A Soft Shoe Strut Down Vegas

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DouglasDoug
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A Soft Shoe Strut Down Vegas

Post by DouglasDoug » Sun Oct 20, 2013 7:27 am

The weekend WSJ has an article,"Investing for the Fun of It", in which John Bogle and Burton Malkiel each admit to stock picking, but only as a hobby, once the serious business of indexing of retirement funds have been concluded. One instance of one investor uses as much as 5-8% of his portfolio as "fun money". "Enjoy the fun of gambling and the thrill of the chase, but not with your rent money and certainly not with college education funds for your children, nor with your retirement nest egg," warns Mr. Bogle. Does anyone else use extra money from their portfolio to go to the races?

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nisiprius
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Re: A Soft Shoe Strut Down Vegas

Post by nisiprius » Sun Oct 20, 2013 7:36 am

I just don't "get" it myself. It seems like very expensive "fun." And I do wonder, because while I am sure this is not the case for Mr. Bogle or Prof. Malkiel, I strongly suspect that "fun" is a euphemism for "the visceral thrill you get only when you know that you have staked more than you can actually afford to lose." That is to say, one feels that the self-loathing and depression induced by losing are more than offset by the glorious illusion of mastery induced by winning.

Obviously the proposition is improved if you really have skill and can tip the winning-to-losing ratio a bit--you can perhaps lower the cost of gambling. But I'd still be concerned about where the "fun" is coming from and how much it costs.

Prof. Malkiel describes himself in A Random Walk Down Wall Street as "one who has been smitten with the gambling urge since birth." I think that it is very likely that the investment industry, at all level, attracts such people and that it is important to keep this in mind--that most of what we hear about investing comes from people whose risk appetite may be systematically higher than that of the population as a whole, and who may have a tendency to project their own tastes onto others.
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.

less
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Re: A Soft Shoe Strut Down Vegas

Post by less » Sun Oct 20, 2013 8:10 am

#nisiprius 'doesn't get it' because he wrongly assumes active investing 'costs' - that your returns are worse. There are lots of us whose returns are not worse - whose returns are higher - whose returns match the market with lower risk. The evidence of stock-pickers' under-performing all comes from institutional investors, not retail investors.

I also go the the track to play the ponies (more past tense than present). Great fun. If you diss it you probably have never tried it.

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Dale_G
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Re: A Soft Shoe Strut Down Vegas

Post by Dale_G » Sun Oct 20, 2013 2:23 pm

nisiprius wrote: ...snip... I just don't "get" it myself. It seems like very expensive "fun."

Obviously the proposition is improved if you really have skill and can tip the winning-to-losing ratio a bit--you can perhaps lower the cost of gambling. But I'd still be concerned about where the "fun" is coming from and how much it costs.
It is not necessarily expensive at all. The expected return of any randomly chosen stock, from say the list of stocks in TSM, is no different than the expected return from TSM. Roughly half of randomly chosen stocks will have a greater return than TSM and half will have less. It is an even money game, quite unlike playing the ponies.

I gave up gambling long ago, but I do own one stock (0.7% of the portfolio) - and I didn't buy it for fun.

On average, those with a small percentage of their portfolio in "fun money" will match the performance of TSM.

Dale
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Atilla
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Re: A Soft Shoe Strut Down Vegas

Post by Atilla » Sun Oct 20, 2013 2:33 pm

I absolutely love the thrill of buying individual stocks. It does bring the same feelings as gambling.

I also follow a "theme" with my picks and I'm building a small portfolio that reflects what my favorite income ETF would be if such a thing existed.

So far so good - decent unrealized cap gains and a solid 8% payout coming from a half-dozen stocks.

