Make no mistake: Mr. Market is smarter than you

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Stryker
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Make no mistake: Mr. Market is smarter than you

Post by Stryker »

Make no mistake: Mr. Market is smarter than you

I was most interested in what Terrance Odean, finance professor at the University of California, Berkeley had to say in the article being I hadn't read anything from him in a long time, since his research paper on individual investors performance came out what seems years ago.

---------------------------------------------

“The vast majority of individual investors will not beat the market through skill,” said Terrance Odean, a finance professor at the University of California, Berkeley, who has studied investor behaviour extensively.

“So if they beat the market, it will be through luck – and luck can go either way.”

Besides lacking the skills to outperform, the instincts of individual investors also tend to work against them. That’s why Mr. Odean found that investors who traded stocks most actively underperformed the market more than those who traded infrequently.

“If an investor bought an index fund tied to the S&P 500, I would say that that investor is a very good investor, but with a zero-per-cent chance of beating the market,” Mr. Odean said.

“In other words, I don’t think beating the market should be the objective of most investors.”
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Re: Make no mistake: Mr. Market is smarter than you

Post by Call_Me_Op »

All well known stuff and widely accepted here.
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Re: Make no mistake: Mr. Market is smarter than you

Post by mickeyd »

Call_Me_Op wrote:All well known stuff and widely accepted here.
:thumbsup
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billyt
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Re: Make no mistake: Mr. Market is smarter than you

Post by billyt »

An awful lot of posters around here appear to think they are smarter than Mr. Bond Market.
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Re: Make no mistake: Mr. Market is smarter than you

Post by tyler_cracker »

billyt wrote:An awful lot of posters around here appear to think they are smarter than Mr. Bond Market.
:thumbsup
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stevewolfe
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Re: Make no mistake: Mr. Market is smarter than you

Post by stevewolfe »

billyt wrote:An awful lot of posters around here appear to think they are smarter than Mr. Bond Market.
This is true...
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cflannagan
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Re: Make no mistake: Mr. Market is smarter than you

Post by cflannagan »

billyt wrote:An awful lot of posters around here appear to think they are smarter than Mr. Bond Market.
Haha, I know, right.. I am used to seeing an occasional thread that attempts to time market in some form, or questioning one's decisions whenever an equity class tanks. But at least, the ratio of Boglehead-worthy posts vs those posts has been decent.

But now the ratio is getting disturbingly low, and out of all things, it is about bonds.

Very disappointed in those posters especially if any of them consider themselves Bogleheads, and/or if they have long time horizon until retirement. Aren't we supposed to stay the course and NOT "sell low"?

I wish I could find that Vanguard article link (someone else posted it in this forum), it is good reading - talking about whether or not it's a good idea to change bond allocation in "rising rate environment" (for people like myself who sometimes struggles to understand bonds fully but will strive to). The take home lesson I got from the article: No, it's not good idea to think of changing bond allocation in anticipation of interest rate changes.

I also learned a thing or two from that article about how short term bonds and long term bonds reacts differently to interest rate changes. Very interesting. If I know when interest rate is going to change, I could try to "time" and pick the correct bond funds, but as the article said, people already tried that in 2011 and got burnt. I am not going to try to do the same either. Mr Market will beat you on stocks, as well as bonds.

Edit: Found the article: http://www.vanguard.com/pdf/icrrol.pdf
Last edited by cflannagan on Sun Aug 25, 2013 3:32 pm, edited 1 time in total.
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Re: Make no mistake: Mr. Market is smarter than you

Post by LAlearning »

I definitely agree I am not smarter. I just came off a week of nights, and realized my co-workers were fretting about what to do with their brokers because they couldn't trade at 2am!!!! For a week!!!! What a horrible existence....

