times what I started with. That said, big losers are still painful and I'm far from perfect. Still, being a freelance reporter with NPR it pays to be at least halfway decent at investing... it sure helps during those droughts where you can't sell a pitch. I also don't disagree with Techboy. Stock picking, even if you do the best research you can and really know your stuff, is a dangerous and mercurial thing. Something unexpected can always happen. You are never in total control and no investment is a lock (even if some really feel that way) What I've done is a combo of luck, psychology, research, and occassionally patience because unlike McD5 I've only done a day trade once in my life and so if a company goes down short term, but I believe in their story, their business model and their numbers I can ride the waves up and down for a bit. If I'm right, eventually the tide will rise. (Of course, that buys into what TB says about index fund investing too and that is certainly less stressful)

[Predicto]

I agree with the "forget market timing" advice, and mutual funds are great, but I have done well for a quarter century using the "make your own mutual fund of individual industry leader stocks spread across the economy and hold them longterm" (and I have the advantage of deferring a lot of tax liability)

Just don't claim to be able to predict the near future of a stock or the market as a whole. That way lies madness (and certain ridicule). :ols:

[techboy]

I agree with the "forget market timing" advice, and mutual funds are great, but I have done well for a quarter century using the "make your own mutual fund of individual industry leader stocks spread across the economy and hold them longterm" (and I have the advantage of deferring a lot of tax liability)

The problem with that approach, as we have discussed before, is that it doesn't diversify away individual company risk, which the market does not (at least in theory) compensate you for. You've done well, but what if you'd bought Enron? That was an industry leader, until it wasn't (fully acknowledging that Enron is like the "Godwin's Law" of investing discussions :ols:).

Besides, owning and holding index funds means that I never sold my shares of Apple (http://www.extremeskins.com/showthread.php?315663-Stock-Market-Top-Appears-In-(9-months-in-and-750-points-lower.)&p=8158820#post8158820) at an inopportune time. :movefast:

[mojobo]

I don't like the idea of precious metals as investment vehicles. It's "arbitrary" that the market assigns a value to them. I especially don't like them now unless I'm holding. Gold, for example, is/was on a twenty year high and people are going nuts buying the stuff at the high point?? It can/could go up but not as much as if bought during the times when it was worthless. It's very reactive type "investing".

I placed the word arbitrary in quotation marks because in days of yore there was a very specific and interesting reason that gold was chosen as the metal of choice for currency. Gold, Silver, and Platinum were the only three metals that are common enough (easily found) but not too easy (like iron) that are not radioactive. Platinum's melting point was too high to make it of any use back in the day. So Gold it was!

Precious metals are a direct hedge against inflation and with currencies around the world being pegged to the U.S. dollar which is dropping rapidly so its probably the best place to be right now. Historically whenever weve gone through a deep recession like this the gold price to dow jones ratio has gone to 1:1. It's a little under 10:1 right now so theres still a long way to go for gold. When we have the "fiscally conservative" GOP saying that they are going to reduce the deficit from $1.5 trillion to $1.44 trillion while trying to keep interest rates low at the same time its obvious that were going to run into inflation. I would say silver will rise higher than gold right now based on the fact that its way below historic ratios, but any commodity you buy is a good bet right now.

[techboy]

but any commodity you buy is a good bet right now.

Commodities have an expected negative real return, because over long periods, they keep up precisely with inflation, but also incur costs for storage and transactions and the like.

Negative real returns are bad. :)

There are only two exceptions to this thinking that I've seen. The first is that, if used in small quantities (like 5% of the portfolio), they can act as portfolio insurance (insurance products have a negative expected return too, but we buy it for catastrophic events). Not all financial experts agree with this approach, but some I respect advocate it.

The second is if you can predict the future. The markets already know everything you mentioned about the weakness of the dollar and so on, and the prices have already jumped. Of course, if you can predict the future, I'd suggest just buying lottery tickets.

Personally, I hedge against potential future inflation by buying TIPS.

[chipwhich]

I'm a garbage collector. In my sandbox account. My returns have been phenomenal. I have been buying garbage since the downturn began and reaping great rewards.

Here is what is in my current sandbox. I have only had 2 that haven't produced. One of the two went bankrupt and I lost it all. I like stocks I can buy into at a minimum of 1000 shares. Didn't adhere to this policy when buying Microsoft or Bank of America.

Currently in hold mode. No flipping.

My trash, Ford, Bank of America, Citibank, Microsoft, Rite Aid, Sirius, Microsoft, Home Depot.

Biggest winner, Ford. Bought it at 1.95 Rate of return 682%

Only stock losing money since I purchased. Microsoft.

Biggest Fail. Buying Six Flags thinking Danny was a genius at marketing. What a fool I was. Bankrupt.

Lowest gainer in the green. Bank of America with a 12% return.

Even trash like Rite Aid I am at a 42% return.

If I had the balls to go all in, I would be retired. But you can't go all in on garbage.

Other holdings outside of my online brokerage account which are doing well. IBM, Wisconsin Energy Corporation.

I like playing in the sand box. I can't do any worse than the salesman that portray themselves as professional money managers. There are a lot of them out there that have less experience investing than I do, but the dress nice :)

[Predicto]

The problem with that approach, as we have discussed before, is that it doesn't diversify away individual company risk, which the market does not (at least in theory) compensate you for. You've done well, but what if you'd bought Enron? That was an industry leader, until it wasn't (fully acknowledging that Enron is like the "Godwin's Law" of investing discussions :ols:).

Besides, owning and holding index funds means that I never sold my shares of Apple (http://www.extremeskins.com/showthread.php?315663-Stock-Market-Top-Appears-In-(9-months-in-and-750-points-lower.)&p=8158820#post8158820) at an inopportune time. :movefast:

Oh you bastard :mad: :silly:

You are correct, of course. What if I had bought Enron? The answer is that I didn't, I bought Exxon instead. And thus my returns have been better than a corresponding mutual fund. I acknowledge that some of that is good fortune, but the fact is, I shied away from Enron back in the day because I couldn't figure out exactly what it was that they did or why it should remain successful. I only invest in things that I am pretty sure I understand today and also understand basically where they expect to be tomorrow (which is also why I sold Apple :cry: ).

(I also have a good percentage in mutual funds, for the same reasons as you).

[zskins]

If you were smart and picked up BP when it hit 27 you would have been making a nice penny like I am. :)

Also, I picked up Sirius at 1.33. But originally I had it at .62 but sold it thinking it was not going to go up anytime soon. :doh:

[21cents]

what are some good etfs i should add to my portfolio

---------- Post added February-18th-2011 at 11:32 PM ----------

what do you guys think about mcdonalds?

it increased over 20% over the past year

[techboy]

what do you guys think about mcdonalds?

it increased over 20% over the past year

Wow. I fully recommend that you buy McDonald's stock last year. :)

[Burgold]

[/COLOR]what do you guys think about mcdonalds?

it increased over 20% over the past year

Bought McD about 2 years ago because I thought that the economy was going to continue to do poorly and therefore people would be buying more cheap food. It's up about 50%. I don't know that I would tell anyone to get in now although the PE's not that bad and the dividend is considerably better than you would get from a bank or many CDs. Do your research though. It took a little dip towards the end of the year and is just beginning to recover. Buying things nearish their current highs always makes me a little skittish.

[mojobo]

Commodities have an expected negative real return, because over long periods, they keep up precisely with inflation, but also incur costs for storage and transactions and the like.

Negative real returns are bad. :)

There are only two exceptions to this thinking that I've seen. The first is that, if used in small quantities (like 5% of the portfolio), they can act as portfolio insurance (insurance products have a negative expected return too, but we buy it for catastrophic events). Not all financial experts agree with this approach, but some I respect advocate it.

The second is if you can predict the future. The markets already know everything you mentioned about the weakness of the dollar and so on, and the prices have already jumped. Of course, if you can predict the future, I'd suggest just buying lottery tickets.

Personally, I hedge against potential future inflation by buying TIPS.

Kind of true, but when currencies are as overvalued as they are right now and with inflation the only real way to finance government spending here and in Europe its a pretty good investment. Things like labor and services will be cheaper in terms of precious metals or goods that need a high amount of labor to make. What the markets aren't accounting for is the artificial demand for U.S. dollars by other central banks that will not be there in the next couple of years. U.S. Dollars and credit denominated in U.S. dollars is in a bubble right now and 5% is way too low of an inflationary hedge for a portfolio, it should be at least 30% and probably closer to 50%. TIPS is probably the worst thing to hedge against inflation because your depending on the people who pay you for inflation to state the true rate of inflation. Its like a cop pulling someone over for speeding and asking how fast he was going and expecting him not to understate how fast he was going.

Between taxes and storage fee it will cost you part of your return but you could off set that through leverage. I think your best bet for the next year or two is the etf AGQ which doubles the return (either positive or negative) for spot silver.

[SpringfieldSkins]

I'm interested in investing in the stock market. I don't know if this would be a good thread to ask this in, or if I should start another thread, but I figured I'd ask here...


I'm a total noob when it comes to the stock market, I realize that trading stock is a risk and a return is never guaranteed. That said, how would/should one go about trading stock? What are the better websites (easier to navigate, most tools)? How much is the least amount of money that one should start a portfolio with? What kinds of tips and advice would you offer somebody starting out in trading stock?



EDIT: I do actually know about the stock market. I don't follow it super closely, but I tend to know what companies are doing well and which ones aren't. I didn't want to give the impression that I am completely ignorant when it comes to the stock market since I referred to myself as a "noob".

[Burgold]

The first thing I would do is go to the library or go to a book store and get a book on investing. You need to learn what everything means. How to look at PEs, Growth, Debt, and to read a stock report and decide which are the factors in the story that you care most about. I'd also suggest mock investing for three months. Give yourself an amount of monopoly money and do your due diligence and make your choices and then track and watch the market. Really the first thing is not to invest or pick your broker or online trading tools. The first thing is to learn and go to school. You have to know about stocks. You have to know about your risk tolerance. You need to know about your trading windows. You need to know what your philosophy is. It's not a bad idea to study the top performers of the best mutual funds and see what characteristics they share.

Sorry for the lecture.

[SpringfieldSkins]

The first thing I would do is go to the library or go to a book store and get a book on investing. You need to learn what everything means. How to look at PEs, Growth, Debt, and to read a stock report and decide which are the factors in the story that you care most about. I'd also suggest mock investing for three months. Give yourself an amount of monopoly money and do your due diligence and make your choices and then track and watch the market. Really the first thing is not to invest or pick your broker or online trading tools. The first thing is to learn and go to school. You have to know about stocks. You have to know about your risk tolerance. You need to know about your trading windows. You need to know what your philosophy is. It's not a bad idea to study the top performers of the best mutual funds and see what characteristics they share.

Sorry for the lecture.

No problem at all, I was almost expecting it. :)

While I was in college, I took the basic macro/micro economics and did fairly well in those classes. I also took an ECON stocks/investments class which I didn't find as interesting as micro or macro. If I only had paid as much attention then it might pay of now, when I actually care about investing. I'm actually doing very well in my 401k with pretty much a portfolio full of high risk funds (3 aggressive and 1 steady growth) and I avoided having any sort of negative returns when the stock market crashed. Being able to do fairly well with my 401k gives me a bit of confidence when it comes to trading stocks with money that is actually liquid (compared to my 401k).

I tried the mock investing thing a couple of years ago but got bored with it because it was (a.) not real money and (b.) hard to navigate the site I was using. That lasted all of a week or so. If I could remember the site or the login/password, I'd be interested to find out how the stocks I selected were doing. Perhaps I'll give that another try. I'm much better when learning on the fly. Reading a book or two would be nice but I learn much more quickly when I see things developing right in front of me.


I do appreciate the advice though.

[Burgold]

I tried the mock investing thing a couple of years ago but got bored with it because it was (a.) not real money and (b.) hard to navigate the site I was using.
.

Cool. Sounds like you are on the right track. The one thing warning side I see in what you wrote is the "got bored" part. Investing isn't supposed to be fun. It's business. Take it seriously. Also, don't invest that which you aren't willing to lose.

Oh, and the most important thing... don't listen to random anonymous people you encounter on the internet... even us well-meaning ones. I tend to be more value based though I always have a few companies that are boom or bust. I also never buy a company that after researching it that I wouldn't be comfortable holding onto for at least three years.

My minimum approach to stock picking is to find a company that I think I might like, learn its story and recent news, then find at least three reports on it and see how three different guys analyze it. Break down the numbers that I care about and then based on all of that make an assessment.

[SpringfieldSkins]

Cool. Sounds like you are on the right track. The one thing warning side I see in what you wrote is the "got bored" part. Investing isn't supposed to be fun. It's business. Take it seriously. Also, don't invest that which you aren't willing to lose.

Oh, and the most important thing... don't listen to random anonymous people you encounter on the internet... even us well-meaning ones. I tend to be more value based though I always have a few companies that are boom or bust. I also never buy a company that after researching it that I wouldn't be comfortable holding onto for at least three years.

My minimum approach to stock picking is to find a company that I think I might like, learn its story and recent news, then find at least three reports on it and see how three different guys analyze it. Break down the numbers that I care about and then based on all of that make an assessment.

Thanks for the advice. I really appreciate it.

[Elessar78]

I'm interested in investing in the stock market. I don't know if this would be a good thread to ask this in, or if I should start another thread, but I figured I'd ask here...


I'm a total noob when it comes to the stock market, I realize that trading stock is a risk and a return is never guaranteed. That said, how would/should one go about trading stock? What are the better websites (easier to navigate, most tools)? How much is the least amount of money that one should start a portfolio with? What kinds of tips and advice would you offer somebody starting out in trading stock?



EDIT: I do actually know about the stock market. I don't follow it super closely, but I tend to know what companies are doing well and which ones aren't. I didn't want to give the impression that I am completely ignorant when it comes to the stock market since I referred to myself as a "noob".

While you're at the library, also pick up a book on personal finance. Investing in the stock market is just a part of your personal finance picture. I hope the ultimate goal for this is for you to build your net worth so think of investing as playing offense, but you also need to know how to play defense.

[SpringfieldSkins]

While you're at the library, also pick up a book on personal finance. Investing in the stock market is just a part of your personal finance picture. I hope the ultimate goal for this is for you to build your net worth so think of investing as playing offense, but you also need to know how to play defense.

That is my ultimate goal, yes. I agree with that line of thinking 100%.

[techboy]

What the markets aren't accounting for is the artificial demand for U.S. dollars by other central banks that will not be there in the next couple of years.

Oh, I see. The legions of professional commodities traders who spend all day every day doing this for a living missed this, but you're on it?

Well, good luck, :)



TIPS is probably the worst thing to hedge against inflation because your depending on the people who pay you for inflation to state the true rate of inflation.

Yes, conspiracy theories about the CPI abound, but they're pretty silly. Here's two quick reasons:

1. It turns out that the CPI does, in fact, skew the results slightly, but it overstates it, not understates it.

That's right, the CPI over-reports inflation. Here is one paper discussing this (http://faculty-web.at.northwestern.edu/economics/gordon/P376_IPM_Final_060313.pdf), by Robert Gordon from Northwestern. The abstract:


This paper provides a retrospective on the 1996 Boskin Commission Report, Toward a More Accurate Measure of the Cost of Living, and its famous estimate that the CPI in 1995-96 was upward biased by 1.1 percent per year. The paper summarizes the report's methods, findings, and recommendations, and then reviews the criticisms that appeared soon after the Report was issued. Post-Boskin changes in the CPI are summarized and assessed, as is recent research on related issues. The paper sharply distinguishes two questions. First, with what we know now, what should the Commission have concluded about CPI bias in 1995-96? Second, what is the bias now after the many improvements introduced into the CPI since the Commission's Report? About the first question, my own recent research on apparel and rental housing indicates a substantial downward bias in the CPI over much of the twentieth century, diminishing in size after 1985. Incorporating these findings into the Boskin matrix would reduce its 0.6 percent annual upward bias due to quality change and new products to a smaller 0.4 percent bias. However, this is more than offset by the stunning discrepancy over 2000-06 in the chain-weighted C-CPI-U compared to the traditional CPI-U, indicating that the Commission greatly understated the magnitude of upper-level substitution bias. This retrospective evaluation suggests that the Boskin bias estimate for 1995-96 should have been 1.2 to 1.3 percent, not 1.1 percent. Current upward bias in the CPI is estimated to have declined from the revised 1.2-1.3 percent in the Boskin era to about 0.8 percent today. Yet the Boskin report, like most contemporary studies of quality change, failed to place sufficient value on the value of new products and on increased longevity. Allowing for these, today's bias is at least 1.0 percent per year or perhaps even higher.

