4 ms·

Stocks for the Long Run

9 points by prakash 18y ago

byrneseyeview 18y ago
http://finance.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=Logarithmic&chdeh=0&chdet=1221681600000&chddm=3927595&q=INDEXSP:.INX&ntsp=0 http://finance.google.com/finance?chdnp=1&chdd=1&chd... Yes, I can see how you would think that. There's even a small chance that 1999-2014 or 2000-2015 will be the first fifteen-year stretch in which stocks were not profitable to own (these data only go back to the 20's -- see Ibbotson's research for more). From the comments: "Today I lost the faith and ended all my investments in stocks. Maybe it comes back, but all experts seem to agree that it is extremely unsure what the future will bring. Too much uncertainty for me. Today 6% interest on a 5 year deposit seems like a very good deal." This is not exactly rational behavior. Stocks are ownership in a business. Consider the parable of Mr. Market: you and Mr. Market have founded a startup, despite Mr. Market's diagnosed case of manic depression. Every day, Mr. Market will offer to buy your share in the business, or sell his, at a particular price. Today, Mr. Market cut his asking price by another 3% -- when he's offering his share of the business for less, why does that make you want to sell?
- jon_dahl 18y ago
  | This is not exactly rational behavior. Exactly what behavioral finance has found. IMO, investing well is less about making the right picks (buy x now, sell y now) and more about saving yourself from yourself. After the market has been down for 8 months, people get scared and feel the need to get out of stocks. But that's exactly the wrong time to get out.
- coliveira 18y ago
  ". Today, Mr. Market cut his asking price by another 3% -- when he's offering his share of the business for less, why does that make you want to sell?" You only want to sell if your business is buying and selling stocks, and not owning a business. Most people get confused by the difference between owning part of a business (and making money on the long run), and making money by buying and selling stocks. These are two distinct ways of making money, although they use the same instrument. It is in a sense similar to investing in real estate and flipping houses. On the other hand, the Wall Street model favors the short-term traders. For example, in the case of bankruptcy the stock owner loses everything, while the short seller makes big bucks...
  - byrneseyeview 18y ago
    Most people get confused by the difference between owning part of a business (and making money on the long run), and making money by buying and selling stocks. A stock is a way to divide up a business. The distinction is that you can rapidly trade stocks, not that you should. On the other hand, the Wall Street model favors the short-term traders. For example, in the case of bankruptcy the stock owner loses everything, while the short seller makes big bucks... This doesn't make sense. If you short a private business, the same thing will happen (it is extremely rare to actually do this, but UBS did 'short' LTCM through a swap deal).
steveplace 18y ago
Buy and Hold is not a form of risk management.
- byrneseyeview 18y ago
  "Sell it when it's on sale" isn't a way to produce capital gains.
  - steveplace 18y ago
    "Sell when your overexposed to a particular asset class" is a much nicer approach. That's a fancy way of saying take profits.
    - byrneseyeview 18y ago
      Sell when my overexposed to an asset class what? I don't understand how that's relevant, anyway: if the price of one asset class goes down, you are less exposed than before -- and if you are still overexposed, why didn't you sell earlier?
      - steveplace 18y ago
        Here's two questions that many people don't ask themselves when they invest. 1) Buy and hold until when? 2) What if you're wrong? As for becoming overexposed... if you've got Stock/Index A that is allocated for 10% of your portfolio and the market price doubles, you're allocation is now 20% (all things being equal). So you need to adjust your position sizing, unless you want to have 20% of your assets under that particular security. That's part of portfolio rebalancing and money management. If the price of a security goes down and you want to have the same exposure in it, then you would buy more to maintain it. I also don't think people really take asset classes into account, mainly because there's not a lot of money in their portfolio to be truly diversified.
        byrneseyeview 18y ago
        1) Until I can find a better business at a better price, adjusted for tax consequences? 2) It's impossible to usefully answer this question without recursing into nihilism. Consider: I think there's an 80% chance that BioCo's new drug will be a hit, and the stock will go from $5 to $10. Does "What if you're wrong?" mean I dial up the uncertainty everywhere (70% chance of going from $5 to somewhere between $8 and $12?). Okay, fine. Now I think there's a 70% chance that the new drug will be a hit, and the stock will trade between $8 and $12. But what if I'm wrong? Well, it must be time to dial up the uncertainty even more -- 50/50 chance of trading between $5 and $15, perhaps. It doesn't add any useful information to just keep second-guessing oneself, or to have a rule that amounts to "Be less certain than you usually are, except about the statement "Be less certain than you usually are, except about the statement "Be less certain...""" It's good to collect enough information to consider different scenarios, but it does no good to blindly assume that you're wrong about a given stock. As for becoming overexposed... if you've got Stock/Index A that is allocated for 10% of your portfolio and the market price doubles, you're allocation is now 20% (all things being equal). So you need to adjust your position sizing, unless you want to have 20% of your assets under that particular security. That's part of portfolio rebalancing and money management. If the price of a security goes down and you want to have the same exposure in it, then you would buy more to maintain it. That's true. In a scenario like the one we have now, that would imply buying. Also, holding (until a better deal comes along). I also don't think people really take asset classes into account, mainly because there's not a lot of money in their portfolio to be truly diversified. I'm not sure what this means. Asset-class allocators don't seem to get better results than people who buy good businesses at good prices. At least, I see fewer people who allocate their way onto the Forbes 400.
DanHulton 18y ago
There's a beauty comment there (top of the list when I checked) about how the author is measuring from the peak of the dot-com bubble to our current, pretty awful trough (though I guess likely to proceed still lower). "Looking back 6 years (to mid-September 2002), counting the recent turmoils, the S&P500 has had average non-inflation-adjusted growth of 4.9% per year. Looking back 12 years (to 1996) the growth is 4.6%." Lies, damned lies, and statistics.
- steveplace 18y ago
  Probably closer to damned lies. Dividends aren't taken into account, and inflation is reported much lower than what it really is.