I also question all those posts about how people say they know what to expect, but still base their decisions off of "what they know" will happen. For me, having my AA be off (ie too much in cash or not in my re-balance bands) causes me so much-much-much more grief than whether the market goes up or down.....
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Re: Make no mistake: Mr. Market is smarter than you

Post by baw703916 »

billyt wrote:An awful lot of posters around here appear to think they are smarter than Mr. Bond Market.
Does Mr. Bond Market invest primarily in the G Fund? 8-)
Most of my posts assume no behavioral errors.
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Re: Make no mistake: Mr. Market is smarter than you

Post by The Wizard »

stevewolfe wrote:
billyt wrote:An awful lot of posters around here appear to think they are smarter than Mr. Bond Market.
This is true...
Yes indeed, and I'm one of them.
I have a 3.0% guaranteed minimum in my TIAA-CREF Traditional account and I'm keeping most of my fixed income allocation there until the long awaited interest rate increase has some history on it.
Yes, indeed...
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Re: Make no mistake: Mr. Market is smarter than you

Post by billyt »

Good luck. You have to be right twice, when to get out and when to get back in. How is you crystal ball?
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Re: Make no mistake: Mr. Market is smarter than you

Post by grabiner »

baw703916 wrote:
billyt wrote:An awful lot of posters around here appear to think they are smarter than Mr. Bond Market.
Does Mr. Bond Market invest primarily in the G Fund? 8-)
You aren't investing with Mr. Market. If you have a non-marketable investment, that may be better than anything Mr. Market offers. The G fund and TIAA Traditional Annuity are two of the most common examples of non-marketable investments. I-Bonds are another option which is available to any investor.
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BradMajors
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Re: Make no mistake: Mr. Market is smarter than you

Post by BradMajors »

* If there are some investors who consistently under perform the market, there must also exist some other investors who consistently over perform the market. (in order to balance things out).
* If you know someone who consistently under performs the market, then you can over perform the market by doing the opposite of what the under performer does.
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Re: Make no mistake: Mr. Market is smarter than you

Post by Methedras »

The consistent "overperformer" you have identified are the brokerages and market makers who charge fees and control spreads for trading of securities.

Two retail investors who do opposite transactions may have nearly opposing returns for a single year, but over the long term will both underperform the market due to these additional costs.
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Re: Make no mistake: Mr. Market is smarter than you

Post by Tom_T »

Methedras wrote:The consistent "overperformer" you have identified are the brokerages and market makers who charge fees and control spreads for trading of securities.

Two retail investors who do opposite transactions may have nearly opposing returns for a single year, but over the long term will both underperform the market due to these additional costs.
Not only that, who says that there has to be "a" group of investors who outperform the market? More likely, it's one mutual fund manager one year, and a different one the next year. It's a lot easier to be in the group that consistently underperforms.
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Re: Make no mistake: Mr. Market is smarter than you

Post by pkcrafter »

The article you provided was written by David Beman. Berman provides quotes from Odean, but does not provide any reference/source for them. :confused

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Re: Make no mistake: Mr. Market is smarter than you

Post by MnD »

Methedras wrote:The consistent "overperformer" you have identified are the brokerages and market makers who charge fees and control spreads for trading of securities.

Two retail investors who do opposite transactions may have nearly opposing returns for a single year, but over the long term will both underperform the market due to these additional costs.
The ongoing ER of an individual security is 0.0%
The impact of trading commisions depends on the size of the trade and turnover frequency.
In my taxable account it runs around 0.01% for individual securities.
With decimal trading, the bid/ask "spread" might be a penny or less, depending on the volume of the security.
ETF investors also face the possibility of commissions and a spread, although given large enough transactions and careful execution this can be negligible compared to the fund ER.