Try reviewing the academic literature on the issue. You can just type "cpi upward bias" into google scholar, and you get this list of articles (http://scholar.google.com/scholar?hl=en&q=cpi+upward+bias&um=1&ie=UTF-8&sa=N&tab=ws).

One such article is CPI Bias from Supercenters: Does the BLS Know that Wal-Mart Exists? (http://econ-www.mit.edu/files/1768), by Jerry Hausman at MIT and Ephraim Leibtag at the USDA. An excerpt from the abstract, found here (http://www.nber.org/papers/w10712) (the first link is to a free version so you can read it)


Hausman (2003) discusses four sources of bias in the present calculation of the CPI. A pure price' index based approach of surveying prices as done by the BLS cannot succeed in solving the problems of bias. We discuss economic and econometric approaches to measuring the first order bias effects from outlet substitution bias. We demonstrate the use of scanner data that permits implementation of techniques that allow the problem to be solved. In contrast, the current BLS procedure does not treat correctly outlet substitution bias and acts as if Wal-Mart does not exist. Yet, Wal-Mart offers identical food items at an average price about 15%-25% lower than traditional supermarkets. The BLS links out' Wal-Mart's lower prices. We find that a more appropriate approach to the analysis is to let the choice to shop at Wal-Mart be considered as a new good' to consumers when Wal-Mart enters a geographic market. This approach leads to a continuously updated expenditure weighted average price calculation. We find a significant difference between our approach and the BLS approach. Our estimates are that the BLS CPI-U food at home inflation is too high by about 0.32 to 0.42 percentage points, which leads to an upward bias in the estimated inflation rate of about 15% per year.

Or maybe just check an Econ Textbook (http://books.google.com/books?id=0NyL70IKABcC&pg=PA155&dq=cpi+upward+bias&hl=en#v=onepage&q=cpi%20upward%20bias&f=false).

2. Ask yourself this... what is the most powerful lobby in the United States, and who are the most influential voters in the United States?

If you said "AARP and the elderly", you win!

Now, ask yourself this... If the CPI (which is totally transparent in method, all you have to do is go to the BLS website) was rigged to downplay inflation, just who do you think would be hurt the most?

If you said "the elderly, whose social security relies on payments indexed to the CPI", you win again!

Now, last question. If the CPI (which is, again, totally transparent in method) was rigged in the manner you suggest, do you suppose the most politically powerful groups in the country would just sit by and do nothing?

Oh, and just for reference, this is confirmed by considering the bond market's future inflation expectations. As of Feb 18, the 5 year Treasury (http://www.treas.gov/offices/domestic-finance/debt-management/interest-rate/yield.shtml) is yielding 2.30%. The 5 year TIPS (http://www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/real_yield.shtml) is yielding .26%. This indicates that the bond market more or less expects inflation to be around 2.04% over the next 5 years (give or take inflation insurance and liquidity premiums).



Between taxes and storage fee it will cost you part of your return but you could off set that through leverage.

You're taking a huge gamble with a negative expected return, so you offset the costs by doubling down, in the process adding borrowing costs to the mix?

That's like taking out a 2nd mortgage because you've got a good feeling about the roulette wheel this week. :ols:



I think your best bet for the next year or two is the etf AGQ which doubles the return (either positive or negative) for spot silver.

I think your best bet is to read the prospectus (http://www.proshares.com/funds/agq.html) of that etf, where we find:


This ETF seeks a return of 200% of the return of an index (target) for a single day. Due to the compounding of daily returns, ProShares' returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period.

The bold and italics aren't mine... they are right in the prospectus.

That warning is very important, as we see in These Funds Can Be Hazardous to Your Wealth (http://www.kiplinger.com/columns/value/archive/2009/va0414.htm). Excerpts:


Real estate investment trusts have performed hideously over the past year. The Vanguard REIT Index fund tumbled 50% through April 7. Now, suppose you were smart enough to buy a fund that goes in the opposite direction of the Vanguard fund, namely ProFunds Short Real Estate fund. Its objective is to return the inverse of a REIT index. Your gain: Not 50%. Not even 25%. Instead, you lost 11%.

The problem is that leveraged and inverse ETFs and funds don't deliver the performance most investors expect -- except over a single day. Beyond that, they tend to return much less than you'd expect and often lose gobs of money -- regardless of the direction of the underlying index.

and


But even Andy O'Rourke, marketing director of Direxion funds, acknowledges that many people miss the message. "Unknowing investors who are used to mutual funds look at the quarter-end performance, and very often our funds are at the top. What people don't notice is that they're also at the bottom." Direxion ETFs, he says, are designed to be short-term trading vehicles. "If you're holding them for more than a day, you're out of sync with the investment."


Holding that kind of fund for years as you suggest is financial suicide.


That said, how would/should one go about trading stock?

I wrote this previously, so I'm just going to cut and paste.

As to investing 101, I'm happy to help as best I can by sharing some of what I have learned in my own research. :)

This is going to be a rather complicated question to answer, though, so it's going to be rather long (surprise!). I'm going to give you my best advice first, though: I'd highly recommend dropping by the Bogleheads forum (http://www.bogleheads.org/forum/index.php), read the stickies, and post a request for help in the Investing- Help section. There are a lot of very knowledgable people, including several authors and academics, that give of their time there for free, and give very good advice.

If you do this after you read through this, they will help you put the general principles I'm going to share into action with a specific plan.

Or, if you like, you can skip everything I'm about to type (don't worry... I'm saving it for the next person that asks ;)), and just go there now. :)

First, why the most common approach of simply looking at funds that have good past performance (perhaps using some kind of "fund screener" at Fidelity or the like is a bad idea:

This excerpt is from a speech by John Bogle on the topic of Investing with Simplicity (http://www.vanguard.com/bogle_site/lib/sp19990130.html).


My third rule comes to grips with the first element that catches the eye of most investors—whether experienced or novice—the fund's past "track record." (The implied analogy to a horse race is presumably unintentional!) But track records, helpful as they may be in appraising how thoroughbred horses will run, are usually hopelessly misleading in helping you appraise how money managers will perform. There is simply no way under the sun to forecast a fund's future returns based on its past record. Rule 3. Do Not Overrate Past Fund Performance.

Now, I must contradict myself ever so slightly. For exceptional funds with exceptional past returns that are substantially superior to the market will regress toward, and usually below, the market in the future. Regression to the mean—I call it the law of gravity in the financial markets—is measurable and apparently almost inevitable. For example, in two studies of returns over consecutive decades, a remarkable 99% of top-quartile funds moved closer to—and even below—the market mean from the first 10-year period to the subsequent 10-year period. There was only one single, solitary exception to the rule, a fund that ruled the world during the 1970s and 1980s alike. But so far in the 1990s, it has regressed magnificently, falling far below the market's return. Sometimes mean reversion requires patience!

Make no mistake about it: the record is clear that top-performing funds inevitably lose their edge. This industry is well aware of that certainty. Yet fund sponsors persist in promoting their most successful (past) performers. Such a strategy defies all reason except for this one: Promotion of such funds brings in lots of new money, and lots of new fees to the adviser. But such promotions, finally, lead investors in precisely the wrong direction. Ignore them.

Actually, it's a great speech overall, and well worth reading for tips on investing.

For a more academic approach, take a look at The Difficulty of Selecting Superior Mutual Fund Performance (http://www.fpanet.org/journal/articles/2006_Issues/jfp0206-art6.cfm). The abstract:



-Much has been written about the management of mutual funds and active versus passive management. This study attempts to quantify the relative performance of actively managed large- and mid-cap domestic stock mutual funds with a passive strategy during a 20-year period, including 11 10-year rolling periods.

-During the study period, most actively managed large- and mid-cap mutual funds underperformed their respective passive strategies. While every period under review had mutual funds that outperformed the passive strategy, few funds did so consistently.

-Furthermore, predicting in advance which mutual funds would outperform was difficult, if not impossible, and the cost of selecting the "wrong" manager was high. These factors combined demonstrate the difficulty for financial planners to select superior performance.

-The study also reviewed the impact of taxes on large-cap investments.
Finally, the author provides recommendations for financial planners in discussing action steps regarding clients' portfolios.


Emphasis mine.

There's virtually no way to predict future success of a particular mutual fund, and certainly not return since inception. All the research is very clear on this.

What does work? I'll share in a bit, but the other thing I will note is that buying just a single fund is a bad idea in any case.

For one thing, there's no way of knowing what's going to be successful in the future. Value stocks are historically a little better than the general market, but there's no way of telling for sure that will continue. It's smart to hedge your bets.

Another reason is that if you spread your allocation out, your portfolio will become less volatile. Most people have trouble stomaching it when their portfolio sinks a huge percentage in one day. That's far more likely to happen if you only own one fund. One benefit of diversification is that if one thing goes down, another will probably go up, meaning the overall portfolio doesn't move around as much, which can be easier on the stomach.

Perhaps one of the biggest reasons to diversify is rebalancing. Consider this NPR article (http://www.npr.org/templates/story/story.php?storyId=89324244&ps=rs) interviewing David Swensen, a brilliant money manager and economist at Yale, One of the reasons I trust Swensen, along with his ridiculously good track record, is that while he could make billions as a hedge fund manager, he chooses instead to live a relatively modest life as an academic at Yale. Here are some excerpts:


To share the wealth with everyone, Swensen wrote a book about retirement investing that details his allocation strategies. He advises having the right long-term mix of stock index funds, bonds and real estate investment trusts (see chart below).

But when stocks tank, that mix gets out of balance: For example, U.S. stocks that once constituted 30 percent of a portfolio may now constitute just 29 percent or 28 percent.

When that happens, Swensen rebalances, shifting more holdings into stock index funds. Then, if the market comes back up and ends the day flat — where it started — Swensen sells those stock index funds.

Swensen's ability to buy low and sell high on the market roller coaster has in some instances earned upwards of $1 million in a single day for Yale's endowment — just by rebalancing amidst volatility.

"So you end up at the same place you started, except a million dollars ahead, that's not bad," he says. "But from rebalancing, not speculating — just sticking with your long-term targets."

That's the upside: The stock market can end up flat, but investors still make money because they rebalanced when it was down. Sometimes the market keeps going down. But over time – five, 10 or 20 years — as the market keeps rising, Swensen says, investors can goose out extra returns by rebalancing along the way.

You can't do that if you only have one fund. There's more on rebalancing in that article if you want to read it, and it actually also has a recommended portfolio which is as good as anything you'll find out there, if you want to take a look at that, though you'll probably want to customize it to your own needs.

What else doesn't work? Market timing and security selection. In other words, you can't get in and out of the market and hope to beat it, and you can't pick stocks or funds and hope to beat the market either. I'm pretty sure you've seen my extensive posts on this subject, so I won't repeat them (though you can find one here (http://www.extremeskins.com/showthread.php?315663-Stock-Market-Top-Appears-In-(9-months-in-and-750-points-lower.)&p=7227580&viewfull=1#post7227580), if you are so inclined), but it's a big reason behind the research I just shared: the experts can't beat the market either, at least not consistently, so any particular fund's outperformance is almost certainly luck, and likely to revert to the mean as Bogle talks about.

What does work? Asset allocation and controlling costs.

There's a great speech by Swenson here (http://webcast.mamato.se/clients/skagenfonder/nyarskonferens2008/). I know the page is in Swedish, but if you click on Swenson's name, it brings up a video of a speech he gave in Stockholm, in English. In it, he talks about what doesn't work (security selection and timing markets), and what does (asset allocation and controlling costs), as well as some general tips on investing. It's about an hour, and well worth the time, but I will summarize this and other research below (I'm also at some point going to include a suggested reading list which will include lots of data on what I'm talking about).

First, asset allocation. In a nutshell, our best data indicates that stocks are riskier than bonds, and more volatile, and pay more (because investors demand more compensation for the risk). In theory, the higher a percentage of stocks one has, the higher the expected return (in his speech, Swensen talks about the difference between investing in T-Bills and a market index in 1929, and the vastly different returns), but there's also a higher potential for loss.

Very generally, then, the more return one needs, the higher percentage one should be in stocks. The less, the more bonds. Adjusting this percentage should, at least in theory, adjust one's returns.

Second, and perhaps more importantly, are costs. From Bogle's speech again (I'm not going to take the time to re-add all the bolds and italics):


Rule 1. Select Low-Cost Funds. I've said "costs matter" for so long that the portfolio manager for one of our funds gave me a Plexiglas pillar with the Latin translation: Pretium Refert. But costs do matter. If you don't believe me, hear Warren Buffett again:

Seriously, costs matter .... Equity mutual funds incur operating expenses—largely payments to funds' managers—that average about 100 basis points (1%), a levy likely to cut the returns their investors earn by 10% or more over time.

Sadly, Mr. Buffett was misinformed. The average equity fund now carries total annual expenses not of 100 basis points, but of upwards of 200 basis points (2%), "a levy," if I may revise the master's words, "likely to cut the returns their investors earn by 20% or more over time." Such costs are, well, unacceptable. And bond fund all-in costs—unbelievably—average some 1.2%, a simply unjustified levy on any gross interest yield. In fact, such costs would cut today's yield of 5.1% on the long U.S. Treasury bond to 3.9%, or nearly 25%. Why would anyone buy a high-cost bond fund?

Expense Ratios: A low expense ratio is the single most important reason why a fund does well. If you select actively managed funds, emulate the index advantage by choosing funds with low operating expense ratios. In fact, the surest route to top-quartile returns is bottom-quartile expenses, a fact reaffirmed in all investment equity styles—small- or large-cap, growth or value—and all bond fund maturity ranges as well. Lower expense ratios are the handmaiden of higher returns. Once again, "little things mean a lot."

Transaction Costs: In addition, with today's average fund portfolio turnover at an absurd 85% per year, transaction costs reduce returns by as much as 1/2 to 2.0 percentage points over and above fund expenses. What is more, it carries enormous tax costs. So favor low turnover funds. Taxes: If your fund holdings are in taxable accounts (i.e., other than in a tax-deferred IRA or a thrift plan), high turnover can not only cause you to pay full income taxes on short-term gains, but also deprive you of the extraordinary value of the deferral of capital gains taxes. (By the way, while high fund turnover hurts taxable investors, there is no evidence whatsoever that it helps tax-deferred investors). The odds against active managers outpacing the after-tax returns of index funds become enormous for taxable investors. So, never forget that taxes are costs too.

The emphasis is mine. Reams of research show that the #1 predictor of returns of any fund is costs.

This actually makes sense, if you think about it. As Buffett writes in a bet he put a million dollars of his own money behind (http://www.longbets.org/362):


A lot of very smart people set out to do better than average in securities markets. Call them active investors.

Their opposites, passive investors, will by definition do about average. In aggregate their positions will more or less approximate those of an index fund. Therefore the balance of the universe—the active investors—must do about average as well. However, these investors will incur far greater costs. So, on balance, their aggregate results after these costs will be worse than those of the passive investors.

