Search found 348 matches
- Sat Oct 09, 2010 9:56 am
- Forum: Investing - Theory, News & General
- Topic: Nassim Taleb, author of "The Black Swan."
- Replies: 32
- Views: 5300
I don't think you are interpreting "The Fourth Quadrant" properly. As you said, Taleb has defined the 3rd quadrant as follows: Third Quadrant: Complex decisions in Mediocristan: Statistical methods work surprisingly well. In "Tableau Of Payoffs" he put "Finance (Investments)" in the column of "Complex Payoffs," which satisfies the 1st condition of the 3rd Quadrant, i.e., "complex decisions." However, he never wrote that financial decisions are complex decisions in Mediocristan where distributions are thin-tailed. One of Taleb's main points is that finance is fat-tailed and resides in Extremestan. Thus, "Finance (Investments)" belong to the 4th Quadrant, which represents complex de...
- Sat Oct 09, 2010 4:52 am
- Forum: Investing - Theory, News & General
- Topic: Nassim Taleb, author of "The Black Swan."
- Replies: 32
- Views: 5300
Taleb seems to be a hypocrite and a polemicist. When he addresses a knowledgeable audience he offers reasoned arguments which are contradicted by the sensationalist tripe he feeds the mainstream press. In this essay by Taleb published on an intellectual society’s website: http://www.edge.org/3rd_culture/taleb08/taleb08_index.html he writes: Are we using models of uncertainty to produce certainties? This masquerade does not seem to come from statisticians—but from the commoditized, "me-too" users of the products. Professional statisticians can be remarkably introspective and self-critical. He gives the following definitions: Third Quadrant: Complex decisions in Mediocristan: Statistical methods work surprisingly well. Fourth Quadra...
- Wed Oct 06, 2010 8:36 am
- Forum: Investing - Theory, News & General
- Topic: Calculating the cost of an annuity's longevity protection
- Replies: 61
- Views: 8462
The next result that surprised me was how costly annuities become if you include even a hint of credit risk in the present value calculations. In the spreadsheet, for a 65 year old couple, the cost of longevity protection when credit risk isn't factored in is only 4.2%. However, if the credit spread between government debt and corporate AA debt is factored in, the cost of the longevity protection jumps as high as 20% . Your calculation of the cost of longevity protection ignores the issue of adverse selection because you use average life expectancy for the entire population as opposed to the life expectancy for the pooled lives used by the insurer. The quoted payouts reflect the fact that people buying annuities tend to be healthier than a...
- Tue Oct 05, 2010 10:17 am
- Forum: Investing - Theory, News & General
- Topic: Taleb essay
- Replies: 26
- Views: 5051
In the linked piece Taleb gives the following definitions: Third Quadrant: Complex decisions in Mediocristan: Statistical methods work surprisingly well. Fourth Quadrant: Complex decisions in Extremistan: Welcome to the Black Swan domain. Here is where your limits are. Do not base your decisions on statistically based claims. Or, alternatively, try to move your exposure type to make it third-quadrant style ("clipping tails"). In the Tableau Of Payoffs below the quadrant it appears to me that he places ‘Finance (investments)’ in the 3rd quadrant, and ‘leveraged portfolios’ in the 4th. If I am interpreting this correctly he is saying that statistical methods work surprisingly well for ‘investments’, but not for ‘leveraged portfolios’.
- Tue Oct 05, 2010 6:29 am
- Forum: Investing - Theory, News & General
- Topic: Taleb essay
- Replies: 26
- Views: 5051
- Fri Aug 27, 2010 4:28 pm
- Forum: Investing - Theory, News & General
- Topic: The Many Minds Hypothesis (MMH) over the EMH
- Replies: 19
- Views: 2394
It's always fun to read those wikipedia pages. They often make connections I'd missed: Tammet also cites the Kasparov versus the World, an online competition that pitted the brainpower of tens of thousands of online chess players choosing moves in a match against Gary Kasparov, which was won by Kasparov, not the "crowd." I guess that's a concrete example of one guy outsmarting many minds. It seems there's a misguided assumption of "strength in numbers" when it comes to thinking. Playing world class chess is a rarity for most individuals. Larger numbers of players probably increases the odds of a weaker move. I would imagine only 3 "Top 20" chess players playing would have fared better against Kasparov than the...
