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 Valuethinker » Mon Feb 25, 2013 1:07 pm

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

Postby Scott S » Mon Feb 25, 2013 1:47 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 predict you will see more than one sickening lurch in your investment life.


Like Lethal, I "got in" in a big way around 2008/2009. We've made remarkable gains since then, and VT's post is worth considering. Now would be a good time to add some bonds to the portfolio, so that the next crash doesn't make you do irrational things. :wink:
My Plan: * Age-10 in bonds until I reach age 60, 50/50 thereafter. * Equity split: 50/50 US/Int'l, Bond split: 50/50 TBM/TIPS. * Everything over 2 months' expenses gets invested.
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Re: Only after a 150% stock market rally in 4 years...

Postby Valuethinker » Mon Feb 25, 2013 1:58 pm

Scott S wrote:
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 predict you will see more than one sickening lurch in your investment life.


Like Lethal, I "got in" in a big way around 2008/2009. We've made remarkable gains since then, and VT's post is worth considering. Now would be a good time to add some bonds to the portfolio, so that the next crash doesn't make you do irrational things. :wink:


Scott

It depends on age.

FWIW CDs are generally more attractive than bonds for investors, right now, subject to taxable location.

I would say this. Even in your 20s and early 30s

Do not overestimate your ability to hold your nerve in a bear market. Most of us have been there, and many of us have lost our nerve.

Age in bonds is no bad rule of thumb (or age in fixed income).
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Re: Only after a 150% stock market rally in 4 years...

Postby john94549 » Mon Feb 25, 2013 2:17 pm

These posts are starting to read like Class Notes.
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Re: Only after a 150% stock market rally in 4 years...

Postby EmergDoc » Tue Feb 26, 2013 6:19 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.


That's my issue. Right there. It isn't that I think a 90% stock portfolio is particularly wise. It's that I say to myself, "Self, what's the point of investing in something with a negative real return for the long term?" Might as well spend the "bond portion" of the portfolio now. :)
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
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Re: Only after a 150% stock market rally in 4 years...

Postby Shireman28 » Tue Feb 26, 2013 9:07 am

EmergDoc wrote:That's my issue. Right there. It isn't that I think a 90% stock portfolio is particularly wise. It's that I say to myself, "Self, what's the point of investing in something with a negative real return for the long term?" Might as well spend the "bond portion" of the portfolio now. :)


Thanks for the response Doc. I feel like I'm crazy some days.

Reminds me of Buffet's Mr. Market example. I'd don't want those 2% bonds Mr. Market, you crazy fool, get away from my door.

Yeah I'm 90/10 as well (bonds are just for the rebalancing bonus), instead of the 70/30 I'd like to be if interest rates were less stupid.

I use target retirement funds in my tax advantaged space and was able to hold during the 2008 crash, takes the emotion out of it and lets Vanguard do the hard rebalancing choices.

I've decided to take the bond portion I normally would be investing and aggressively pay down the mortgage. I will get bond-like income via a reduction of expenses when I get it paid off in a few years. Hopefully real estate will hold some kind of value in real terms moving forward.

Then I can buy bonds later when Mr. Market comes back offering them at 5% in a few years.
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Re: Only after a 150% stock market rally in 4 years...

Postby swaption » Tue Feb 26, 2013 10:42 am

EmergDoc wrote:
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.


That's my issue. Right there. It isn't that I think a 90% stock portfolio is particularly wise. It's that I say to myself, "Self, what's the point of investing in something with a negative real return for the long term?" Might as well spend the "bond portion" of the portfolio now. :)


I view my bond allocation as akin to insurance. I have no expectations that my annual contributions to my life insurance provider will be a positive investment, but I do it anyway. To some extent, I only view my 65% stock allocation as my portfolio, and the rest as insurance. My assessment is that the 65% will be enough so I can afford the stabilizing impact of bonds. I genuinely think people underestimate the sources of value in equties. Investors don't equate a 90% stock allocation with 90% of their money "at risk", but they should. If risk happens, the bond allocation keeps you in the game. If it doesn't, enough is invested to still win the game.
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Re: Only after a 150% stock market rally in 4 years...

Postby Cut-Throat » Tue Feb 26, 2013 10:45 am

Shireman28 wrote:Then I can buy bonds later when Mr. Market comes back offering them at 5% in a few years.


Don't hold your Breath.
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Re: Only after a 150% stock market rally in 4 years...

Postby hsv_climber » Tue Feb 26, 2013 10:53 am

Why do some of you talk like fixed income is the same as negative real return?

I-bonds ($10k / person, $20k / couple) - 0% real
EE-bonds ($10k / person, $20k / couple) - 3.5% nominal over 20 years
20+ year TIPS - positive real return. Recent 30 year auction: 0.6*% real return

Also:
Compass Bank 5+% up to ~$10k
Some debit cards 4+% up to $5k
PenFed CDs... Whatever they are right now.

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

Postby pingo » Tue Feb 26, 2013 11:25 am

swaption wrote:I view my bond allocation as akin to insurance.


I find myself viewing my portfolio through many different lenses (most of which are geared toward keeping me on course), and this is one of them: bonds are also a form of portfolio insurance.

swaption wrote:To some extent, I only view my 65% stock allocation as my portfolio...


Same here! Better said, I often remind myself that I hold 100% stocks in 75% of my portfolio. :D
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Re: Only after a 150% stock market rally in 4 years...

Postby Chan_va » Tue Feb 26, 2013 11:51 am

Shireman28 wrote:
Then I can buy bonds later when Mr. Market comes back offering them at 5% in a few years.


A. Unless you are buying actual bonds, why do you think you are locked into a 2% return now? If you buy a bond fund, you are reinvesting the income at higher rates if rates go up. And the bond fund buys new bonds at new rates as old ones mature

B. If you can believe you can time the bond market, why not do the same for the stock market?

Just remember that the bond market is much larger, much more sophisticated and much more mature than the stock market. And hence much more efficient too. All your concerns about the future may be valid, but they have been priced in.
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Re: Only after a 150% stock market rally in 4 years...

Postby Shireman28 » Tue Feb 26, 2013 12:17 pm

Chan_va wrote:
A. Unless you are buying actual bonds, why do you think you are locked into a 2% return now? If you buy a bond fund, you are reinvesting the income at higher rates if rates go up. And the bond fund buys new bonds at new rates as old ones mature

B. If you can believe you can time the bond market, why not do the same for the stock market?

Just remember that the bond market is much larger, much more sophisticated and much more mature than the stock market. And hence much more efficient too. All your concerns about the future may be valid, but they have been priced in.


In response to your very good points:

A: Total bond market yields 1.59% for 5.3 year duration. If I increase total bond market today or put new money into the fund, it would be like taking 1.59% for 5.3 years on that money. That is not attractive to me. I have an emergency fund for emergencies, don't need bonds for insurance. I'll hold some to get the free rebalancing bonus, but that's it.

B: I'm not trying to time it, but I don't think I'll reach my goals in 25+ years locking in 1.59% nominal for the next 5.3 years. Will TIPS at .6% real get young middle class families a good retirement? I would say no.

To me, this is really going to affect the long term growth and compounding of the young investor's portfolio. It's like giving up on that portion of the portfolio.

Has there ever been a period when bonds are this expensive where the investment turned out well in the past? Probably some period in the 1920's?

If they go to 0% interest will young investors still be buying with big chunks of retirement savings? Doesn't common sense kick in at some point?

I totally understand the other side of the argument, I just don't agree. Not trying to troll you guys or anything. I guess I'm blasphemous on this issue.
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Re: Only after a 150% stock market rally in 4 years...

Postby Scott S » Tue Feb 26, 2013 6:38 pm

Valuethinker wrote:
Scott S wrote:
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 predict you will see more than one sickening lurch in your investment life.

Like Lethal, I "got in" in a big way around 2008/2009. We've made remarkable gains since then, and VT's post is worth considering. Now would be a good time to add some bonds to the portfolio, so that the next crash doesn't make you do irrational things. :wink:

Scott

It depends on age.

FWIW CDs are generally more attractive than bonds for investors, right now, subject to taxable location.

I would say this. Even in your 20s and early 30s

Do not overestimate your ability to hold your nerve in a bear market. Most of us have been there, and many of us have lost our nerve.

Age in bonds is no bad rule of thumb (or age in fixed income).

Yeah, I was using "bonds" as shorthand for bonds, CDs, MM, other kinds of fixed income. :sharebeer I'm hoping that my current AA will be conservative enough to see me through the next bear market.
My Plan: * Age-10 in bonds until I reach age 60, 50/50 thereafter. * Equity split: 50/50 US/Int'l, Bond split: 50/50 TBM/TIPS. * Everything over 2 months' expenses gets invested.
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Re: Only after a 150% stock market rally in 4 years...