Costs skyrocket when large annual fees, large performance fees, and active trading costs are all added to the active investor’s equation. Funds of hedge funds accentuate this cost problem because their fees are superimposed on the large fees charged by the hedge funds in which the funds of funds are invested.

A number of smart people are involved in running hedge funds. But to a great extent their efforts are self-neutralizing, and their IQ will not overcome the costs they impose on investors. Investors, on average and over time, will do better with a low-cost index fund than with a group of funds of funds.

Since market timing is basically impossible, those costs are a killer.

How should you invest, given what we have seen so far?

In a nutshell, you need to pick a mix of stocks and bonds (and perhaps real estate) which matches your need, ability, and willingness to take risk. What does that mean?

Need- You have to sit down and figuire out how much money you will need for retirement, and how much you'll need to tilt to stocks to get there. This would include any pensions you might have, and what your goals are. You're going to have to consider things like how much you expect stocks (and bonds) to return in the future (there are good conservative estimates out there... I use perhaps 5% real for stocks, less for bonds), and how much money you think you'll need (considering lifespan and a safe withdrawl rate- a lot of people use 4% per year).

A rich person with millions of dollars in the bank has a lot less need to take risk than a twentysomething just starting out.

Ability- Balanced with this is how able you are to take risk. The best plan in the world won't work if you panic when the market's down 30% and you sell all your stocks (exactly the wrong time to do so). You need to take an honest look at yourself and decide what you can handle. The stronger your stomach, the more stocks you can own. We just recently had a huge downturn, so it might be easier to make that assessment. I apparently have a stomach of iron, because I didn't flinch. For others, knowing that down markets are when stocks really make money didn't help, and they panicked. This is sometimes known as the "sleep test", and it's important to be brutally honest with yourself.

Willingness- You might just not want to take risk, even if you can. A person that has enough money to meet his goals can go very conservative with the rest, or he can invest it in stocks with the hopes of leaving it to heirs.

Once you have determined your need, ability, and willingness to take risk, you can set your stock/bond ratio. Personally, my wife and I are young, we both have pensions, and I have an iron stomach, so I went 80/20, which is very aggressive, but our basic needs will certainly be met by our pensions no matter what else happens, and I have dreams of a villa in Italy. :)

You shouldn't, however, go less than 20% or greater than 80% in stocks, because it hurts the ability to rebalance.

How to break down those stocks and bonds further? Glad you asked. ;)

First, you want the lowest cost possible, and that means index funds. Most 401(k)s have a lot of actively managed, high cost funds. Forget those (as much as possible), and stick with low-cost index funds. You might have to make some compromises based on your investment options in your 401(k), but stick to this as much as possible. Remember: costs matter.

Second, you want to be as diversified as possible. This is for reasons I have already covered, as well as the fact that it is the core of what is called Modern Portfolio Theory, which won the Nobel in economics for Markowitz. These posts are long enough, so if you want more on that, there will be plenty in the suggested reading I include at the end.

Now to the nitty gritty:

Bonds- This is your safety zone. As you get older, this percentage should go up, because bonds are more stable and safe, and you shouldn't have money you'll need in the next 10 to 20 years in stocks (as we saw over the last decade... they'll probably recover, but that's no consolation to people that need the money now). Because you want safety, you want only U.S. Treasuries, the safest there is. There's a bit of discussion about what to do here, but I personally use a 50/50 mix of a TIPS fund (to account for inflation) and an intermediate Treasury fund. Others use slightly different mixes. There's no way of knowing which is best in advance, of course, so the best thing to do is to do some research, pick something that makes sense, and stick with it.

Stocks- Here, you want to diversify. You basically want to hold every stock world-wide, or an approximation thereof. You can do this by holding a fund or funds that invest in the U.S. (many 401ks have at least an S&P 500 fund, which is a good proxy for the U.S. market, though a total market index would be even better, or you can add a small cap fund to the S&P), and a fund or funds that hold the rest of the world.

You'll want to decide on a split between U.S. and international. Most people use something between 20 and 50% international, though that's a raging debate. Personally, I use 40%.

You might also want to include some real estate. If you do, buy an REIT index. Most people recommend 10% of the total portfolio, taken out of the stock side (remember... bonds are for safety).

If you want to get really advanced, many believe that small and value outperform, so you can tilt to those (I do), but you need to do your own research and make your own decisions about that. It's a complicated and controversial topic.

Also, taxes matter (because they are costs). In general, you want to hold bonds and REITs in tax advantaged accounts, and equities in taxable (if you have any taxable investments). You can find more detail in the books, on the wiki, or at the forum in the recommendations below.

In general, the advice is this:

1) Fund the 401(k) up to the match (if any, no sense in giving away free money, no matter how bad the expense ratios are)

2) Fully fund the Roth IRA (because you can choose the provider and get low cost funds)

3) Fund the 401(k) to max (unless the ER is REALLY bad, the tax advantage is usually better than a lower cost fund in taxable)

4) Invest in taxable

If you follow that order, you should be good. Working around ERs in our 401k's is something we all have to deal with, and sometimes compromises have to be made.

Finally, once you have a plan, the important thing to do is stick with it. Buy, hold, and rebalance. It helps many people to write up an IPS (Investment Plan Statement).

You're going to need to do some research now, of course. Again, the best advice I can give you is to go to the Diehards Investing- Portfolio Help forum (http://www.diehards.org/forum/viewforum.php?f=1&sid=c2c9797ea9d935be106d8101e011f92d), read the sticky about asking portfolio questions, and then pose your question to the group. They'll steer you right.

Diehards is a fantastic resource for investing... the people there are exceptionally knowledgable, including several financial authors and advisors who give of their time and expertise for free. Two of my favorites are Larry Swedroe and Rick Ferri, both financial advisors.

Ferri has a free e-book on the web, Serious Money, Straight Talk about Investing for Retirement (http://www.portfoliosolutions.com/research-books-6.html). Great stuff, and he talks about all this in much more detail.

The Bogleheads' Wiki (http://www.bogleheads.org/wiki/Main_Page) also has a ton of article about all this stuff.

Other places to start right away are the speeches by Swensen and Bogle I linked earlier, as well as the articles in my various posts.

In terms of books, I'd recommend:

The Only Guide to a Winning Investment Strategy You'll Ever Need (http://books.google.com/books?id=MXcOAAAACAAJ&dq=inauthor:Larry+inauthor:E+inauthor:Swedroe) by Swedroe

All About Asset Allocation (http://books.google.com/books?id=C4XYcDyJ2YAC&printsec=frontcover&dq=all+about+asset+allocation&hl=en&ei=eEhhTYD9FMGB8gbFnp3tCw&sa=X&oi=book_result&ct=result&resnum=1&ved=0CDUQ6AEwAA#v=onepage&q&f=false) by Ferri

A Random Walk Down Wall Street (http://books.google.com/books?id=3cioifqOLxkC&printsec=frontcover&dq=malkiel&sig=95hrVRepVujUaf7kqnRS5K0hqNY) by Malkiel (a real classic)

and

Unconventional Success (http://books.google.com/books?id=WRLNZwZRRLsC&printsec=frontcover&dq=unconventional+success&sig=MBLnMcR8XM6e9P3S_yRkCH-qUSA) by Swenson.

I'd recommend you start with the Ferri or Swedroe books... they're easy to read and very acessible.

Let me know if you have any questions at any time, and I'll help as much as I can.



The first thing I would do is go to the library or go to a book store and get a book on investing.

Good idea. I've provided some recommendations above.



I'd also suggest mock investing for three months.


Bad idea. Sometimes the absolute worst thing that can happen to a new investor is a little success, because it makes him think he's smarter than he actually is.



Sorry for the lecture.

I think I've covered you there. :ols:

[chipwhich]

Techboy, not another thread arguing over theory please.

Here is the stock I didn't pull the trigger on this year. CAT. Kicking myself for not doing it. My buddy went all in at around $60.

Here is my current "garbage" I am considering. Cisco (CSCO). In the toilet. Time to buy. Plus Cisco is supposed to start paying dividends.

Nokia (NOK) This one isn't as much a win as the Cisco buy for me. I might put in a limit order and hope to grab it on a drop.

I have never seen such quality garbage in my entire investing life. My parents started investing with/for me when I was 12.

The quality of the garbage could have allowed me to retire. I didn't go all in. But it's not to late to sweep the streets and watch some of these low hanging fruits rebound.

[techboy]

Techboy, not another thread arguing over theory please.

There's very little "theory" involved here, especially in that last post.

The suggestion was made that we can't trust TIPS because the government cooks the CPI numbers. I responded with research showing that if anything, the CPI over-states inflation. That's not a theory, and neither is the fact that the CPI methodology is transparent.

I suppose it's a theory that the AARP and the eldery wouldn't stand idly by if the government were cooking the books and hurting their social security, but it's pretty obvious to me, unless you want to posit an even wider and deeper conspiracy, involving not just the BLS, most economists, and the elderly.

The TIPS-nominal spread is what it is.

It's certainly not a theory that leveraged ETFs operate in a manner that many don't understand, and that using them for periods exceeding a day is exceptionally dangerous.

As for my response to SpringfieldSkins' question about how best to invest, that's a compilation of what the research shows: market timing and stock picking are suboptimal, and the best approach is an individualized portfolio of broad market indexes. This is not only theory, but born out in study after study of real world events. Just as one quick example, look at How to lose $9 trillion in a bull market: That's what bad timing cost investors over the past 25 years. But you can learn to avoid a similar fate (http://money.cnn.com/2007/11/29/pf/bull_market_timing.moneymag/index.htm?postversion=2007112910), by Jason Zweig. Excerpts:


An inconvenient truth
An accounting professor at the University of Michigan named Ilia Dichev has cracked the case, and his findings, published recently in the prestigious American Economic Review, have huge implications for how you should invest.

I've written before about the gap between the returns reported by mutual funds and the money earned by their investors. Reported returns almost always look better than investor returns because people pile in after a fund gets hot and then sell or freeze after it's gone cold.

What Dichev's research shows is that the same thing holds true for the stock market as a whole.

By looking at how much money was flowing into publicly traded companies through initial and secondary stock sales and how much was flowing out via dividends, buybacks and buyouts, Dichev was able to measure the return on the typical invested dollar.


So what about that $9.5 trillion? "The money did not disappear," says Dichev. "It was never there in the first place." In other words, reported long-term returns aren't historical, they're hypothetical.

The U.S. stock market was never worth $28 trillion. That 13.3 percent "average" return was only for a strict buy-and-hold investor, a description that hardly applies to the big institutional players that move the stock market.

Consider that between 1973 and 2002, Nasdaq stocks gained an annual average of 9.6 percent. But that assumes money was invested on Jan. 2, 1973 and stayed put until Dec. 31, 2002 (with no taxes paid on the gains).

In reality, because investors pumped $1.1 trillion into Nasdaq stock offerings between 1998 and 2000 - just before the worst crash in modern history - the typical dollar invested in the Nasdaq earned only 4.3 percent a year, less than half the historical return.

Anyway, here's the paper (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=544142), with free pdf download.

The abstract:


Abstract: The existing literature typically does not differentiate between security returns and the returns of investors in these securities; usually implicitly, these two concepts are assumed to be the same. However, the returns of stock investors depend not only on the returns of the securities they hold but also on the timing of their capital flows into and out of these securities. This paper suggests a new and more accurate measure of stock investors’ historical returns, which involves dollar-weighting of the returns and properly reflects the effect of investors’ timing. Theoretically, the essence of dollar-weighted returns is that they value-weight both the cross-section and the time-series of returns. In practical terms, dollar-weighted returns are computed as internal rate of returns (IRRs) from investment projects in which initial market values and contributions from investors (e.g., stock issues) enter with negative signs, and distributions to investors (e.g., dividends, stock repurchases) and final market values enter with positive signs. The empirical results indicate that aggregate dollar-weighted returns are systematically lower than buy-and hold returns. The annual difference is 1.3 percent for the NYSE/AMEX market over 1926-2002, 5.3 percent for Nasdaq over 1973-2002, and averages 1.5 percent for 19 major stock markets around the world over 1973-2004. Thus, this study provides comprehensive evidence that stock investors’ actual returns are considerably lower than those from passive holdings and from those documented in the existing literature on historical stock returns. These results have implications for the debate on the equity premium, for the literature on long-run returns following capital flows, for building successful investment strategies, and others.


Emphasis mine. Some other excerpts:


These results have a number of implications. The most obvious one is that stock investors’ actual historical returns are lower than existing estimates based on buy-and-hold specifications.


For example, the annualized buy-and-hold return on Cisco’s stock since the initial public offering in 1990 until the end of 2002 is 48.7 percent, indicating a truly extraordinary performance. However, Cisco’s dollar-weighted return over this period is only 11.7 percent.


For example, one puzzling finding in
the existing literature is that most investment managers underperform the market (measured as buy-and-hold returns), which questions the value-added of professional investment management.

Again, this study's period covers exactly when, if market timing worked, it should have. It's about the worst scenario one can imagine for buy and hold: it starts right before the worst Bear Market in ages, so the "hold" held it down 50%, and it ends right after another horrible drop in 2002 (tech bubble pop plus 9/11). And yet buy and hold still outperformed.

That's not theory. That's nine and one half trillion reasons to pay attention.

I will grant, however, that indexing is not exciting. It doesn't give that gambler's high that some seek. It's certainly not going to let you hit a home run and retire overnight.

People are certainly free to ignore the data I present. And, to those that do, again I thank you for making the markets more efficient and liquid, which makes things easier for me. :)

[National Defense]

nokia has a very good chance of going bust in the next few years--better off with cisco

[chipwhich]

That's not theory. That's nine and one half trillion reasons to pay attention.

I will grant, however, that indexing is not exciting. It doesn't give that gambler's high that some seek. It's certainly not going to let you hit a home run and retire overnight.

People are certainly free to ignore the data I present. And, to those that do, again I thank you for making the markets more efficient and liquid, which makes things easier for me. :)

I am not talking strategy for the investment over long term. I am simply talking of the enormous potential for the next year or so. Garbage collecting in the now. This strategy doesn't work on a normal market. We have large companies whose prices are at historic lows. I think it's an opportunity to make some real cash.

I will track my buys over the next year. I posted my percentage earnings earlier in the thread. I think over the next year I can make a pretty penny.

[techboy]

I think over the next year I can make a pretty penny.

I hope you're right. :)

Meanwhile, I will just keep plodding along, content to be average. Just for the record, though, if you do happen to beat the market this year I'm just going to chalk it up as luck. Somebody beats the market every year. The real trick is doing it consistently for something like 30 or 40 years. ;)

[Burgold]

Meanwhile, I will just keep plodding along, content to be average.

That just struck me as really dreary as a life philosophy. I had visions of cubicles and gray suits, glazed eyes and stooped shoulders. Don't be a drone, techboy... don't give up!

[techboy]

That just struck me as really dreary as a life philosophy. I had visions of cubicles and gray suits, glazed eyes and stooped shoulders. Don't be a drone, techboy... don't give up!

Do keep in mind that I'm talking about accepting the market average (minus the minimal costs of indexing), which happens to be well above average when we're talking about investors (as the Dichev study shows). :)

[Corcaigh]

Do keep in mind that I'm talking about accepting the market average (minus the minimal costs of indexing), which happens to be well above average when we're talking about investors (as the Dichev study shows). :)

I think Burgold is disappointed that you'd rather have greater actual financial gains than the delusion that you are smarter than the rest of the world.

[chipwhich]

I hope you're right. :)

Meanwhile, I will just keep plodding along, content to be average. Just for the record, though, if you do happen to beat the market this year I'm just going to chalk it up as luck. Somebody beats the market every year. The real trick is doing it consistently for something like 30 or 40 years. ;)

Look, I plod along in my 401K plan and my other investments.

In my sandbox, I like to have fun.