- Fri Aug 27, 2010 4:04 pm
- Forum: Investing - Theory, News & General
- Topic: Bernstein's new Efficient Frontier article on Harry Browne
- Replies: 131
- Views: 17545
Found a later article on the topic by wbern: The above simulations provide an approximate answer to the question "Under what circumstances does it pay or not pay to rebalance?" Rebalancing works best with volatile, uncorrelated assets whose returns are roughly similar. http://www.efficientfrontier.com/ef/197/rebal197.htm Well, this seems to still suggest a rebalancing bonus for an allocation like the PP. Still searching for the "retraction." The retraction is on this page in this thread on the Diehards forum: http://socialize.morningstar.com/NewSocialize/forums/t/167631.aspx?PageIndex=4#PageIndex=4 Below follows everything Bernstein posted in that thread. Hi All: There's a much, much simpler way to look at the RB, which...
- Fri Aug 27, 2010 9:37 am
- Forum: Investing - Theory, News & General
- Topic: Does efficient-market hypothesis justify passive investing?
- Replies: 152
- Views: 11977
An efficient market does and should reward arbitrageurs with virtually riskless profits for performing useful functions like narrowing spreads and establishing equilibrium. They do however pay for it with their sweat just like any other labourer.Charybdis wrote:Yes, I added this to my previous post: "I know that according to the EMH, fundamental and technical analysis don't produce excess return. But what is the case with arbitrage strategies, which find those $100 bills very quickly?"fluffyistaken wrote:Picking up $100 bill is risk-free.
- Fri Aug 27, 2010 2:55 am
- Forum: Investing - Theory, News & General
- Topic: Does efficient-market hypothesis justify passive investing?
- Replies: 152
- Views: 11977
Here are my observations. In 1965, the memory of the 1929 bubble and crash was a distant memory. Prices had been more or less stable to that point in 1965 when Fama declared the market price is a good estimate of intrinsic value. This is another way of saying that the price is right. Otherwise, if the price was not right, then traders would move prices until market participants agreed once again the price is right. Where the wheels fell off on this "price is right" version were later bubbles and crashes. First the Nifty-Fifty in 1972, then October 1987 crash and finally the biggest bubble of all time in tech and internet stocks in the late 1990's. Remember what Keynes said long ago: "The market can remain irrational..."...
- Thu Aug 26, 2010 10:38 am
- Forum: Investing - Theory, News & General
- Topic: Does efficient-market hypothesis justify passive investing?
- Replies: 152
- Views: 11977
Fama defined the efficient market in 1965 like this: An 'efficient' market is defined as a market where there are large numbers of rational, profit-maximizers actively competing, with each trying to predict future market values of individual securities, and where important current information is almost freely available to all participants. In an efficient market, competition among the many intelligent participants leads to a situation where, at any point in time, actual prices of individual securities already reflect the effects of information based both on events that have already occurred and on events which, as of now, the market expects to take place in the future. In other words, in an efficient market at any point in time the actual ...
- Wed Aug 18, 2010 7:40 am
- Forum: Investing - Theory, News & General
- Topic: Updated Modification of Harry Browne Permanent Portfolio
- Replies: 3555
- Views: 1462998
I don't know if this has been discussed before, but I found this piece on gold by Fama and French interesting. http://www.dimensional.com/famafrench/2010/04/qa-does-gold-belong-in-my-portfolio.html if you judge that the past average return on gold is the best estimate of its future expected return. We don't buy this, for two reasons. First, much of the stock of gold is in the form of jewelry and other goods that pay a "consumption dividend." This dividend increases the current price of gold and lowers its expected capital gain return. But an investor who holds gold bullion as a portfolio asset only expects to get the expected capital gain, which does not suffice to compensate for the risk of the asset. Second, if the capital gain ...
- Thu Aug 05, 2010 8:00 am
- Forum: Investing - Theory, News & General
- Topic: Liquidity as an Investment Style
- Replies: 11
- Views: 2395
- Tue Aug 03, 2010 10:15 am
- Forum: Investing - Theory, News & General
- Topic: Big Investors Fear Deflation - WSJ
- Replies: 59
- Views: 6716
Because of yen appreciation the growth was much more modest in yen terms.grayfox wrote:BTW, I also checked Japans GDP to see if they had economic growth or not.
