Very interesting. Could it be that the most successful investors have this in common? They never second guess themselves and they never sell. However, they are wary and picky of the company they dump their money in. Buying in when the market underprices a security and holding on to it. Only selling when you see fundamentals of a security as flawed and the market still thinks its overvalued.
Except that in this case, the guy bought the whole market by indexing, so he wasn't very wary and picky, although the index itself took care of getting rid of bad performers (because they went out of business).
that's what makes this even more beautiful. you don't need to drive down to the balance sheets of each company you want to invest, he bought a representation of a basket of companies.
What's the likelihood of another market crash like the one in the 80s?
What's the likelihood of 2008 housing market crash?
I reckon that the latter is more predictable and omnious, while a sudden market crash without any signs like the one in the 1980s is less likely.
The theory that market is already efficient over a long stretch of time must be true. It reverts to its mean which is a continued bull as long as the economy can fit it.
However, this must be a tough concept to sell. "Hey I just lost 60% of your money because I bought in right at the peak recently, but please don't pull out your money yet, it will recover for sure in 5 years." Again, this example shows the difference between Bob and the average investor. Bob would've said okay, while the average investor would've taken his/her money out and getting ready to sue you for fraud, "but you promised 20% return on my money". "YES, you will get 20% compound interest on your money if you wait another 10 years, believe me the stock market always goes up".
But unlike Bob, you can definitely time your market entry.
1. Wait for market crash.
2. Buy.
3. Check in a couple of years.
And people who buy after a major market meltdown, when everybody shudders at the word 'stock', the wise ones buy in. When everybody is talking about it, you run. Contrarian investing.
You can also apply this bullish bias in markets outside of stocks. Forget daytrading noise, just buy & hold.
1. Buy Crude Oil mini futures.
2. Hold on to it.
3. Check back every few months instead of every few
minutes provided you still can meet the margin calls.
What a great article. This really have resparked my interest in investing and trading.
All very easy, but how do you tell when a market has crashed? If the price is down 20% on a week before, who says its not due to go down another 30% next week?
The answer should be obvious. The market isn't predictable at all, for the reason that there are any number of players, each following a private strategy. Without cheating, without using insider information, you're better off investing in an index fund and tracking the slow but reliable increase in market valuation, instead of trying to track the unpredictable peaks and valleys along the way.
People who use the index fund strategy are statistically ahead of all other strategies -- I mean statistically. You can obviously find exceptions, black swans, but as a matter of probability and averages, you're better off in an index fund than any other market investment strategy.
Guess who swears by this idea, and who is going to make all his relatives adopt it after he's gone? Warren Buffet.
But Warren Buffet invests in individual companies using valuation technique to discover under valued companies which the market is ignoring.
One peculiar thing about Warren Buffet is that he has strayed away from technology companies, he's always invested in very stable ideas like brand and other economic moats unlike the tech sector which is susceptible to unexpected disruptions, like two boys working in a garage to build a better search engine. He even stayed clear of Microsoft and seems like it fit his plan of holding onto a good stock forever.
For those that do not know how to come up with a intrinsic valuation of a company, for example, reading through K's and Q's and figuring out if there's discrepancies in what it actually says and what the market thinks, it's best to invest an index, a large basket of companies and you bet your ass that for a country like United States, it's going to go up in valuation, seeing how well aligned the NSA's global surveillance is poised to benefit American corporations, I'd definitely back American companies, although the intrusion into individual freedom and privacy is jarring, I'll play the dirty capitalist, if it means I can make money work for me.
> But Warren Buffet invests in individual companies using valuation technique to discover under valued companies which the market is ignoring.
Yes, this is true, but the possibility exists that Buffet realizes his early success might have arisen from chance, and that his present success arises from the announcement effect (everyone wants to invest in the same stocks he invests in, so he can't go wrong.)
I have no idea whether that's so, I won't pretend to have any inside knowledge, but it's certainly true that Buffet has set things up so his inheritors are in index funds and buy & hold, two ideas he has spoken well of over the years.
Loved this article, mostly because of the fact that it turns much of the normal perspective on markets on its head. Rather than looking at a best case or a simulated median case, looking at a worst case is pretty cool.
What would make this more interesting would be to look at a constantly rebalanced portfolio that is a blend of stocks and bonds. That would have performed even better.
@notastartup -- "the best investors" is a complicated statement. Usually investors are graded on an annual basis compared to the market. If you outperform the market and justify your fee (if your fee is 1%, you had better outperform by a lot more than that, or else an index fund would have been a safer way to go), you keep your job, are able to get more capital into your fund, and generally are more highly regarded as an investor. So while I think there is a ton of merit to using an approach like this (or using the rebalancing approach I mention above), this is not what makes successful professional investors successful. That can be ascribed to luck, a ton of luck, skill, nefarious dealings, or any other number of other good or not-so-good reasons.
What would make this more interesting for me would be a pretty accurate answer to the question: "what are the chances that this could happen again if the guy started in 2014"? :)
Property prices are fuelled primarily by population growth. If we look 30 years ahead, it's likely that the population of rich world countries (especially Europe[1]) will decrease as the baby-boomers, sadly, disappear. That could be a huge chunk of the current home-owning population leaving lots of empty homes, often in quite desirable areas. It would be safe to assume this extra supply would cause demand, and therefore price, to fall in the next 30 years.
Immigration could fill the gap but as the source countries grow in prosperity, perhaps immigration from them will reduce too.
This all depends on whether or not population will continue to increase, indefinitely.