9 points by prakash 18y ago

http://finance.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=Logarithmic&chdeh=0&chdet=1221681600000&chddm=3927595&q=INDEXSP:.INX&ntsp=0 http://finance.google.com/finance?chdnp=1&chdd=1&chd... Yes, I can see how you would think that. There's even a small chance that 1999-2014 or 2000-2015 will be the first fifteen-year stretch in which stocks were not profitable to own (these data only go back to the 20's -- see Ibbotson's research for more). From the comments: "Today I lost the faith and ended all my investments in stocks. Maybe it comes back, but all experts seem to agree that it is extremely unsure what the future will bring. Too much uncertainty for me. Today 6% interest on a 5 year deposit seems like a very good deal." This is not exactly rational behavior. Stocks are ownership in a business. Consider the parable of Mr. Market: you and Mr. Market have founded a startup, despite Mr. Market's diagnosed case of manic depression. Every day, Mr. Market will offer to buy your share in the business, or sell his, at a particular price. Today, Mr. Market cut his asking price by another 3% -- when he's offering his share of the business for less, why does that make you want to sell?

jon_dahl 18y ago
| This is not exactly rational behavior. Exactly what behavioral finance has found. IMO, investing well is less about making the right picks (buy x now, sell y now) and more about saving yourself from yourself. After the market has been down for 8 months, people get scared and feel the need to get out of stocks. But that's exactly the wrong time to get out.
coliveira 18y ago
". Today, Mr. Market cut his asking price by another 3% -- when he's offering his share of the business for less, why does that make you want to sell?" You only want to sell if your business is buying and selling stocks, and not owning a business. Most people get confused by the difference between owning part of a business (and making money on the long run), and making money by buying and selling stocks. These are two distinct ways of making money, although they use the same instrument. It is in a sense similar to investing in real estate and flipping houses. On the other hand, the Wall Street model favors the short-term traders. For example, in the case of bankruptcy the stock owner loses everything, while the short seller makes big bucks...
- byrneseyeview 18y ago
  Most people get confused by the difference between owning part of a business (and making money on the long run), and making money by buying and selling stocks. A stock is a way to divide up a business. The distinction is that you can rapidly trade stocks, not that you should. On the other hand, the Wall Street model favors the short-term traders. For example, in the case of bankruptcy the stock owner loses everything, while the short seller makes big bucks... This doesn't make sense. If you short a private business, the same thing will happen (it is extremely rare to actually do this, but UBS did 'short' LTCM through a swap deal).