Postby Valuethinker » Wed Feb 27, 2013 5:49 am

Scott S wrote:
Valuethinker wrote:Age in bonds is no bad rule of thumb (or age in fixed income).

Yeah, I was using "bonds" as shorthand for bonds, CDs, MM, other kinds of fixed income. :sharebeer I'm hoping that my current AA will be conservative enough to see me through the next bear market.


I would not generally put Money Market Funds in 'fixed income'. They are cash substitutes.

Fixed income, to me, implies more than 1 year-- ie taking on interest rate risk. However with FDIC insured CDs right now, you are actually in a *better* position than you are with bonds, generally.
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Re: Only after a 150% stock market rally in 4 years...

Postby Default User BR » Wed Feb 27, 2013 2:40 pm

Valuethinker wrote:I would not generally put Money Market Funds in 'fixed income'. They are cash substitutes.

Fixed income, to me, implies more than 1 year-- ie taking on interest rate risk. However with FDIC insured CDs right now, you are actually in a *better* position than you are with bonds, generally.

I consider cash itself to be fixed income, let alone "cash substitutes".


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

Postby LFKB » Wed Feb 27, 2013 3:07 pm

Default User BR wrote:
LFKB wrote:The market may have returned 150% over the last four years but it has also returned approximately 0% over the last 13. I consider this a 13 year bear market rather than a four year bull market.

This is nonsense on two points. One, you very carefully selected the starting point exactly to include the first crash. There's no particularly good reason to start any period there other than you want to.

The second is that in total return the market has NOT returned 0% over that period. I suggest you review the actual numbers.

I personally don't believe in the "secular markets". They can, in my opinion, only be determined well after the fact, and contain no actionable information going forward. There's no way to tell whether there was a 13+ year bear market that started in 2000 and continues, or whether there was 9 year bear market that started then and ended in 2009, with the start of a bull market following, or if indeed 2000 and 2009 were just corrections in a very long term bull market (after all, neither lasted more than a few years).

I don't try to outguess the market.


Brian


I'm not trying to outguess the market. I recently invested a lot of money I had in cash for two reasons: 1) I've recently learned more about investing and indexing and 2) like I said in my previous post, valuations are reasonable and near historic averages. Neither of those are trying to "outguess the market" as you suggest. People on this board tend to try to spin everything into market timing even when it isn't.

I have seen Rick Ferri (I believe it was Rick, maybe Larry S though) and other knowledgeable posters say they think we've been in a 13 year bear market, but that is beside the point and not the reason I am now investing. I'm 26 and realize near term market returns are not of much importance to me. If anything, a decline would be beneficial to me as I am still accumulating significant $ in the markets.

I was just responding to the OP's point which is that everyone is jumping in because the market has returned well over the last four years. While on the other hand, you could say the market has returned poorly over the last 13 years. Like you said, it all depends on where you pick your starting point.
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Re: Only after a 150% stock market rally in 4 years...

Postby Scott S » Wed Feb 27, 2013 5:19 pm

Valuethinker wrote:
Scott S wrote:
Valuethinker wrote:Age in bonds is no bad rule of thumb (or age in fixed income).

Yeah, I was using "bonds" as shorthand for bonds, CDs, MM, other kinds of fixed income. :sharebeer I'm hoping that my current AA will be conservative enough to see me through the next bear market.


I would not generally put Money Market Funds in 'fixed income'. They are cash substitutes.

Fixed income, to me, implies more than 1 year-- ie taking on interest rate risk. However with FDIC insured CDs right now, you are actually in a *better* position than you are with bonds, generally.


I'll try again -- how about "things that aren't stocks or gold"? (IOW, don't most people include CDs, MMs, cash, etc in their "bond" allocation even if they aren't technically bonds?)
My Plan: * Age-10 in bonds until I reach age 60, 50/50 thereafter. * Equity split: 50/50 US/Int'l, Bond split: 50/50 TBM/TIPS. * Everything over 2 months' expenses gets invested.
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Re: Only after a 150% stock market rally in 4 years...

Postby Valuethinker » Wed Feb 27, 2013 6:00 pm

Scott S wrote:
Valuethinker wrote:
Scott S wrote:
Valuethinker wrote:Age in bonds is no bad rule of thumb (or age in fixed income).

Yeah, I was using "bonds" as shorthand for bonds, CDs, MM, other kinds of fixed income. :sharebeer I'm hoping that my current AA will be conservative enough to see me through the next bear market.


I would not generally put Money Market Funds in 'fixed income'. They are cash substitutes.

Fixed income, to me, implies more than 1 year-- ie taking on interest rate risk. However with FDIC insured CDs right now, you are actually in a *better* position than you are with bonds, generally.


I'll try again -- how about "things that aren't stocks or gold"? (IOW, don't most people include CDs, MMs, cash, etc in their "bond" allocation even if they aren't technically bonds?)


AFAIK a professional asset manager would not include cash and near cash (money market funds etc.) as 'fixed income'. OK that may be different for how people here do it, but I tend to take a dogmatically CFA line about such things.

As an individual investor, unless you have access to TIAA CRED RE account, then your choices are limited. REITs the index funds behave more like stocks than the underlying asset class. Just about anything else-- Swensen and Swedroe both take you through them-- it's difficult or impossible to get access to at reasonable cost.

But there's lots to do with stocks and bonds. There are inflation linked bonds. There are international stocks. Small cap value stocks (technically separate but the combined effect is so large that it's worth grabbing both). Emerging Markets. If you are into racy there are frontier markets.

In truth it's all 'bells and whistles' against stocks-bonds-cash. *that* split will determine your returns, pretty much, assuming you are using index funds.
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Re: Only after a 150% stock market rally in 4 years...

Postby Beanbone » Wed Feb 27, 2013 8:35 pm

Valuethinker wrote:
Scott S wrote:
Valuethinker wrote:
Scott S wrote:
Valuethinker wrote:Age in bonds is no bad rule of thumb (or age in fixed income).

Yeah, I was using "bonds" as shorthand for bonds, CDs, MM, other kinds of fixed income. :sharebeer I'm hoping that my current AA will be conservative enough to see me through the next bear market.


I would not generally put Money Market Funds in 'fixed income'. They are cash substitutes.

Fixed income, to me, implies more than 1 year-- ie taking on interest rate risk. However with FDIC insured CDs right now, you are actually in a *better* position than you are with bonds, generally.


I'll try again -- how about "things that aren't stocks or gold"? (IOW, don't most people include CDs, MMs, cash, etc in their "bond" allocation even if they aren't technically bonds?)


AFAIK a professional asset manager would not include cash and near cash (money market funds etc.) as 'fixed income'. OK that may be different for how people here do it, but I tend to take a dogmatically CFA line about such things.

As an individual investor, unless you have access to TIAA CRED RE account, then your choices are limited. REITs the index funds behave more like stocks than the underlying asset class. Just about anything else-- Swensen and Swedroe both take you through them-- it's difficult or impossible to get access to at reasonable cost.

But there's lots to do with stocks and bonds. There are inflation linked bonds. There are international stocks. Small cap value stocks (technically separate but the combined effect is so large that it's worth grabbing both). Emerging Markets. If you are into racy there are frontier markets.

In truth it's all 'bells and whistles' against stocks-bonds-cash. *that* split will determine your returns, pretty much, assuming you are using index funds.



Sorry to jump in hear but what is a TIAA CRED RE ? Do you mean the real estate fund that tiaa offers?
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Re: Only after a 150% stock market rally in 4 years...

Postby letsgobobby » Wed Feb 27, 2013 9:14 pm

LFKB wrote:
Default User BR wrote:
LFKB wrote:The market may have returned 150% over the last four years but it has also returned approximately 0% over the last 13. I consider this a 13 year bear market rather than a four year bull market.

This is nonsense on two points. One, you very carefully selected the starting point exactly to include the first crash. There's no particularly good reason to start any period there other than you want to.

The second is that in total return the market has NOT returned 0% over that period. I suggest you review the actual numbers.

I personally don't believe in the "secular markets". They can, in my opinion, only be determined well after the fact, and contain no actionable information going forward. There's no way to tell whether there was a 13+ year bear market that started in 2000 and continues, or whether there was 9 year bear market that started then and ended in 2009, with the start of a bull market following, or if indeed 2000 and 2009 were just corrections in a very long term bull market (after all, neither lasted more than a few years).

I don't try to outguess the market.


