Only after a 150% stock market rally in 4 years...

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Re: Only after a 150% stock market rally in 4 years...

Postby VictoriaF » Sun Mar 03, 2013 10:33 am

Valuethinker,

I'd like to clarify that I agree with your other points about the fractal nature of market trends and de-emphasis of the history of the U.S. stock markets performance. I think the very notion of market optimists and pessimists if deeply flawed. The approach to investing should be as unemotional as possible. Behavioral stuff already affects one's ability to invest optimally. The hype about optimists and pessimists is downright damaging.

Victoria
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Re: Only after a 150% stock market rally in 4 years...

Postby baw703916 » Sun Mar 03, 2013 11:21 am

VictoriaF wrote:"explaining and correcting"! Did it come across as pedantic? I was trying to illustrate my point, and people on this site don't accept any statements unless they are supported by citations or some indication that a valid source exists. Writing many posts seems no different from writing papers, except that I don't get any credit here.

Victoria


It didn't come across as pedantic at all...I thought at the time that my wording didn't come across in quite the right way, and spent a couple minutes thinking about what words I should use--and didn't end up choosing my words very well. The point that Taleb himself found it had to lose a little on a consistent basis while waiting for the big payoff is an important point (in its psychological implications) which my inaccurate understanding of the story glossed over.

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Re: Only after a 150% stock market rally in 4 years...

Postby VictoriaF » Sun Mar 03, 2013 11:39 am

baw703916 wrote:The point that Taleb himself found it hard to lose a little on a consistent basis while waiting for the big payoff is an important point (in its psychological implications) which my inaccurate understanding of the story glossed over.

Brad


I looked up what Taleb has actually written. Here it is:

Taleb in The Black Swan wrote:Of all the people he knew, Nero was the least genetically designed for such a strategy. His brain disagreed so heavily with his body that he found himself in a state of continuous warfare. It was his body that was his problem, which accumulated physical fatigue from the neurobiological effect of exposure to the small continuous losses, Chinese-water-torture-style, throughout the day. Nero discovered that the losses went to his emotional brain, bypassing his higher cortical structures and slowly affecting his hippocampus and weakening his memory.


OK, Taleb does not say "I," he describes Nero's difficulties. But I think the general point still holds. Nero (and Fat Tony) are Taleb's complementary alter egos.

Taleb in The Black Swan further wrote:He did better emotionally with his own portfolio than with those of clients, since he was not obligated to monitor it continuously.


Thus, individual investors have advantage in exploiting behavioral biases in comparison to fund managers. Are individual investor behaviors less prone to arbitrage?

Victoria
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Re: Only after a 150% stock market rally in 4 years...

Postby baw703916 » Sun Mar 03, 2013 12:32 pm

VictoriaF wrote:Valuethinker,

Is your argument a variation of the Lucas critique, i.e., that once the public receives new information, the information itself is weakened by the reaction to it?

I see your point about "a *handful* of arbitrageurs driving stock values back to equilibrium" in the Glassman's case. Behavioral investing seems different though. Let us say that Brad has developed an algorithm that exploits the Prospect Theory. He creates a hedge fund "Brad's Prospects" and start investing based on his algorithm without telling anyone (even his investors) what the algorithm does. Can the market reverse-engineer Brad's algorithm by analyzing his trades? Would there be difference between Brad's Prospects trading individual stocks and broad-based ETFs?

Victoria


Hi Victoria,

Thanks for touting my hypothetical hedge fund! ;)

I think, though, that aside from the issue of whether the manager really does have a working crystal ball, the problem of agency (which Valuethinker explained to me some time ago) comes into play.

The person whose money is being invested by the institutional manager may find that the manager's interests do not coincide with hers.

A classic example is management fees (the manager wants them to be as high as possible; the investor, as low as possible).

