Can You Get Rich With CDs?

[haha]

But if you bet on every horse in the race, you are certain to have money on the winner. Your chances of winning at least some money on the race are now 100% (unless they all go lame, which as you point out is unlikely). If you put all your money on one horse, it may be un-placed, and then you lose your whole stake. This is not just hindsight. By betting on every horse you can know before the race that you will win some of your bets.

Don't take that to the track. If you bet on every horse, you are a guaranteed loser by the amount of the takeout and breakage.

Ha

 

[samclem]

I will always prefer owning a percentage of individual stocks.

I am not concerned about non-compensated risk, I prefer owning more stocks of businesses I understand and can share in the profits when I feel they are very good value and less when I feel they are overvalued.

This is a well stated explanation of a POV to which many subscribe. It has served some investors well, and some very poorly. But, there's no getting around the fact that those who (primarily) index are dependent on analysts and investors like you who continually make judgments on the values of individual securities. Without these millions of hours of research (some of it better than others) which is distilled down to a market price for each stock, the market would not be efficient and indexing would not work as well as it does. And it does work.

Agreeing with modern portfolio theory inevitably leads to agreeing one can never know anything about the market other than a core belief that markets always go up.

I would say instead that the efficient market hypothesis says that I don't know more about the stocks you follow than you do. Likewise for every other stock out there--I am not smarter or a better judge of the value of that stock in the future than all the thousands of those who make it their business to follow these things. And, I'm seldom wrong when I bet that I'm ignorant!

 

[landonew]

But if you bet on every horse in the race, you are certain to have money on the winner. Your chances of winning at least some money on the race are now 100% (unless they all go lame, which as you point out is unlikely). If you put all your money on one horse, it may be un-placed, and then you lose your whole stake. This is not just hindsight. By betting on every horse you can know before the race that you will win some of your bets.

Precisely My point.... By betting on all of the horses you know that you will not lose all your money.

But you also know that you will make less that if you had focused your entire investment on the winning horse. Your compensation (regarding the risk) is the potential to see a significant return on your entire investment. For instance, say you have 10 horses each of which has 11:1 odds (impossible, but assuming the assets appreciate on the whole).

If you place $100 on each to win, you are ensured that you will recieve $1,100.... after all one horse must win.

If you place the entire $1,000 on 1 horse, then you have a 90% chance of losing the entire investment..

Thus the risk is 90%. However, you have a 10% chance of walking away with $11,000.

Thus, you are compensated for taking a higher risk with the opportunity to recieve a higher rate of interest.


The sam can be said with equities. Invest heavily in one equity with the hopes that it outperforms the market, and you will obtain a higher rate of return then someone with a diversified portfolio. That opportuntiy to realize a higher rate of return is what "compensates" for the added risk.


Anyhow, this is really just an argument concerning semantics. I understand now... uncompensated = high risk

 

[landonew]

This is a well stated explanation of a POV to which many subscribe. It has served some investors well, and some very poorly. But, there's no getting around the fact that those who (primarily) index are dependent on analysts and investors like you who continually make judgments on the values of individual securities. Without these millions of hours of research (some of it better than others) which is distilled down to a market price for each stock, the market would not be efficient and indexing would not work as well as it does. And it does work.


I would say instead that the efficient market hypothesis says that I don't know more about the stocks you follow than you do. Likewise for every other stock out there--I am not smarter or a better judge of the value of that stock in the future than all the thousands of those who make it their business to follow these things. And, I'm seldom wrong when I bet that I'm ignorant!

I never bought into the efficient market hypothesis. I was introduced to the theory in law school (securities regulation class) and thought it was BS.

Truth be known, the market appears to be dominated by a handful of whales (institutional investors). The minows (guye like you and me) that are able to react most quickly when the whales change direction are able to occassionally make a "quick buck".

However, when slow minows think their quick, they get eaten by the sharks. That is what happened to my father.


Maybe it is best to be an piece of coral. Stay put and grow with the ocean? (i.e. buy and hold)

 

[Alan]

Precisely My point.... By betting on all of the horses you know that you will not lose all your money.

But you also know that you will make less that if you had focused your entire investment on the winning horse. Your compensation (regarding the risk) is the potential to see a significant return on your entire investment. For instance, say you have 10 horses each of which has 11:1 odds (impossible, but assuming the assets appreciate on the whole).

If you place $100 on each to win, you are ensured that you will recieve $1,100.... after all one horse must win.

If you place the entire $1,000 on 1 horse, then you have a 90% chance of losing the entire investment..

Thus the risk is 90%. However, you have a 10% chance of walking away with $11,000.

Thus, you are compensated for taking a higher risk with the opportunity to recieve a higher rate of interest.


The sam can be said with equities. Invest heavily in one equity with the hopes that it outperforms the market, and you will obtain a higher rate of return then someone with a diversified portfolio. That opportuntiy to realize a higher rate of return is what "compensates" for the added risk.