Brian


I'm not trying to outguess the market. I recently invested a lot of money I had in cash for two reasons: 1) I've recently learned more about investing and indexing and 2) like I said in my previous post, valuations are reasonable and near historic averages. Neither of those are trying to "outguess the market" as you suggest. People on this board tend to try to spin everything into market timing even when it isn't.

I have seen Rick Ferri (I believe it was Rick, maybe Larry S though) and other knowledgeable posters say they think we've been in a 13 year bear market, but that is beside the point and not the reason I am now investing. I'm 26 and realize near term market returns are not of much importance to me. If anything, a decline would be beneficial to me as I am still accumulating significant $ in the markets.

I was just responding to the OP's point which is that everyone is jumping in because the market has returned well over the last four years. While on the other hand, you could say the market has returned poorly over the last 13 years. Like you said, it all depends on where you pick your starting point.

Stocks had done even more poorly four years ago, but didn't see a lot of new investors dumping their life savings in the market then.

But obviously my post was a general observation, not applicable to every individual.
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Re: Only after a 150% stock market rally in 4 years...

Postby af895 » Wed Feb 27, 2013 9:53 pm

letsgobobby wrote:Do we seem to get an abundance of young, enthusiastic, successful but nonetheless untested new investors proposing shockingly aggressive asset allocations... The question I always ask is, "Why now?"...Is our message not getting across? Are these investors truly better late than never or is this something more dangerous?


I'm one of those (young?) enthusiastic (but not irrationally exuberant) untested investors so I'll field the questions.

I'm equity heavy because of the messages here and on Vanguard: risk and return as two sides of the same coin. (FWIW: I have a three way equity split, 1/3 of each Canadian, USA, EAFE)

Why now? Because I just started. If I'd started 10 years ago, knowing what I know now, I'd be in the same allocation. Timing is a red herring. I'm just allocating based on my personal risk tolerance.

I've been a contrarian at heart in every profession, sport, and hobby I've ever had and I feel the same way about money. It's discouraging to be lumped in with "everyone else," the people who panic sell when chips are down. "Temet nosce" - know theyself. I do.

I expect to get a lot of flack for that. C'est la vie.
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Re: Only after a 150% stock market rally in 4 years...

Postby letsgobobby » Wed Feb 27, 2013 11:39 pm

from me, you'll only get flak for the flack.
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Re: Only after a 150% stock market rally in 4 years...

Postby SurfCityBill » Thu Feb 28, 2013 12:19 am

Rick Ferri wrote:This is not a new phenomenon. There is evidence of new investors changing the valuation of the markets going back 100 years. It happened after the crash in 29, again after 1970s, and again today. It's a generational phenomena. See Major Investor Shifts from 1900 to 1999 starting on page 45 of Serious Money (free download) and particularly Figure 5-1 on page 47. BTW, the secular bear market started in 2000, not in 2007.

Rick Ferri


So what I gather from this is that new generations of inept investors will continue to cause the market to cycle to new highs for all the wrong reasons.

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

Postby Valuethinker » Thu Feb 28, 2013 6:53 am

Beanbone wrote:
Valuethinker wrote:As an individual investor, unless you have access to TIAA CRED [EDIT CREF] RE account, then your choices are limited. REITs the index funds behave more like stocks than the underlying asset class. Just about anything else-- Swensen and Swedroe both take you through them-- it's difficult or impossible to get access to at reasonable cost.

But there's lots to do with stocks and bonds. There are inflation linked bonds. There are international stocks. Small cap value stocks (technically separate but the combined effect is so large that it's worth grabbing both). Emerging Markets. If you are into racy there are frontier markets.

In truth it's all 'bells and whistles' against stocks-bonds-cash. *that* split will determine your returns, pretty much, assuming you are using index funds.



Sorry to jump in hear but what is a TIAA CRED RE ? Do you mean the real estate fund that tiaa offers?


Sorry yes. I believe technically it is the TIAA CREF (note typo) RE annuity.

Swensen takes you through it in some detail, and why investors should not invest in 'private label' RE Limited Partnerships. (I think if one googles 'REIT wrecks' one can enjoy the stories).

The TIAA fund (hotly discussed on the TIAA forum on Morningstar) is (for individual investors) a fairly unique way of getting access to the characteristics of commercial RE markets. We've discussed it a lot here, the pluses and minuses.

Generally I view it as blue chip and at a reasonable cost, and if you can live with the downsides of it, then it's not a bad place to put 5-10% of total invested wealth. More than 10% I get jumpy recommending any other asset classes but the classic ones (bonds, equities, cash).

Generally CRE should have higher returns than bonds, lower returns than stocks. Lower volatility than stocks (however REITs appear to have higher price volatility than the stock market as a whole-- a major issue with proxying CRE investment using a REIT fund). Greater correlation with inflation than stocks and greater protection from inflation than bonds. It is however quite vulnerable to financial crashes (doubly so: the biggest office markets in the world are London, New York etc, which are centres of the securities industry ie the blue chip tenants; in addition the value of buildings and the supply swings with the credit cycle-- when you are in a credit bubble, CRE will race up, when it busts, it will crash).

In a brilliant example of this process, Songbird (ie Canary Wharf, largest office district in Europe) insured its tenants (including Lehman Brothers) for default on their rent. Their insurer of choice?.... AIG ;-). Talk about correlation of underlying risks, 'in a crisis, correlation goes to 1.0' ;-).

One must understand CRE is long cycle-- typically there is a horrendous bust every 15 years or so. In Japan, that bust went on for 20 years. If you look at places like New England or Toronto, which crashed in the early 90s, CRE didn't really pick up again until the 2000s I don't think. Buildings built in Calgary in 1980 during that oil boom were still empty in 1990. Once built, surplus buildings sit on the market a *long* time, hitting values and rents for everyone.

That's why I think one has to not go above 10%. There's the fund manager risk, that TIAA eventually mucks it up (not so far, good track record), and there's the risk that one is just stuck in a deflationary down cycle on CRE.

Why CRE shows that pattern is nicely explained in a book by Jon Sterman about Systems Dynamics Modelling (a rather massive textbook, but there are couple of pages in there). It has to do with forecast errors and the lags between demand for office or retail space, and its eventual construction. Commercial property has been boom and bust for probably all of modern history.

In fact there is an architectural history of the skyscraper called 'Form follows Finance' which is fascinating. The world's then tallest buildings usually top out at the point of the bust, or just after-- Empire State was 1934 I think, and was not fully occupied until the WW2 boom. WTC was only saved from insolvency in the mid 70s when the landowner, the Port Authority, moved its offices in there.
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Re: Only after a 150% stock market rally in 4 years...

Postby JW Nearly Retired » Thu Feb 28, 2013 10:00 am

swaption wrote:
kenschmidt wrote:Being a regular poster back on the old Morningstar Diehards board, I can say that it was exactly like this back in 1999-2000 as well. Not that this will turn out the same (it could), but there were lots of "who needs bonds", "should I dump my value funds and buy Janus Twenty", etc. posts. I think it is just human nature to chase performance.


It is worth noting that Greenspan coined the phrase "Irrational Exuberance" on December 5, 1996.

I'm not sure exactly what you are getting at.......... but it's also worth noting that VG total stock market has a total return of 285% since December 5, 1996. So even those exuberant irrational performance chasers haven't done all that bad, providing they subbornly stayed in equities. More balanced funds like Wellesley and Wellington did slightly better (about 350%) but bonds were earning something so who knows from here on.
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Re: Only after a 150% stock market rally in 4 years...

Postby letsgobobby » Thu Feb 28, 2013 12:23 pm

JW Nearly Retired wrote:
swaption wrote:
kenschmidt wrote:Being a regular poster back on the old Morningstar Diehards board, I can say that it was exactly like this back in 1999-2000 as well. Not that this will turn out the same (it could), but there were lots of "who needs bonds", "should I dump my value funds and buy Janus Twenty", etc. posts. I think it is just human nature to chase performance.


It is worth noting that Greenspan coined the phrase "Irrational Exuberance" on December 5, 1996.

I'm not sure exactly what you are getting at.......... but it's also worth noting that VG total stock market has a total return of 285% since December 5, 1996. So even those exuberant irrational performance chasers haven't done all that bad, providing they subbornly stayed in equities. More balanced funds like Wellesley and Wellington did slightly better (about 350%) but bonds were earning something so who knows from here on.
JW

Are you sure that isn't a total return of 185%?
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Re: Only after a 150% stock market rally in 4 years...