The reason many individual stock investors do poorly is not due to fees and spreads but due to the combination of increased volatility for individual stocks coupled with the tendency for hot stock chasing, anchoring, and other psychological factors that often result in a poor buy/sell decision making process.
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Re: Make no mistake: Mr. Market is smarter than you

Post by Browser »

All the points about market timing vs. buy and hold seem directed at short-term in-and-out market timing. I agree that luck controls at least 99% of the variance of returns for short-term timing. But I'm not sure that you can't beat the market with effective long-term timing based on valuations. For example, if I systematically reduce market exposure when valuations are poor (for example, using CAPE) and hold that reduced exposure for a few years, rather than a few weeks or months - and I systematically increase market exposure when valuations are favorable, holding that exposure for a few years, I believe that it can be shown I will do better than holding a constant market exposure over the same time frame -- at least in terms of risk adjusted returns, if not absolute returns. I'd like to see this kind of long term strategic market "timing" analyzed before I'm prepared to throw out the notion completely.
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Re: Make no mistake: Mr. Market is smarter than you

Post by G-Money »

Browser wrote:All the points about market timing vs. buy and hold seem directed at short-term in-and-out market timing. I agree that luck controls at least 99% of the variance of returns for short-term timing. But I'm not sure that you can't beat the market with effective long-term timing based on valuations. For example, if I systematically reduce market exposure when valuations are poor (for example, using CAPE) and hold that reduced exposure for a few years, rather than a few weeks or months - and I systematically increase market exposure when valuations are favorable, holding that exposure for a few years, I believe that it can be shown I will do better than holding a constant market exposure over the same time frame -- at least in terms of risk adjusted returns, if not absolute returns. I'd like to see this kind of long term strategic market "timing" analyzed before I'm prepared to throw out the notion completely.
First, you'd need much clearer parameters outlining when you'd get in and out of the market (which market(s)?). Out when CAPE > 20? 25? In when CAPE < 15? 10? Is it a relative measure, taking into account interest rates? Your theory can't be tested until you explicitly state what your theory is.

And, regrettably, even if you go to the trouble of explicitly outlining when you'd jump in and out, my bet is you are as likely to outperform as you are to underperform. As Tigermoose eloquently stated in a different thread:
Tigermoose wrote:
hsv_climber wrote: "Smart investors know that while there's little to no evidence that you can successfully use valuations to time the market, valuations do matter. " - Larry Swedroe

http://www.cbsnews.com/8301-505123_162- ... to-expect/
In horse racing, it is obvious that the speed of the horse matters in a race. The trouble is, before the race, you just don't know which one is going to be faster in that particular race.
(Also, take a look at the Larry Swedroe article linked there. He expressly discusses the use of CAPE.)

Personally, the idea that a simple metric (after all, you and I can calculate CAPE within minutes with Excel) can somehow allow one to outperform pension funds, university endowments, etc., all of whom have far more sophisticated professionals, more powerful financial computers and programs, and longer investing horizons, doesn't pass the smell test. It's not like those guys haven't heard of CAPE.
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Re: Make no mistake: Mr. Market is smarter than you

Post by Browser »

You assume that I'd be "jumping in and out" of the market at designated valuation breakpoints, such as CAPE > 20 or CAPE < 10 for example. Not so. I would follow a strategy of more gradually increasing or decreasing exposure. For example, one strategy would be to set various thresholds such as CAPE > 20 (go to 50% normal market exposure, >25 (go to 25% normal exposure, >30 (go to 0% normal exposure). Same on the other side for increasing exposure. Next, I would only change a percentage of my total market capital annually, not the entire amount, and then I'd maintain that allocation for, say, 5 years. For example, if in Year 1 CAPE > 20, I'd adjust, say, 20% of my total market capital to 50% exposure, and plan to hold that portion allocation for 5 years. If in Year 2 CAPE is still > 20 but less than 25, I'd adjust another 20% of my total market capital. If in Year 2 CAPE > 25 but less than 30, I'd adjust the 20% from Year 1 to 25% exposure (hold for the next 4 years) and another 20% to 25% exposure (hold for the next 5 years). And so forth. I'd do the same in reverse to gradually increase exposure during declining markets. In this way, I'd be slowly adjusting my total equity allocation and holding those adjustments for several years. This is quite different from popping in and out of the market. The problem with using valuation as a timing trigger is that valuations are not predictive of returns over periods of 5-7 years or shorter. But they are predictive over longer time periods. So the answer to that is making gradual adjustments and using longer holding periods and being patient. This kind of strategy would, for me, be psychologically beneficial if nothing else. I am just so uncomfortable hanging onto the same equity exposure in the face of high and rising P/E multiples. Conversely, I would need some psychological hand-holding to help me increase equity exposure gradually during periods when valuations are becoming more attractive even though the market action is probably scary. If you don't believe that P/E multiples are informative in some useful ways to adjust your equity exposure, then you don't believe in mean reversion.
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Re: Make no mistake: Mr. Market is smarter than you

