« prev   random   next »

2
0

Money, Money, Money (and Investing)

By Patrick follow Patrick   2021 Mar 30, 8:33pm 287 views   18 comments   watch   nsfw   quote   share    


Lots of great points in this old article:

http://philip.greenspun.com/materialism/money


Suppose somehow that you collect a non-negligible amount of cash and want to invest it. If you are investing for the long-haul, then common stocks are your only reasonable choice since they offer the best return. According to the Efficient Market Hypothesis, all stocks are fairly valued because everyone on Wall Street has the same information. So unless you have friends who will give you insider information, there is no reason that you should buy Microsoft rather than General Motors. Sure, Microsoft has a monopoly and GM doesn't, but Microsoft's monopoly is already reflected in their lofty price/earnings ratio and GM's perennial engineering and management problems are already reflected in their absurdly low price/revenue ratio.

If you buy into the Efficient Market Hypothesis then you're just as happy to buy a portfolio of stocks selected by throwing darts at the inside pages of the Wall Street Journal. In fact, the WSJ for many years pitted expert wall street analysts against a dartboard portfolio and the darts almost always did better. If you don't have very much money, then a problem with a dartboard portfolio is that you will only be able to buy a few stocks. Your expected return will still be 7 percent per year but the variance will be extremely high because one company going bust could wipe out all of your gains.

Mutual Funds

Here's where Wall Street professionals step in, eager to help you. If you don't like all that risk, join our mutual fund, the Chump Fund. You give us $10,000 and we'll give you a share in our $10,000,000 portfolio with lots of different stocks, all chosen by Harvard MBAs. We'll skim 2% off the top every year to pay for our office space, salaries, computers, and mailing out advertisements to other people like yourself. You might not like paying the 2%, but look at how much better we've done than the S&P 500 index over the last five years.

So you buy into the Chump Fund. Halfway through the year, the Harvard MBAs are tired of their drab offices and Pentium computers. Do they take part of the 2% and move uptown and then buy Pentium Pros? No. They discover all of a sudden that they shouldn't have any General Electric. Westinghouse is really a better investment. And Ford is looking better than Chrysler now too. In fact, the entire $10,000,000 portfolio needs to be traded. Do your mutual fund managers, who've sworn to look out for your best financial interests, execute the trades with the broker who has the lowest commissions? No. After all, the money for trading commissions comes out of your 98% and not their 2% (read the fine print). So why not go to a "full-service" broker with high commissions? That broker will be so grateful that he'll discover he has a whole bunch of office space uptown that he isn't using, already equipped with a bunch of Pentium Pros. He'd be delighted to allow his best customers at the Chump Fund to hang out rent-free.

In your naivete, you might call this a kickback but in the industry it is known as "soft money." Every time the Chump Fund trades with a broker, they accumulate some soft money that they can spend on computers, furniture, data feeds, etc. This comes on top of the opera tickets, broadway shows, limousines, and the rest of the Wall Street lifestyle that is paid for by Mr. and Mrs. Middleamerica.

If the Chump Fund keeps on doing this, eventually their return will be much lower than the S&P 500 and they won't be able to run those nice-looking advertisements anymore. What do they do? Look among the 20,000 tiny little mutual funds out there. Find one that has randomly achieved above-average performance for the past five years. Call it the Chump Growth and Income Fund and run ads showing its past performance. Send letters to all the old Chump Fund customers telling them that the Chump Fund is being closed and, unless they object, their investments will be rolled into the new Chump Growth and Income Fund as of September 1.

An even better strategy for a mutual fund company is to do all of this in-house. If they have 50 mutual funds they can just hang onto the ones that randomly do better than average and flush the ones that do noticeably worse. Then at any time they can show that "45 out of our 50 funds outperform the indices". Now you know why you can't find any mutual funds advertised in the Wall Street Journal that sport worse-than-average performance.