Property prices are also tough to predict as preferences change and the general buying power of the economy changes. A major issue with the most recent housing slump is that many young people, who would be first time homebuyers, are choosing not to purchase a home. This is reducing liquidity for those that would normally sell their starter homes to them and upgrade. While general property values will probably rise, it is a very illiquid asset class and highly dependent on geographical preferences.
Provided the overall market and economy continue to grow in spite of short term volatility, it would happen again. If one honestly believes that the whole market is going to go down over time, then probably best to look at bonds or precious metals.
Yeah, the condition you mention is the key: what are the odds that the US economy (or the overall world average, if you're diversified with a global index) will continue to grow as gloriously as it has done in the past 50 years? (when the guy started investing)
What would the best strategy be to lose money in the stock market? If we ignore fees, would it be any easier to time market purchases to optimize for loss than it would be to optimize for gain? And I don't mean picking dates after the fact.
It wouldn't be any easier, because losing money & gaining money are actually the same thing- if you can predict which stocks will decrease, then you can short those equities (essentially buying negative amounts of the stocks), and then make a profit equal to the amount of the decrease.
Not so, because you can always transact to lose money. Just cross the market to buy, cross the market to sell what you just bought, as fast as you can. You can blow off an arbitrary amount of money in an arbitrarily short amount of time. It's basically true that you can't make money by picking losing stocks any easier.
20 comments
[ 3.1 ms ] story [ 46.7 ms ] threadWhat's the likelihood of another market crash like the one in the 80s?
What's the likelihood of 2008 housing market crash?
I reckon that the latter is more predictable and omnious, while a sudden market crash without any signs like the one in the 1980s is less likely.
The theory that market is already efficient over a long stretch of time must be true. It reverts to its mean which is a continued bull as long as the economy can fit it.
However, this must be a tough concept to sell. "Hey I just lost 60% of your money because I bought in right at the peak recently, but please don't pull out your money yet, it will recover for sure in 5 years." Again, this example shows the difference between Bob and the average investor. Bob would've said okay, while the average investor would've taken his/her money out and getting ready to sue you for fraud, "but you promised 20% return on my money". "YES, you will get 20% compound interest on your money if you wait another 10 years, believe me the stock market always goes up".
But unlike Bob, you can definitely time your market entry.
And people who buy after a major market meltdown, when everybody shudders at the word 'stock', the wise ones buy in. When everybody is talking about it, you run. Contrarian investing.You can also apply this bullish bias in markets outside of stocks. Forget daytrading noise, just buy & hold.
What a great article. This really have resparked my interest in investing and trading.50% market crash that would be however very unlikely and rare occurence.
Looking beyond the Americas,
https://finance.yahoo.com/echarts?s=%5EN225+Interactive#symb...
In some cases, like Japan, they never really really recovered after 1990. Imagine if you were Bobsan, "It's been 20 years...." I shudder to imagine.
On a side note, looks like the nikkei really shows Japan's stagnation starting from mid 1990s....really isn't promising.
https://ca.finance.yahoo.com/echarts?s=%5EKS11#symbol=%5EKS1...
You can see KOSPI has been on a strong bull run but still following the nikkei similarly.
I would stay away from anything else besides United States at the moment to play like Bob.
More here: http://arachnoid.com/equities_myths
People who use the index fund strategy are statistically ahead of all other strategies -- I mean statistically. You can obviously find exceptions, black swans, but as a matter of probability and averages, you're better off in an index fund than any other market investment strategy.
Guess who swears by this idea, and who is going to make all his relatives adopt it after he's gone? Warren Buffet.
One peculiar thing about Warren Buffet is that he has strayed away from technology companies, he's always invested in very stable ideas like brand and other economic moats unlike the tech sector which is susceptible to unexpected disruptions, like two boys working in a garage to build a better search engine. He even stayed clear of Microsoft and seems like it fit his plan of holding onto a good stock forever.
For those that do not know how to come up with a intrinsic valuation of a company, for example, reading through K's and Q's and figuring out if there's discrepancies in what it actually says and what the market thinks, it's best to invest an index, a large basket of companies and you bet your ass that for a country like United States, it's going to go up in valuation, seeing how well aligned the NSA's global surveillance is poised to benefit American corporations, I'd definitely back American companies, although the intrusion into individual freedom and privacy is jarring, I'll play the dirty capitalist, if it means I can make money work for me.
Yes, this is true, but the possibility exists that Buffet realizes his early success might have arisen from chance, and that his present success arises from the announcement effect (everyone wants to invest in the same stocks he invests in, so he can't go wrong.)
I have no idea whether that's so, I won't pretend to have any inside knowledge, but it's certainly true that Buffet has set things up so his inheritors are in index funds and buy & hold, two ideas he has spoken well of over the years.
What would make this more interesting would be to look at a constantly rebalanced portfolio that is a blend of stocks and bonds. That would have performed even better.
@notastartup -- "the best investors" is a complicated statement. Usually investors are graded on an annual basis compared to the market. If you outperform the market and justify your fee (if your fee is 1%, you had better outperform by a lot more than that, or else an index fund would have been a safer way to go), you keep your job, are able to get more capital into your fund, and generally are more highly regarded as an investor. So while I think there is a ton of merit to using an approach like this (or using the rebalancing approach I mention above), this is not what makes successful professional investors successful. That can be ascribed to luck, a ton of luck, skill, nefarious dealings, or any other number of other good or not-so-good reasons.
Immigration could fill the gap but as the source countries grow in prosperity, perhaps immigration from them will reduce too.
This all depends on whether or not population will continue to increase, indefinitely.
[1] http://en.wikipedia.org/wiki/Projections_of_population_growt...
1) Buying every month
2) Only buying at some set period after each correction (e.g. market drops x% over 7 days).
Are there any online tools that make it simple to work out these ideas?