Post by G-Money »

Browser wrote:You assume that I'd be "jumping in and out" of the market at designated valuation breakpoints, such as CAPE > 20 or CAPE < 10 for example. Not so.
I'm not assuming anything. Whether you are jumping in and out of only a portion of equities, or all equities, doesn't much matter. If you seriously think you've got the magic formula, you just need to explicitly state what rules you'll be following. Otherwise, your method can't be evaluated.
Browser wrote:For example, one strategy would be to set various thresholds such as CAPE > 20 (go to 50% normal market exposure, >25 (go to 25% normal exposure, >30 (go to 0% normal exposure). Same on the other side for increasing exposure. Next, I would only change a percentage of my total market capital annually, not the entire amount, and then I'd maintain that allocation for, say, 5 years. For example, if in Year 1 CAPE > 20, I'd adjust, say, 20% of my total market capital to 50% exposure, and plan to hold that portion allocation for 5 years. If in Year 2 CAPE is still > 20 but less than 25, I'd adjust another 20% of my total market capital. If in Year 2 CAPE > 25 but less than 30, I'd adjust the 20% from Year 1 to 25% exposure (hold for the next 4 years) and another 20% to 25% exposure (hold for the next 5 years). And so forth. I'd do the same in reverse to gradually increase exposure during declining markets.
This is closer to fully explaining your methodology. Obviously, more detail would be needed to cover all possible scenarios, but it's closer.
Browser wrote:The problem with using valuation as a timing trigger is that valuations are not predictive of returns over periods of 5-7 years or shorter. But they are predictive over longer time periods.
Again, this doesn't address why investors with longer time horizons don't already implement this strategy.
Browser wrote:If you don't believe that P/E multiples are informative in some useful ways to adjust your equity exposure, then you don't believe in mean reversion.
You're right. I don't believe there mean reversion is some immutable law which the markets must follow. Future stock returns do not care about past stock returns. Future profits do not care about past profits. The fact that we can look at past performance and find all sorts of interesting patterns doesn't mean those interesting patterns will persist.
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Re: Make no mistake: Mr. Market is smarter than you

Post by Browser »

Browser wrote:
The problem with using valuation as a timing trigger is that valuations are not predictive of returns over periods of 5-7 years or shorter. But they are predictive over longer time periods.
Again, this doesn't address why investors with longer time horizons don't already implement this strategy.
I think it's relatively easy to explain why most individuals don't follow it -- it requires the same patience and long-term perspective that passive buy-and-hold requires, and we know how that's been working out for the majority of investors. Why entities such as pension and endowment funds, which have infinite time horizons, might not exploit it is another matter. Again, one can come up with explanations based on the notion that the managers of such entities are hired and fired based on shorter term results than this valuation strategy would produce. Another perspective is that the long, slow cyclical valuation-based strategy won't improve absolute returns as much as risk-adjusted returns. Pensions and endowments care about absolute returns, but individuals care more about risk-adjusted returns to optimize risk-tolerance. We all know that one of the greatest impediments to "staying the course" is the inability to tolerate downside volatility and bailing out at the wrong time. If my strategy allows me to hold an average equity allocation of 60% over, say, a one, two, or three decade period with a relatively small variation around that mean, I'm probably going to be better off than the guy who does jump in and out based on behavioral reactions to short-term portfolio losses.
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Re: Make no mistake: Mr. Market is smarter than you

Post by G-Money »

If this 99 post thread (which you started) failed to convince you using CAPE isn't the magic bullet you suggest it is, there's nothing I'll be able to say here to convince you.