There''s also a converse problem (I'm not quite sure what this one is called). The manager, even if he is acting in the investor's best interests, may find that the investor does not believe he is. In other words, maybe the manager has found some inefficiency, and intends to exploit it for his clients' benefit. But if the investors don't understand the efficiency, are not convinced of its existence, or run out of patience waiting for a return to be made...the manager may not be able to exploit the inefficiency after all.

The story of Michael Burress' hedge fund is an example of this. He was absolutely right about the real estate bubble, and found a good way to capitalize on its eventual collapse. But he was very nearly undone by a revolt of his investors before his approach became profitable. Eventually he decided that he should stick to investing his own money and not anybody else's, to avoid this issue.

Ultimately, institutional managers are at the mercy of their customers' whims. Their job is primarily to attract assets, and only secondarily to generate good performance. Scaring your investors (even if you are ultimately proved right) isn't a good path to success. ;)

To be sure, there are a few ultra-high net worth individuals out there who are managing their own money--and have enough of it to move markets. But not many.

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Re: Only after a 150% stock market rally in 4 years...

Postby VictoriaF » Sun Mar 03, 2013 12:59 pm

baw703916 wrote:I think, though, that aside from the issue of whether the manager really does have a working crystal ball, the problem of agency (which Valuethinker explained to me some time ago) comes into play.


It's a good point. Not only the investors cannot take poor performance for a long time, but they also have a fundamental distrust of their agent. I consider the "principal-agent problem" a subset of the "conflict of interest" concept. Is it accurate?

baw703916 wrote:The story of Michael Burress' hedge fund is an example of this. He was absolutely right about the real estate bubble, and found a good way to capitalize on its eventual collapse. But he was very nearly undone by a revolt of his investors before his approach became profitable. Eventually he decided that he should stick to investing his own money and not anybody else's, to avoid this issue.


Agree.
Furthermore, does not Burress' story contradict Valuethinker's assertion that any "interesting" strategies get arbitraged? (Burress' autism provided a distinct advantage in avoiding behavioral mistakes.)

baw703916 wrote:To be sure, there are a few ultra-high net worth individuals out there who are managing their own money--and have enough of it to move markets.


And again, when these wealthy, behaviorally-enlightened individuals move markets, do others arbitrage their strategies?

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Re: Only after a 150% stock market rally in 4 years...

Postby Valuethinker » Thu Mar 07, 2013 2:29 pm

VictoriaF wrote:Valuethinker,

Is your argument a variation of the Lucas critique, i.e., that once the public receives new information, the information itself is weakened by the reaction to it?

I see your point about "a *handful* of arbitrageurs driving stock values back to equilibrium" in the Glassman's case. Behavioral investing seems different though. Let us say that Brad has developed an algorithm that exploits the Prospect Theory. He creates a hedge fund "Brad's Prospects" and start investing based on his algorithm without telling anyone (even his investors) what the algorithm does. Can the market reverse-engineer Brad's algorithm by analyzing his trades? Would there be difference between Brad's Prospects trading individual stocks and broad-based ETFs?

Victoria


Sorry I missed this.

If Brad's hedge fund remains entirely secret in its approach (as Renaissance Technologies, a c. $20bn hedge fund based on speech recognition technologies, has) then it's possible the anomaly will continue-- not publicly known.

However as scale increases the chances of an outsider figuring out what you are doing increases, simply by observing what you do, and the movement of stock prices. Brokers would leak information about his trades, his positions would be SEC disclosable etc.

Also his market impact (when he buys he moves the price against himself) would start to eat up his alpha (ie his risk adjusted outperformance).

$100m he could make a lot of money. $1bn maybe. $100bn no.

Depending on what Brad's strategy is, stock trading would be very different v. ETFs. As ETFs can move to a discount or premium, increasing his market impact costs.

With Glassman, what Schlifer argues in a famous piece on inefficient markets, is that in a really big bubble the rational speculator, who has limits to his borrowing, is better to jump on the bubble and ride it up, than bet against it. Thus meaning that for bubbles like the dot com bubble or the US housing bubble, the market can get inefficiently misvalued, and efficient markets just don't work.