In 2000 Japan's nominal GDP was $2.9 trillion and in 2009 it was $4 trillion. Since prices were flat or slightly falling, that means real GDP growth.
GDP per capita went from $23,400 to $33.400.
And they had about 4 to 5 percent unemployment.
See for yourself, the numbers are at this website.
http://www.indexmundi.com/g/g.aspx?v=67&c=ja&l=en
- Tue Aug 03, 2010 10:10 am
- Forum: Investing - Theory, News & General
- Topic: Big Investors Fear Deflation - WSJ
- Replies: 59
- Views: 6716
The yen has been appreciating by almost 2% per year these last 20 years against the US$ (from 127 to 87), buffering Japan against imported inflation.yobria wrote:Keep in mind those numbers mix in global goods (eg oil) with rising prices.grayfox wrote:Here is the inflation rate in Japan
If you were to look only and Japanese goods and services (eg housing), you'd see pronounced deflation.
Nick
- Sat Jul 31, 2010 3:28 pm
- Forum: Investing - Theory, News & General
- Topic: gummy-stuff, eh?
- Replies: 29
- Views: 10692
- Wed Jul 28, 2010 3:59 am
- Forum: Investing - Theory, News & General
- Topic: Ruin-contingent life annuity
- Replies: 15
- Views: 5119
I apologize for bumping this thread, but I noticed that Prof. Moshe Milevsky recently registered on this forum. Who knows he might post an answer to this old question. In summary his paper on a Ruin Contingent Life Annuity (RCLA) claims that a 62 year old retiree can invest his retirement capital in a 100% stock portfolio and draw down 5% of the initial portfolio value, annually adjusted for inflation. To insure against the possibility of this strategy leading to ruin, he can pay a once off premium of 6.2% of the portfolio value upfront. Should the money run out during his lifetime, the RCLA will kick in, and pay the 5% cola’d income for the rest of his life. To illustrate use the example in the opening post: Portfolio $1,000,000, premium $...
- Wed Jul 28, 2010 2:15 am
- Forum: Investing - Theory, News & General
- Topic: Moshe Milevsky: Financial Deicide
- Replies: 56
- Views: 7378
Re: Your Money Milestones....
Welcome Prof Milevsky, I have great respect for you work.Moshe.Milevsky wrote:It’s quite fascinating to me, how so many people can form opinions about someone based entirely on a two paragraph excerpt from an online interview conducted by a reporter who himself probably only read a portion of the introduction to my book...Alas, perhaps markets aren’t as rational as I thought.
Does anyone know which online interview Milevsky refers to? Please supply a link.
- Tue Jul 27, 2010 9:11 am
- Forum: Investing - Theory, News & General
- Topic: Are stocks less volatile in the long run?
- Replies: 110
- Views: 12345
I think the Bodie argument is hair splitting. Bodie's main point was that equities don't get safer if you hold them for a long time. I have heard him say in the past that they don't get safer over longer holding periods and some financial economists think they get riskier over longer holding periods. I believe I have read recently where Bodie says he agrees with the findings of this paper. So he would probably now say that equities certainly don't get safer and this paper gives a clear indication that they get riskier over longer holding periods.BobK In light of the PS paper’s findings I agree that I am splitting hairs. I stick with my argument though, and would love to hear a counter argument. However, whether the risk of investing in sto...
- Sun Jul 25, 2010 4:28 pm
- Forum: Investing - Theory, News & General
- Topic: Are stocks less volatile in the long run?
- Replies: 110
- Views: 12345
Need to agree on what is being discussed: variability of average returns or variability of terminal values. Assuming random walk, I think these are two sides of the same coin, can’t have one without the other. As you said earlier: “If we are referring to the Utility of Returns (probability X outcome value), then the answer is that volatility is the same over time.” This is all that matters. If you try to separate the two concepts you get a distorted view of reality. IIRC, Bodie concluded that the cost of insuring against earning less than the risk-free rate of interest increases as the length of the investment horizon increases. Here's the paper . No, Bodie observed that the cost of insuring against earning less than the risk-free rate of ...