Good luck.
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Re: Make no mistake: Mr. Market is smarter than you

Post by cflannagan »

G-Money wrote:If this 99 post thread (which you started) failed to convince you using CAPE isn't the magic bullet you suggest it is, there's nothing I'll be able to say here to convince you.

Good luck.
That was a good read (of what I've read so far.. plan to continuing reading the rest) ;)
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Re: Make no mistake: Mr. Market is smarter than you

Post by Browser »

I think most of the thread addressed the issue of using CAPE as a short-term market timing tool. I'm convinced that it isn't useful for that, but I'm not convinced that it can't be used for strategic long-term allocation planning, at least to improve risk-adjusted returns and provide behavioral support for people like me who are afraid that the light at the end of the tunnel ahead might really be a locomotive. At least I'll feel like I'm doing something to get out of the way and save a piece of my hide, and in the process - if it's wrong - at least it's a disciplined process and I'll end up not as bad off as the heart attack I'll have if Mr. SmartMarket decides to hijack 50% of my equity holdings again. :shock:
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Re: Make no mistake: Mr. Market is smarter than you

Post by G-Money »

Browser wrote:At least I'll feel like I'm doing something to get out of the way and save a piece of my hide, and in the process - if it's wrong - at least it's a disciplined process and I'll end up not as bad off as the heart attack I'll have if Mr. SmartMarket decides to hijack 50% of my equity holdings again. :shock:
Well, I'd submit you'd do better to heed Bogle's words: "Don't do something, stand there!" :beer

From the sounds of it, though, your heart is telling you to revisit your AA. :)
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Re: Make no mistake: Mr. Market is smarter than you

Post by MnD »

billyt wrote:An awful lot of posters around here appear to think they are smarter than Mr. Bond Market.
Investing in the bond market is lending. Individual investors are not compelled to lend at whatever rate the market demands while assuming interest-duration risk. We are also not limited to only investing in a certain bond index that even the creator of the modern index fund now characterizes as badly flawed (due to the global currency reserve role of the US$ coupled with the size and liquidity of the Treasury and agency bond market).

It seems be "OK" to consider rates, duration and terms when engaging in other forms of lending and borrowing, such as when mortgage shopping or deciding whether or not to refinance your house with the large variety of notes, terms and durations offered. Pay cash or borrow also seems to be a popular topic on this board. Hold cash or lend via various instruments other than TBM is taboo?

In lending out a significant portion of our investment portfolio, individuals can and do look at options and consider alternatives that are not available to say the governments of Norway and China. And doing some thinking about what terms we as individual investors are willing to lend at, and whether offered terms and risks are acceptable or unacceptable.

Lending is not stock market investing. If you lend at 1.5% for 6 years, there is no potential big upside that's going to reward you in an outsized manner for taking on those terms and risks. In stock market investing even "fully priced" markets may double in value if a variety of factors come to pass. You may in fact "miss out" by not holding market risk. There's a less compelling case for always holding interest risk regardless of current yields. Many people are in fixed income alternatives to TBM not because they thought it was going to drop some huge percentage, but simply felt that yields did not compensate them for the interest risk. Something can be not terribly risky but still represent a poor value, especially when there are good alternatives available.