steveplace 18y ago

Buy and Hold is not a form of risk management.

byrneseyeview 18y ago
"Sell it when it's on sale" isn't a way to produce capital gains.
- steveplace 18y ago
  "Sell when your overexposed to a particular asset class" is a much nicer approach. That's a fancy way of saying take profits.
  - byrneseyeview 18y ago
    Sell when my overexposed to an asset class what? I don't understand how that's relevant, anyway: if the price of one asset class goes down, you are less exposed than before -- and if you are still overexposed, why didn't you sell earlier?
    - steveplace 18y ago
      Here's two questions that many people don't ask themselves when they invest. 1) Buy and hold until when? 2) What if you're wrong? As for becoming overexposed... if you've got Stock/Index A that is allocated for 10% of your portfolio and the market price doubles, you're allocation is now 20% (all things being equal). So you need to adjust your position sizing, unless you want to have 20% of your assets under that particular security. That's part of portfolio rebalancing and money management. If the price of a security goes down and you want to have the same exposure in it, then you would buy more to maintain it. I also don't think people really take asset classes into account, mainly because there's not a lot of money in their portfolio to be truly diversified.
      - byrneseyeview 18y ago
        1) Until I can find a better business at a better price, adjusted for tax consequences? 2) It's impossible to usefully answer this question without recursing into nihilism. Consider: I think there's an 80% chance that BioCo's new drug will be a hit, and the stock will go from $5 to $10. Does "What if you're wrong?" mean I dial up the uncertainty everywhere (70% chance of going from $5 to somewhere between $8 and $12?). Okay, fine. Now I think there's a 70% chance that the new drug will be a hit, and the stock will trade between $8 and $12. But what if I'm wrong? Well, it must be time to dial up the uncertainty even more -- 50/50 chance of trading between $5 and $15, perhaps. It doesn't add any useful information to just keep second-guessing oneself, or to have a rule that amounts to "Be less certain than you usually are, except about the statement "Be less certain than you usually are, except about the statement "Be less certain...""" It's good to collect enough information to consider different scenarios, but it does no good to blindly assume that you're wrong about a given stock. As for becoming overexposed... if you've got Stock/Index A that is allocated for 10% of your portfolio and the market price doubles, you're allocation is now 20% (all things being equal). So you need to adjust your position sizing, unless you want to have 20% of your assets under that particular security. That's part of portfolio rebalancing and money management. If the price of a security goes down and you want to have the same exposure in it, then you would buy more to maintain it. That's true. In a scenario like the one we have now, that would imply buying. Also, holding (until a better deal comes along). I also don't think people really take asset classes into account, mainly because there's not a lot of money in their portfolio to be truly diversified. I'm not sure what this means. Asset-class allocators don't seem to get better results than people who buy good businesses at good prices. At least, I see fewer people who allocate their way onto the Forbes 400.

DanHulton 18y ago

There's a beauty comment there (top of the list when I checked) about how the author is measuring from the peak of the dot-com bubble to our current, pretty awful trough (though I guess likely to proceed still lower). "Looking back 6 years (to mid-September 2002), counting the recent turmoils, the S&P500 has had average non-inflation-adjusted growth of 4.9% per year. Looking back 12 years (to 1996) the growth is 4.6%." Lies, damned lies, and statistics.

steveplace 18y ago
Probably closer to damned lies. Dividends aren't taken into account, and inflation is reported much lower than what it really is.