Do you use any economic "theory" in your approach to investing?

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Ron Scott
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Do you use any economic "theory" in your approach to investing?

Post by Ron Scott » Mon Oct 22, 2018 5:40 pm

I don't think I do.

I trust the US economy more than "the world" or individual entities, so I'm kind of a 2-fund investor. The general BH approach with indexing makes sense, as does low-cost, but that's not really theoretical; more of an indictment of actively-managed schemes over their lifespans.

My AA is about 40-60 sans real estate, based on my interest in living off bonds alone.

I cannot think of one economic theory I actually use? (I believe in my signature...) Maybe I'm missing it.

You?
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vineviz
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Re: Do you use any economic "theory" in your approach to investing?

Post by vineviz » Mon Oct 22, 2018 5:47 pm

Ron Scott wrote:
Mon Oct 22, 2018 5:40 pm
I cannot think of one economic theory I actually use? (I believe in my signature...) Maybe I'm missing it.
Yep. You’re missing it.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Oicuryy
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Re: Do you use any economic "theory" in your approach to investing?

Post by Oicuryy » Mon Oct 22, 2018 6:42 pm

I believe it's called Capitalism.

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megabad
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Re: Do you use any economic "theory" in your approach to investing?

Post by megabad » Mon Oct 22, 2018 6:49 pm

Ron Scott wrote:
Mon Oct 22, 2018 5:40 pm
I don't think I do.

I trust the US economy more than "the world" or individual entities, so I'm kind of a 2-fund investor. The general BH approach with indexing makes sense, as does low-cost, but that's not really theoretical; more of an indictment of actively-managed schemes over their lifespans.

My AA is about 40-60 sans real estate, based on my interest in living off bonds alone.

I cannot think of one economic theory I actually use? (I believe in my signature...) Maybe I'm missing it.

You?
You can't think of one economic theory you use? Why do you "trust the US economy more than the world"? What makes the US economy different in your eyes? Is indexing an indictment of active management or is active management and attempted indictment of indexing? Why does indexing and low cost make sense? What makes low cost options a possible? Why have fund expenses gone down as a whole in recent years? Why do have a 40/60 allocation? Why do you invest in bonds? Why do you invest in equities?

To me, your post appears to describe numerous elements of economic theory and/or the results of such.

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Alexa9
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Re: Do you use any economic "theory" in your approach to investing?

Post by Alexa9 » Mon Oct 22, 2018 6:52 pm

Efficient Market Hypothesis is the strongest case for indexing. As Bogle quoted one of his bosses in his early days, "Nobody knows nothing!"

zengolf2011
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Re: Do you use any economic "theory" in your approach to investing?

Post by zengolf2011 » Mon Oct 22, 2018 7:20 pm

I think most investors subscribe to the theory that the economy will expand over the long run. I think many of us doubt the reliability of short-term forecasting. To me, these two beliefs are the theoretical basis for my buy-and-hold approach to investing.

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JoMoney
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Re: Do you use any economic "theory" in your approach to investing?

Post by JoMoney » Mon Oct 22, 2018 7:46 pm

Alexa9 wrote:
Mon Oct 22, 2018 6:52 pm
Efficient Market Hypothesis is the strongest case for indexing. As Bogle quoted one of his bosses in his early days, "Nobody knows nothing!"
Contrary to this, I think the EMH sends people off on a tangent (pun intended) looking for theoretically optimal 'efficient' portfolios that don't work out in practice.
If the market isn't 'efficient'... :
Dr. Steven Thorley in The Inefficient Markets Argument for Passive Investing , 1999 wrote:... If prices in the stock market are not efficient and investing is a skill-based game, then low-skilled investors will consistently lose to players with a competitive advantage. If, on the other hand, you assume that the market is perfectly efficient, then the less-skilled players have the same one-in-three chance of beating the index as everyone else. Market efficiency protects the less-skilled players from routinely making bad investments. There is, however, no such protection in an inefficient market, and so the active investing majority that underperforms the index will tend to be the same every year. The argument for indexing is even stronger for most investors if the stock market is not efficient.

About two-thirds of all active investors, whose only financial justification for being active is beating the index, must fail in that objective each year. The two-thirds failure rate is as mathematically certain as the forecast that exactly half of the workforce will earn less than the median income. Each active investor should therefore confront both the question: Am I in the top third of everyone who thinks they are? And the unavoidable answer: Probably not...
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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nisiprius
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Re: Do you use any economic "theory" in your approach to investing?

Post by nisiprius » Mon Oct 22, 2018 8:04 pm

John C. Bogle's "CMH" (Cost Matters Hypothesis).
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Re: Do you use any economic "theory" in your approach to investing?

Post by drk » Mon Oct 22, 2018 8:22 pm

Sure, I use the only true theories in economics: those of behavioral economics. I try to avoid "theories."

UpperNwGuy
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Re: Do you use any economic "theory" in your approach to investing?

Post by UpperNwGuy » Mon Oct 22, 2018 8:47 pm

I don't use an economic theory to guide my investing. I know enough about economics to know that I am not knowledgeable enough about its theoretical aspects to base my investment decisions on economic theory.

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SevenBridgesRoad
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Re: Do you use any economic "theory" in your approach to investing?

Post by SevenBridgesRoad » Mon Oct 22, 2018 8:53 pm

Let's get grounded in a definition. "Theory" definition: a supposition or a system of ideas intended to explain something, especially one based on general principles independent of the thing to be explained.

From your writings (posts), I think you have a theory (i.e. "a system of ideas...based on general principles...")