Postby intendedeffect » Thu Feb 28, 2013 3:05 pm

I'm not sure if this will make the OP feel better or not, but I'm also new to the forum, I'm 31, and I wish I knew how these 26 year-olds were ending up with mid-six-figure portfolios! I came here because I had my low-mid five-figure portfolio invested in one rollover IRA and one 401k, both in target retirement date funds (at 0.78 and 1.46 er, respectively). I did contributed at a decent rate in my early 20s, but both my wife and I spent 2008-2011 in the job wilderness, retraining for a new field (in her case) or trying to start an ultimately unsuccessful business (in mine). I managed to ignore the carnage being wrought on my portfolio, but I didn't continue contributing, so I'm not too far ahead of par right now. Anyway, I just started reading this forum (and your absolutely fantastic wiki) because I'm due to become a father in September, which has given me a jolt of "time to be an adult" energy for things like this. FWIW, we're at 24/37/37 right now bonds/domestic/international, so I don't think we're irrationally chasing recent performance.

Now it's only fair that, if you can analyze us newcomers, you oldsters come in for some interpretation, too. When I first got here, I couldn't understand how everyone could spend so much time offering thoughtful advice to all of us financial castaways who drift in here; I mean, you're clearly all very generous people with a great interest in investing who want to help others, but still. Since first poking around here, though, I've caught the bug myself, and I think I realize part of what drives this forum: everyone here loves thinking about investing, about finding just the right AA, and about strategizing the best way to get market returns while minimizing expenses and taxes, but everyone here is also cursed to be an adherent of a philosophy that considers Stay the Course a commandment. So if you know you shouldn't be mucking around with your own portfolio, but you also love thinking about the best way to plan for retirement, your best bet might just be helping the guy who wanders in asking if his whole life insurance policy and Magellan shares are a good idea. A nice way to use all that investing knowledge while earning a healthy karmic dividend! Anyway, please take this as a heartfelt "thank you" from one of those castaways :)
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Re: Only after a 150% stock market rally in 4 years...

Postby BBL » Thu Feb 28, 2013 6:43 pm

Now it's only fair that, if you can analyze us newcomers, you oldsters come in for some interpretation, too. When I first got here, I couldn't understand how everyone could spend so much time offering thoughtful advice to all of us financial castaways who drift in here


Welcome, intended. Please keep reading and learning - someone has to think about this stuff from a fresh, young perspective and take the baton in the future. I think you just self-nominated. Thanks. :beer
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Re: Only after a 150% stock market rally in 4 years...

Postby mrspremise » Thu Feb 28, 2013 11:55 pm

Another relatively newcomer here, and fairly young at 31. I'm not completely new to investing exactly, in that I've been maxing out my 401k since I started work in a fairly aggressive AA (even through the crash). I am hitting the forum now not because stock are doing well but because I've just hit the point in my life where I have realized I still have extra money and need to do something intelligent with it. The timing is purely coincidental- we have paid off all student loans, bought a new car (cash), paid 20% down for a house, then more to bring the mortgage to a 15 year loan with the same payment. A year or so after that, with a few years of raises under out belts, we suddenly realized we had upper 5 figures siting in the bank (and at an abysmally low rate- we were earning <$10 a year!) and very low 6 figures in company stock from the DSPP plan. This combined with having a baby made me get serious about making good choices. It just happened to be after the market was mostly recovered, but I certainly wish it had been 2008 (which happened to be right after we bought our house of course)! As far as the asset allocation, while we're not leveraging or going all equities, we're still pretty aggressive (ideally 20% bonds, though our DSPP kind of throws that off a bit). It's not so much that we're in love with equities but that bonds are so low right now. Since our time horizon is long and our crash tolerance (as tested in the last one) seems pretty solid right now, age-10 seems more appropriate.
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Re: Only after a 150% stock market rally in 4 years...

Postby JW Nearly Retired » Fri Mar 01, 2013 9:06 am

letsgobobby wrote:
JW Nearly Retired wrote: I'm not sure exactly what you are getting at.......... but it's also worth noting that VG total stock market has a total return of 285% since December 5, 1996. So even those exuberant irrational performance chasers haven't done all that bad, providing they subbornly stayed in equities. More balanced funds like Wellesley and Wellington did slightly better (about 350%) but bonds were earning something so who knows from here on.
JW

Are you sure that isn't a total return of 185%?

You are correct, it's a 185% increase. I should have said $10k grows to $28.5k to make it clear.
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Re: Only after a 150% stock market rally in 4 years...

Postby SunDevil » Fri Mar 01, 2013 11:31 am

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.



I think portfolio value makes a huge difference in this discussion. I have to remind myself of this because sometimes I am tempted to look back at 08/09 and feel like I am very risk-tolerant. At that time, I was also looking at stock valuations and pouring in every spare cent that I had. But then I remember... I only had 20k at stake and even a portfolio wipeout would not have impacted my life in a meaningful way. I was in grad school with a great job outlook and the recession just meant stock market opportunity.

With a mid 6 or 7-figure portfolio, a 10% dip = a much nicer car than I have now. A 50% collapse = the price of a house evaporated into thin air. That's painful.

Even if you're confident that you will hold equities and even rebalance through an economic collapse, the reality is that may be impossible. That is when jobs will be least secure and you are likely to NEED those savings.

I'm really just trying to remind myself of this... even if you're young, a 90/10 allocation is going to feel much different depending on how much skin you have in the game.
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Re: Only after a 150% stock market rally in 4 years...

Postby Dandy » Fri Mar 01, 2013 11:56 am

my thoughts pretty much. There is nothing like success to get people too excited. Add to the fact that yields are so low and bonds are a bit risky and you have lots of push toward equities. Unfortunately, we also see the demise of private pensions, concerns about Social Secuity and evaporating 401k matches by employers and the normal media hype. You probably need to be a bit more aggressive if you are young than you did before. It also seems that new investors get enthusiatic about getting invested and tend to jump in with both feet.

The above is why I dislike that VGs lateTarget Date funds are so aggressive. It is usually young, inexperienced investors that will choose them and many may not be fully aware of the pros and cons.
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Re: Only after a 150% stock market rally in 4 years...

Postby nisiprius » Fri Mar 01, 2013 12:07 pm

Think of the 2008-2009 decline in terms of number of years' savings. I found that that's how my wife and I were thinking of it while it was happening. Before a crash, you say, hey, a total portfolio decline of 20%, 25%, 30%... sure, I can hack that, a lost of 1/4, not so bad. During the crash you say "How long did it take us to save that up? How many years? Patient savings, voluntarily reduced take-home pay, scrimped vacations... built up slowly over years, shot to hell in months.

2008-2009 are a little dangerous, too, because we know how the story came out. Don't take it as a model for "what crashes are like." It's just what the 2008-9 crash was like. Ignore all the silly charts that superimpose crashes and talk about the "average bear market." Happy stock markets are all alike, every crash crashes in its own way. The next crash will not be a replay of 1987 or 2008-9 or 1929. It may be V-shaped, L-shaped, W-shaped, ௹-shaped, שּׁ-shaped, or ☲-shaped.

P. S. I notice that investor "risk tolerance" questionnaires are always stated in percentages, never in terms of years of savings lost. And I notice that they are always framed in such a way that the percentage is much less than 50%. Vanguard's: "2. "From September 2008 through November 2008, stocks lost over 31%. If I owned a stock investment that lost about 31% in 3 months, I would..."

How about, "From August 1929 through November 1932, stocks lost over 75%. If I owned a stock investment that lost over 75% in 3 years, I would..."

The unwritten rules of the game say that if you are claiming that stocks are good long-term investments, you're allowed to look back to 1926. But if you are thinking about the possibility of catastrophic risk, the rules are that 1929-1932 shouldn't count.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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Re: Only after a 150% stock market rally in 4 years...

Postby EDN » Fri Mar 01, 2013 12:41 pm

nisiprius wrote:Think of the 2008-2009 decline in terms of number of years' savings. I found that that's how my wife and I were thinking of it while it was happening. Before a crash, you say, hey, a total portfolio decline of 20%, 25%, 30%... sure, I can hack that, a lost of 1/4, not so bad. During the crash you say "How long did it take us to save that up? How many years? Patient savings, voluntarily reduced take-home pay, scrimped vacations... built up slowly over years, shot to hell in months.

2008-2009 are a little dangerous, too, because we know how the story came out. Don't take it as a model for "what crashes are like." It's just what the 2008-9 crash was like. Ignore all the silly charts that superimpose crashes and talk about the "average bear market." Happy stock markets are all alike, every crash crashes in its own way. The next crash will not be a replay of 1987 or 2008-9 or 1929. It may be V-shaped, L-shaped, W-shaped, ௹-shaped, שּׁ-shaped, or ☲-shaped.