I certainly am not advocating going all in. I certainly didn't. And I wont now. That's not to say there isn't tremendous opportunity out there. If putting 100% of your assets in your index funds or whatever is your thing, so be it. I like investing enough, that on the side, I keep a little money in an online account to play.

We have enough threads in here that go back and forth on buy hold, plodding along, market timing, etc, etc.

We need one for gunslingers :) Pick some stocks and tell tales along the way.

[Elessar78]

I am not talking strategy for the investment over long term. I am simply talking of the enormous potential for the next year or so.

Well this is where his post isn't valuable, nor probably directed to you. I've spoken with techboy and I'm a disciple.... techboy:notworthy It's just counter to the idea of investing to have such a near horizon.

[chipwhich]

Well this is where his post isn't valuable, nor probably directed to you. I've spoken with techboy and I'm a disciple.... techboy:notworthy It's just counter to the idea of investing to have such a near horizon.

Glad to know you only do 1 thing with all of your investment $$$. Read my previous posts.

[techboy]

Look, I plod along in my 401K plan and my other investments.

In my sandbox, I like to have fun.

There is, of course, nothing wrong with that. Even the most orthodox index investing types allow for what's often called the "play money account", where you roll the dice and try to hit the big score. Some think of it as an outlet that keeps one from going crzay with the main account.

I'd do it too, except that I wouldn't have any fun. As with gambling at a casino, I understand the math too well to enjoy it (or at least I think I do :ols:).

I will say this, though... If I was going to do it, it wouldn't be with any blue chip company, depressed value or not. The real lottery ticket is in microcaps, i.e. Microsoft before it was Microsoft. I'd probably find some obscure biotech company and hope it's the next Pfizer or something. Maybe nanotech.

---------- Post added February-20th-2011 at 08:17 PM ----------


We have enough threads in here that go back and forth on buy hold, plodding along, market timing, etc, etc.

We need one for gunslingers :) Pick some stocks and tell tales along the way.

I guess I should briefly address this too... There was a thread like that, McD5's "trading" thread, designed specifically for short-term trading. I made nary a comment there (except maybe a lame joke or two).

If, on the other hand, a general thread on investing pops up, especially where someone asks a question about how best to invest, then I'm going to share the information I have with him or her. Every single time, annoying to others or not.

It's too serious a topic, and indexing is so little heard about in the media (except to occasionally declare it dead :ols:), that I feel I have to at least put it out there.

Same deal with people recommending leveraged ETFs as long term investments. Lots of people don't realize how dangerous that is.

[chipwhich]

There is, of course, nothing wrong with that. Even the most orthodox index investing types allow for what's often called the "play money account", where you roll the dice and try to hit the big score. Some think of it as an outlet that keeps one from going crzay with the main account.

I'd do it too, except that I wouldn't have any fun. As with gambling at a casino, I understand the math too well to enjoy it (or at least I think I do :ols:).

I will say this, though... If I was going to do it, it wouldn't be with any blue chip company, depressed value or not. The real lottery ticket is in microcaps, i.e. Microsoft before it was Microsoft. I'd probably find some obscure biotech company and hope it's the next Pfizer or something. Maybe nanotech.

Microsoft was at my fathers plodding :ols:

I rolled the dice on Ford, Sirius, Bank of America, Citibank. They could all have been, or will be on the verge of bankruptcy. Ford at under $2 wasn't exactly at a safe bet. And Sirius under a dollar was looking pretty bleak. Six Flags was just plain stupid :ols:

Hey I have significant $$$ in a CD getting me .90 percent rate of return.

Talking investing as an entire portfolio to me is different than talking a single stock investment strategy for the majority of your funds. In the end my CD's, IRA's, House, 401K, sandbox, etc have to get me through retirement. But as you said even the most orthodox index investors choose more than just 1 thing to base their life portfolio upon. So talking about doing it should be OK :)

---------- Post added February-20th-2011 at 08:41 PM ----------



It's too serious a topic, and indexing is so little heard about in the media (except to occasionally declare it dead :ols:), that I feel I have to at least put it out there.


Sorry, so what are you suggesting I buy? I haven't been following closely enough. Index funds? Which one are you recommending.

[Elessar78]

Glad to know you only do 1 thing with all of your investment $$$. Read my previous posts.

Yup. I'm boring too. My short term and mid-range (15-20 years)* needs are addressed by my income, so long term (35+ years) is the only thing I need to cover. I can live comfortably on our income and can do without the volatility and "maintenance" involved with intensive research into the stock market. I have other things to do with my time--and that's not a value judgment that my way is better than your way. It's just different.

*if I haven't needed it for 15-20 years then I probably can live without it for another 15 years. But really it's just an option if we need it to fund college educations.

---------- Post added February-20th-2011 at 10:16 PM ----------

Sorry, so what are you suggesting I buy? I haven't been following closely enough. Index funds? Which one are you recommending.


SP500 or SPIDER/Total Market fund. NASDAQ and/or a European stock index funds are good as well.

[chipwhich]

Yup. I'm boring too. My short term and mid-range (15-20 years)* needs are addressed by my income, so long term (35+ years) is the only thing I need to cover. I can live comfortably on our income and can do without the volatility and "maintenance" involved with intensive research into the stock market. I have other things to do with my time--and that's not a value judgment that my way is better than your way. It's just different.


That's a nice smug response. But it doesn't make it an honest response.

Your short term and mid-range goals HOPEFULLY are addressed by your income. I am glad you know how your income will look for the next 15+ years.

I don't do "intensive" maintenance or "research". Please read my posts. I spend less time investing in my sandbox than I spend on extremeskins :ols: When I see a company like Ford trading at penny stock prices and I can buy 1500 shares for around 2 grand, that isn't anything but a button click and a login.

I am glad you have no savings and keep all your money in SPIDER or SP500 and rely on your income to survive. In the meantime, there is opportunity out there to better your portfolio. If that isn't your thing, so be it. But don't try and slam me in a stock thread about investing to make a point. This is a thread about stocks, shares, and investments....not how to utilize your time.

[Burgold]

Well this is where his post isn't valuable, nor probably directed to you. I've spoken with techboy and I'm a disciple.... techboy:notworthy It's just counter to the idea of investing to have such a near horizon.

Yes and no. There is a philosophy called value investing in which you look for very good companies with good fundamentals that happen to cheap for whatever reason. The sector is out of favor, down market, company has recovered or isn't sexy or whatever. I think the "garbage" term he uses isn't quite right. Look at the companies he's touting Caterpiller, Cisco, etc. These are pretty big mainstay corporations. Regardless, the idea of the value investor is to buy things on the cheap because they are bound to grow. Good companies will eventually recover. In some respect, this is a short term philosophy because if you're looking at a ten year window it doesn't really matter if the company you bought today was undervalued on that day. It will rise or fall with the market and on its own steam.

So, I think Chipwhich's philosophy is sound. More, I use it myself except my window is a company that I think I would like to own for 3-5 years.

Disclaimer: The biggest danger of the philosophy is that sometimes there is a very good reason that a company is cheap that you miss. For example, for years people were telling me to buy Citibank. They said its numbers were too low for a company that big, strong, and had that much power. Look at its income, its PE. I did, but digging a little deeper, I just didn't like the company. Something just felt wrong (I think part of it was its debt ratio). Thankfully, I didn't go in because I probably would have got slaughtered by the financial crisis. I didn't have any financials when that happened... actually, I think I had one which I still own, though in honesty that was a most miserable year. I still did better than the market, but that doesn't mean I didn't lose money.

Anywho, garbage collecting or value collecting is a pretty sound principle. If you are going to invest in individual stocks, I think a percentage of your portfolio really should be based on this thought.

[techboy]

But as you said even the most orthodox index investors choose more than just 1 thing to base their life portfolio upon.

No, I actually didn't. What I said was that some choose to have a small percentage of their portfolios in "play money". It's not a "base" in any way, it's more like money set aside for Vegas or the occasional lottery ticket.



Sorry, so what are you suggesting I buy?

I'm not suggesting you buy anything. I'm just noting that if I were to devote some of my money to gambling, I'd probably find some real small company in either the biotech or nanotech sector (or something like that), and hope that I get lucky and they invent the next Viagra or something.

[Elessar78]

That's a nice smug response. But it doesn't make it an honest response.

Your short term and mid-range goals HOPEFULLY are addressed by your income. I am glad you know how your income will look for the next 15+ years.

I don't do "intensive" maintenance or "research". Please read my posts. I spend less time investing in my sandbox than I spend on extremeskins :ols: When I see a company like Ford trading at penny stock prices and I can buy 1500 shares for around 2 grand, that isn't anything but a button click and a login.

I am glad you have no savings and keep all your money in SPIDER or SP500 and rely on your income to survive. In the meantime, there is opportunity out there to better your portfolio. If that isn't your thing, so be it. But don't try and slam me in a stock thread about investing to make a point. This is a thread about stocks, shares, and investments....not how to utilize your time.

Why is it a smug response. You have to give benefit of the doubt that I'm just trying to have an investing conversation here. Utilizing time IS the basis of most investment theory. It harnesses the power of compounding interest.

As far as savings, I'm pretty good with that. We have 6 months worth of expenses sitting liquid in a bank savings account. Which doesn't include monies we've saved to pay cash for a car and take a vacation in the near future.

It is a thread about "stocks/shares/investments" and that's why I've posted on here. I felt the OP was pretty open ended and certainly the discussion has taken an open tack.

I don't see why short and mid-range goals being covered by income is in anyway a controversial idea. If we can foresee it, then we save and budget for it. There's a speculative nature in putting $2,000 in stocks to address a need, say $10,000 in ten years. If I can see the need for it, then I'll save $80/month for the next ten years and I'll get to my goal without the risk of losing my $2,000.

Plus, the idea of owning a company (which is what owning stocks is) that I haven't researched to an inch of it's life is a non-starter for me. Again, not a value judgment, just a difference in philosophy.

[techboy]

Yes and no. There is a philosophy called value investing in which you look for very good companies with good fundamentals that happen to cheap for whatever reason.

The research does indeed show that on average, over long periods, both small company stocks and value stocks (stocks with a low book to market ratio) tend to do slightly better, or at least they have.

This doesn't, however, avoid the problem of uncompensated company risk.

It's most apparent in microcaps (the smallest of the small). They traditionally have a premium over the normal market of 1 to 2%. The problem is that virtually all of that return is typically in one or two companies that suddenly become hugely successful. If you aren't holding that one or two, you miss out, and probably underperform the total market.

The only way to avoid this is to hold them all.

The problem is less acute with value stocks, but no less real.

And, of course, the problem is compounded if you try to time things in and out, rather than just buying some value stocks and holding them for 30 years.

[Burgold]

And I agree with that. By the 1980's everyone knew that IBM was wrong and the PC was going to be huge. The question was which one? Compaq? Dell? Gateway? Compuserv? Some of the biggest early players are now extinct. Compaq doesn't exist anymore for crying out loud. So, even if you know what the next big "it" is you can't necessarily figure out who is the guy who's gonna profit off it and make you rich. I still know people who swear that Beta w'as far better than VHS, but VHS won and now they're both extinct. First isn't always the winner. Best isn't always the winner.

That makes picking the next Google, Microsoft, or whatever really, really hard even if you know the area from which the next blockbuster is going to come from.

[redskins59]

I am currently using the low price/book approach and buying up micro stocks. Research shows that only 40% of microcap stocks go up, whereas the rest actually goes down. The 40% of the companies that go up have a few that actually go up a lot. As a result, the portfolio as a whole historically beats the market.

[Corcaigh]

I am currently using the low price/book approach and buying up micro stocks. Research shows that only 40% of microcap stocks go up, whereas the rest actually goes down. The 40% of the companies that go up have a few that actually go up a lot. As a result, the portfolio as a whole historically beats the market.

How dependent is this on holding all of the "few that actually go up a lot". Unless you hold ALL, both winners and losers, the outlier that goes up by 10,000% will skew the results.

[techboy]

How dependent is this on holding all of the "few that actually go up a lot". Unless you hold ALL, both winners and losers, the outlier that goes up by 10,000% will skew the results.

Exactly. Compounding this issue is that the stocks traditionally considered "microcap", CSRP 9 and 10 (the 9th and 10th deciles, basically), are very small and often highly illiquid (rarely trading), so the transaction costs can be huge. It's a problem even for the indexing approach, actually, because often the funds have trouble buying every stock in the sector, especially because if they hold a fair amount of assets, they might end up having to buy more than the company is worth! :ols:

A lot of advisors actually recommend skipping the microcap sector altogether for this reason, and just sticking to small cap and value.

I do hold a little BRSIX (a passive microcap fund), but the tracking error is huge, and I'm not terribly happy with it.

[chipwhich]

The research does indeed show that on average, over long periods, both small company stocks and value stocks (stocks with a low book to market ratio) tend to do slightly better, or at least they have.


It's fine to have such a rigid investing philosophy, but I bet the mentors you follow aren't so rigid.

In 1995, when I jumped from my town home to a large single family home, with a payment outside of my comfort zone, I did so because I felt the opportunity was there to get in on a housing market prepared to make a run. It was one of the best investments in my life.

Now in 2009/2010/2011 we are coming off essentially the great depression of our time. There are stocks out there priced at points you may never see again in your lifetime.

Techboy, the biggest cop out argument is the "gambling", "lottery ticket" argument. What a load of horse **** :ols: Putting money in today's banks is a gamble. If major failure occurs, the FDIC could never truly guarantee your money. If you bought a house in the last few years, or in the process of buying a house, it's a gamble. When interest rates rise, I can assure you there will be another price adjustment. If you bought a new car recently, you just threw a couple grand on the Vegas floor. Talking gambling over less than $2K investment on Ford is weak sauce. You buying index funds is a gamble. The market could downturn and go south for the next 5 years. Buying Gold is a gamble. Putting money under a mattress is a gamble. You are making a decision for the next 5, 10, 15 years based on what you know now and historical probability. Elessar is ASSUMING his life goes as planned. Life has a way of throwing you a curve ball.

To me, gambling is throwing money at some random bio tech firm in hoping they will become the next Pfizer.

Ellesar makes his point about putting $80 a month a way for ten years. That isn't investing, that is savings. There is nothing wrong with an approach to saving money. This thread isn't about that.

My sandbox investing is a small aspect of what I do investment wise. The approach I posted above isn't an approach I adhere to year over year. Right now opportunity knocks. If you don't like investing, then don't answer the door. I am not suggesting a strategy for the future. It's a strategy for now. The proof is in the returns. I haven't speculated what I posted earlier. Those are real numbers. I enjoy my investments, be it my CD, or 401K, or IRA, or sandbox, or my coin collection. I have been investing in the stock market for 33 years.


So save the gambling commentary. I think I am comfortable knowing my purchase is a little more than hoping that the black jack dealer doesn't beat my 17.

[zoony]

I think I'm just about done with Mutual Funds. I'm going to try to migrate to index funds and individual stocks only over 2011.

Unfortunately, I have to keep my 401(k) in mutual funds. :kickcan:

[techboy]

It's fine to have such a rigid investing philosophy, but I bet the mentors you follow aren't so rigid.

I suspect you'd be surprised, but that's neither here nor there.



In 1995, when I jumped from my town home to a large single family home, with a payment outside of my comfort zone, I did so because I felt the opportunity was there to get in on a housing market prepared to make a run.

I'm sure you have a lot of stories like this, but the plural of anecdote is not data.



Now in 2009/2010/2011 we are coming off essentially the great depression of our time. There are stocks out there priced at points you may never see again in your lifetime.

Yes, I get it. "Right now, things are different". The thing is, things are always "different", if you ask market timers/stock selectors.


To me, gambling is throwing money at some random bio tech firm in hoping they will become the next Pfizer.

Yes, I agree. That's why I wouldn't do it.