What worries me is we are all so sold on equities, and many equity investors are so leveraged up, that actually equities are really expensive right now and the 1999-2013 period has not corrected that. We are all sitting as unwilling participants in a giant hedge fund, and a margin call is past due.
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Re: Only after a 150% stock market rally in 4 years...

Postby cb474 » Fri Mar 08, 2013 10:08 pm

letsgobobby wrote:Is our message not getting across?

No our message is not getting across.

Even amongst friends and relativesl, I've discovered no one wants unsolicited investing advice. And if you don't know better, talking about unsystematic risk and systematic risk, and correlations, etc., just sounds like another get rich quick scheme.

I have learned to keep my mouth shut.

It's sad, but I don't think you can beat the Wall Street PR machine, couple with the general level of disinterest in the complexities of investing. It's like math, for most people. They hate thinking about it. And if you don't really understand for yourself the reasons behind boglehead investing styles, I think it's hard to really stick to it through all the ups and downs.
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Re: Only after a 150% stock market rally in 4 years...

Postby donaldfair71 » Mon Apr 08, 2013 9:05 pm

Valuethinker wrote:
Lethal wrote:I am 26 and really started getting into investing around March '09 when the DOW was near its bottom. Basically just dumped all the money I had saved up and put nearly all of my paychecks into investments since I viewed the market crash as a good opportunity. Worked out nicely for me. Was surprised to hear people I know that had a lot of cash but were scared to put money into the market. Missed a wonderful opportunity IMO and I nearly tripled my portfolio in the past 3-4 years.



Ahh my friend. In the next market crash, when your wealth is x one day, and say x -40% 12 months later... you wait. October 19th 1987. September 16th 2008 was good fun too-- there was that day when the Congress kicked out the TARP and the Dow cast its opinion poll by dropping 8%. A number of my friends who work in financial institutions realized their employers were technically bankrupt as of that day.

I wasn't investing in 1974, but that was another fun one, and part of a 14 year when the market went absolutely nowhere (before inflation). The UK market managed a -80%+ drop in 18 months, with no revolutions, no uprisings, no tanks in the street. Just an economic meltdown.

I managed to make a really serious commitment to my pension in March 08, after markets had fallen 'a lot'. I am still below book cost on that :wink: :wink: :?

I predict you will see more than one sickening lurch in your investment life.


I only experienced one of these in my lifetime (2008), but I remember back to that, just one year into my first job and only having like 8K in my 403b, and sometimes wish I knew as little now as I did then. Since then, I have (thanks to the stock market coming back and committing more each year as I got raises + fully funding my IRA beginning last year) increased that 8K many times over and I wonder if I could handle the crash well now. It isn't about the money amount difference, but my educational difference. Now, I actually understand the importance having money in your retirement accounts, how compounding is important, etc. Back then I was such a newbie that I got my statements, saw I was down 10%+ in the last quarter (even though it was "only" $800-1,000 lost, that was A LOT of money compared to my net worth just out of college!), and didn't even know/care what it meant. Just kept investing. I really think my indifference/ignorance would have led me to the same thought process even if I had 6 figures and lost 10% and I was halfway to retirement. That sounds dumb, and many of you say, "that's easy for you to say!", but I was so ignorant of the significance and the process that I wouldn't have known what the numbers represented anyway.

Now, thanks to the posters here (I've been lurking here for a few years), I actually understand the value of passive investing, how it works, and why having a nest egg is vital. However, since I pay more attention to the markets and being literate in investing, I'm not sure I could stomach a similar decline.

All that being said, I still carry a pretty aggressive 85/15 allocation, but I'm still 30+ years out from retiring.
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Re: Only after a 150% stock market rally in 4 years...