P. S. I notice that investor "risk tolerance" questionnaires are always stated in percentages, never in terms of years of savings lost. And I notice that they are always framed in such a way that the percentage is much less than 50%. Vanguard's: "2. "From September 2008 through November 2008, stocks lost over 31%. If I owned a stock investment that lost about 31% in 3 months, I would..."

How about, "From August 1929 through November 1932, stocks lost over 75%. If I owned a stock investment that lost over 75% in 3 years, I would..."

The unwritten rules of the game say that if you are claiming that stocks are good long-term investments, you're allowed to look back to 1926. But if you are thinking about the possibility of catastrophic risk, the rules are that 1929-1932 shouldn't count.


Quite honestly, I think that is a terrible way to view stock declines. Why intentionally try to make them seem worse and more painful/tragic than they already are? Have you done the same thing reciprocally as the market has come all the way back and balanced portfolios are now well above their old highs--calculate how much in annual savings you have earned? How about calculating how much in annual savings your portfolio has generated over the last decade, as US large stocks have compounded at 8% per year, large value close to 10%, and small value over 13%. Int'l has been even better, and value stocks in emerging markets have compounded at over 20% per year. A 60/40 has come in around 10.5% per year.

For fun, lets do this math: you had $1M 10 years ago (3/2003), at the 60/40 you have over $2.7M today ignoring taxes, withdrawals, etc. If you had been a super-saver and put away an average of about $50K per year -- the growth on your portfolio represented 34 years of hard earned savings, or an entire lifetime! What a fabulous outcome that, yes, required you see your stocks fall about 60% from 2007-2009 (and your 60/40 about -30%). But you needed not wallow in despair, or spend every waking hour wondering "what if it never comes back or everything goes to 0". For short-term needs you had plenty of fixed income (the right kind continued to produce gains right through the decline), and you had plenty of historical perspective to believe that a globally diversified portfolio would come back...as it always has, and as it did again. If it didn't, well, we were all screwed and it didn't much matter.

Looked at another way, 2007-2009 was the decline necessary to tag stocks with the fair amount of risk that enabled them to earn a return commensurate with a lifetime worth of savings in just 10 years!

No, there are no unwritten rules, just those each of us choose to follow. Mine are: markets work, risk and return are related and we have a compelling reason to expect to earn a reward commensurate with our risk at all times so that the only thing that separates one investor from the next historically, today, and in the future is investment philosophy (active or passive), portfolio structure (your asset allocation), and your ability to stay with your plan (which is made more difficult by rubbing your own nose in painful by likely-temporary declines).

Be positive, it's a better way to live life.

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

Postby Valuethinker » Fri Mar 01, 2013 1:19 pm

EDN wrote:
nisiprius wrote:Think of the 2008-2009 decline in terms of number of years' savings. I found that that's how my wife and I were thinking of it while it was happening. Before a crash, you say, hey, a total portfolio decline of 20%, 25%, 30%... sure, I can hack that, a lost of 1/4, not so bad. During the crash you say "How long did it take us to save that up? How many years? Patient savings, voluntarily reduced take-home pay, scrimped vacations... built up slowly over years, shot to hell in months.

2008-2009 are a little dangerous, too, because we know how the story came out. Don't take it as a model for "what crashes are like." It's just what the 2008-9 crash was like. Ignore all the silly charts that superimpose crashes and talk about the "average bear market." Happy stock markets are all alike, every crash crashes in its own way. The next crash will not be a replay of 1987 or 2008-9 or 1929. It may be V-shaped, L-shaped, W-shaped, ௹-shaped, שּׁ-shaped, or ☲-shaped.

P. S. I notice that investor "risk tolerance" questionnaires are always stated in percentages, never in terms of years of savings lost. And I notice that they are always framed in such a way that the percentage is much less than 50%. Vanguard's: "2. "From September 2008 through November 2008, stocks lost over 31%. If I owned a stock investment that lost about 31% in 3 months, I would..."

How about, "From August 1929 through November 1932, stocks lost over 75%. If I owned a stock investment that lost over 75% in 3 years, I would..."

The unwritten rules of the game say that if you are claiming that stocks are good long-term investments, you're allowed to look back to 1926. But if you are thinking about the possibility of catastrophic risk, the rules are that 1929-1932 shouldn't count.


Quite honestly, I think that is a terrible way to view stock declines. Why intentionally try to make them seem worse and more painful/tragic than they already are? Have you done the same thing reciprocally as the market has come all the way back and balanced portfolios are now well above their old highs--calculate how much in annual savings you have earned? How about calculating how much in annual savings your portfolio has generated over the last decade, as US large stocks have compounded at 8% per year, large value close to 10%, and small value over 13%. Int'l has been even better, and value stocks in emerging markets have compounded at over 20% per year. A 60/40 has come in around 10.5% per year.


Cherrypicking. That's from the bottom of the dot com crash, 10 years is.

The knowledge that recovery took place doesn't really help us. Stock returns are fractal. We could have been investing in any number of the world's largest stockmarkets in 1910 (Berlin, Buenos Aires, Cairo, Vienna, Budapest, Shanghai, St. Petersburg etc.) and things didn't turn out too well in the next 100 years-- we went to zero somewhere in there.

For fun, lets do this math: you had $1M 10 years ago (3/2003), at the 60/40 you have over $2.7M today ignoring taxes, withdrawals, etc. If you had been a super-saver and put away an average of about $50K per year --


What Nisi is cautioning you about is a mental frame that says 'recovery always comes quickly'. In 20 years it hasn't in Japan-- down 60%+ from the peak.

If you adopt the 'optimistic' mental frame you'll wind up with 100% equities-- not a good place to be if you get caught in 1929-1932.

You are assuming that somehow our wisdom has guided us to 60/40, without us having the underlying wisdom that steers us towards 'high' bond weightings (as Zvi Bodie points out, the rational investor would be 90%+ in TIPS bonds).

Looked at another way, 2007-2009 was the decline necessary to tag stocks with the fair amount of risk that enabled them to earn a return commensurate with a lifetime worth of savings in just 10 years!


Again life doesn't look so good if we take that from say January 2000.

No, there are no unwritten rules, just those each of us choose to follow. Mine are: markets work, risk and return are related and we have a compelling reason to expect to earn a reward commensurate with our risk


Not unfortunately if we have finite investing lives. As has been pointed out on this forum many times by many mathematically adept people, if you look at the stock returns graph, it looks fractal, ie you cannot tell what the time scale is from looking at the pattern.

Equities can produce long periods of lousy returns. Under no way are stocks cheap by the standards of say 1910. The world cannot rediscover the cult of equities.

In addition our data besides being thin (no more than 5 independent 30 year periods) suffers from survivor bias. We don't look at that Budapest based investor in 1910, we use a US based one.

Dimson and Marsh get this right in 'Triumph of the Optimists'. The 20th century was the all time great century for stocks, because their merits were not fully recognized. Unless we get a rerun of the 1929 thing, then the 21st century is unlikely to be as great for stocks (good news: at 3% real return, over the century, stocks will do 19.1x -- so your grandchildren will be quite well off ;-)).

at all times so that the only thing that separates one investor from the next historically, today, and in the future is investment philosophy (active or passive), portfolio structure (your asset allocation), and your ability to stay with your plan (which is made more difficult by rubbing your own nose in painful by likely-temporary declines).


Rather the opposite. An awareness of how bad it *can* get prepares you to stay the course.

You might call that a very 'British' worldview than an 'American' one, but I'll stick by it. My father survived the Blitz in London, when the suicide bombers hit on 7/7/05, he was very good about it all, about getting through it we had some really good talks-- they blew up a Tube train I took *every* day to work. I walk by the monument in that square most days-- peoples' bodies in the trees when the last bomber detonated himself on the top deck. A certain British phlegmaticism about how bad life can get often stereotyped as 'stiff upper lip' turned out to be very useful.

Be positive, it's a better way to live life.

Eric


Better not to be unrealistically positive.

Long run stocks should throw out +3% real returns say on a 30 year view. If you plan your finances around that *and* know just how bad stocks got in the 20th century, then you're in good shape.

Note that in the UK in the 1972-74 period, total return basis, stocks fell by around 80% in real terms. That's with no wars, no revolutions, not a heck of a lot of civil unrest. Just a developed economy, the first industrial nation, hitting the safety barriers. You didn't make your money back, despite Mrs. Thatcher et al, until the early 80s.
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Re: Only after a 150% stock market rally in 4 years...

Postby letsgobobby » Fri Mar 01, 2013 1:39 pm

ValueThinker - that was a great post. Really hit the nails on the head. :sharebeer
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Re: Only after a 150% stock market rally in 4 years...