- Sat Jul 24, 2010 5:27 pm
- Forum: Investing - Theory, News & General
- Topic: Are stocks less volatile in the long run?
- Replies: 110
- Views: 12345
The reason for this higher risk is primarily because we don't know the expected return. In other words not only is there risk associated with the variability around the expected return, but there is additional risk in the uncertainty of the true value of the expected return. Thanks for that post BobK, it really clarified the essence of the PS paper for me. I would like to run a few things by you to confirm that I get it: As I understand Samuelson on risk, he proved that if one assumes normally distributed periodic returns around a mean expected return, risk remains constant over time for investors with constant relative risk aversion. This paper in no way contradicts Samuelson, he would have agreed that a distribution with an uncertain mea...
- Fri Jul 23, 2010 9:02 am
- Forum: Investing - Theory, News & General
- Topic: A few thoughts on the Variable Annuity living benefits
- Replies: 17
- Views: 4371
Re: A few thoughts on the Variable Annuity living benefits
Will the PV continue growing at 6% after withdrawals start thereby effectively guaranteeing a 6% increase in the withdrawal per year.ddb wrote:The rider establishes a Protected Value, PV, which on any given day is defined as the highest of all past daily contract values, CV, compounded forward through today at 6%. There is also a provision that in year 10, the PV will be a minimum of 200% of the initial deposit, and on year 20, the PV will be a minimum of 400% of the initial deposit. Once the contractholder elects to begin making withdrawals, the issuer guarantees that s/he can withdraw x% of the PV each year for life, regardless of what happens to the actual CV.
- Thu Jul 22, 2010 9:57 am
- Forum: Investing - Theory, News & General
- Topic: Moshe Milevsky: Financial Deicide
- Replies: 56
- Views: 7378
We tried to warn him in Jan 08.Rodc wrote: Unfortunately Milevsky was something like 150% stocks and that was not right for him and apparently this turned out to be an eye opener for him.
http://www.bogleheads.org/forum/viewtop ... +portfolio
- Thu Jul 22, 2010 6:45 am
- Forum: Investing - Theory, News & General
- Topic: Are stocks less volatile in the long run?
- Replies: 110
- Views: 12345
Verde wrote: The above is not true when markets exhibit mean reversion. In that case both probability and magnitude of loss diminish the longer the investment horizon over what would be expected for a random walk iid market. Not so, according to Prof. Bodie: Some financial economists and other observers of the stock market have claimed that stock returns do not follow a random walk in the long run. Rather, they argue, the behavior of stock returns is best characterized as a mean-reverting process. It is mean reversion in stock returns, some say, that is the reason stocks are less risky for investors with a long time horizon. But our result is valid for mean reverting processes too. The reason is that arbitrage-based option pricing models, ...
- Wed Jul 21, 2010 9:57 am
- Forum: Investing - Theory, News & General
- Topic: Are stocks less volatile in the long run?
- Replies: 110
- Views: 12345
The arithmetic mean should always be used in evaluating projected cash flows. Historical risk premia are usually computed using geometric means. Projected risk premia are constructed using arithmetic means. This is the same as when looking at equity returns. Historically we look at the geometric returns, but when making a forecast of equity returns we use the arithmetic mean. BobK Another quote from the Ibbotson article on the ERP http://corporate.morningstar.com/ib/documents/MethodologyDocuments/IBBAssociates/EquityRiskPremiums.pdf The equity risk premium is a key element in many cost of equity models. The build-up approach, capital asset pricing model, and Fama-French three factor model all require an equity risk premium to compute a cos...
- Wed Jul 21, 2010 9:11 am
- Forum: Investing - Theory, News & General
- Topic: Are stocks less volatile in the long run?
- Replies: 110
- Views: 12345
Bodie draws on the work of Samuelson and Merton, who view equity risk in terms of probability of loss X magnitude of loss. Assuming a positive risk premium for stocks, the probability of loss relative to the risk-free asset decreases with time, but the range of returns increases with time. Where Total Risk = (probability of loss X magnitude of loss), total risk remains constant over time. If risk is viewed only in terms of the probability of loss, then (assuming a positive risk premium) risk decreases with time. In other words, the variability of the mean of returns decreases over time. If risk is viewed only in terms of the possible magnitude of loss, then it increases with time. In other words, the variability of the ending value of retu...