Anyhow, this is really just an argument concerning semantics. I understand now... uncompensated = high risk

I don't think betting works like this. Favorites usually win races so if you put $100 on every horse in a 10 horse race the chances of the favorite winning at say, evens, means that you are much more likely to win $100, rather than $1000 on the 10-1 outsider.

 

[makeitadouble]

If the events of the past year haven't convinced anyone that the equity markets are one big Ponzi scheme, then go for it. Those who understood that the markets are a Ponzi setup thought that there was sufficient governmental oversight and regulation to preclude the calamitous events which have sent worldwide economies into a tailspin. Hindsight now reveals that there was no at the 'gate.' Educate yourself to the best of your ability in understanding exactly what vehicle you are considering placing your money into. There are always opportunities to increase net worth, even at this time.

 

[landonew]

I don't think betting works like this. Favorites usually win races so if you put $100 on every horse in a 10 horse race the chances of the favorite winning at say, evens, means that you are much more likely to win $100, rather than $1000 on the 10-1 outsider.

Its a metaphore for investing my friend. Your right, betting doesn't work like this. Firstly, there is a rake.

However, investing in large caps is not to much different. Assuming, per the efficient market hypothesis, that the stocks are priced appropriately... then it really is just a flip of the coin. Of course, people who look at PE ratios and other financial information don't buy into this hypothesis.

 

[ERD50]

Its a metaphore for investing my friend. Your right, betting doesn't work like this. Firstly, there is a rake.

OK, so let's make a better analogy. BTW, your view is not 'wrong' per se - but I don't think it gets to the point we are trying to make. Try this:

Imagine an "index" fund of 100 stocks, each trading at $100. $10,000/share. A few years later, the fund has tread water, and is at the same value. Now, let's say that it got there because half the stocks went to zero, and half doubled to $200, still $10,000/share.

Now picture 100 people who each invested in one share of the fund. None of them lost, none of them gained.

Now picture 100 other people, each who put $10,000 into one of the 100 stocks, with no duplicate buys. Half those people doubled their money, half lost everything.

On *average* - each group did the same. Assuming you don't have a crystal ball, and can't know which stocks would go belly up, you have a 50-50 chance of doubling or losing it all if you are a single stock person. Mathematically, you have not gained anything, so you have not been compensated for the risk of losing it all. You have gained the opportunity to double your money, but it is an even bet. In investment lingo, there is no 'alpha' to the position. If the odds somehow magically changed to 60-40, you could say that you are compensated. But that is a different assumption.

Another parallel is junk bonds. They pay a higher yield to compensate for the added risk over high grade bonds. That is an example of compensated risk, and there needs to be some potential 'alpha' there to attract investors.

-ERD50

 

[landonew]

OK, so let's make a better analogy. BTW, your view is not 'wrong' per se - but I don't think it gets to the point we are trying to make. Try this:

Imagine an "index" fund of 100 stocks, each trading at $100. $10,000/share. A few years later, the fund has tread water, and is at the same value. Now, let's say that it got there because half the stocks went to zero, and half doubled to $200, still $10,000/share.

Now picture 100 people who each invested in one share of the fund. None of them lost, none of them gained.

Now picture 100 other people, each who put $10,000 into one of the 100 stocks, with no duplicate buys. Half those people doubled their money, half lost everything.

On *average* - each group did the same. Assuming you don't have a crystal ball, and can't know which stocks would go belly up, you have a 50-50 chance of doubling or losing it all if you are a single stock person. Mathematically, you have not gained anything, so you have not been compensated for the risk of losing it all. You have gained the opportunity to double your money, but it is an even bet. In investment lingo, there is no 'alpha' to the position. If the odds somehow magically changed to 60-40, you could say that you are compensated. But that is a different assumption.

Another parallel is junk bonds. They pay a higher yield to compensate for the added risk over high grade bonds. That is an example of compensated risk, and there needs to be some potential 'alpha' there to attract investors.

-ERD50

That makes since. I can accept that.

 

[kyounge1956]

Don't take that to the track. If you bet on every horse, you are a guaranteed loser by the amount of the takeout and breakage.

Ha

What's "takeout and breakage"?

I haven't set foot on a racetrack in more than thirty years. I bet on the favorite and the longshot. They came in 5th & 6th so bye-bye money. That cured me of playing the ponies, not that I was in much danger of getting sucked in.

 

[landonew]

What's "takeout and breakage"?

I haven't set foot on a racetrack in more than thirty years. I bet on the favorite and the longshot. They came in 5th & 6th so bye-bye money. That cured me of playing the ponies, not that I was in much danger of getting sucked in.

Takeout and Breakage refer to the rake, or the commission that the bookie takes out to cover profit and expenses.