OK, so you expected to get cheated a bit by these Wall Street types. But they're experts so of course they will do a better job picking stocks, won't they? Some will. But with tens of thousands of mutual funds out there, even if they are all choosing stocks at random, you'd expect some to do consistently much better than average and some to do consistently much worse. You'd find, however, that most of them would fall in the middle, forming a Gaussian curve.

That's what Burton Malkiel expected to find. He was an economics professor at Princeton who made his life's work the study of investment. When he charted the performance of all the mutual funds, they did indeed form a bell curve. But the center was not the same as the S&P 500. It was shifted slightly to the left. That's right, the average mutual fund was underperforming the blind index by a couple of percentage points. This confused Malkiel until he realized that the discrepancy could be accounted for by the expenses skimmed off the top of the mutual funds and also the commissions they paid to trade the portfolio. [Note: these curves are published in Malkiel's excellent A Random Walk Down Wall Street, an essential book to read before investing.]
1   Patrick   ignore (1)   2021 Mar 30, 8:36pm     ↓ dislike (0)   quote   flag      

He also made the interesting point that the long-term return of the stock market (7%) should be the inverse of the market's p/e ratio.

So the long-term p/e ratio of the market should be about 14. And yes that does seem to be a reasonably close approximation:



Kind of scary how high the market p/e is at the moment.
2   clambo   ignore (5)   2021 Mar 30, 8:51pm     ↓ dislike (0)   quote   flag      

The article states 2% fees which is not accurate today.

My funds cost me a fraction of a percent. One is free, one is 0.05%

For capital appreciation, an index fund is difficult to beat and the real question is why worry about beating the index anyway?

The successful stock pickers must predict which stocks others will like after they do; after all, the stock market is an auction. Note that some stocks become popular for no reason (Tesla).

For other needs, managed funds may be useful.

Mutual funds today are so convenient and useful that there are few advantages to buying stocks yourself.

I bought my select stocks after I had significant dough in mutual funds. They increased my net worth but without much risk.
3   Hircus   ignore (0)   2021 Apr 11, 7:27pm     ↓ dislike (0)   quote   flag      

clambo says
My funds cost me a fraction of a percent. One is free, one is 0.05%


It does seem like mutual fund fees in general have come down a lot.

Some of them I think are due to the general popularity of indexing, which is mostly done by computer, and so hard to justify much in fees, while simultaneously driving down market prices via price competition.

But, I also suspect we've experienced a rise in hidden fees - basically, while the advertised fee is 0.05%, the fund may be stuffing costs into the 99.95% bucket, giving you an underperformance. This would be easy to spot on something with comparables, like say, an s&p500 index fund, but if it's a typical mutual fund where they play stock picker, there's many opportunities for them to do backdoor shady stuff, while remaining invisible to investors.

Personally I try to stick mostly to index ETFs, but I do have some mutual funds in my 401k.
4   Hircus   ignore (0)   2021 Apr 11, 7:39pm     ↓ dislike (0)   quote   flag      


Patrick says







There does seem to be a distinct upwards PE trend corresponding with the downtrend in interest rates, which started in the 80s. Which makes sense I suppose, because as rates fall, bonds become less appealing, which makes stocks more appealing, on a relative basis. I've also heard people say "low rates represents lots of idle cash seeking investment", and from that perspective, low rates = lots of cash chasing/competing for the returns provided by stocks, which would inflate stock prices.

And, I've also heard people say that as rates asymptotically approach 0, the effect on stocks increases. i.e., moving from 2.00% down to 1.75 may make stocks go up 1X, but moving from 0.5 down to 0.25 may make stocks go up 4X, or something like that. Basically, things get more sensitive near 0. Although I'd imagine this effect is more/less pronounced on certain stocks.

I wonder why PE shot up at the end of 2019? At first I though it shot up due to covid's effect on the economy, but it looks like PE started climbing well before Q1 2020. The pre-covid PE of 20-25 was much more comforting.