- Wed Jul 21, 2010 7:20 am
- Forum: Investing - Theory, News & General
- Topic: Are stocks less volatile in the long run?
- Replies: 110
- Views: 12345
- Wed Jul 21, 2010 7:20 am
- Forum: Investing - Theory, News & General
- Topic: Are stocks less volatile in the long run?
- Replies: 110
- Views: 12345
So we can expect the 7% historical risk premium to persist. Real return on US stocks last 100 years (1910-2009) is 5.8%. Real return on US bonds last 100 years is 1.6%. Therefore, historical risk premium is 4.2%, NOT 7%. data source: Triumph of the Optimists including updates thru 2009. BobK I think the article refers to the arithmetic mean risk premium. Quote from this Ibbotson article: http://corporate.morningstar.com/ib/documents/MethodologyDocuments/IBBAssociates/EquityRiskPremiums.pdf Arithmetic vs. Geometric Mean One area regarding the equity risk premium that is not disputed in academic circles is whether the arithmetic or geometric mean equity risk premium should be used. The arithmetic mean should always be used in evaluating proj...
- Wed Jul 21, 2010 6:18 am
- Forum: Investing - Theory, News & General
- Topic: Are stocks less volatile in the long run?
- Replies: 110
- Views: 12345
Bodie's paper showed that stocks are riskier in the LR by looking at the cost of insuring the portfolio of stocks. If Bodie argues that stocks are riskier in the long run, is he not at odds with Samuelson who showed that risk remains constant over time? Obviously there is a difference between the error on annualized return and the error on total return. Standard deviation on annualized return does go down. Standard deviation on total return goes up. Siegel does not dispute the above, he shows that US stock data exhibits mean reversion, so the long term SD is lower than what would be expected if returns were iid. This also does not mean that markets always mean revert. They probably mean revert only when the companies they price are operati...
- Tue Jul 20, 2010 8:05 am
- Forum: Investing - Theory, News & General
- Topic: Are stocks less volatile in the long run?
- Replies: 110
- Views: 12345
Sorry, I trusted Wikipedia.bobcat2 wrote:Therefore, historical risk premium is 4.2%, NOT 7%.
data source: Triumph of the Optimists including updates thru 2009.
BobK
Quote"In the United States, the observed "equity premium"—the risk premium (in fact the historical outperformance) on equity in stocks vs. government bonds—over the past century was approximately 7% per annum."
http://en.wikipedia.org/wiki/Equity_premium_puzzle
- Tue Jul 20, 2010 6:52 am
- Forum: Investing - Theory, News & General
- Topic: Are stocks less volatile in the long run?
- Replies: 110
- Views: 12345
- Wed Jul 07, 2010 5:22 am
- Forum: Investing - Theory, News & General
- Topic: What risk really is
- Replies: 80
- Views: 15823
I think this is a very interesting chart, and I think different data sets might slide the curves around a bit but I suspect the general pattern is right. Nisi, you realise that this chart is based on Monte Carlo simulations assuming a normal distribution of returns. I mention this because I know you have expressed misgivings about that methodology in the past. I have always argued that this method, with its known shortcomings, is the best tool we have to educate the average investor on the consequences of asset allocation choices. We just have to present the results fairly. It is wrong to only show the failure rate, the magnitude of those failures should also be presented and given equal weight when the results are evaluated. I agree that ...
- Mon Jul 05, 2010 9:57 am
- Forum: Investing - Theory, News & General
- Topic: If Equity % keeps falling when can you retire
- Replies: 21
- Views: 3529
Yes, but the $850k is in real terms. In nominal terms it will have to grow with inflation. If inflation is 3% p.a. between 2008-12 the amount required in 2012 will be ±$950k. I mention this, because the numbers stated by the OP are nominal.livesoft wrote:Each year you keep working and not withdrawing from your retirement portfolio reduces the required longevity of the portfolio.
Very roughly.
If you projected for a 35-year retirement in say 2008 with $1 million and a presumend $40K a year withdrawal, then you can retire in 2012 with $850K since by working you did not withdraw any money over those 4 years. But your retirement portfolio might only last 31-years.