A theory can be valid or not. A theory must be tested to determine validity.

A theory gets tested by experiments and/or measurable reality and becomes more and more valid as it seems to predict measurable results (or less and less valid as it does not reflect observed and measurable reality).

So, I would guess you hold to be true: a theory of "Random Walk Down Wall Street", which I think the data supports. This is (I'm guessing) part (part!) of your system of ideas intended to explain something, thus a theory.

I happen to think your system of ideas (theory) is valid, based on observable, measurable results.

Others?
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Ron Scott
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Re: Do you use any economic "theory" in your approach to investing?

Post by Ron Scott » Mon Oct 22, 2018 11:12 pm

Oicuryy wrote:
Mon Oct 22, 2018 6:42 pm
I believe it's called Capitalism.
LOL, yes I am a capitalist. I never actually thought of it as much a theory as an ideological system. A horrible system actually; only better than the others.

Alexa9 wrote:
Mon Oct 22, 2018 6:52 pm
Efficient Market Hypothesis is the strongest case for indexing.
I actually argued fairly strongly in favor of this point in the lengthy "tautology" thread and was pounded by more than one BH "economist" who said EMH had nothing to do with diversification or indexing. But I agree with you. What I disagree with is the need for EMH for investing. It doesn't lay out indexing per se, nor does it precede the understanding and wide use of diversification approaches to investment. I don't use it myself and I'd say most BHers would refer to the failure of active management, not EMH, as the reason for their passive investments.

megabad wrote:
Mon Oct 22, 2018 6:49 pm
You can't think of one economic theory you use? Why do you "trust the US economy more than the world"? What makes the US economy different in your eyes? Is indexing an indictment of active management or is active management and attempted indictment of indexing? Why does indexing and low cost make sense? What makes low cost options a possible? Why have fund expenses gone down as a whole in recent years? Why do have a 40/60 allocation? Why do you invest in bonds? Why do you invest in equities?
I guess I do not see the issues raised in your questions as theories.

Here's a list of the 50 most important economic theories in one person's opinion. I do not know all of them and do not use any in my investing approach.
https://seekingalpha.com/article/156431 ... c-theories

nisiprius wrote:
Mon Oct 22, 2018 8:04 pm
John C. Bogle's "CMH" (Cost Matters Hypothesis).
To get grounded, here's the point at hand: No matter how efficient or inefficient markets may be, the returns earned by investors as a group must fall short of the market returns by precisely the amount of the aggregate costs they incur.

True, but that's not really an economic theory as much as it is a logical statement of fact. Sort of like saying you will never realize the fullest gain to be had on a tax refund if you pay an accountant to prepare your return.

UpperNwGuy wrote:
Mon Oct 22, 2018 8:47 pm
I don't use an economic theory to guide my investing. I know enough about economics to know that I am not knowledgeable enough about its theoretical aspects to base my investment decisions on economic theory.
This is where I'm at, although I'll go out on a limb and say that economics hasn't really contributed much to the understanding or applied practice of successful investing.

vineviz wrote:
Mon Oct 22, 2018 5:47 pm
Yep. You’re missing it.
Don't leave us hanging. What is it?

SevenBridgesRoad wrote:
Mon Oct 22, 2018 8:53 pm
Let's get grounded in a definition. "Theory" definition: a supposition or a system of ideas intended to explain something, especially one based on general principles independent of the thing to be explained.

From your writings (posts), I think you have a theory (i.e. "a system of ideas...based on general principles...")

A theory can be valid or not. A theory must be tested to determine validity.

A theory gets tested by experiments and/or measurable reality and becomes more and more valid as it seems to predict measurable results (or less and less valid as it does not reflect observed and measurable reality).

So, I would guess you hold to be true: a theory of "Random Walk Down Wall Street", which I think the data supports. This is (I'm guessing) part (part!) of your system of ideas intended to explain something, thus a theory.

I happen to think your system of ideas (theory) is valid, based on observable, measurable results.

Others?
Thank you.

Let's ground this one too:

The so-called "Random Walk Theory" is that the past movement or direction of the price of overall market or an individual stock is not a suitable predictor of future movement. Stock price fluctuations are independent of one another, they have the same probability distribution, and over a period of time, prices maintain an upward trend.

Essentially, this theory holds that stock prices take a random path, and one that is unpredictable. Practitioners of the theory believes that it is impossible to outperform the broader market unless one takes on additional risk. Malkiel advised in his book that both technical analysis and fundamental analysis are, effectively, a waste of time, and they are still unproven in being able to outperform markets over the long term.

As a result of these ideas, Malkiel and other believers in the random walk theory believe that a long-term buy-and-hold strategy is the most effective, and that any attempts to time the market are futile. In the book, Malkiel backs up this assertion with statistics that show that most mutual funds fail to beat benchmark averages, including the S&P 500.


I do believe this. And I do have specific ideas and beliefs that guide my investing. I do not believe the Random Walk preceded diversification as a strategy to benefit from the market without falling for its downside risks, and I think Bogle et al developed index funds because they saw how poorly active funds behaved in comparison to the market indexes, not because of Malkiel's work.
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.

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SevenBridgesRoad
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Re: Do you use any economic "theory" in your approach to investing?

Post by SevenBridgesRoad » Mon Oct 22, 2018 11:40 pm

Yes! Exactly!!

You, therefore, do have a theory, an "economic theory in your approach to investing".

And there is a lot of data to validate your theory. I happen to agree with your theory and it's validity.
There are stars in the Southern sky | And if ever you decide | You should go | There is a taste of time sweetened honey | Down the Seven Bridges Road

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