Here's the thing, though. The vast majority of stock trades today are made by the big Wall Street players. They drive the market, and its pricing.

When you say that you think a stock is underpriced, or on a fire sale, or a once in a lifetime opportunity, what you're really saying is that you think you know more about that stock than a legion of professional stock investors who do nothing all day but research stocks and look for the tiniest of opportunities they can exploit (and in the process, make disappear).

I can guarantee you're not getting that information they don't have through any public source, so unless you're engaging in a little insider trading (illegal), you don't, in fact, know more than they do.

Then it comes down to either the idea that you're smarter than everybody else, or you're going with your gut (i.e, gambling).

Maybe you are smarter than everybody else (or are trading illegally on insider information), but as for me, I'm not smarter than everybody else, so I'd be gambling if I tried to pick stocks. :)



My sandbox investing is a small aspect of what I do investment wise.

Yes, I got it last time.



So save the gambling commentary. I think I am comfortable knowing my purchase is a little more than hoping that the black jack dealer doesn't beat my 17.

Hey, you don't have to justify your approach to me. My only goal in these discussions (especially where people ask questions) is to present the data and research I have gathered over the years, so that others might consider it and possibly benefit from it.

If someone then chooses to follow a different approach anyway, in full or in part, well, it's no skin off my nose. :)

[Corcaigh]

Someone has to win the lottery. It's usually the toothless dude living in a trailer. If that's your peer group, gamble away, and best of luck.
:)

[techboy]

http://www.pixelgarden.com/blog/billboard2LG.jpg

[zoony]

When you say that you think a stock is underpriced, or on a fire sale, or a once in a lifetime opportunity, what you're really saying is that you think you know more about that stock than a legion of professional stock investors who do nothing all day but research stocks and look for the tiniest of opportunities they can exploit (and in the process, make disappear).



I think that's a steaming pile of horse ****. Actually, I don't think, I know it is.

99% of these traders you are talking about are looking to make their quarterly, monthly, weekly, and even their daily number. It is what drives their actions. The supercomputers make trades on algorithms set up to make a number by the minute.

For the prudent, long-term investor, opportunities for a long term play abound. For instance, Caterpillar at $29 and Dow Chem at $7 in 2008 are perfect examples. They were traded so low by investors (computers) selling short and driving the stock down based on panic and trends in the market, with a goal of making money by close of business that day.

Any idiot paying partial attention knew they were a good buy over a 5 year period. I started a thread about it at the time, which goes to prove that :)

Was there risk? Of course. But comparing it to playing the lottery is just, well... horse ****.

---------- Post added February-21st-2011 at 12:48 PM ----------

Here we go:

http://www.extremeskins.com/showthread.php?283151-Stock-Thread-post-good-bad-buys

$1000 investment in Dow Chem when I posted this would be worth ~ $5000 now. (less than 2 years ago)
$1000 investment in Sirius when I posted this would be worth ~ $6000 now.
$1000 investmen in Alcoa would be worth ~ $3000

Was there more risk in buying these individual stocks than in your index fund? I won't even argue the point, I'll give it to you. I will, however, ask you to post the return you saw in said fund.

Risk, reward. You want to equate it with buying a lottery ticket, your loss. But go sell stupid somewhere else. :silly:

[chipwhich]

Hey, you don't have to justify your approach to me. My only goal in these discussions (especially where people ask questions) is to present the data and research I have gathered over the years, so that others might consider it and possibly benefit from it.

If someone then chooses to follow a different approach anyway, in full or in part, well, it's no skin off my nose. :)

I like how you choose to ignore the entire premise of my post in order to promote your agenda. Way to keep it honest.

[techboy]

Was there risk? Of course. But comparing it to playing the lottery is just, well... horse ****.


It wasn't me that compared stock picking to playing the lottery. I compared it to gambling, which I will admit is not totally accurate/fair, since as chipwich rightly pointed out, there's risk in buy and hold investments as well (that is, in fact, why the investor is compensated... to take on risk). The difference is that the buy and hold index investor is pursuing the strategy with the maximum expected return, so on average, the market timer/stock picker is leaving money on the table in the hopes of the big score. It's this unnecessary giving up of part of the expected return in exchange for the chance at being smarter than everybody else that I really think of as "gambling".

I did post the picture, because I find the text on the bottom of the billboard funny. Or sad. I can't decide which. Maybe both :)

As to the rest of your diatribe, it's interesting. Every year, I hear about these "opportunities" that "any idiot can see". It's always something.

And yet, despite all these amazing "opportunities", the research consistently shows market timers and stock pickers lagging behind. Funny...

And no, I'm not impressed that you can point to a few big winners (maybe... I'm not even sure you actually made those plays). Again, the plural of anecdote is not data, and the data tells a very different story when looking at the whole. Like 9 1/2 trillion dollars different.

I do want to be clear, though. People that market time and select stocks will probably end up okay. There's a greater chance they'll go bust completely, and there's also a greater chance they'll hit the big one, but on average, they'll do okay.

It's just that "okay" is, on average, around 1.5% in returns less than they'd do if they just left well enough alone.



I like how you choose to ignore the entire premise of my post in order to promote your agenda. Way to keep it honest.

I thought I had addressed the premise of your post. If I didn't, it's not dishonesty, but stupidity.

Which is why I don't try to pick stocks. ;)

[mojobo]

Oh, I see. The legions of professional commodities traders who spend all day every day doing this for a living missed this, but you're on it?

Well, good luck, :)
the ones selling did, the professionals who bought and held precious metals and other commodities got it right, and I'll take a wild guess that those buying and holding precious metals and other commodities, especially silver, are still right and are going to be right in a big way. Even since I mentioned buying AGQ within the past couple days silver has gone up almost 5% and if the stock market were open today AGQ would have gone up between 9%-10% (not saying this proves me right in the long run but its a step in the right direction). Maybe your sarcastic good luck was worth more than you thought it was :) :)




Yes, conspiracy theories about the CPI abound, but they're pretty silly. Here's two quick reasons:

1. It turns out that the CPI does, in fact, skew the results slightly, but it overstates it, not understates it.

That's right, the CPI over-reports inflation. Here is one paper discussing this (http://faculty-web.at.northwestern.edu/economics/gordon/P376_IPM_Final_060313.pdf), by Robert Gordon from Northwestern. The abstract:



Try reviewing the academic literature on the issue. You can just type "cpi upward bias" into google scholar, and you get this list of articles (http://scholar.google.com/scholar?hl=en&q=cpi+upward+bias&um=1&ie=UTF-8&sa=N&tab=ws).

One such article is CPI Bias from Supercenters: Does the BLS Know that Wal-Mart Exists? (http://econ-www.mit.edu/files/1768), by Jerry Hausman at MIT and Ephraim Leibtag at the USDA. An excerpt from the abstract, found here (http://www.nber.org/papers/w10712) (the first link is to a free version so you can read it)



Or maybe just check an Econ Textbook (http://books.google.com/books?id=0NyL70IKABcC&pg=PA155&dq=cpi+upward+bias&hl=en#v=onepage&q=cpi%20upward%20bias&f=false).

The two main points that article tries to make is that inflation is understated because an item can go up in price due to quality and not because of fluctuations in the money supply and that it doesn't account for places like Walmart that sells items for less than others and therefore CPI should reflect Walmarts efficiency in selling its products to its consumers. What has changed is that since that article was written is that cheap places like Walmart are now accounted for and the quality portion of price fluctuation is quantified by the government. They are overstating the amount of quality improvement, and likely don't state the change in quality when companies lower the quality of their good or service (for example if a company like McDonalds reduces the amount of chicken in their dollar menu sandwich and keeps it at a dollar instead of keeping the same amount of meat and increasing the price).

The CPI has stated that inflation has only been between 26 and 27 percent over the last 10 years. The return on Silver and Gold the last 10 years has been 618.49% and 435.09%. So either you are wrong in a big way that the CPI overestimates inflation or you are wrong that there is no real return on gold or silver. Either way I'd rather have the inflation hedge that went up 618.49% and 435.09% rather than the one that went up 27%.



2. Ask yourself this... what is the most powerful lobby in the United States, and who are the most influential voters in the United States?

If you said "AARP and the elderly", you win!

Now, ask yourself this... If the CPI (which is totally transparent in method, all you have to do is go to the BLS website) was rigged to downplay inflation, just who do you think would be hurt the most?

If you said "the elderly, whose social security relies on payments indexed to the CPI", you win again!

Now, last question. If the CPI (which is, again, totally transparent in method) was rigged in the manner you suggest, do you suppose the most politically powerful groups in the country would just sit by and do nothing?

Oh, and just for reference, this is confirmed by considering the bond market's future inflation expectations. As of Feb 18, the 5 year Treasury (http://www.treas.gov/offices/domestic-finance/debt-management/interest-rate/yield.shtml) is yielding 2.30%. The 5 year TIPS (http://www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/real_yield.shtml) is yielding .26%. This indicates that the bond market more or less expects inflation to be around 2.04% over the next 5 years (give or take inflation insurance and liquidity premiums).
I'm pretty sure the whole prescription drug benefit plan was due to rising costs in prescriptions. You are right in that they should be doing a lot more and are going to blindsided with the inflation that is going to hit them as will most other Americans. I don't know what items you or people in the bond market think are only going to rise 2.04% annually over the next 5 years because things like food, energy, precious and industrial metals, clothing, etc. are going to be a lot higher than that.





You're taking a huge gamble with a negative expected return, so you offset the costs by doubling down, in the process adding borrowing costs to the mix?

That's like taking out a 2nd mortgage because you've got a good feeling about the roulette wheel this week. :ols:



I think your best bet is to read the prospectus (http://www.proshares.com/funds/agq.html) of that etf, where we find:



The bold and italics aren't mine... they are right in the prospectus.

That warning is very important, as we see in These Funds Can Be Hazardous to Your Wealth (http://www.kiplinger.com/columns/value/archive/2009/va0414.htm). Excerpts:



and



Holding that kind of fund for years as you suggest is financial suicide.

When you buy a 2x leveraged stock you are not only taking on twice the risk/reward associated with the asset, but you are also taking on risk/reward of an asset moving consistently versus it being volatile. When they balance out the etf at the day they make the debts equal to half of the assets it holds so if an asset goes down for days in a row at the same percentage then back up to where it started you will have less than what you started. However if an asset goes up 4 days in a row and then goes back to where it started you will have more than what you started with. That is why AGQ which is indexed to 2x the daily return of silver over its lifetime of a little over 2 years has increased 657% and SLV which is indexed to the same return as silver has gone up 238.89% over the same period of time. So while AGQ is set to only return 2x what silver returns in a day, over its lifetime it has returned 2.75x of what silver has done. I'm really not trying to come off as arrogant in this discussion and mainly just trying to defend what I'm saying so I hope you don't take it that way.

[zoony]

As to the rest of your diatribe, it's interesting. Every year, I hear about these "opportunities" that "any idiot can see". It's always something.

And yet, despite all these amazing "opportunities", the research consistently shows market timers and stock pickers lagging behind. Funny...

And no, I'm not impressed that you can point to a few big winners (maybe... I'm not even sure you actually made those plays). Again, the plural of anecdote is not data, and the data tells a very different story when looking at the whole. Like 9 1/2 trillion dollars different.

so an investor who sees long term plays based on the limited vision of the market is now a market timer? Okay. whatever supports your argument.

In April of 2008 I bought CBI, Dow, SIRI, MSFT. I've since sold Dow and MSFT, but still hold CBI and SIRI.

(and I probably should dump SIRI, not necessarily a fan long term. But I have such a limited amount invested (1000 shares), I'm actually curious what will happen in a detached sort of way.)

[techboy]

Maybe your sarcastic good luck was worth more than you thought it was :) :)

It actually wasn't sarcastic, believe it or not, so maybe it was. :ols:



The two main points that article tries to make is that inflation is understated because an item can go up in price due to quality and not because of fluctuations in the money supply and that it doesn't account for places like Walmart that sells items for less than others and therefore CPI should reflect Walmarts efficiency in selling its products to its consumers.

I'm not going to nitpick that one article with you because it was just a representative of an academic consensus: the CPI has an upward bias.


The CPI has stated that inflation has only been between 26 and 27 percent over the last 10 years. The return on Silver and Gold the last 10 years has been 618.49% and 435.09%. So either you are wrong in a big way that the CPI overestimates inflation or you are wrong that there is no real return on gold or silver.

Neither choice you propose is correct.

What I said was that over the long term there is no real return in gold and silver. If you've ever heard the ad about how one ounce of gold has always been able to buy a good men's suit, that's what they're talking about. After costs, that zero return becomes negative.

There are lots of short term fluctuations, of course. The recent run-up seems to have been due to a combination of factors including a new ease of purchase (GLD and other ETFs not available before, making it easy for anyone to own), fear in certain quarters of inflation, and perhaps some other things.

What you are seeing in gold and silver prices is not inflation as it is, but speculation. Some people think inflation will be (or even was) much higher. Others think they can get in on the ride up and dump it at the right time.

Gold is a great investment if you can buy it 10 years ago. Who knows what it's going to do now? Many people are hoping to find a "greater fool".



Either way I'd rather have the inflation hedge that went up 618.49% and 435.09% rather than the one that went up 27%.

If you could buy past returns today, you'd be right. :)



You are right in that they should be doing a lot more and are going to blindsided with the inflation that is going to hit them as will most other Americans. I don't know what items you or people in the bond market think are only going to rise 2.04% annually over the next 5 years because things like food, energy, precious and industrial metals, clothing, etc. are going to be a lot higher than that.

And so we are back to the premise that you are smarter than the entire bond market, and most of academia, and the BLS, and the AARP, and...

I hope for your sake that you're right. Seriously. :)



I'm really not trying to come off as arrogant in this discussion and mainly just trying to defend what I'm saying so I hope you don't take it that way.

You're correct that buying AGQ is a bet not only on silver's rise, but on its doing so with minimal volatility. I suppose if you want to bet on volatility (which you didn't mention before) as well, this makes a sort of sense.

The problem is that you can be right about silver going up and still lose money with sufficient volatility, and most people don't understand that when they buy that ETF.

---------- Post added February-21st-2011 at 04:53 PM ----------


so an investor who sees long term plays based on the limited vision of the market is now a market timer? Okay. whatever supports your argument.

What else would you call getting in and out of a position based on one's perception of market conditions and stock valuations?

[mojobo]

It actually wasn't sarcastic, believe it or not, so maybe it was. :ols:
Lets hope it lasts for more than a day...




I'm not going to nitpick that one article with you because it was just a representative of an academic consensus: the CPI has an upward bias.
It was right to an extent in that rising quality and efficient retail distributors that lower costs weren't accounted for in the CPI but if you measure rising prices by how much the materials that go into making them go up it would far outpace the CPI. If you want to get into why it involves lowering real costs of labor and entrepreneurial skill and why their real costs go down during inflation.





Neither choice you propose is correct.

What I said was that over the long term there is no real return in gold and silver. If you've ever heard the ad about how one ounce of gold has always been able to buy a good men's suit, that's what they're talking about. After costs, that zero return becomes negative.

Were probably going to end up going in circles on this so it might be better to agree to disagree but you will realize a higher standard of living holding precious metals in an inflationary period because of falling real labor and entrepreneurial costs. Its similar to countries with an appreciating currency can afford more goods, services, and capital relative to countries with depreciating currencies. It gets really detailed as to why the real costs go down and its not exactly the easiest thing to articulate but thats the basis as to why (or at least where I'm coming from).



There are lots of short term fluctuations, of course. The recent run-up seems to have been due to a combination of factors including a new ease of purchase (GLD and other ETFs not available before, making it easy for anyone to own), fear in certain quarters of inflation, and perhaps some other things.

What you are seeing in gold and silver prices is not inflation as it is, but speculation. Some people think inflation will be (or even was) much higher. Others think they can get in on the ride up and dump it at the right time.