Postby EDN » Fri Mar 01, 2013 3:03 pm

Valuethinker, we see things quite differently. I'm cautiously optimistic and realistic, you are pessimistic. That's OK. More specifically:

Valuethinker wrote:
Cherrypicking. That's from the bottom of the dot com crash, 10 years is.

The knowledge that recovery took place doesn't really help us. Stock returns are fractal. We could have been investing in any number of the world's largest stockmarkets in 1910 (Berlin, Buenos Aires, Cairo, Vienna, Budapest, Shanghai, St. Petersburg etc.) and things didn't turn out too well in the next 100 years-- we went to zero somewhere in there.

Not cherry-picking...ITS THE LAST 10 years! It also included the 2nd worst decline in the US for the last 9 decades. But let's not cherry-pick, lets look at a US 60/40 (equities are S&P 500, large value, and small value) from the start of the Great Depression through the end of the Tech Bubble (1929-2002)...a 9.9% return. So it doesn't appear like the last decade was anything exceptional.

And why would we put 100% of our money in one stock market? Not good advice, although these cherry-picked examples do help validate a pessimistic view. The reality is, since 1900, including markets that went to 0%, the WORLD equity portfolio earned 5.5% REAL, not even 1% less than the US.


_________________________________

What Nisi is cautioning you about is a mental frame that says 'recovery always comes quickly'. In 20 years it hasn't in Japan-- down 60%+ from the peak.

If you adopt the 'optimistic' mental frame you'll wind up with 100% equities-- not a good place to be if you get caught in 1929-1932.

You are assuming that somehow our wisdom has guided us to 60/40, without us having the underlying wisdom that steers us towards 'high' bond weightings (as Zvi Bodie points out, the rational investor would be 90%+ in TIPS bonds).

No, this isn't right at all. Nisi and you are applying some sort of abstract about recoveries. All we know is when prices fall, expected returns rise and we should expect to be compensated for the risk we take. Again, markets work. Not 1 stock, not one sector, not one market. Global markets. That these higher expected returns have led to recoveries happening quicker than many expect in the trough of a decline simply speaks to an unfamiliarity with the inverse nature of prices and expected returns, and maybe compounding as well.

If you are optimistic, you will simply assume markets will continue to fairly reward us for the risk we take. Nothing more, nothing less. That it has always been the case on a global scale is something the pessimists want to dismiss, but it doesn't make it disappear. An optimistic frame of mind doesn't take us to any particular allocation, just the one that provides us with a necessary expected real return to fit our objectives. 100% stock is fine for younger investors or anyone else that is OK with the tradeoffs. 60/40 is an excellent "middle ground". Bodie's 100% TIPS? An idea that has curried favor with the irrationally risk averse and those especially susceptible to recency bias.


__________________________________

Again life doesn't look so good if we take that from say January 2000.

Life looks fine so long as we weren't 100% US LG stocks. The same 60/40 I originally mentioned earned over 8% per year, and 6% real. Pretty good, eh? Pay's to be optimistic, and diversified.

___________________________________

Not unfortunately if we have finite investing lives. As has been pointed out on this forum many times by many mathematically adept people, if you look at the stock returns graph, it looks fractal, ie you cannot tell what the time scale is from looking at the pattern.

Equities can produce long periods of lousy returns. Under no way are stocks cheap by the standards of say 1910. The world cannot rediscover the cult of equities.

In addition our data besides being thin (no more than 5 independent 30 year periods) suffers from survivor bias. We don't look at that Budapest based investor in 1910, we use a US based one.

Dimson and Marsh get this right in 'Triumph of the Optimists'. The 20th century was the all time great century for stocks, because their merits were not fully recognized. Unless we get a rerun of the 1929 thing, then the 21st century is unlikely to be as great for stocks (good news: at 3% real return, over the century, stocks will do 19.1x -- so your grandchildren will be quite well off ;-)).

Sure, equities can do poorly, balanced portfolios certainly help to narrow the odds, and the alternatives are much, much worse. Are stocks cheap? I'll leave that to the active managers and hedge fund guys to debate. I know based on BtM ratios that US equities have exactly the same valuations (large and small, growth blend and value) as the average of the last 40 years (and its been a good 40 year period). That's not a popular view amongst the pessimists, but it's an accurate one.

Finally, we don't need 500 years of statistical proof of anything, this is where well documented financial theory comes in: markets work, risk and return are related, cost of capital is an investor's expected return, etc.

_________________________________

Rather the opposite. An awareness of how bad it *can* get prepares you to stay the course.

You might call that a very 'British' worldview than an 'American' one, but I'll stick by it. My father survived the Blitz in London, when the suicide bombers hit on 7/7/05, he was very good about it all, about getting through it we had some really good talks-- they blew up a Tube train I took *every* day to work. I walk by the monument in that square most days-- peoples' bodies in the trees when the last bomber detonated himself on the top deck. A certain British phlegmaticism about how bad life can get often stereotyped as 'stiff upper lip' turned out to be very useful.

Not quite. Appreciating the risks is one thing, wallowing in them to the point where you are disproportionately in bonds and taking massive purchasing power risks is something else altogether. I won't try to speak to personal stories or the significant issues with the representativeness heuristic, only to say that things seem to have gone according to script in the UK?

1956-2012
UK LG = +9.5%
UK LV = +14.2%
UK SG = +11.8%
UK SV = +17.6%

Those patterns look eerily familiar (stocks have handsome returns, small beats large, value beats growth, etc.), and the magnitude of those returns make us poor Yanks jealous!


_____________________________________

Better not to be unrealistically positive.

Long run stocks should throw out +3% real returns say on a 30 year view. If you plan your finances around that *and* know just how bad stocks got in the 20th century, then you're in good shape.

Note that in the UK in the 1972-74 period, total return basis, stocks fell by around 80% in real terms. That's with no wars, no revolutions, not a heck of a lot of civil unrest. Just a developed economy, the first industrial nation, hitting the safety barriers. You didn't make your money back, despite Mrs. Thatcher et al, until the early 80s.


OK, so stocks are going to do +/- 50% worse in real terms than they did from 1900-2012. Got it. I assume we should also ignore any size premium, any value premium, any observation that Int'l valuations are in the single digits, balanced portfolios have historically earned 0.5% or more than the asset weighted returns due to the diversification benefit, etc. You can plan on that result, I'll expect something just a tad bit more rosy while accepting it could happen and I'll be prepared.

Finally, I note a tendency in your (and other) comments: historical results (or our impression of those results) are worthy of consideration when they confirm our pessimistic orientation. Any counter evidence that would challenge that notion is biased or associated with a cult or simply should be ignored. Well, I'll continue to absorb all history and weight it equally, you can focus in on this country or that one or this period or that while writing off anything that doesn't confirm your view.

In that sense, you can probably ignore this actual UK stock return data (in US $) as well, for it too doesn't jive with your comments:

1956-1972
FTSE = +519%
UK LV = +1673%
UK SV = +3693%

So we see a period of almost 20 years where UK stocks earn stratospheric returns, and then, a bear market:

1973-1974
FTSE = -65%
UK LV = -56%
UK SV = -54%

OK, it happens. 50% to 60% is no panacea, but part of the price of admission. Do UK stocks ever come back? Uh, yeah...

1975-1980
FTSE = +534%
UK LV = +567%
UK SV = +716%

But we keep hearing 73-74 in the UK was a tail event, or black swan, or some example that disproves the rule or should shake us from our perch of cautious optimism about stocks. What were the annualized returns starting with the decline through to the first few years of recovery?

1973-1980 Annualized
FTSE = +10.3%
UK LV = +15.6%
UK SV = +18.0%

Hey, that wasn't supposed to happen! What about Buenos Aires, I swear we were headed that way! :P


Look, I spend this amount of time providing a counter opinion and clarifying the long-term history in some cases where its been misrepresented only to try and squeeze some sort of optimism out of a pretty pessimistic bunch. I don't have anything else to add, I'll let the perspective stand for itself.

Good luck!

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

Postby swaption » Fri Mar 01, 2013 4:53 pm

I think I said this earlier in the thread, but my personal opinion is to view money in equity as "at risk". Nothing about history, optimism, pesimism, or expected returns is going to change that. To me, at risk means no assurances of return of capital. People with real wealth often understand that. People that want real wealth often don't. Go figure.
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Re: Only after a 150% stock market rally in 4 years...

Postby hsv_climber » Fri Mar 01, 2013 4:54 pm

EDN, you are cherry-picking data. Valuethinker post is correct.

Lets take a look at FTSE Dec.31, 1972 to Jan.1, 1980

12/31/1972 -> FTSE index value 218.8
01/01/1980 -> FTSE index value 229.79

Source: http://www.finfacts.com/Private/curency ... rmance.htm

In other words, <1% nominal return + dividends between 1972 and 1980.
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Re: Only after a 150% stock market rally in 4 years...

