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Old 01-23-2009, 01:49 PM   #81
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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.
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Old 01-23-2009, 01:57 PM   #82
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Originally Posted by Alan View Post
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.
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Old 01-23-2009, 02:26 PM   #83
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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
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Old 01-23-2009, 02:33 PM   #84
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Originally Posted by ERD50 View Post
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.
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Old 01-23-2009, 02:48 PM   #85
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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.
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Old 01-23-2009, 02:53 PM   #86
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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.
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Old 01-23-2009, 03:02 PM   #87
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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.
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Old 01-23-2009, 03:43 PM   #88
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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.
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Old 01-23-2009, 09:50 PM   #89
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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.
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Old 01-23-2009, 10:28 PM   #90
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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
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Old 01-23-2009, 11:03 PM   #91
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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.
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Old 01-24-2009, 10:01 AM   #92
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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
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Old 01-24-2009, 11:37 AM   #93
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The best answer is to be the guy collecting the fees.
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Old 01-24-2009, 11:55 AM   #94
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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.
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