I guess I find it hard to imagine rates consistently going up in the near future (ignoring the typical ~1yr volatility up/down trends), unless there was some major economic changes made.
5   WineHorror1   ignore (2)   2021 Apr 11, 7:44pm     ↓ dislike (0)   quote   flag      

clambo says
My funds cost me a fraction of a percent. One is free, one is 0.05%

For capital appreciation, an index fund is difficult to beat and the real question is why worry about beating the index anyway?

I'm with Merrill Lynch. Should I ask my advisor what their lowest fee index fund is and go with it?
6   mell   ignore (6)   2021 Apr 11, 7:59pm     ↓ dislike (0)   quote   flag      

Also the p/e is higher when high growth tech stocks dominate (often coinciding with low rates) as they have higher p/es in general due to higher growth. If the market shifts back to conservative stocks needed for primary survival (agriculture, ammo, fertilizer etc.) then the p/e comes down.
7   REpro   ignore (0)   2021 Apr 11, 8:31pm     ↓ dislike (0)   quote   flag      

Wall street is controlled by limited number of people. They will always find the way to grab your money. Create uptrends and downtrends. They love limo and $100 lunch, where they only talk about money. That's they job.
Currently you trading with computers, you can't beat them, can follow them only.
I used to keep money in Mutual Funds, but after market start going down, so they portfolios. The smartest Harvard students did nothing to preserve portfolio. That was the end.
8   mell   ignore (6)   2021 Apr 11, 9:01pm     ↓ dislike (0)   quote   flag      

REpro says
Wall street is controlled by limited number of people. They will always find the way to grab your money. Create uptrends and downtrends. They love limo and $100 lunch, where they only talk about money. That's they job.
Currently you trading with computers, you can't beat them, can follow them only.
I used to keep money in Mutual Funds, but after market start going down, so they portfolios. The smartest Harvard students did nothing to preserve portfolio. That was the end.


You can still make money with good research, e.g. in biotech, and beat the computers in total return. The machine's strengthues lies in HFT, not in long term buys or shorts.
9   Patrick   ignore (1)   2021 Apr 11, 10:10pm     ↓ dislike (0)   quote   flag      

Also, if you just buy and hold an individual stock, you are immune from a lot of their shenanigans. They get you when you buy and when you sell, but they can't really get much out of the guy who just holds for years.
10   clambo   ignore (5)   2021 Apr 11, 10:20pm     ↓ dislike (0)   quote   flag      

Winehorror,
I would see about simply doing business with a mutual fund company directly yourself.
The adviser is likely charging you 1% of your total on top of the fund expense ratio.

I don’t recommend doing dentistry, surgery, law without a professional, but investing we can do for ourselves.

Retirement investing isn’t complicated; you want capital appreciation.

Check out Primecap Odyssey funds; they have just several excellent funds and you choose how aggressive you want to be.

I have Vanguard, T. Rowe Price, Fidelity funds. Primecap manages a couple of my favorite Vanguard funds.

Edit/Addendum:
The expense ratio of Primecap Odyssey Growth Fund is 0.65%
The expense ratio of Fidelity zero index funds is 0.0%
The expense ratio of Fidelity Contrafund is 0.86%
The expense ratio of Vanguard index funds is 0.05%
The expense ratio of Vanguard Wellington fund is 0.17%
The expense ratio of T.Rowe Price Blue Chip Growth is 0.69%
I own too many funds; I would have been fine with Primecap funds in my IRAs and index funds in the non-retirement.
11   Donald   ignore (0)   2021 Apr 12, 12:07pm     ↓ dislike (0)   quote   flag      

The problem with buying individual stocks is that most people stink at stock picking. For every person who bought Tesla at the bottom, there is another who bought Nikola. Ask a Nikola investor how they are feeling today. Or a Lordstown Motors investor. Or a Viacom investor.
12   clambo   ignore (5)   2021 Apr 12, 1:10pm     ↓ dislike (0)   quote   flag      