Postby midareff » Fri Mar 01, 2013 6:09 pm

Bobby... maybe I've just gone stupid, or overly sensitive after being an investor for 35 years or so BUT... here we are on March 1, 2013 looking at bond returns that are plain frighteningly scarce..... in many cases under the inflation rate for a negative real. A market of equities that seems overly inflated by any measure, after the current and still on-going run up. The Fed seems to be threatening almost everything from Tax-Exempts to SS to IRS rates to ??

I looked for a hole to crawl into but it wasd full of annual percentage advisors..... LOL although really not so funny! :oops:
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Re: Only after a 150% stock market rally in 4 years...

Postby Valuethinker » Sat Mar 02, 2013 11:22 am

hsv_climber wrote:EDN, you are cherry-picking data. Valuethinker post is correct.

Lets take a look at FTSE Dec.31, 1972 to Jan.1, 1980

12/31/1972 -> FTSE index value 218.8
01/01/1980 -> FTSE index value 229.79

Source: http://www.finfacts.com/Private/curency ... rmance.htm

In other words, <1% nominal return + dividends between 1972 and 1980.


It was actually a lot worse than that.

Tax rates were around 80% on dividend income (depending). I don't remember when capital gains were indexed to inflation, but if you made the mistake of dying during that period, your heirs paid full death duties on the inflated nominal value.

AND you have over 20% inflation a couple of those years.

So your real return over the whole 1970s was pretty soggy (Barclays Equity Gilt, equities, 100% gross income reinvested) : 0.4% real return. Before you paid taxes (there were a lot less tax shelters then).

The point about the UK in the 70s was that it had none of the classic examples of 'equity drops to zero' ie wars, revolutions etc. It was just a bad time in the UK political economy. This was a country with a stock market as old as the US (older?), developed and functioning institutions, strong rule of law and protection of private property etc. etc.

And that's a general point about equities. Yes in the long run they *should* do better than bonds, but there's no free lunch. Those higher returns come from their higher risk/ volatility.

And most of us don't have a 100 year time horizon. We'll be lucky to get 30 in. That's quite important in thinking about asset allocation-- because we don't have many 30 year periods to guide us, not ones that are truly statistically independent.

It's arguable that, ex ante, the world in 1900 didn't know what equities would do in the 20th century. As long as we remember that places like the US and Australia were the winners-- there's huge survivor bias in those numbers, as an investor in 1910 Hungary, Austria, Russia, Germany, Egypt or Argentina could have told you.

We can't have that kind of rerating of equities again. Equities can't go from say 0.8 times book to say 2.0 times now, then to 4.0 times. Indeed the more bullish you get about technology the less that's true (technology tends to destroy incumbent companies and monopolies, and so is bad for shareholders. A slow moving industry like tobacco is a much better play for investors than a fast moving one like tech).

Of course their are frontier markets. But the governance issues are horrendous-- easy to make money and have it stolen by the insiders or the government (or in cahoots). See Russia. But if anyone is going to make those sky high returns, it's likely to be the investor in Nigeria rather than the investor in the US or the UK. Because you could (not sure you still can) find companies in Sub Saharan Africa trading at below book value.
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Re: Only after a 150% stock market rally in 4 years...

Postby Valuethinker » Sat Mar 02, 2013 11:58 am

EDN wrote:Valuethinker, we see things quite differently. I'm cautiously optimistic and realistic, you are pessimistic. That's OK. More specifically:

Eric


Eric

Thanks for all your data.

In an efficient market, an asset class cannot offer higher returns without higher risk. In the 20th century, that risk, if you managed (you couldn't generally, which is part of the trick) to be internationally diversified, you managed to grab the risk premium of equities. It's also arguable (Dimson and Marsh) that the 20th century was a surprise century in terms of how well equities did. That's only true if we pick the markets that didn't go to zero though due to political and economic disruption. So if we had the luxury of spending the 20th century investing in Australia and the US, say, and avoided for example UK Death Duties (which were punitive) as well as other personal taxation (80% tax rates at one point). The really big fortunes in the UK are held in land (the Duke of Westminster, the Grosvenor Estate, is a larger land owner than the Queen) for this reason - it generates an income with some correlation with inflation, and no UK government has ever really tried to confiscate land, probably won't unless we have a revolution. And if you don't sell it, no capital gains.

If we argue that there are a series of anomalies allowing excess return for equities- The equity return anomaly itself (hotly debated), small cap, value etc.-- then we have to have a theory why.

Otherwise what we have is a 100 year model run, and there was a set of outcomes where equities did worse than bonds. If that's not possible, then you are in a trap. Equities can never do worse than bonds, therefore they are less risky than bonds and they offer higher returns. Therefore the market is inefficient.

One theory is simply statistical. We have only one 100 year model run. Financial markets are a model, and we've run them exactly ONCE over that period. So past historical relationships are simply artefacts of the data.

That's more or less the efficient market theory.

Another theory is behavioural. For specific reasons, humans *in aggregate* make mistakes about expected returns and that makes them exploitable. Latest version of this is the low beta anomaly (that has been applied to understanding Warren Buffett's success). Also see David Laibson, Richard Thaler et al 'hyperbolic discounting' ie that humans are biased towards the short term, thus allowing long term investors to arbitrage that.

The trouble with behavioural explanations (that explain excess return without higher risk) are:
- you have to then argue why they are not easily arbitraged away
- they tend to be 'ad hoc' in the way they are applied-- so we have psychological explanations when it suits us, but we can't convincingly explain their general application eg ALL market actors make the same mistakes and underestimate the likely returns from equities long run

A balanced view on all this is that equities are *likely* to return more than bonds, by construction. However given that equities are starting a price to books of c. 2.0 times in developed markets, they cannot easily double that valuation (as they did in the 20th century, say). We can't rediscover what a great investment equities are. (this btw is more or less Stephen Wright and Andrew Smither's argument, and both the books they wrote are an excellent read-- perhaps not coincidentally, they are Brits writing about Wall Street ;-)).

In the last 110 years we got lucky, We ran the model, and equities delivered high real returns. But the source of real returns that was rerating (an increase in PE or PB multiples) cannot reoccur except in some Panglossian universe. So then it comes down to corporate profits growth + dividends.

Well dividend yields are not high by historic standards (once upon a time, it was conventional wisdom that equity yields had to exceed bond yields-- that was true until about 1958). And there's no reason to think that corporate profit growth (except perhaps in emerging markets) in the 21st century is likely to exceed the 20th century *in aggregate*. In fact I'd argue the other way: profits relative to GDP in the US and other countries are at an almost all time high. In fact, what is more likely in the 21st century is that labour will start to claw back some proportion of the ground they have lost since the late 1970s. Partly due to labour shortages (demographics) and partly due to politics.

It's a guess based on past experience that real returns on stocks of between 3 and 5% are likely -- over a 30 year period. However the example of Japan has to loom behind us- -it's no dead certain thing, particularly not in a world of aging demographics (the Fed produced a paper showing the PE ratio of the stock market is well correlated with the size of the 35-45 year old cohort in the country, coincidence? We shall see).

Remember also Samuelson's paradox. (John Norstrad's website has a good explanation). Equities don't get any less risky the longer you hold them (unless you have a fixed wealth target, then as you achieve that target you can switch into low risk assets-- of which TIPS (or rather Real Return Bonds) are the lowest risk asset, by design).

And that's why most of us are on ranges of 40-60% for equities. The 1970s weren't great for equities or bonds, but bonds were worse (and in fact TIPS, which didn't exist then, are perfectly designed for a rerun of the 1970s-- hence their attractions). The 80s and 90s were obviously great for equities, but the 2000s have not been.

There are people here who have been investing for a long time, and seen some pretty sickening lurches-- people who remember the 'tech' bubble of the early 60s, or the 'one decision' Nifty Fifty of the early 70s, or the 1966-1980 market that ended with 'Is Stock Investing Dead'? and c. -40% real returns over that period. Taylor Larimore's father was a stockbroker, so they nearly starved in the 1930s. I have friends who when they got into the stock market in 1979 (as brokers, or investment managers, or corporate financiers) they were the first new people hired in 10 years-- tells you what the 70s was like.

What we are fighting against is the tendency, usually from people younger than ourselves, to look at those graphs and say 'wow, if you hold onto equities you make so much more than anything else so 100% equities' or '100% small cap value' etc. We've been around long enough to see these 'sure things' disappointed.