Gold is a great investment if you can buy it 10 years ago. Who knows what it's going to do now? Many people are hoping to find a "greater fool".
Gold was a great investment today if you bought it 10 years ago, 9 years ago, 8 years ago, ... 1 year ago. The only period of time it was a bad investment would be from early 08 to early 09, and even that held up better than equities. Silver has been a little crazy and has a lot more speculative buyers than gold (both long and short positions) but it still has held up very well and will likely outpace gold based on it being well below the historical gold to silver ratio. I think there will be a time when gold and silver is over speculated but with the way our federal and municipal debt is being financed through inflation there is a long way up to go before it hits that.





If you could buy past returns today, you'd be right. :)
The future is still bright, its not too late to hop on to the silver bull




And so we are back to the premise that you are smarter than the entire bond market, and most of academia, and the BLS, and the AARP, and...

I hope for your sake that you're right. Seriously. :)
With all of the artificial players in the bond markets your not going to get an accurate read. If interest rates were based purely on supply of savings and demand for credit then they would be a lot higher. When the main holder of Treasuries is a printing press there is no way interest rates are where they should be. I have no doubt that I'm right and that the entire bond market, most of academia, the BLS, and AARP are wrong so I guess if I strike out it wont be due lack of confidence.
(not ignoring the rest of your post just have to go for now).

[techboy]

I have no doubt that I'm right and that the entire bond market, most of academia, the BLS, and AARP are wrong so I guess if I strike out it wont be due lack of confidence.

I guess this settles the discussion, then. :)

[mojobo]

You're correct that buying AGQ is a bet not only on silver's rise, but on its doing so with minimal volatility. I suppose if you want to bet on volatility (which you didn't mention before) as well, this makes a sort of sense.
It's not really something that you seek, just something you have to tolerate. The volatility doesn't have to be minimal either, the risk comes from the underlying asset going down consistently then coming back up to where it was. If that happens then you will be below where you started. In my opinion that risk is nullified by the fact that you come out ahead if the stock goes up consistently then comes back down and you gain more than 2x if it goes up more than it comes down. The asset would have to be very volatile for you to not come out ahead, although it is a possibility. Its something that makes it a little more tricky and can either add or subtract to the 2x.

[scoopssn]

Any suggestions on good personal finace books? Or books on investing, stocks, etc?

[techboy]

Any suggestions on good personal finace books? Or books on investing, stocks, etc?

Online articles:

Investing with Simplicity (http://www.vanguard.com/bogle_site/lib/sp19990130.html), a transcript of a speech by John Bogle.

This NPR article (http://www.npr.org/templates/story/story.php?storyId=89324244&ps=rs) interviewing David Swensen.

Online speech to watch (about an hour, but very informative and actually pretty entertaining):

David Swensen (http://webcast.mamato.se/clients/skagenfonder/nyarskonferens2008/). I know the page is in Swedish, but if you click on Swensen's name, it brings up a video of a speech he gave in Stockholm, in English.

Free E-Book:

Serious Money, Straight Talk about Investing for Retirement (http://www.portfoliosolutions.com/research-books-6.html).

Wiki:

The Bogleheads' Wiki (http://www.bogleheads.org/wiki/Main_Page)

In terms of books, I'd recommend:

The Only Guide to a Winning Investment Strategy You'll Ever Need (http://books.google.com/books?id=MXcOAAAACAAJ&dq=inauthor:Larry+inauthor:E+inauthor:Swedroe) by Swedroe

All About Asset Allocation (http://books.google.com/books?id=C4XYcDyJ2YAC&printsec=frontcover&dq=all+about+asset+allocation&hl=en&ei=eEhhTYD9FMGB8gbFnp3tCw&sa=X&oi=book_result&ct=result&resnum=1&ved=0CDUQ6AEwAA#v=onepage&q&f=false) by Ferri

A Random Walk Down Wall Street (http://books.google.com/books?id=3cioifqOLxkC&printsec=frontcover&dq=malkiel&sig=95hrVRepVujUaf7kqnRS5K0hqNY) by Malkiel (a real classic)

and

Unconventional Success (http://books.google.com/books?id=WRLNZwZRRLsC&printsec=frontcover&dq=unconventional+success&sig=MBLnMcR8XM6e9P3S_yRkCH-qUSA) by Swenson.

I'd recommend you start with the Ferri or Swedroe books... they're easy to read and very acessible.

Or, perhaps the best advice is to drop by the Bogleheads forum (http://www.bogleheads.org/forum/index.php), read the stickies, and post a request for help in the Investing- Help section. There are a lot of very knowledgable people, including several authors and academics, that give of their time there for free, and give very good advice.

I also wrote a book in this thread in post 32. :silly: (The bottom half of the post is about investing approaches).


It's not really something that you seek, just something you have to tolerate.

No, you certainly don't have to tolerate it. Those ETFs were designed as intra-day instruments, mostly so that a firm or individual can maintain exposure to an asset class while using some of the money for something else.

If you absolutely must compound your bet with leverage, there are other ways to go about it. The most traditional of these is to buy on margin.



The volatility doesn't have to be minimal either, the risk comes from the underlying asset going down consistently then coming back up to where it was.

I also think you underestimate the risk. In the real world, investors have already been burned many times by investing in these leveraged ETFs without understanding how they work. From the Wall Street Journal ( http://blogs.wsj.com/marketbeat/2009/04/14/when-leverage-and-volatility-collide-in-etfs/):


In that five-week period, financials have been fairly predictable, rising on most days. But a look back at longer performance periods – and these ETFs in particular were only introduced in November – shows how additional leverage can crash into volatility to produce truly ugly results.

The Russell 1000 financial index is down nearly 13% since the beginning of the year, which isn’t good, but not horrifying in this environment. The Financial Bull ETF has been much worse, though, falling 62%, but the Financial Bear ETF is also getting creamed, having lost 74% of its value this year.

“For the person who thought they were going to buy the financials at the beginning of the year and make some money, you’re hurting quite a bit,” says Matt McCall, president of the Penn Financial Group in Denver, and editor of the ETF Bulletin.

Similar results can be seen in other leveraged ETFs, such as Proshares, which has Ultra Financials and Ultrashort Financials funds, which seek to double the returns (or the inverse of returns) on a daily basis. Those funds are down 37% and 42%, respectively, on the year.

Just because it hasn't happened in silver yet, doesn't mean it won't.

Given that we've established that you're smarter than the entire bond market, the vast majority of academics, the AARP, and the BLS, it'd be a shame to be right, but lose out because you rolled the dice on the volatility of the silver market, and lost.

[chipwhich]

It wasn't me that compared stock picking to playing the lottery. I compared it to gambling, which I will admit is not totally accurate/fair, since as chipwich rightly pointed out, there's risk in buy and hold investments as well (that is, in fact, why the investor is compensated... to take on risk). The difference is that the buy and hold index investor is pursuing the strategy with the maximum expected return, so on average, the market timer/stock picker is leaving money on the table in the hopes of the big score. It's this unnecessary giving up of part of the expected return in exchange for the chance at being smarter than everybody else that I really think of as "gambling".

I thought I had addressed the premise of your post. If I didn't, it's not dishonesty, but stupidity.

Which is why I don't try to pick stocks. ;)

Well you did mention buying a lottery ticket in a previous post. So.....

The problem with your argument is my returns haven't been average. I already have returns in the last year or so to trump your premise for the next decade. So I can sell now, put it in a safe interest bearing account...and dwarf your retrun.

But you get on your soap box on and on ad nausea about your investing strategy.

Meanwhile I just proved you wrong in a year which I implied was different than your "every year is different" strategy. We are essentially coming out of the great depression of our time. That isn't like any time you have seen in your lifetime. I simply said unlike any other time, stocks can be purchased at prices you may never see again in your lifetime. But I guess since you admitted your ignorance to understanding stocks, prices, and what to buy, I will forgive you somewhat.

But like Zoony said early, stop trying to sell stupid :)

Proof is in the returns. I posted mine earlier. So you keep on being content to be average.....and ignoring the premise of my posts.

[techboy]

The problem with your argument is my returns haven't been average.

Apparently I did understand the premise of your post, then.

As I said, I am unimpressed. If I fill Fedex Field with people flipping quarters, some of them are going to get heads 10 times in a row.

It is not likely, however, that they have "quarter flipping skill".

I'm glad you won (really). Given that there are two sides of any trade, somebody had to.

It's pretty unlikely, though, that we're going to hear from the "I sold Sirius at two bucks. Crap!" crowd (unless it's in the context of some greater victory), so your individual story means nothing.

So let me be perfectly clear.

If one decides to use indexes to accept market returns (minus minimal costs), that's what one will get.

If, on the other hand, one decides to engage in market timing/security selection, it widens the range of possible returns considerably. One can end up like George Soros at one extreme, or like the broker jumping out a window at the other.

This means that there will always be "winners" running around, crowing about their "skill". People don't generally make decisions without at least thinking that they had a good reason, so they even usually have a story behind that "skill", like "it was a once in a lifetime opportunity after the 2nd Great Depression" (historical note: we had Depressions before 1929), or "it was a once in a lifetime opportunity because the US is printing money and inflation is going to go through the roof", or "it was a once in a lifetime opportunity because the internet is booming, game changer", or "it was a once in a lifetime opportunity to short because Bank of America is going under", or whatever.

The hard data, though, shows that (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=544142)


The empirical results indicate that aggregate dollar-weighted returns are systematically lower than buy-and hold returns. The annual difference is 1.3 percent for the NYSE/AMEX market over 1926-2002, 5.3 percent for Nasdaq over 1973-2002, and averages 1.5 percent for 19 major stock markets around the world over 1973-2004. Thus, this study provides comprehensive evidence that stock investors’ actual returns are considerably lower than those from passive holdings and from those documented in the existing literature on historical stock returns.

and oddly enough, that 1973 Bear (which had market drops about as severe as the one we just went through) wasn't "once in a lifetime" enough, apparently.

If you want to give up that 1.5% for the chance at hitting the home run and looking real smart at cocktail parties (while also assuming the risk of being the "sold Sirius" guy"), great. More power to you. That's not for me, though. I'd rather maximize my expected return.

I'd note, by the way, that the "average" I'm content to get is still better than about 80-90% of investors. I'm okay with that. :)

[PeterMP]

Meanwhile I just proved you wrong in a year which I implied was different than your "every year is different" strategy. We are essentially coming out of the great depression of our time. That isn't like any time you have seen in your lifetime. I simply said unlike any other time, stocks can be purchased at prices you may never see again in your lifetime. But I guess since you admitted your ignorance to understanding stocks, prices, and what to buy, I will forgive you somewhat.

How old are you?

http://www.multpl.com/

[Dukes21]

As I said, I am unimpressed. If I fill Fedex Field with people flipping quarters, some of them are going to get heads 100 times in a row.



You might want to double check your math on that one :)

I think you give very good investment advice though.

[techboy]

You might want to double check your math on that one :)

Sorry, extra zero. :)

Technically speaking, that would be my typing, not my math though. ;)

[chipwhich]

I'm glad you won (really). Given that there are two sides of any trade, somebody had to.

If, on the other hand, one decides to engage in market timing/security selection, it widens the range of possible returns considerably. One can end up like
I'd note, by the way, that the "average" I'm content to get is still better than about 80-90% of investors. I'm okay with that. :)

Well to start, two sides to any trade doesn't mean somebody has to lose. You have to be kidding. Two sides to any trade can be a win/win or a lose/lose or a lose/win. Which I would say, stop "selling stupid".

But to the premise of my post(s), which you like to ignore to stand on your soap box, I haven't been selling market timing any more than you.

Your premise is that buying an index fund is better than any other scenario put forth under any market conditions. That is both idiotic, and I guarantee your "mentors" would disagree with you on.

Meanwhile my returns trumped your premise, yet you still shout from your soap box, calling foul.

I don't have a problem with your theory of investing. It's the incoherent, irresponsible promotion that any other means of investing in any market is inexcusable, I have a problem with. But you don't seem to get that.

Based on your soap box, investing in a single stock is never acceptable. That is absolutely LUDICROUS.

It's fine if you want to be average. Go forth and prosper. Meanwhile there is an opportunity to be above average, but you refuse to allow that, because average is good. :ols:

I would be happy to list my investments in comparison to market average.

My investment in Atlantic Richfield, my first stock, Wisconsin Energy Corporation, my stock investment in DRIPS, IBM, my stock investment as an employee, or Sybase, my stock investment as an employee when bought out by SAP. None of which you would have bought on your soap box because buying single stocks is TABOO.

To try and claim otherwise in any situation is dumbfounding to me.

---------- Post added February-22nd-2011 at 11:25 PM ----------


How old are you?

http://www.multpl.com/

45, but never have I lived in a market as negatively volatile as the last few years.

It wasn't a day in market history. It was years.

[Elessar78]

tech, how much do taxes, service fees, and other forms of overhead affect the performance of an "actively traded" portfolio?

[chipwhich]

tech, how much do taxes, service fees, and other forms of overhead affect the performance of an "actively traded" portfolio?

You really need to ask that?

Service fees are relatively inconsequential. Taxes depend on individual investors. Any investment strategy will be taxed the same based on an individual investors tax liability.

It's scary that anyone would post such a question. It explains a lot.

[techboy]

Well to start, two sides to any trade doesn't mean somebody has to lose.

Oh really? So, when you were making your "buys of a lifetime", the guy you were buying from knew the stocks were destined to go up too, but sold them anyway because he wanted to do you a favor? :ols:

In another thread, Predicto shared the story of how he sold 1,000 shares of Apple, only to see it skyrocket. I don't think he felt like a winner.


But to the premise of my post(s), which you like to ignore to stand on your soap box, I haven't been selling market timing any more than you.

And here I'd ask you the same question I'd ask zoony. Just what would you call getting into and out of positions based on market conditions?

You don't have to be McD5 to be a market timer.



Your premise is that buying an index fund is better than any other scenario put forth under any market conditions.

It's not a premise. It's basic arithmetic.

No matter what the current market conditions are (high, low, whatever), the market itself is determined by the average of all trades. For every "once in a lifetime" buy you make, someone else is selling, and all those trades put together is what those indexes represent.

The average of the active traders' results is the index.

The difference is that indexing costs much less, so the indexer must, on average, come out ahead.

The Dichev study bears out that this is exactly what happens in the real world.



Meanwhile my returns trumped your premise, yet you still shout from your soap box, calling foul.

People walk out of Vegas winners all the time, too. It doesn't mean they have a "system" for beating Vegas. Your returns mean nothing in the grand scheme of things.

Notice that while I am able to cite study after study, both theoretical and practical, that show that market timing and stock picking are suboptimal, all you have to fall back on is your own personal anecdotes.

Sorry. Not impressed.



I don't have a problem with your theory of investing. It's the incoherent, irresponsible promotion that any other means of investing in any market is inexcusable, I have a problem with.


I never said it was inexcusable. Market timers will get the average too, just with a much wider variance and much higher costs.

I just said it was suboptimal.

Which it is.

I'm really sorry that you have apparently chosen to take this personally, but when people ask for advice on investing, I'm not going to withold information because it makes you uncomfortable.

The world is full of people bragging about their latest genius stock move. The financial networks are full of talking heads promoting the next big market timing idea. The financial magazines are generally nothing but an examination of the latest hot money manager (though no one notices from year to year when it's someone different each time).

The idea that one can outsmart the market sells.

Indexing, on the other hand, is boring. It's not a get rich quick scheme. There will always, just by the dispersion of returns, be people that do better (though again, that often changes from year to year). Wall Street firms and financial advisors don't make much money on it, and magazines and financial shows need new material, so printing "buy, hold, and rebalance" over and over again doesn't sell.