I concur with Donald.
Even Buffet made some lousy picks, e.g. WFC.
Unforeseen events can affect the stock price.
I’m fortunate with my few stock picks, but I prefer the buy and forget aspect of mutual funds.
I read a couple of stock blogs, and the absolutely inane comments sometimes make me conclude that many guys should not pick stocks.
13   Patrick   ignore (1)   2021 Apr 12, 1:11pm     ↓ dislike (0)   quote   flag      

If you don't trade (ie, hold for at least a year) and you pick well-established stocks that are in the indexes anyway, I think you'll do fine.
14   clambo   ignore (5)   2021 Apr 12, 4:21pm     ↓ dislike (0)   quote   flag      

Yes, you could see the holdings of various mutual funds and buy and hold those stocks.

The convenience of a fund is that you can start a 50+ stock portfolio with a hundred bucks (Fidelity)
15   Rin   ignore (8)   2021 Apr 12, 5:06pm     ↓ dislike (0)   quote   flag      

REpro says
The smartest Harvard students did nothing to preserve portfolio.


First of all, I don't know what that statement means? If you're smart, you publish papers in academic journals, not trade stocks.

Look, our first trader easily (and I mean easily) made, anywhere from 25 to 40% per year trading currencies and futures. Sure, he went to London School of Economics but it wasn't his British "Ivy League counterpart" credentials. It was his ability to be able to observe problems before they occurred and hedge the riskiest components of the portfolio.

And he knew price movement like the back of his hand. He knew exactly when a Bollinger Band bounce would happen and when it wouldn't.

When he developed his own US stock portfolio system, outside of work for his retirement hobby (as if he really needed the money, which he didn't), he separated growth vs income stocks. Income stocks, range bound, made their money on reinvested dividends. Growth stocks were either trending, consolidating, or having a sell off. He made sure of what was what and took action accordingly. Since his private retirement fund was based out of a British tax haven, well ... he never had to deal with short term cap gains so he's done quite well, as a result.

Let's just say that after retiring from "full time employment", he had a mansion in London, another in the English countryside, and one more in the Caribbean, all of which he probably paid off with a couple of years worth of trading. I'm not sure if he uses NetJets or not but you get the point, he's loaded.
16   REpro   ignore (0)   2021 Apr 12, 7:41pm     ↓ dislike (0)   quote   flag      

Patrick says
If you don't trade (ie, hold for at least a year) and you pick well-established stocks that are in the indexes anyway, I think you'll do fine.


Here is sample of some well-established stocks:
Kodak, GE, WorldCom, Woolworth.... unfortunately not doing well.
Dow Jones should represent the best horses in horse farm, but like any game, leaders are changing.
17   REpro   ignore (0)   2021 Apr 12, 7:45pm     ↓ dislike (0)   quote   flag      

Rin says
REpro says
The smartest Harvard students did nothing to preserve portfolio.


First of all, I don't know what that statement means? If you're smart, you publish papers in academic journals, not trade stocks.

Look, our first trader easily (and I mean easily) made, anywhere from 25 to 40% per year trading currencies and futures. Sure, he went to London School of Economics but it wasn't his British "Ivy League counterpart" credentials. It was his ability to be able to observe problems before they occurred and hedge the riskiest components of the portfolio.

And he knew price movement like the back of his hand. He knew exactly when a Bollinger Band bounce would happen and when it wouldn't.

When he developed his own US stock portfolio system, outside of work for his retirement hobby (as if he really needed the money, which he didn't), he separated growth vs income stocks. Income st...


What are you waiting for, just follow his method.
18   B.A.C.A.H.   ignore (0)   2021 Apr 12, 7:55pm     ↓ dislike (0)   quote   flag      

REpro says
Here is sample of some well-established stocks:
Kodak, GE, WorldCom, Woolworth.... unfortunately not doing well.
Dow Jones should represent the best horses in horse farm, but like any game, leaders are changing.


Chill out man, you don't have to be so gotcha! Snarkey.

Are you from SF?

about   best comments   contact   one year ago   suggestions