4 ms·

Are you saying that the novices are the cause of overly high valuations? If so I'm rather skeptical because these novices control very small amounts of money ev

by vostok 9y ago

Are you saying that the novices are the cause of overly high valuations? If so I'm rather skeptical because these novices control very small amounts of money even in aggregate. If you're saying that the novices are just bad investors who always buy at the wrong time then I'd want a little more evidence of that. My base assumption is that the novices do not have predictive power and are simply "noise traders". Note that I'm not expressing a view on the market in this comment.

mcappleton 9y ago
The point is that when novice investors finally know about it and get in, all the good investors have already been in for a while. At that point, there is no one left to buy. If there is no one left to buy, the stock quits going up. Of course then people will start selling, the smart ones first.
- WalterBright 9y ago
  The stock price is always at an equilibrium between buyers and sellers, i.e. the number of each is the same.
  - mcappleton 9y ago
    If it was always at equilibrium, price would always be the same. A crash occurs when there are no buyers. To generate demand people offer their shares at very low prices. Then hopefully someone will buy. But if no one does, the offer their shares at even lower prices, and that's how the tumble works.
cbanek 9y ago
The big investing fad now is all about indexing. That's what everyone recommends, including Warren Buffet. This means that with less than $1000, you can own a representation of the S&P500, weighted by market cap, either through ETFs or mutual funds. Weighted by market cap means that you're putting a larger percentage of that $1000 into the bigger companies, versus the smaller companies. When a few companies start to dominate the market, everyone can be overweight a few stocks in the same way, and not even know it. https://www.cnbc.com/2017/05/17/four-tech-heavyweights-make-up-a-huge-share-of-the-sp-500.html https://www.cnbc.com/2017/05/17/four-tech-heavyweights-make-...
- vostok 9y ago
  One of the ideas of cap weighting is that it has minimal impact. If company A is worth 10x what company B is worth then I can buy 10x of company A and 1x of company B to spread my impact as evenly as possible.
  - cbanek 9y ago
    But if everyone does that, that inherently pushes up the price of company A a lot faster than company B. Which reinforces the feedback loop of the bigger they are the more you buy. This is all done without anything needing to happen to the actual value of the company. Only active traders and institutions would sell individual stocks to bring that value down. Selling the index keeps the market weights even. The minimal impact of cap weighting is actually that you don't have to rebalance your investments to keep them tracking the same. By them going up and down, they keep the same percentage by market cap weight. What you seem to be saying is good is diversification, which it is, but you have to make sure you are well diversified.
    - vostok 9y ago
      > But if everyone does that, that inherently pushes up the price of company A a lot faster than company B. Can you explain how this works? Suppose Company A is worth $100 billion and Company B is worth $10 billion. Buying $100 of Company A and buying $10 of Company B shouldn't push up the price of Company A faster than Company B. You're buying 0.0000001% of each company so you'd expect that you'd push up the price of both companies at the same rate. > The minimal impact of cap weighting is actually that you don't have to rebalance your investments to keep them tracking the same. By them going up and down, they keep the same percentage by market cap weight. Yes this is another benefit of cap weighting.
      - cbanek 9y ago
        > Suppose Company A is worth $100 billion and Company B is worth $10 billion. Buying $100 of Company A and buying $10 of Company B shouldn't push up the price of Company A faster than Company B. You're buying 0.0000001% of each company so you'd expect that you'd push up the price of both companies at the same rate. Sorry, you're totally right. The prices should increase in the same weighting when buying just like they go down in the same when selling. The difference is that you're weighted by market caps, so you're increasing the P/E of the entire market (in a super small way). That is, you're not investing more in companies that are valued more "attractively" (lower P/E multiple) than those that might be "over valued" (high P/E), which is what the market typically does to determine prices.
thisisit 9y ago
Not really. The idea is if everyone and their mom think they should buy stock then it could point to overheating in the market. This idea comes from Joe Kennedy's experience with a shoeshine boy during 1930 great depression: http://archive.fortune.com/magazines/fortune/fortune_archive/1996/04/15/211503/index.htm http://archive.fortune.com/magazines/fortune/fortune_archive...

by vostok 9y ago

mcappleton 9y ago

The point is that when novice investors finally know about it and get in, all the good investors have already been in for a while. At that point, there is no one left to buy. If there is no one left to buy, the stock quits going up. Of course then people will start selling, the smart ones first.