That means most people don't know about it, or the actual facts, and that's why I am going to continue to share this information, the only exception being in threads specifically dedicated to active trading ideas.

Sorry.

[chipwhich]

Oh really? So, when you were making your "buys of a lifetime", the guy you were buying from knew the stocks were destined to go up too, but sold them anyway because he wanted to do you a favor? :ols:


Please don't ignore the obvious. If I buy a stock for $1 that someone pays .90c for, and it goes to $2. Both the buyer and seller are winners. Please don't be obtuse just to make your sandbox better.



In another thread, Predicto shared the story of how he sold 1,000 shares of Apple, only to see it skyrocket. I don't think he felt like a winner.


Doesn't make him a loser from a $$$ perspective. Again, don't be obtuse when your premise is being "average" from a return perspective. Don't play both sides of the fence.




And here I'd ask you the same question I'd ask zoony. Just what would you call getting into and out of positions based on market conditions?

You don't have to be McD5 to be a market timer.


I would say anytime you buy any security with the "assumption" that your return will be greater than your loss is market timing. Be it an index fund or a stock. Your implication that an index fund will guarantee your return is better than a stock, which I have proven you wrong, is the issue.



It's not a premise. It's basic arithmetic.


Okay, so show me how you beat my returns.



No matter what the current market conditions are (high, low, whatever), the market itself is determined by the average of all trades. For every "once in a lifetime" buy you make, someone else is selling, and all those trades put together is what those indexes represent.


What does that have to do with rate of return??????? Are you kidding me????? Please tell me you are deeper than that.



The average of the active traders' results is the index.

The difference is that indexing costs much less, so the indexer must, on average, come out ahead.

The Dichev study bears out that this is exactly what happens in the real world.


I am talking a specific scenario, of which I already beat you at. Not sure your point?????



People walk out of Vegas winners all the time, too. It doesn't mean they have a "system" for beating Vegas. Your returns mean nothing in the grand scheme of things.


Yeah and I never said my entire investment philosophy is based on recommendations in this thread. I did say, a small portion is an opportunity to gain additional profit. Again, you ignore.



Notice that while I am able to cite study after study, both theoretical and practical, that show that market timing and stock picking are suboptimal, all you have to fall back on is your own personal anecdotes.


No I gave you real world returns, not studies.



Sorry. Not impressed.


Neither am I.


I never said it was inexcusable. Market timers will get the average too, just with a much wider variance and much higher costs.

I just said it was suboptimal.

Which it is.


See my real world examples and jump up and down on your box.




I'm really sorry that you have apparently chosen to take this personally, but when people ask for advice on investing, I'm not going to withold information because it makes you uncomfortable.


What makes me uncomfortable is the fact that you give bad advice based on being stubborn and insisting it's your way or the highway.



The world is full of people bragging about their latest genius stock move. The financial networks are full of talking heads promoting the next big market timing idea. The financial magazines are generally nothing but an examination of the latest hot money manager (though no one notices from year to year when it's someone different each time).


I wasn't bragging, I was simply stating my movies. The only braggart was you, but please re-read the posts.



The idea that one can outsmart the market sells.


Again, reread my posts.



Indexing, on the other hand, is boring. It's not a get rich quick scheme. There will always, just by the dispersion of returns, be people that do better (though again, that often changes from year to year). Wall Street firms and financial advisors don't make much money on it, and magazines and financial shows need new material, so printing "buy, hold, and rebalance" over and over again doesn't sell.

That means most people don't know about it, or the actual facts, and that's why I am going to continue to share this information, the only exception being in threads specifically dedicated to active trading ideas.

Sorry.

Again, you are dancing in your soap box and ignoring the fact that you refuse to admit that any investment outside your single policy is idiotic. Even your "mentors" are man enough to admit it, but you want to make a point to "win".

[techboy]

tech, how much do taxes, service fees, and other forms of overhead affect the performance of an "actively traded" portfolio?

It depends upon how active the investor, but it's always going to be more than the buy and hold indexer.

Service fees themselves have come down a lot, but there are still bid-ask spreads (for individual stocks) and expense ratios (for funds), and while $9 trades don't seem like much, do it more than few times and that can add up too.

There are also taxes, which are much higher if held short-term, but are triggered more often by the active trader in any case. A true buy and hold investor, by contrast, might not pay much of anything, assuming he or she holds the security until death and then passes it on to heirs on a stepped up basis.



Any investment strategy will be taxed the same based on an individual investors tax liability.

You actually mocked another poster for asking a question about taxes, then posted this? :ols:

So if I buy and sell a stock daily (one of McD5's strategies), paying short term capital gains taxes, I will be taxed the same as a buy and hold investor that only pays long term capital gains once, if at all?

Or maybe you weren't thinking about short term trading as a strategy. I'll give you that.

If I buy and sell a stock 3 times, paying taxes 3 times, I'm going to pay the same taxes as someone that only sells once, at the very end?

Have you heard of compound interest?

---------- Post added February-23rd-2011 at 12:40 AM ----------


Please don't ignore the obvious. If I buy a stock for $1 that someone pays .90c for, and it goes to $2. Both the buyer and seller are winners.


No, you're right. Everybody beats the market. Nobody loses or does worse than the market average. Ever. :rolleyes:



Your implication that an index fund will guarantee your return is better than a stock, which I have proven you wrong, is the issue.

I never implied that.

I stated that on average, the indexer is going to do better than the market timer (the Dichev study puts it at about 1.5%). It is certainly possible for any individual trader to do better, and in fact it's necessary for some to do better, because some clearly do worse, and that's how an average works.

This is why your repeated assertion that you personally beat the market during one particular year is totally irrelevant, just as the fact that some gamblers come out of Vegas ahead doesn't change the fact that on average Vegas wins.



I am talking a specific scenario, of which I already beat you at. Not sure your point?????

Yes, I'm starting to see that. Let's try it another way:

Can every active trader beat the market?



Yeah and I never said my entire investment philosophy is based on recommendations in this thread. I did say, a small portion is an opportunity to gain additional profit.


If your strategy is so much better than everything else (just look at those fabulous returns, right?), why not base your entire investment philosophy on it? If it works, it works, right?



No I gave you real world returns, not studies.

Those studies represent real world returns. You're not the only investor in the universe.



I wasn't bragging, I was simply stating my movies.

I actually didn't accuse you of bragging, you know. I was just speaking generally.



Again, you are dancing in your soap box and ignoring the fact that you refuse to admit that any investment outside your single policy is idiotic.


Very well. I admit that any investment outside my single policy is idiotic. Better? ;)

[chipwhich]

You actually mocked another poster for asking a question about taxes, then posted this? :ols:

So if I buy and sell a stock daily (one of McD5's strategies), paying short term capital gains taxes, I will be taxed the same as a buy and hold investor that only pays long term capital gains once, if at all?

Or maybe you weren't thinking about short term trading as a strategy. I'll give you that.

If I buy and sell a stock 3 times, paying taxes 3 times, I'm going to pay the same taxes as someone that only sells once, at the very end?

Have you heard of compound interest?

I mocked Larry because I cry fowl on his posts, yet that is another story and another posting discussion, preferably over PM :)

Meanwhile please respond to my previous post and try and keep it real. Thanks :)

[Seabee1973]

I don't like the idea of precious metals as investment vehicles. It's "arbitrary" that the market assigns a value to them. I especially don't like them now unless I'm holding. Gold, for example, is/was on a twenty year high and people are going nuts buying the stuff at the high point?? It can/could go up but not as much as if bought during the times when it was worthless. It's very reactive type "investing".

I placed the word arbitrary in quotation marks because in days of yore there was a very specific and interesting reason that gold was chosen as the metal of choice for currency. Gold, Silver, and Platinum were the only three metals that are common enough (easily found) but not too easy (like iron) that are not radioactive. Platinum's melting point was too high to make it of any use back in the day. So Gold it was!

I got a gold mutual fund when it was 7.00 a share it has now hit 30 dollars a share. I also bought a gold mining company for around 6 dollars a share it is pushing close to 30 also

[techboy]

I mocked Larry because I cry fowl on his posts, yet that is another story and another posting discussion, preferably over PM :)


No, you mocked Elessar78 for asking about increased taxes paid by active traders over buy and hold investors, then made the ridiculous assertion that there's no difference. While I don't find that "scary", it is somewhat ironic. :)

[chipwhich]

No, you mocked Elessar78 for asking about increased taxes paid by active traders over buy and hold investors, then made the ridiculous assertion that there's no difference. While I don't find that "scary", it is somewhat ironic. :)

The question wasn't anything to do with active traders over buy and hold investors. You obviously don't read well.

If you compare apples to apples and READ his question, it was simply ludicrous. A stock trade in any investment situation is equal to a stock trade in any investment situation. He didn't specify a duration of the holding, or a market timer, or a buy and hold.

But stomp on your soap box without reading posts.

He simply asked about taxes and trading. Yeah, it's not scary and not ironic that you missed that.

[techboy]

Meanwhile please respond to my previous post and try and keep it real. Thanks :)

Whoa, there. Replying takes time. You can write almost as much as me at times. :ols:

Anyway, look up. I hope that's real enough for one night, because I'm going to bed. I'm already going to be regretting it at 5:45 tomorrow morning when the alarm goes off.

[chipwhich]

Whoa, there. Replying takes time. You can write almost as much as me at times. :ols:

Anyway, look up. I hope that's real enough for one night, because I'm going to bed. I'm already going to be regretting it at 5:45 tomorrow morning when the alarm goes off.

Your Ellesar response is as good as your bedtime response.

Night night :)

P.S. Sleep tight, don't let the bed bugs bite :)

[techboy]

The question wasn't anything to do with active traders over buy and hold investors. You obviously don't read well.

Uh...


tech, how much do taxes, service fees, and other forms of overhead affect the performance of an "actively traded" portfolio?

You knew that too, because we've been talking about buy and hold versus more active strategies, and then you proceeded to say that any strategy will have the same tax consequence.

Which is totally wrong.

No bed bugs here, thankfully. :)

[chipwhich]

Uh...
You knew that too, because we've been talking about buy and hold versus more active strategies, and then you proceeded to say that any strategy will have the same tax consequence.



Quote me once where I recommended buy and hold OR more active strategies?

I never recommended buying and selling.

buying and holding.

Reading comprehension is your friend.

But please respond to my previous post. Stop bantering me :)

[Seabee1973]

I'm a garbage collector. In my sandbox account. My returns have been phenomenal. I have been buying garbage since the downturn began and reaping great rewards.

Here is what is in my current sandbox. I have only had 2 that haven't produced. One of the two went bankrupt and I lost it all. I like stocks I can buy into at a minimum of 1000 shares. Didn't adhere to this policy when buying Microsoft or Bank of America.

Currently in hold mode. No flipping.

My trash, Ford, Bank of America, Citibank, Microsoft, Rite Aid, Sirius, Microsoft, Home Depot.

Biggest winner, Ford. Bought it at 1.95 Rate of return 682%

Only stock losing money since I purchased. Microsoft.

Biggest Fail. Buying Six Flags thinking Danny was a genius at marketing. What a fool I was. Bankrupt.

Lowest gainer in the green. Bank of America with a 12% return.

Even trash like Rite Aid I am at a 42% return.

If I had the balls to go all in, I would be retired. But you can't go all in on garbage.

Other holdings outside of my online brokerage account which are doing well. IBM, Wisconsin Energy Corporation.

I like playing in the sand box. I can't do any worse than the salesman that portray themselves as professional money managers. There are a lot of them out there that have less experience investing than I do, but the dress nice :)


I have a lot of trash stocks as you could call them most of them do good I bought my microsoft in 2003 and kept it and just recently bought 25 more shares which doubled my my shares. I had BAC when it was CW and was up 25 percent at leats before this mess hopefully it returns to those levels again I also got some high yielding Riets which i hope keep paying out for another year or 3

[Burgold]

In another thread, Predicto shared the story of how he sold 1,000 shares of Apple, only to see it skyrocket. I don't think he felt like a winner.
.

To be honest, there are winners and WINNERS as well as losers and LOSERS! I've done things similar to Predicto where I've bought a company and then after a few years of steady growth or 6 months of flatline growth I decide my money could be best used elsewhere. If I sell that company and it's 30% above where I've bought it I've won. I've made money. If that company then invents the newest penicillan and shoot 500% above where I've bought it... well, I still won, I just didn't WIN!

That's true in all aspects of life. If you don't take the risk, if you don't play the game, you can't win, but winning is defined in many ways. I occassionally regret not buying certain compannies or sticking with them longer, but if I made what I wanted from that company I still won... I'm ahead of the game.

My favorite example is Google. I've never owned Google. When it first IPOed I looked at it, but the numbers felt so wrong. It seemed so overvalued based on the price. I decided to let the market settle and check back in. Six months later, it was worth more and had even a more ridiculous valuation and so I passed again. My knowledge of Yahoo! probably scared me off the company. Yahoo! was great, but didn't really have a way of making money. Anywho, the story kept repeating itself and I've never owned the company. Do I regret never buying it. Sure, I'd be up about 600% even if I rode the economic crash. The thing is, I always knew I should own Google... I just never pulled the trigger. That makes me a loser, but not a LOSER because I haven't lost anything other than an opportunity.

[Seabee1973]

I got in on google and aapl when they were cheaper i wouldnt buy them again unless they dropped significantly

[PeterMP]

45, but never have I lived in a market as negatively volatile as the last few years.

It wasn't a day in market history. It was years.
The flip side of that is there has never been a time in history when the market has been as positively volatile as it was from about 1995-2000.

It is hard to look at historical P/E ratios and make the argument that stocks are significantly under priced. If anything, the historical data would suggest that they are over priced.

(Of course, it is still very possible that we will have a multi-year increase in prices without corresponding increases in earning (or a decrease in earnings without a decrease in prices.)

[techboy]

But please respond to my previous post.

I did. It's just that I started my reply before you posted again, so the new software tacked it on to my previous post, which is why I wrote "look up".The answer to your latest thoughts is in post #82.

I'm not sure it's going to matter, though, because all you seem to be doing is repeatedly arguing that your personal returns are better than the market (and therefore indexing), and as I have repeatedly tried to tell you, that doesn't matter.

Perhaps a slightly different example might help. At a casino, different games have different expected returns given optimal play. Blackjack, using perfect basic strategy, has a house advantage of roughly .2%, depending upon the rules of the game. Betting on a color in roulette, on the other hand, has a house advantage of roughly 4.5% (again, depending on the rules).

It is very clear, therefore, that for a person going to the casino, if maximizing returns is the goal, it is better to play blackjack using basic strategy than it is to make bets on a color on the roulette wheel. I hope we can agree on that.

Now, let's pretend that you and I go to the casino. I play blackjack using basic strategy, and you play roulette. On average, I'm going to come out ahead. I have the better approach.

Let's suppose, though, that on this particular trip, you win more than I do. It's still a game of chance, variance still occurs (especially if you're making large bets, increasing your variance, and I'm making small ones, making it more likely that my returns will approach the expected due to the law of large numbers).

Does that then "prove" that it is better to play a color in roulette than it is to play basic strategy blackjack? Of course not.

Now, let's turn to our topic of discussion. Investing is like gambling in that one takes a risk in hopes of a reward. The only real difference is that while blackjack and roulette each have negative expected returns (which is how Vegas makes its money), investing has a positive expected return.

What we have seen in all the research, though, is that market timing has a lower expected return than buy and hold (though both are generally positive), just as roulette has a lower expected return than blackjack.

And, just as one trip where roulette does better doesn't mean that it is better (at maximizing returns), the fact that one person over one period who market times might have returns better than indexing doesn't mean that market timing is generally better.

We can go even further, because while we wouldn't necessarily expect that some roulette players will do better than the blackjack players (though it's possible), it is practically necessary that some market timers do better than indexers, at least over short periods of time, because if some are lower than the average, some must be higher. That's just how averages work.