Very roughly.
- Mon Jul 05, 2010 7:45 am
- Forum: Investing - Theory, News & General
- Topic: "Stocks Down, Thankfully"
- Replies: 77
- Views: 12742
- Fri Jul 02, 2010 5:36 am
- Forum: Investing - Theory, News & General
- Topic: Retirement investing: the new normal?
- Replies: 85
- Views: 14731
An investor who saved 15% of his income every month from January 1976 to May 2010 and invested 60% in the S&P500 and 40% in 5 year treasuries accumulated 14.6 x annual income by 31 May 2010 (Real return 5.4% per annum). Had he invested in Treasury bills he ended up with 6.4 x annual income (Real return 1.2% per annum).2bitwise wrote:You guessed wrong. I started serious investing in 1976. I have never engaged in panic selling or nervously moving in and out of the market.
Currently, anything I can invest is going into Short Term bond, to limit my risk.
The above assumes zero costs and taxes, monthly rebalancing and a constant real income over the 34.5 years.
- Sat Jun 26, 2010 4:59 pm
- Forum: Investing - Theory, News & General
- Topic: Market bubbles and crashes are the norm - not the exception
- Replies: 166
- Views: 17781
In the real market the prices are not independently random (as hypothesized for the theoretical random market per the above discussion), the unknown future information which has an influence on intrinsic value is random.bob90245 wrote: I disagree. A random market can certainly be described as efficient. In fact, it actually goes to the heart of what efficiency is really all about. If prices were not random but in instead predictable, our crystal balls would be no longer cloudy, but crystal clear. Therefore, you, me and everybody else can easily beat the market.
- Wed Jun 23, 2010 8:35 am
- Forum: Investing - Theory, News & General
- Topic: Unveiling the Retirement myth [book] - frustrating.
- Replies: 40
- Views: 7290
I have not read the book, so I don't know the context, but a good benchmark for any retirement plan is to compare it to the payout that can be achieved using an inflation adjusted immediate annuity. 6% of starting capital is the ballpark figure which a 65 year old couple will start with, adjusting for inflation and paying out for the life of the last survivor.
- Wed Jun 23, 2010 7:28 am
- Forum: Investing - Theory, News & General
- Topic: Risk premium only exists in the tails?
- Replies: 27
- Views: 2952
The volatility smile is not the typical pattern for index and long dated options. These options typically display a volatility smirk. If one creates an options pricing model that incorporates understanding of volatility, that expected volatility varies and tends to be negatively correlated to returns, one get the "volatility smirk". The "quants" employed by the dominant market players develop and use these models. Thus options market prices reflect this sophisticated understanding. IMO, Bodie and Taleb are fools to think they're smarter than the options market. -- James I agree with that sentiment, but it only applies to Taleb. Bodie's strategy does not rely on the market being wrong - he uses options to lever stock mar...
- Wed Jun 23, 2010 6:20 am
- Forum: Investing - Theory, News & General
- Topic: Risk premium only exists in the tails?
- Replies: 27
- Views: 2952
I posted this information in another discussion http://www.bogleheads.org/forum/viewtopic.php?p=725255&highlight=#725255 , but I think it is relevant here. Bodie's position http://www.businessweek.com/magazine/content/07_37/b4049090.htm "If there's a fat tail event on the upside, buy an out-of-the-money call option on a market index. [A call is a bet that the market will rise. Calls are "out of the money" when the strike price is greater than the market price of the underlying security.] It has a low probability of paying off, but if it does, you'll make a killing. I implement this in my own retirement portfolio. I have about 95% in TIPS and 5% in out-of-the-money call options that go out as long as three years on the mar...
- Sun Jun 06, 2010 6:26 am
- Forum: Investing - Theory, News & General
- Topic: Fat Tails & Volatility Clustering in Stock Returns
- Replies: 112
- Views: 15463
BobK, below is a quote from one of your posts in the recent A&N thread dated 12 May 10. I have just read the Ayres' column that Yuba has linked to. I am practically speechless about the following investment advice Ayres offers. A month ago (when the PE10 was 21.7 and the VIX was a low 16.48 percent), our Samuelson share calculator would have advised someone with moderate risk aversion to invest 46.3 percent of his or her retirement portfolio in stock . But as of Friday’s close , with the fall of the PE10 to 20.15 and the dramatic increase of the VIX to 40.95 percent, our calculator would advise the same person to invest just 9.4 percent in stock . So last month, according to A&N, my stock allocation should have been 46.3% of my reti...
