Comments on: CASINO WALL STREET

By: topquark

topquark — Tue, 06 Jan 2009 04:27:19 +0000

…the financial quarks exist in waves of Value at Risk… Trust me, this is too bizarre even for “bizarre sub-nano world” :)

But I agree that low-risk long-term investing, diversification, and most of the conventional financial “wisdoms” is an intentional deception coming from those who benefit and then converted to mantra by the brainless majority of financial “experts”

By: Scott

Scott — Mon, 05 Jan 2009 12:18:50 +0000

Asset allocation is medicore/lazy/fraudulent strategy during bull markets (hard to lose in that environment) and a bad/destructive strategy for bear markets… asset allocation is a simple (idiot proof) concept easy for advisors (salesmen) to explain (sell) to clients… the passive buy-and-hold, one-size-fits-all asset allocation marketed to the masses for the benefit of the street is broken.

Active, competent, knowledgeable management is needed now…

By: Deflator

Deflator — Mon, 05 Jan 2009 05:40:34 +0000

Even apart from the issue of dividends, this chart can’t be accurate. Prices fell about 30% from 1929-33, meaning that real losses on the Dow were about 30% less than nominal losses. The chart, however, shows real and nominal prices dropping in tandem during that period. Only when prices start to reflate is there a divergence. Same thing seems to be happening during the briefer deflation of 1937-38. If the base is 30% higher, that would make the equality point (not counting dividends) somewhere around 1955.

What is scarier is that the chart shows (not counting dividends) that the Dow didn’t regain its 1965 level in real dollars until about 1995.

However, Dow dividends have been substantial over the period — a quick check on the web (not verified) has estimates of 2.3% or 4.6% over long periods depending on the exact years. Dividend yields rise and fall inversely with the market , providing further insulation from CPI swings. According to Wikipedia, http://en.wikipedia.org/wiki/Dividend_yield#Dow_Industrials, the dividend yield on the Dow was 15% in 1932, and on the S&P was 6.7% in 1982.

By: Porsche87

Porsche87 — Mon, 05 Jan 2009 05:00:23 +0000

@ManoLA & victor
Sorry, but I have to disagree. Diversification is a fraud foisted upon investors by fund managers. Look at Gates or other billionaires, they didn’t achieve their wealth through diversifying their investments. Let your winners ride and stop out your losers. If you look at horse racing or poker, the intensity of research is close to what the market requires, and the winners put in the time and effort. If you are not willing to do the time, then your advice fits, sort of like playing the odds on blackjack. You won’t win big, but shouldn’t lose big either. I do have to agree with ManoLA, investing with your client’s money with a percentage off the top is the best gig in town.

By: ManoLA

ManoLA — Mon, 05 Jan 2009 03:22:09 +0000

Not to mention that no-one should use the Dow as a proxy for the market (or the S&P for that matter). An asset allocation based on a blend of index funds (foreign, domestic, small-cap, large cap, bonds) is the correct way to manage risk over time and to capture the long term upside in the market. It’s pretty well known by now that most of your returns over time derive from allocation (and regular rebalancing), NOT market timing. The Wall Street firms are out there to sell you Alpha because they’re fee-based businesses. They know the drill and they know the data – over time you will lose out, but they will retain their fees. All the financial scholarship out there points to the fact that Alpha is not worth the risk taken to get it. That is, if you’re a limited partner. On the other hand, as a managing partner, well, 2+20 is definitely worth the risks you take with your clients’ money. The best gig in town actually.

By: victor

victor — Mon, 05 Jan 2009 03:04:25 +0000

To ManoLA,

you are absolutely correct; but most people still don’t understand the difference between investing and speculating…too bad, because the market can be very unforgiving with these people; here is a prescient old saw: “if you do not know yourself well, the stock market is the wrong place to find out”. Articles like this one tend to appear; during bull markets, the whining stops, replaced by…bragging rights. I tell my friends to follow John Bogle’s advise about where to invest their financial assets: steady as she goes, 50% total stock market index fund, 50% total bond market index fund, period. As for risk, well, it is EVERYWHERE, yes, including in the equities markets!!! Risk CANNOT be completely eliminated from any man made endeavour; but “up there”, who knows?

By: ManoLA

ManoLA — Mon, 05 Jan 2009 02:05:43 +0000

Yes, you need to include dividends (since stocks are actually claims on future cash flow) and also you have to account for the deeply flawed and unscientific construction of the Dow index over time. The Dow, with only 30 components, chosen more or less in a random fashion or according to the current market fads, is useless. I would tend to say that the S&P is not exempt of the similar flaws either. So-called fundamental-weighted indexes are much, much better (see Dimensional and the CRSP). So I’d like to see what these non-traditional indexes look like, corrected for inflation.

By: Mike M

Mike M — Mon, 05 Jan 2009 00:33:33 +0000

“It is shocking to see the Dow, when corrected for inflation, sitting at the same level in 1995 as in the peak of 1929. ”

Not at all. Stocks are a way of preserving your wealth. They are an inflation hedge. Including dividends would provide a real return.

By: gloppie

gloppie — Mon, 05 Jan 2009 00:28:52 +0000

Interesting parallel with quantum mechanics;
The uncertainty principle definitely applies to market value….the observer’s gaze alone influences the observed quanta, like if we knew the content of the FDIC’s list of troubled banks for instance, or when the SEC shows up at the door…..oh wait, nobody cares about those guys anymore.

By: Matt SF

Matt SF — Mon, 05 Jan 2009 00:22:22 +0000

Traders who do well use well placed stop loss orders way above 50% losses. Many use 1% stops since the best trades pay off quickly. And if not, they generally decide to reverse their position if the market tells them otherwise.