And so, when we hear from you and others about your great results buying stocks when they are "cheap", or buying gold and seeing it shoot up, or whatever other anecdote is being shared, it's really great. I really am happy for you. But it doesn't prove anything about that strategy's returns over buy and hold indexing, because given the information I'm presenting, we'd expect some to do better than the index, just by random luck, and we're not generally going to hear from the people that are underperforming.

As I said, I'm all about maximizing expected return, and in that sense, indexing is the best way to go.

---------- Post added February-23rd-2011 at 09:35 AM ----------


To be honest, there are winners and WINNERS as well as losers and LOSERS!

Well, yes, and I'm not suggesting that people who attempt to pick stocks and time the market are going to actually lose money, on average. They just will usually underperform the index (or average), which in my mind, is losing.

[mojobo]

Just for the record AGQ is up over 22% since I recommended it 2 weeks ago. Not saying it couldn't go down just as quickly, but so far I've been right...

[The Brave Little Toaster Oven]

:wtf; is up with the stock market today? everything has tanked on me :(

[PeterMP]

:wtf; is up with the stock market today? everything has tanked on me :(
Because people are see what is happening in Japan and are scared (and remember the US stock market has people worldwide invested in it, including Japan) and when people are scared they look for "safe" things to put their money in.

And uncertainity in the ME also feeds in.

[The Brave Little Toaster Oven]

Because people are see what is happening in Japan and are scared (and remember the US stock market has people worldwide invested in it, including Japan) and when people are scared they look for "safe" things to put their money in.

And uncertainity in the ME also feeds in.

yeah, but none of my stocks have ties to the middle east or japan....it simply tanked this morning :(

[PeterMP]

yeah, but none of my stocks have ties to the middle east or japan....it simply tanked this morning :(
First, there is no such thing as a stock that is independent of the Japan AND the ME.

There is also some of the market has been going up a lot lately, and how long can this continue, and maybe it is a good time to take some of the profits out to be safe attitude that kicks in sometimes, especially when things start to get a little scary.

[PiLfan]

My favorite small caps that have been and I think will continue to do well...

ACHN, APRI, BSQR


Here are some more risky ones...could see big gains, but due to high volatility and risk I wouldn't put too much into these (risk captial at best), though all have significant potential from where they're currently priced:

ASTM, AVII, CRDC, WATG, SORL

[mojobo]

And so we are back to the premise that you are smarter than the entire bond market, and most of academia, and the BLS, and the AARP, and...

I hope for your sake that you're right. Seriously. :)


AGQ is up 35% since I recommended it on February 18... Not saying its proof that I'm smarter than the entire bond market, most of academia, the BLS, and the AARP but its not a bad return for a little over 4 week period...

[techboy]

AGQ is up 35% since I recommended it on February 18... Not saying its proof that I'm smarter than the entire bond market, most of academia, the BLS, and the AARP but its not a bad return for a little over 4 week period...

From the Wall Street Journal: Silver-Mad Small Investors Fueled an Epic Rise and Fall (http://online.wsj.com/article/SB10001424052748703859304576307380172271272.html)


When silver prices hit a three-decade high last week, David Zornetsky decided to do some buying. Searching for a job, the 31-year old in Beacon, N.Y., hoped to use gains from silver to finance a move to New York City and to pay down student loans. "I had been hearing that silver could go up to $150 an ounce this year," says Mr. Zornetsky.

Instead, silver has suffered its worst one-week drubbing since 1980, when an infamous alleged attempt by Texas's Hunt brothers to corner the silver market came undone. This week's brutal tumble sent silver-futures prices down to $35.28 ...

I hope you were in early enough that this didn't wipe you out, and you're still ahead.

The larger point here, though, is that it's pretty clear that silver's movements were/are not a direct indicator of inflation, unless you think we just entered a period of staggering deflation.

Maybe the entire bond market, most of academia, the BLS, and the AARP are on to something... ;)
.

[Skinz4Life12]

citi jumped like 40 points this morning and i thought HOLY **** i'm gonna dump my shares and make a huge profit, but come to find out it was a 1 for 10 reverse split :ols:

[mojobo]

From the Wall Street Journal: Silver-Mad Small Investors Fueled an Epic Rise and Fall (http://online.wsj.com/article/SB10001424052748703859304576307380172271272.html)



I hope you were in early enough that this didn't wipe you out, and you're still ahead.

The larger point here, though, is that it's pretty clear that silver's movements were/are not a direct indicator of inflation, unless you think we just entered a period of staggering deflation.

Maybe the entire bond market, most of academia, the BLS, and the AARP are on to something... ;)
.

Haha I figured you would be back here. Even after this HUGE pullback silver is up 17% since we started this convo on February 18 and AGQ is still up about 25%. I've been in for about 6 months so I'm still doing fine relative to where I started, although I did get hit hard last week. I had to bite my tongue in April when it was going up so quickly because I figured a big pull back was coming (had no idea it was going to be anywhere near as bad as it was but I doubt most people did). This was a huge combination of people getting over leveraged when it was going up in April, a small dollar rally, a margin hike, and a lot of speculation all happening at once (at least in my opinion). Don't get too excited just yet, I'm still up by a good amount as of February 18 and I think this huge pull back is just about done.

[Predicto]

The longer I live, the more clear it becomes to me that it is very hard to recognize a bubble when you are in the middle of it. There is always some "logical"explanation for why the bubble is happening, but that explanation often flames out, and it turns out that the rise comes from people strongly believing in the explantion more than from underlying reality.

I can't predict short term commodities stuff like this summer's silver prices, or this summer's oil prices, and I don't think any ordinary investor can. I can look at very long term trends and see that China and India are going to continue to raise their standard of living, and thus they will buy a lot of commodities in the long run, but it is very difficult for me to see if the price of commodities (and commodity-dependent companies) ALREADY reflects that future demand.

In short, the insiders have too much of an advantage over me in this area. I won't swim with those sharks.

[techboy]

Haha I figured you would be back here.

Perhaps, but it's not to gloat, as you seem to think. I'm genuinely pleased your gamble seems to have worked out.

My primary point is that you are wrong about the reasoning behind the gamble, i.e. runaway inflation.



Even after this HUGE pullback silver is up 17% since we started this convo on February 18 and AGQ is still up about 25%.

Did inflation have a huge pullback? Is it still up 17% since February 18?



I've been in for about 6 months so I'm still doing fine relative to where I started

Good.



, although I did get hit hard last week.

Sorry.



I had to bite my tongue in April when it was going up so quickly

It's probably good that you did, because you would have looked a little silly trying to claim that inflation was rising just as fast. ;)



Don't get too excited just yet,

I don't get excited by the silver market... I'm not invested in it, and I take no pleasure in seeing others suffer.

Well, except Cowboys fans during football season. :D



I'm still up by a good amount as of February 18 and I think this huge pull back is just about done.

Maybe. If it is, though, it's not because of runaway inflation.

[mojobo]

Perhaps, but it's not to gloat, as you seem to think. I'm genuinely pleased your gamble seems to have worked out.

My primary point is that you are wrong about the reasoning behind the gamble, i.e. runaway inflation.
I know you are not one to rub it in, but I don't think you should use the pullback as a validation that you are right just as it would be silly for me to say that AGQ going up over 120% at its peak last week was a validation that I was right. Silver is probably the most sensitive commodity to both inflationary and deflationary pressures. For what its worth I put a lot of time and effort into studying and researching not only our fiscal/monetary policy, but fiscal/monetary policy around the world and the history of it all both in the classroom and on my own.



Did inflation have a huge pullback? Is it still up 17% since February 18?
They did reflect an increase and decrease in credit used in silver specifically. In general this was more the result of dollar demand as margin requirements were raised and people who were over leveraged in the first place were knocked out. Nothing has changed at its core though. Governments and businesses are still dependent on cheap credit with savings that aren't there so there will be heavy dependence on central banks. The fed is currently buying 70% of our federal government bonds and unless other nations are willing and able to take on some of that commodity prices will continue to rise.




It's probably good that you did, because you would have looked a little silly trying to claim that inflation was rising just as fast. ;)




I don't get excited by the silver market... I'm not invested in it, and I take no pleasure in seeing others suffer.

Well, except Cowboys fans during football season. :D



Maybe. If it is, though, it's not because of runaway inflation.

It is definitely magnified, but it is a reflection of inflation occurring.

[techboy]

I know you are not one to rub it in, but I don't think you should use the pullback as a validation that you are right just as it would be silly for me to say that AGQ going up over 120% at its peak last week was a validation that I was right.

The reason it would be silly for you to claim the 120% increase as validation is that it would be ridiculous to claim that inflation jumped 60% in that time period.

It is clear from the wild movements that, at least for the short term, silver prices are not reflecting either inflation or the reasonable expectation thereof.



It is definitely magnified, but it is a reflection of inflation occurring.

Inflation is currently roughly 3%. If by "magnified" you mean "20 times reality", sure.

[gbear]

Individual vs. Index. Techboy, you mention the argument of all market timers being a 0 sum game compared to those who simply index and hold. I'm thinking this is not true, and here's a simplified example of why your argument may not be true.

Market consists of 2 stocks all trading for $10 per share. Stock 1 looks poised to go down and stock 2 looks poised to go up. The other 8 stocks look to be flat.

Market timer sees stock 1 start to drop and sell at $9.85. He then puts the 9.85 into stock 2 now trading at $10.15. He now owns none of stock 1 and 1.97 shares of stock 2. As the next buy in happens the stocks sit at $9 for stock 1 and $11 for stock 2. The indexer put $10 into each stock again while the market timer again puts $20 into stock 2 because he still thinks it is better than stock1 leaving him with essentially shares of stock 2.

If the prices remain steady, at the end of period 2, the market timer 3.72 shares of stock2 worth $40.92 while the indexer has 2.11 shares of stock 1 and 1.9 shares of stock 2 for a total worth of $18.99 stock 1 and 20.9 of stock2 for $39.89 (rounding issues but right around $40). While the index of funds still maintains the average of the stocks, the market timer has gained almost 2.5% on the indexer. If one assumes further volatility as others see the first market timer's success, one can assume the stocks would further unbalance making the market timer who jumped all in first do better compared to the index.

Note, it was not a 0 sum game because we did not account for whomever sold the shares. Yes, somebody sold stock 2 and bought stock 1, but why is it assumed it is not somebody leaving the market or companies buying back or selling addional shares? If someone leaves the market selling their shares, they are not a loser in this senario for not holding the stocks longer. They aren't playing anymore to win or lose. If a company issues more stock and the price remains flat, are there losers? For this made up example,market investor A bought stock 2's newly issued stocks with the proceeds from when stock 1 bought back some stock to try and prop up it's value. Thus it is popssible for a non 0 sum game to benefit the market timer more than the indexer.

I am not saying this example is the norm, and even in this example the market timers would jump on it creating a bubble of 0 sum opportunities around the trend of each of the stocks.

Am I in left field in my understanding?

[techboy]

Am I in left field in my understanding?

Yeah, pretty much. Rather than repeat myself, I'll link this short article by William F. Sharpe in The Financial Analysts' Journal , The Arithmetic of Active Management (http://www.stanford.edu/~wfsharpe/art/active/active.htm)


If "active" and "passive" management styles are defined in sensible ways, it must be the case that

(1) before costs, the return on the average actively managed dollar will equal the return on the average passively managed dollar and

(2) after costs, the return on the average actively managed dollar will be less than the return on the average passively managed dollar

These assertions will hold for any time period. Moreover, they depend only on the laws of addition, subtraction, multiplication and division. Nothing else is required.

[tds]

Anyone have any stock tips? I started buying positions in 8x8 inc (EGHT). http://www.barchart.com/opinions/stocks/EGHT on 6/27 and I'm up about 13.4%. Check it out! Probably beginners luck. Outside of my 401k I've never put money in the stock market.
I just put a monday morning limit order in for BPAX at $3.65. http://www.barchart.com/opinions/stocks/BPAX

[tdigle]

Anyone here ever wish they had the money to invest in a hedge fund like SAC Capital? If only I had 25 million to spare I could enjoy a consistent net return of 25-30% every year.

[techboy]

Don't get too excited just yet, I'm still up by a good amount as of February 18 and I think this huge pull back is just about done.

Hope you're still doing okay with this.Silver's been sort of rangebound the last few months, but the volatility could be potentially deadly in a leveraged ETF, as we discussed.


Anyone have any stock tips?

Yeah. Stop trying to time stocks. ;)


Anyone here ever wish they had the money to invest in a hedge fund like SAC Capital? If only I had 25 million to spare I could enjoy a consistent net return of 25-30% every year.

Yeah, until it blows up and you're left holding the bag. Hedge fund managers take huge risks so they can get big payoffs via their 2 and 20, and when the risks show up, they just shut down, then move on and open up a new hedge fund later. Lots of reward, and the risk is entirely absorbed by wealthy clients. Pretty sweet gig if you can get it, I guess.

5 Reasons You Should Avoid Hedge Funds (http://moneywatch.bnet.com/investing/blog/wise-investing/5-reasons-you-should-avoid-hedge-funds/2300/?tag=content;col1), by Larry Swedroe, is a good article on this.



In 1990, there were only about 530 hedge funds managing about $50 billion. By the end of 2009, there were more than 8,000 hedge funds. And despite the retrenchment in 2008, the hedge fund industry now has in excess of $2 trillion dollars under management. Does performance match the hype?

As we’ve discussed before, much of the alpha claimed by the industry isn’t alpha at all, but forms of risk other than beta. Also, hedge funds have exorbitant fees, around 2 percent of assets and 20 percent of profits. If there’s any alpha in the gross returns, that alpha is going to the managers and fund sponsors, not investors. And finally, as all of the returns shown are pretax, and because of their high turnover rates hedge funds tend to be highly tax inefficient, the after-tax results would surely be worse. To sum it all up, the evidence suggests that hedge funds really aren’t investment vehicles, they are compensation schemes.

However, the returns reported by hedge funds may not be as good as they claim. The following discusses the large biases in the data that you should know.

This is perhaps more succinctly stated in this review of Swedroe's latest book in the Financial Times (http://opinion.financialpost.com/2011/06/22/swedroe-ignore-all-forecasters-including-him/):


And hedge funds are even worse, in Swedroe’s view, referring to DFA cofounder Rex Sinquefield’s notorious quote (originally delivered to me over dinner) that “hedge funds are mutual funds for idiots.” As reported here, Sinquefield later clarified that “hedge funds are mutual funds for rich idiots.”

Swedroe says hedge funds are illiquid, tax inefficient, lack transparency and offer no persistent outperformance beyond what might be randomly expected. The result is risk-adjusted returns similar to Treasury Bills.

[tdigle]

Yeah, until it blows up and you're left holding the bag. Hedge fund managers take huge risks so they can get big payoffs via their 2 and 20, and when the risks show up, they just shut down, then move on and open up a new hedge fund later. Lots of reward, and the risk is entirely absorbed by wealthy clients. Pretty sweet gig if you can get it, I guess.

5 Reasons You Should Avoid Hedge Funds (http://moneywatch.bnet.com/investing/blog/wise-investing/5-reasons-you-should-avoid-hedge-funds/2300/?tag=content;col1), by Larry Swedroe, is a good article on this.


Uh, SAC Capital has produced consistent, high returns since its inception in 1992. There are a handful of hedge funds that are more than worthy of investing money into, hence why I qualified the statement in my original post.

[techboy]

Uh, SAC Capital has produced consistent, high returns since its inception in 1992. There are a handful of hedge funds that are more than worthy of investing money into, hence why I qualified the statement in my original post.

Yeah, so did LTCM.

Until it spectacularly blew up.

This is part of "survivor bias". Read the article for more.

But yes, I highly recommend investing in SAC Capital in 1992. :)