Carrying interest risk does hold the possibility of speculative capital gains in addition to the yield, but at yields as low as 1.5% recently and with interest rates on nominal bonds usually bounded by zero, what were those potential upsides versus potential downsides? Bond investors have been richly rewarded over the past 30 years as rates declined roughly an order of magnitude from ~15% to ~1.5% last year. I wouldn't hold your breath for a repeat performance.
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Re: Make no mistake: Mr. Market is smarter than you

Post by billyt »

Where does this myth come from about rich rewards from falling rates over the last 30 year? Bond and bond fund total returns have done nothing but fall for the last 30 years. Any NAV gain is temporary (unless you sell right away) because the bonds will return to par at maturity. Yes, you can sell your high-yielding bond for more than you paid, but then you must reinvest that money at lower rates. Falling rates lower the return of bonds and bond funds, not increase them.
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Re: Make no mistake: Mr. Market is smarter than you

Post by JoMoney »

Browser wrote:I think most of the thread addressed the issue of using CAPE as a short-term market timing tool. I'm convinced that it isn't useful for that, but I'm not convinced that it can't be used for strategic long-term allocation planning, at least to improve risk-adjusted returns and provide behavioral support for people like me who are afraid that the light at the end of the tunnel ahead might really be a locomotive. At least I'll feel like I'm doing something to get out of the way and save a piece of my hide, and in the process - if it's wrong - at least it's a disciplined process and I'll end up not as bad off as the heart attack I'll have if Mr. SmartMarket decides to hijack 50% of my equity holdings again. :shock:
You're right about improving risk-adjusted returns. When you mix two uncorrelated assets you'll always have less risk then if you only held the most "risky" one. Most of the time your returns will be somewhere in the middle of the two.
If I'm understanding your strategy right, for all intents and purposes it's the same as people who "re-balance" based on price relative to their asset percentage mix. Instead of basing it on price alone, you incorporate a moving average of the past decades earnings with CAPE. Personally, I don't think you're likely to hold on to any extra return you may (or may not) see from time to time. You may luck out and make a few good trades, but the more you move it around, the more likely your results will just be a weighted average between the two assets - but you will certainly have less risk than either alone. Your method just requires a little more calculating then other rebalancing strategies.
If it helps you stay invested, it's definitely better then not saving at all, and there's no telling that it won't work out well. If any of us were certain about timing the market I'm sure we'd do it. Good Luck! :happy
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Re: Make no mistake: Mr. Market is smarter than you

Post by Tigermoose »

I suspect that mean reversion is a story we tell ourselves when we look at past data --- a lot like "technical analysis" and "world history." Sure, it makes sense and its a good story, but its worthless for predicting the future.
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Re: Make no mistake: Mr. Market is smarter than you

Post by Browser »

When I have the time to do it, I'll run some numbers just to see how I would have fared from, say, 1990 - 2001 if I'd used the gradual valuation-based allocation strategy I described. And it might be interesting to run it again for 2003 - 2009 or so. I suspect it would have improved at least risk-adjusted returns over buy-and-hold during those time periods. It would have kept you at least partially in the market during the bubble runups and gradually reducing your exposure so that you wouldn't have been totally whacked by the market wipeouts in 2001 and 2008.
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Re: Make no mistake: Mr. Market is smarter than you

Post by umfundi »

BradMajors wrote:* If there are some investors who consistently under perform the market, there must also exist some other investors who consistently over perform the market. (in order to balance things out).
* If you know someone who consistently under performs the market, then you can over perform the market by doing the opposite of what the under performer does.
Those who outperform the market do not do so consistently.

Those who consistently underperform the market do so because of fees.

Market averages are cap-weighted and are averages, not medians. The "average stock" is actually the median stock, and it will underperform the market.

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Re: Make no mistake: Mr. Market is smarter than you

Post by magician »

It isn't so much that Mr. Market is smarter than you are (though he might be): Mr. Market runs the game. He decides on the prices of the securities, whether they're rational or not, justified or not. You may be a lot smarter than he in determining the proper, rational, justified prices of securities, but he gets to decide what they'll be, your analysis notwithstanding.
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Re: Make no mistake: Mr. Market is smarter than you

Post by MathWizard »

billyt wrote:An awful lot of posters around here appear to think they are smarter than Mr. Bond Market.
The difference between the bond market and the stock market is the direct effect of monetary policy by the
FED to keep interest rates low. This is an indirect attempt by the FED to spur investment, which indirectly
increases overall equity prices, or so the FED appears to hope.