 

[Running_Man]

Actually you are not guaranteed to lose by the takeout and breakage, this could only happen if you were the only one betting. That is the amount of money the track and government takes to pay purses and grease the wheels of justice, usually in the 15-20 percent range.

If you bet an equal amount on every horse and assume a 10 horse field you would need a 9-1 horse to win on average. But in actuality most horse races (33 percent)are won by favorites and studies have shown the longer shot the horse you play the larger percentage of your bet you will lose. Favorites if bet on every race would tend to lose you eight percent of your money from many racing studies. From my memory the longest shot in the race tends to lose you nearly fifty percent of your wager. Elimination of the losers is the first criteria for both stocks and race horses.

In other words if you bet $20 on a horse race by betting $2.00 on every horse you would need an average payout of $16 (7-1) to reflect the 20% takeout by the track. But I think overall average payouts are closer to the $10-$12 range due to the preponderance of favorites winning.

 

[Alan]

Actually you are not guaranteed to lose by the takeout and breakage, this could only happen if you were the only one betting. That is the amount of money the track and government takes to pay purses and grease the wheels of justice, usually in the 15-20 percent range.

If you bet an equal amount on every horse and assume a 10 horse field you would need a 9-1 horse to win on average. But in actuality most horse races (33 percent)are won by favorites and studies have shown the longer shot the horse you play the larger percentage of your bet you will lose. Favorites if bet on every race would tend to lose you eight percent of your money from many racing studies. From my memory the longest shot in the race tends to lose you nearly fifty percent of your wager. Elimination of the losers is the first criteria for both stocks and race horses.

In other words if you bet $20 on a horse race by betting $2.00 on every horse you would need an average payout of $16 (7-1) to reflect the 20% takeout by the track. But I think overall average payouts are closer to the $10-$12 range due to the preponderance of favorites winning.

Wow, good knowledge.

My Dad has always been keen on horse races and has donated plenty of money to sick horses over the years. A good few years ago the UK government realized that it could take in even more tax revenue by allowing the 'punters' to gamble on the taxes. When you place your bet you can choose to pay the tax up front to save you paying on your winnings. My Dad and all his mates of course thought this was a great deal and always pay the taxes on their stake rather than the few times they actually win.

 

[Marcretire]

If the events of the past year haven't convinced anyone that the equity markets are one big Ponzi scheme, then go for it. Those who understood that the markets are a Ponzi setup thought that there was sufficient governmental oversight and regulation to preclude the calamitous events which have sent worldwide economies into a tailspin. Hindsight now reveals that there was no at the 'gate.' Educate yourself to the best of your ability in understanding exactly what vehicle you are considering placing your money into. There are always opportunities to increase net worth, even at this time.

I'm beginning to agree. I also feel that the market is rigged in favor of institutional investors and the individual investors are just along for the ride whether the ride is up or all the way down. I admire John Bogle immensely for his integrity and for providing a wonderful way for the average investor to access the market with index funds, but, at the same time, there have been long, long stretches, lasting decades, when the market was essentially flat. I'm just not comfortable any longer with the big casino known as the stockmarket.

 

[ERD50]

I'm just not comfortable any longer with the big casino known as the stockmarket.

Then it's not for you.

But what is the alternative? What else can be expected to grow capital (over the long run) than investing in companies that create value?

-ERD50

 

[NW-Bound]

I also feel that the market is rigged in favor of institutional investors and the individual investors are just along for the ride whether the ride is up or all the way down.

That's what many people feel. However, regarding the multitude of hedge funds that blew up, aren't they institutional investors? Pension funds that lost money? Individual investors who are insiders like James Cayne, chairman of Bear Stearns, who lost $1B? Kerkorian? Prince Alwaleed?

Their losses are just as spectacular as ours. James Cayne fared worse than Va, percentage wise, except that he did not really have a choice. Cayne couldn't sell his huge share portion that easily to get out, while us individuals can get out of any position with just one click of the mouse.

 

[ERD50]

I also feel that the market is rigged in favor of institutional investors and the individual investors are just along for the ride ....

there have been long, long stretches, lasting decades, when the market was essentially flat.

Like NW-B, I'm trying to understand this.

Are you saying that "institutional investors" fared better during flat periods in the market? Clearly, some investors fared better than others, depending on what sectors their money was in, but it's not clear to me that the dividing line would be between "institutional" and "individual".

When I see things like SPY ETFs trading with very low expenses and very low commissions and bid/ask spreads, and instant access via the internet, I fail to see where the individual is at any great disadvantage. I think there has been no better time for the individual investor than the present (relative to the "institutional investor" - a down market is a down market). I can also buy puts and collars and all those fancy option devices if I care to.

-ERD50

 

[Tadpole]

The best answer is to be the guy collecting the fees.

 

[NW-Bound]

The best answer is to be the guy collecting the fees.

As long as they don't get high on their supply. Investment bankers have blown up. We all know of realtors who bought 10 houses for themselves.