WalterBright 9y ago
The stock price is always at an equilibrium between buyers and sellers, i.e. the number of each is the same.
- mcappleton 9y ago
  If it was always at equilibrium, price would always be the same. A crash occurs when there are no buyers. To generate demand people offer their shares at very low prices. Then hopefully someone will buy. But if no one does, the offer their shares at even lower prices, and that's how the tumble works.

cbanek 9y ago

The big investing fad now is all about indexing. That's what everyone recommends, including Warren Buffet. This means that with less than $1000, you can own a representation of the S&P500, weighted by market cap, either through ETFs or mutual funds. Weighted by market cap means that you're putting a larger percentage of that $1000 into the bigger companies, versus the smaller companies. When a few companies start to dominate the market, everyone can be overweight a few stocks in the same way, and not even know it. https://www.cnbc.com/2017/05/17/four-tech-heavyweights-make-up-a-huge-share-of-the-sp-500.html https://www.cnbc.com/2017/05/17/four-tech-heavyweights-make-...

vostok 9y ago
One of the ideas of cap weighting is that it has minimal impact. If company A is worth 10x what company B is worth then I can buy 10x of company A and 1x of company B to spread my impact as evenly as possible.
- cbanek 9y ago
  But if everyone does that, that inherently pushes up the price of company A a lot faster than company B. Which reinforces the feedback loop of the bigger they are the more you buy. This is all done without anything needing to happen to the actual value of the company. Only active traders and institutions would sell individual stocks to bring that value down. Selling the index keeps the market weights even. The minimal impact of cap weighting is actually that you don't have to rebalance your investments to keep them tracking the same. By them going up and down, they keep the same percentage by market cap weight. What you seem to be saying is good is diversification, which it is, but you have to make sure you are well diversified.
  - vostok 9y ago
    > But if everyone does that, that inherently pushes up the price of company A a lot faster than company B. Can you explain how this works? Suppose Company A is worth $100 billion and Company B is worth $10 billion. Buying $100 of Company A and buying $10 of Company B shouldn't push up the price of Company A faster than Company B. You're buying 0.0000001% of each company so you'd expect that you'd push up the price of both companies at the same rate. > The minimal impact of cap weighting is actually that you don't have to rebalance your investments to keep them tracking the same. By them going up and down, they keep the same percentage by market cap weight. Yes this is another benefit of cap weighting.
    - cbanek 9y ago
      > Suppose Company A is worth $100 billion and Company B is worth $10 billion. Buying $100 of Company A and buying $10 of Company B shouldn't push up the price of Company A faster than Company B. You're buying 0.0000001% of each company so you'd expect that you'd push up the price of both companies at the same rate. Sorry, you're totally right. The prices should increase in the same weighting when buying just like they go down in the same when selling. The difference is that you're weighted by market caps, so you're increasing the P/E of the entire market (in a super small way). That is, you're not investing more in companies that are valued more "attractively" (lower P/E multiple) than those that might be "over valued" (high P/E), which is what the market typically does to determine prices.

thisisit 9y ago

Not really. The idea is if everyone and their mom think they should buy stock then it could point to overheating in the market. This idea comes from Joe Kennedy's experience with a shoeshine boy during 1930 great depression: http://archive.fortune.com/magazines/fortune/fortune_archive/1996/04/15/211503/index.htm http://archive.fortune.com/magazines/fortune/fortune_archive...