- Wed Jun 02, 2010 3:36 am
- Forum: Investing - Theory, News & General
- Topic: Zvi Bodie TIPS
- Replies: 36
- Views: 7700
Re: Zvi Bodie TIPS
No, if the calls expire worthless you don't buy more.ddb wrote:Yes, buy more. In theory, when you win, you win big, so even one win every few "rounds" can more than offset the ones that expired worthless.LTAccumulator wrote:What if the S&P calls expire worthless...do you buy more? Then more? Then more? Then more? Sounds like the same problem as high-fee actively managed mutual funds....gets nibbled away slowly.
- DDB
The whole point of the strategy is that the Tips investment will cover your minimum income needs.
You never touch this part of the portfolio to take risk.
- Tue Jun 01, 2010 5:03 am
- Forum: Investing - Theory, News & General
- Topic: Safety-First Investing: A Guide for Risky Times
- Replies: 46
- Views: 8157
I think most of the general public will abhor both Ayres and Nalebuff and Bodie. We will idolise someone like Mr Bogle more with his balanced approach. Hi at, And just what is balanced about mitigating risk solely thru diversification and completely ignoring mitigating risk by hedging and insuring thru matching strategies? The answer is that there is nothing balanced about any risk mitigation strategy that relies solely on diversification. Idolization is definitely not a sound investment strategy. BobK There are four ways to mitigate investment risk (diversifying, insuring, hedging, and investing in safe assets). We can rely on the market to price the assets we require to build diversified portfolios with an appropriate allocation to safe ...
- Sat May 29, 2010 1:32 pm
- Forum: Investing - Theory, News & General
- Topic: PE10 predicitive power
- Replies: 143
- Views: 18771
Robert Shiller's data is available here in excel format.zeugmite wrote:Would you guys mind to publish the source data you have or post a link for where to find it? Thanks.
http://www.econ.yale.edu/~shiller/data.htm
- Fri May 28, 2010 3:05 am
- Forum: Investing - Theory, News & General
- Topic: PE10 predicitive power
- Replies: 143
- Views: 18771
On the subject of the predictive power of P/E10, it seems that it is based on a belief that P/E10 is mean reverting. I think there is more to it than mean reversion. Expected return using the Gordon equation is Dividend yield + expected growth in earnings/share + change in P/E. The mean reversion refers to the change in P/E or Bogle’s speculative return. If P/E doubles or halves over 20 years, that adds or subtracts about 3.5% p.a. to returns. There is a strong inverse relationship between P/E10 and dividend yield – the first element of the equation. DY at a P/E10 of 10 can be expected to be roughly 2x DY at a P/E10 of 20. Even if P/E10 remains constant for the 20 years (no mean reversion), the Gordon equation says real returns will be hig...
- Thu May 27, 2010 3:51 am
- Forum: Investing - Theory, News & General
- Topic: PE10 predicitive power
- Replies: 143
- Views: 18771
On the subject of the predictive power of P/E10, it seems that it is based on a belief that P/E10 is mean reverting. I think there is more to it than mean reversion. Expected return using the Gordon equation is Dividend yield + expected growth in earnings/share + change in P/E. The mean reversion refers to the change in P/E or Bogle’s speculative return. If P/E doubles or halves over 20 years, that adds or subtracts about 3.5% p.a. to returns. There is a strong inverse relationship between P/E10 and dividend yield – the first element of the equation. DY at a P/E10 of 10 can be expected to be roughly 2x DY at a P/E10 of 20. Even if P/E10 remains constant for the 20 years (no mean reversion), the Gordon equation says real returns will be hig...
- Wed May 26, 2010 7:05 am
- Forum: Investing - Theory, News & General
- Topic: The Cauchy distribution is boggling my mind
- Replies: 117
- Views: 23093
Re: Volatility clustering
Are stocks riskier than the market realizes? Is the market pricing risk properly?bobcat2 wrote:
This stylized fact of volatility clustering in stock market returns is one of the things that make stocks riskier investments than most people realize.