Postby letsgobobby » Fri May 03, 2013 5:46 pm

As of today, total TSM returns including dividends since the March 9 2009 low have been 159% (according to Morningstar). That is 25.6% annualized over the 4.166 years since the low.

That must be among the best four years in the stock market ever?
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Re: Only after a 150% stock market rally in 4 years...

Postby bayview » Sat May 04, 2013 12:14 am

The new folks don't have a course to stay yet. They're just suddenly realizing that maybe there's a point to saving for retirement after all (there's a lot of nihilism out there among people in their twenties; understandable IMO), and they get all revved up about investing, and they find the BH forums on a Google search and start madly posting without really realizing what they've stumbled across.

Most will leave without reading or learning anything, others will leave but will have BH philosophy niggling away at their minds until they're ready to hear and learn, and some will stay and find their course.
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Re: Only after a 150% stock market rally in 4 years...

Postby Random Musings » Sat May 04, 2013 7:31 am

letsgobobby wrote:As of today, total TSM returns including dividends since the March 9 2009 low have been 159% (according to Morningstar). That is 25.6% annualized over the 4.166 years since the low.

That must be among the best four years in the stock market ever?


One of the best in the U.S., during the roaring 20's, 33-36, 42-45, 49-52, 95-98 and 96-99 were also good four year stretches. For the longer 10, 15, 20, and 25 year periods, those cycles ending in 1999 were the best for the S&P 500. Since this index only goes back to 1926, we don't have a real four year cycle for the 500 [edit - in the 20's].

I bet if we cherry picked within those four year periods, we can find a handful better. Small caps, of course, will even have more favorable ramp up periods.

RM
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Re: Only after a 150% stock market rally in 4 years...

Postby AndroAsc » Sat May 04, 2013 7:46 am

Didn't realize there was such a strong rally... no wonder I'm sitting on a load of cash right now (using VA strategy and 7%/4% assumption for stock/bond returns)...

How can the stock market have risen so quickly? Employment situation still sucks out there, am I missing something?
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Re: Only after a 150% stock market rally in 4 years...

Postby Rick Ferri » Sat May 04, 2013 8:25 am

AndroAsc wrote:How can the stock market have risen so quickly? Employment situation still sucks out there, am I missing something?


Where do you want people to invest in to get the returns we need for retirement?

I ain't got nowhere else to go!

I ain't got nothin' else.

Semper Fi,
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Re: Only after a 150% stock market rally in 4 years...

Postby dmcmahon » Sat May 04, 2013 8:42 am

Shireman28 wrote:Perhaps we young investors know that US Treasuries at 2% aren't going to get us to retirement in real dollars in a country with a major aging demographic problem and long term debt issues.

I'll pass on loaning Uncle Sam money at 2%, thanks.


Amen bro - I don't think it's market timing to pass on an investment that promises a negative real return, especially one that locks such a return in for a protracted period of time.
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Re: Only after a 150% stock market rally in 4 years...

Postby Cut-Throat » Sat May 04, 2013 9:24 am

AndroAsc wrote:Didn't realize there was such a strong rally... no wonder I'm sitting on a load of cash right now (using VA strategy and 7%/4% assumption for stock/bond returns)...

How can the stock market have risen so quickly? Employment situation still sucks out there, am I missing something?


Corporations have record profits and they continue to produce without hiring anyone. They have also created a lot of jobs in China and India.
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Re: Only after a 150% stock market rally in 4 years...

Postby leo383 » Sat May 04, 2013 9:33 am

AndroAsc wrote:Didn't realize there was such a strong rally... no wonder I'm sitting on a load of cash right now (using VA strategy and 7%/4% assumption for stock/bond returns)...

How can the stock market have risen so quickly? Employment situation still sucks out there, am I missing something?


It's the old "wall of worry".

Plus, we have gone a long time without a really big piece of unexpected bad news. Waiting for a "Minsky Moment."
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