In my opinion, this non-market force shifts the risk adjusted return to favor equities over bonds.
My AA has shifted more towards equities as a result. I don't want to lock in low 30 year rates in bonds,
so I choose short-term bond funds instead. If that makes me a bond market timer, then so be it.
If I am in it for the long-term, and can weather downturns in a diversified stock portfolio,
why should I be locking in sub-par bond returns?

Once the artificial effects of the FED are removed, I'll shift back.

If somebody has their thumb on the scale at the fish market, I'll shop for steak.
Browser
Posts: 4857
Joined: Wed Sep 05, 2012 4:54 pm

Re: Make no mistake: Mr. Market is smarter than you

Post by Browser »

Commentary from Bill Bonner about Mr. Market:
Mr. Market is watching. He allows bulls to make money. He allows bears to make money. He allows smart people to make money. And dumb people too.

But at some point, Mr. Market gets tired of watching people make money. He likes to see them all lose money too. This could be one of those times …
It does worry me that dumb people do seem to be making money again in stocks these days -- bad karma.
We don't know where we are, or where we're going -- but we're making good time.
technovelist
Posts: 3611
Joined: Wed Dec 30, 2009 8:02 pm

Re: Make no mistake: Mr. Market is smarter than you

Post by technovelist »

MathWizard wrote:
billyt wrote:An awful lot of posters around here appear to think they are smarter than Mr. Bond Market.
The difference between the bond market and the stock market is the direct effect of monetary policy by the
FED to keep interest rates low. This is an indirect attempt by the FED to spur investment, which indirectly
increases overall equity prices, or so the FED appears to hope.

In my opinion, this non-market force shifts the risk adjusted return to favor equities over bonds.
My AA has shifted more towards equities as a result. I don't want to lock in low 30 year rates in bonds,
so I choose short-term bond funds instead. If that makes me a bond market timer, then so be it.
If I am in it for the long-term, and can weather downturns in a diversified stock portfolio,
why should I be locking in sub-par bond returns?

Once the artificial effects of the FED are removed, I'll shift back.

If somebody has their thumb on the scale at the fish market, I'll shop for steak.
So you don't think that the Fed's thumb on the scale affects stocks in much the same way as it does bonds? I'm pretty sure it does, in which case they are also overpriced.
In theory, theory and practice are identical. In practice, they often differ.
MathWizard
Posts: 6542
Joined: Tue Jul 26, 2011 1:35 pm

Re: Make no mistake: Mr. Market is smarter than you

Post by MathWizard »

technovelist wrote:
MathWizard wrote:
billyt wrote:An awful lot of posters around here appear to think they are smarter than Mr. Bond Market.
The difference between the bond market and the stock market is the direct effect of monetary policy by the
FED to keep interest rates low. This is an indirect attempt by the FED to spur investment, which indirectly
increases overall equity prices, or so the FED appears to hope.

In my opinion, this non-market force shifts the risk adjusted return to favor equities over bonds.
My AA has shifted more towards equities as a result. I don't want to lock in low 30 year rates in bonds,
so I choose short-term bond funds instead. If that makes me a bond market timer, then so be it.
If I am in it for the long-term, and can weather downturns in a diversified stock portfolio,
why should I be locking in sub-par bond returns?

Once the artificial effects of the FED are removed, I'll shift back.

If somebody has their thumb on the scale at the fish market, I'll shop for steak.
So you don't think that the Fed's thumb on the scale affects stocks in much the same way as it does bonds? I'm pretty sure it does, in which case they are also overpriced.
I think that the effect of the low interest rates is to spur investment in new equipment and investment in new startups.
I can't pick which companies will benefit from this, but the total market should. The benefits of the low interest rates now
will last long into the future for companies which invest for the long-term using the current low rates. This is more of a
value argument. The value of a business can rise even when the price does not rise.

I may very well be all wet, but so be it. If they are both over-priced, then it hardly matters whether I choose
stocks or bonds if I can stay the course. I'm not planning to go all cash.
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