BobK
- Tue May 25, 2010 12:50 pm
- Forum: Investing - Theory, News & General
- Topic: The Cauchy distribution is boggling my mind
- Replies: 117
- Views: 23093
Re: fat tails and Warren Buffett
There is no doubt that the distributions of historical stock return data are fatter tailed than the normal distribution. I don't think the issue is as clear cut as that. Refer to this thread http://www.bogleheads.org/forum/viewtopic.php?t=28687&postdays=0&postorder=asc&start=50 for an analysis by poster sgr000 which concludes: Summary: Using Shiller's yearly data, there is no convincing evidence of non-normality in the distribution of returns. This may be an averaging effect, where fat-tailed daily returns give rise to less fat-tailed monthly returns which in turn give rise to very nearly normal yearly returns. However, with N =136 data points in the yearly dataset, this means we can't depend on seeing events with probability m...
- Tue May 25, 2010 8:08 am
- Forum: Investing - Theory, News & General
- Topic: The Cauchy distribution is boggling my mind
- Replies: 117
- Views: 23093
Maybe bobcat2 will find this thread and chime in, because he says non-normality is old stuff and the financial community has known how to deal with it for ages. So far in this thread the only critics of the assumption of normality implicit in so many financial models that have been mentioned are the doom-and-gloomers who believe that the normal distribution underestimates tail risk. Let’s not forget the ‘Stocks for the long run’ crowd who criticise the assumptions of normality on the basis that it overestimates tail risk. Some quotes from the following paper: Cornell, Bradford , Warren Buffett, Black-Scholes and Long Dated Options (June 2009). http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1433622 For example, Siegel (2008) reports tha...
- Tue May 25, 2010 7:04 am
- Forum: Investing - Theory, News & General
- Topic: P/E ratio of current stock market
- Replies: 61
- Views: 10365
The predictive power of PE10 has a very low degree of statistical significance, in large part because we only have about 10 independent 10 year periods with reliable data, and only have about 5 independent 20 year periods. True, but the hypothesis behind why PE10 should have strong predictive power at least at extreme levels is plausible. At least the scant data supports the outcome predicted by the hypothesis. The hypothesis goes something like this: Markets occasionally suffer from irrational manias and depressions. There are times when the liquidity premium is sky high and others when it turns negative. Investors should not accept a negative liquidity premium. High liquidity premiums in the stock market indicates that risk is lower than...
- Fri May 14, 2010 4:38 am
- Forum: Investing - Theory, News & General
- Topic: Updated Modification of Harry Browne Permanent Portfolio
- Replies: 3555
- Views: 1462998
Anybody by accident has the 2009 results for the Japanese pp? I send a message to Verde, the creator of the Japanese pp, hope he gets it. Here his japanese pp results up to 2008: http://www.bogleheads.org/forum/viewtopic.php?p=543403&highlight=#543403 I have updated the Japan PP for 2009. In the process I found better data sources which I have incorporated, so the new numbers are slightly different from last years'. The biggest find was a source for 30 year bond yields dating back to 2002. Here is a link. http://www.mof.go.jp/english/bonds/interest_rate/data.htm I decided to use this data for 2002 onwards and abandon the 10 year bond returns. For years prior to 2002 I created synthetic 30 year returns based on the 10 year yields I have...
- Tue May 11, 2010 10:05 am
- Forum: Investing - Theory, News & General
- Topic: Ayres and Nalebuff: Young people should buy stocks on margin
- Replies: 421
- Views: 84105
Verde - Otar and others have argued that the problem with age-based allocation (e.g., age in bonds) strategies in retirement is that it doesn't mitigate sequence of returns risk. If you happen to be unlucky enough to experience 2 or 3 lousy years at the beginning of retirement decumulation - when your stock allocation is the highest - reducing your stock allocation at the same time actually makes it more difficult to recover from the losses. It's kinda like a negative rebalancing strategy, selling your losses and locking them in. Otar is among those who argue you should maintain a constant equity allocation throughout retirement that is appropriate for your needs and risk tolerance. I was trying to align this advice with the theoretical co...