It's fun and harmless given the amount of money involved. :D
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LowER
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Re: A Soft Shoe Strut Down Vegas

Post by LowER » Sun Oct 20, 2013 2:34 pm

<1% of portfolio is invested in 3 stocks: APPL, CHOP, and DIAMLAR. I never trade, just watch, and it keeps me from having any desire to ever do it again, unless it's a sure thing of course. :oops:

Karamatsu
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Re: A Soft Shoe Strut Down Vegas

Post by Karamatsu » Sun Oct 20, 2013 4:00 pm

I think that it is very likely that the investment industry, at all level, attracts such people and that it is important to keep this in mind--that most of what we hear about investing comes from people whose risk appetite may be systematically higher than that of the population as a whole, and who may have a tendency to project their own tastes onto others.
It's a good point, not just about risk appetite but values generally. Personally, gambling doesn't appeal to me at all, so I have no interest in doing so with individual stocks. If I think back to when I did invest in individual stocks, what I liked most was actually analysing companies, figuring out how they worked, and the search for one that (I thought) worked really well... The business of putting money at risk was not fun, and even when I was successful, a moment's reflection on all the unknowns and assumptions made it clear that it was nothing I could count on. Of course, I can't count on the indexes, either. The primary advantage of index investing, for me, is that it gives me more time to do things that matter more. There is, after all, nothing more valuable or fleeting than time.

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Re: A Soft Shoe Strut Down Vegas

Post by HurdyGurdy » Sun Oct 20, 2013 4:47 pm

less wrote:There are lots of us whose returns are not worse - whose returns are higher - whose returns match the market with lower risk. The evidence of stock-pickers' under-performing all comes from institutional investors, not retail investors.
How about http://faculty.haas.berkeley.edu/odean/ ... turns.html
"The Common Stock Investment Performance of Individual Investors" by Brad Barber and Terrance Odean.

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nisiprius
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Re: A Soft Shoe Strut Down Vegas

Post by nisiprius » Sun Oct 20, 2013 8:18 pm

JuanZ wrote:
less wrote:There are lots of us whose returns are not worse - whose returns are higher - whose returns match the market with lower risk. The evidence of stock-pickers' under-performing all comes from institutional investors, not retail investors.
How about http://faculty.haas.berkeley.edu/odean/ ... turns.html
"The Common Stock Investment Performance of Individual Investors" by Brad Barber and Terrance Odean.
To be fair, though, the cost of trading in 2013 is really quite a lot less than it was at "a large discount broker during 1991 to 1996." My recollection is that in those days "discount brokers" typically charged around $30 per trade, which itself was a lot less than the >$100 in the fixed-commission days.

Here's an ad from July, 1994:

Image

Indeed, even at the mutual fund level, some of the cost penalty actively managed funds incur relative to index funds, due to lower turnover, has probably been reduced, too.
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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Archie Sinclair
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Re: A Soft Shoe Strut Down Vegas

Post by Archie Sinclair » Sun Oct 20, 2013 9:01 pm

Dale_G wrote:It is not necessarily expensive at all. The expected return of any randomly chosen stock, from say the list of stocks in TSM, is no different than the expected return from TSM. Roughly half of randomly chosen stocks will have a greater return than TSM and half will have less. It is an even money game, quite unlike playing the ponies.
Research shows that individual investors underperform compared to the mutual funds that they invest in, because they tend to buy high and sell low. The same issue applies to individual stocks.

People are really dumb with money. Especially the people who think they're smart with money.

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Dale_G
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Re: A Soft Shoe Strut Down Vegas

Post by Dale_G » Mon Oct 21, 2013 1:10 am

Archie, I agree some investors have a rather magical talent for reverse timing the market, and probably buyers of individual stocks possess more of this talent than mutual fund buyers.

My point was that, absent trading costs, which are rather low today, reasonably disciplined Bogleheads with a little play money in the market will on average achieve the same returns as if they invested in TSM. On average, there is no cost to doing so. If for any reason, they enjoy the process, they are on average ahead of the game.

I am fascinated though by the ability of some investors to reverse time the market. It is sort of reverse rebalancing - stocks go down - sell stocks and buy cash, stocks go way up, sell cash and buy stocks.

Dale
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