We've also been around long enough to endure some really bad financial scares (and some bubbles). Of which I have to say the gap between 15 September 2008 and 13 October 2008 (between Lehmans bankruptcy and Gordon Brown's Reuters speech, which kicked off bailouts in the UK, US and Europe in quick succession) was the worst-- with the collapse of money markets, the world financial system stopped functioning-- liquidity dropped to zero for all meaningful purposes. It was a moment of sheer terror, when the authorities and participants seemed overwhelmed by events, that I hope never to again experience.

I mean 1998 (Long Term Capital Management) was bad, so was 2000-March 2003, but this one the world financial machine literally stopped. I had a former high school classmate, a broker at a major Canadian bank (some of the best capitalized banks in the world) tell me 'we didn't know if we'd be broke on Monday morning'.

The other thing about people here, and I am not counting myself in this, is that they have a high level of mathematical/ physics aptitude combined without the dead weight of years of finance training that crams everything into Gaussian normal distributions.

In other words, show them a stock market graph over any period of time, and they say 'fractal'. Meaning it's timescale independent.

That's a pretty profound insight, and it led me to read Benoit Mandelbrot 'The Misbehavio(u)r of Markets'. Which was a pretty extraordinary insight into financial markets returns. His metaphor of a blind archer firing arrows towards a wall (some fly parallel and never hit). And the longest series of daily financial data we have (Egyptian cotton prices since the 1500s) shows that.

The fractal nature of equity returns tells you what efficient markets tells you. Ie that yes, equities are likely to rise more than bonds, because they are riskier. But the data we have is one model run, and you cannot assume that future model runs will show equities finishing up higher than they started.
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Re: Only after a 150% stock market rally in 4 years...

Postby VictoriaF » Sat Mar 02, 2013 12:35 pm

Valuethinker wrote:Another theory is behavioural. For specific reasons, humans *in aggregate* make mistakes about expected returns and that makes them exploitable. Latest version of this is the low beta anomaly (that has been applied to understanding Warren Buffett's success). Also see David Laibson, Richard Thaler et al 'hyperbolic discounting' ie that humans are biased towards the short term, thus allowing long term investors to arbitrage that.

The trouble with behavioural explanations (that explain excess return without higher risk) are:
- you have to then argue why they are not easily arbitraged away
- they tend to be 'ad hoc' in the way they are applied-- so we have psychological explanations when it suits us, but we can't convincingly explain their general application eg ALL market actors make the same mistakes and underestimate the likely returns from equities long run.


Valuethinker,

It's a fantastic post, thank you.

Your first "trouble" with behavioral explanations is valid. Just as there are opposite proverbs, I occasionally encounter scenarios where different behavior-economic findings seem to be applicable with opposite outcomes.

The second "trouble" is less straight forward. Behavioral anomalies have to be exploited by someone, by someone who has sufficient funds, has a long-term view, and can turn off his own inclination to follow the main-stream investing. There is probably only a very small segment of market players that could satisfy all of these conditions. Fund managers are judged on their quarterly performance, they cannot bleed money for a long time and explain it as a behaviorally justified approach. Most individuals do not have the guts to go against their nature, at least not with substantial sums. Those who have figured it out probably don't want to publicize how they do it.

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

Postby baw703916 » Sat Mar 02, 2013 12:47 pm

VictoriaF wrote: Fund managers are judged on their quarterly performance, they cannot bleed money for a long time and explain it as a behaviorally justified approach.


Victoria,

This is a very good point. Didn't Taleb give up running a hedge fund because most of the investors couldn't wrap their heads around the idea of losing money on a consistent basis until the next black swan shows up and makes you a fortune?

Buffett has a huge advantage (aside from his patience) in that he, plus a few other insiders, own a controlling interest in the company. So he was never in danger of being removed as chairman due to underperformance over a certain time period. The shareholders couldn't revolt even if they wanted to.

Brad
Most of my posts assume no behavioral errors.
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Re: Only after a 150% stock market rally in 4 years...

Postby letsgobobby » Sat Mar 02, 2013 12:57 pm

it's not only that stocks are more volatile. They also can and do underperform bonds for surprisingly long stretches of time. Long term treasuries outperformed stocks over the 30 year period ending in 2011. Yes, I agree that means stocks are likely to do better going forward because price paid matters. But we still should not neglect the larger point: stocks can and do underperform bonds for surprisingly long stretches of time. In 1981 stocks were at their lowest valuations in at least 50 years and they still did not outperform bonds.
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Re: Only after a 150% stock market rally in 4 years...

Postby VictoriaF » Sat Mar 02, 2013 1:10 pm

baw703916 wrote:
VictoriaF wrote: Fund managers are judged on their quarterly performance, they cannot bleed money for a long time and explain it as a behaviorally justified approach.


Victoria,

This is a very good point. Didn't Taleb give up running a hedge fund because most of the investors couldn't wrap their heads around the idea of losing money on a consistent basis until the next black swan shows up and makes you a fortune?

Buffett has a huge advantage (aside from his patience) in that he, plus a few other insiders, own a controlling interest in the company. So he was never in danger of being removed as chairman due to underperformance over a certain time period. The shareholders couldn't revolt even if they wanted to.

Brad


Hi Brad,

I exercised inhuman willpower not to mention Taleb. His name tends to attract more undesired attention than a pretty girl passing a construction site.

In The Black Swan, Taleb writes that it was difficult even for him. In the book, the context is not the pressure from the investors but his own discomfort with prolonged losses. The Prospect Theory explains this, but knowing the underlying cognitive processes is not sufficient for counteracting them.

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

Postby baw703916 » Sun Mar 03, 2013 1:17 am

VictoriaF wrote:Hi Brad,

I exercised inhuman willpower not to mention Taleb. His name tends to attract more undesired attention than a pretty girl passing a construction site.

In The Black Swan, Taleb writes that it was difficult even for him. In the book, the context is not the pressure from the investors but his own discomfort with prolonged losses. The Prospect Theory explains this, but knowing the underlying cognitive processes is not sufficient for counteracting them.

Victoria


I feel really bad for making your exercise in willpower all for naught! :( But I'm sure it will come in handy for self-discipline in investing...

Thanks for explaining and correcting my misunderstanding of Taleb.

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

Postby VictoriaF » Sun Mar 03, 2013 9:11 am

baw703916 wrote:
VictoriaF wrote:Hi Brad,

I exercised inhuman willpower not to mention Taleb. His name tends to attract more undesired attention than a pretty girl passing a construction site.

In The Black Swan, Taleb writes that it was difficult even for him. In the book, the context is not the pressure from the investors but his own discomfort with prolonged losses. The Prospect Theory explains this, but knowing the underlying cognitive processes is not sufficient for counteracting them.

Victoria


I feel really bad for making your exercise in willpower all for naught! :( But I'm sure it will come in handy for self-discipline in investing...


Unfortunately, it does not work that way. Willpower is not a level state. Exercise of willpower depletes it. I read about some experiments where subjects were first asked to abstain from cookies and then to solve puzzles that had no solutions. The subjects who were made to resist cookies gave up in 8 minutes. In contrast, the control group persevered for 12 minutes.

It's a good thing that today is not a trading day and I cannot gamble my fortune because of you and Taleb.

baw703916 wrote:Thanks for explaining and correcting my misunderstanding of Taleb.

Brad


"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.

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

Postby Valuethinker » Sun Mar 03, 2013 9:55 am

Brad and Victoria

To be clear, the problem with behavioural finance is *not* that many or most investors suffer from behavioural biases.

The problem is that you have to show how that would be sustained *once it is generally known*.

Because a *handful* of arbitrageurs could drive stock values back to equilibrium.

This was the whole problem with the Glassman Dow 36,000 argument: that since stocks always do better than bonds, over a long enough horizon, they are undervalued.

But if that were true, the Dow should move immediately to 36,000-- there is 'money on the table' for arbitrageurs to pick up. Then of course stocks are no longer undervalued.

You could argue the 20th Century was one giant realization of the value of stocks (but beware survivor bias: we are only looking at the stock markets that *succeeded*).

But that cannot happen again. We can't learn that stocks are such a great investment, again.

Otherwise there is some limit to arbitrage going on that prevents the market from closing the valuation anomaly opened up by widespread behavioural biases.

I am more comfortable that as individuals we make systematic mistakes when investing than I am in arguing that financial markets as a whole make systematic mistakes.

Or to be more precise it appears to me that markets can make systematic mistakes (aka bubbles and their negative opposite) re valuation, but it's hard to argue they systematically misprice assets outside of that, relative to each other.
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Re: Only after a 150% stock market rally in 4 years...

Postby VictoriaF » Sun Mar 03, 2013 10:09 am

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
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