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Re: Four Pillars of Investing - Efficient Market Theory!?!?
Old 04-02-2007, 11:31 AM   #21
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Re: Four Pillars of Investing - Efficient Market Theory!?!?

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Originally Posted by 3 Yrs to Go
That Warren Buffet has produced excess returns does not, in and of itself, prove markets are inefficient. An efficient market will produce a normal distribution of returns, with some active investors earning above average and some below average returns.
For a different, and I think more meaningful take on this read Super Investors of Graham and Doddsville (text of a speech by WEB at I believe The Columbia Universtiy Business School.

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Re: Four Pillars of Investing - Efficient Market Theory!?!?
Old 04-02-2007, 01:31 PM   #22
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Re: Four Pillars of Investing - Efficient Market Theory!?!?

I disagree with the efficient market theory in practice... at least a strong version..

Let me give an example.... I was looking at a stock last Friday. One of the research firms has a "STRONG BUY"... Another has an "AVOID"...

So, if the market was efficient, why is there this huge gap in recommendations

Now, is the market good at pricing stock in the long run... IMO yes...
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Re: Four Pillars of Investing - Efficient Market Theory!?!?
Old 04-02-2007, 02:04 PM   #23
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Re: Four Pillars of Investing - Efficient Market Theory!?!?

If you do not believe in efficient markets, I strong advise that you act on the following unsolicited e-mails that I just received. It is on the internet, it must be true :

Watch this closely, Quantex Capital Corp (QCPC). We are seeing some momentum on this over the week, expectation 0.72+ by Friday.

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Re: Four Pillars of Investing - Efficient Market Theory!?!?
Old 04-02-2007, 02:11 PM   #24
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Re: Four Pillars of Investing - Efficient Market Theory!?!?

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Originally Posted by bbuzzard
If you do not believe in efficient markets, I strong advise that you act on the following unsolicited e-mails that I just received. It is on the internet, it must be true :

Watch this closely, Quantex Capital Corp (QCPC). We are seeing some momentum on this over the week, expectation 0.72+ by Friday.
Yes, obviously your advice is what everyone who doesn't believe in the efficient market theory would do.

BTW, once all the "believers" are dead or senile, then better models will be used. This will be unfortunate for as WEB says, investing in a market full of efficient market believers is like having a fight with someone who ties his R hand behind his back.

Ha
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Re: Four Pillars of Investing - Efficient Market Theory!?!?
Old 04-03-2007, 01:12 PM   #25
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Re: Four Pillars of Investing - Efficient Market Theory!?!?

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Originally Posted by Texas Proud
I disagree with the efficient market theory in practice... at least a strong version..

Let me give an example.... I was looking at a stock last Friday. One of the research firms has a "STRONG BUY"... Another has an "AVOID"...

So, if the market was efficient, why is there this huge gap in recommendations

Now, is the market good at pricing stock in the long run... IMO yes...
I'm not sure if you're joking or not, but I thought I should reply. I think many people don't understand the idea of an efficient market.

The efficient market theory does not say that the market prices things perfectly. It doesn't say that people all agree on what the prices should be either (as pointed out by those recommendations). So if you agree or not on the price is irrelevant.

What it says is this: There are hundreds of millions of people investing in the market. There are hundreds of thousands actively looking at stocks. Each person has basically the same information in front of them. There are enough very smart people out there making guesses on the value of large companies to make the "average" price be accurate in relation to the available data. They may very well be wrong, but you can't know differently because you're looking at the same data.

In other words, you have the exact same data as thousands of other bright people. They've collectively valued a stock. They're not overlooking anything you are able to notice (without insider information).

For example, gas prices were at $1, and the gas stocks were low. You can look back and say that people were stupid for not buying those stocks. However, there were also many news reports about replacing gas cars with hydrogen, electric, etc. There were reports about huge new finds of oil in areas which would make the price of gas plummet. There were reports about gas companies pension obligations hitting them similar to the car companies. You can go on & on. There were plenty of logical reasons why the oil companies were not obvious steals.

Now of course many people bet that their own interpretation of the data is correct. They're right sometimes, and wrong sometimes. The funny thing about most people is that if they're wrong, they were "unlucky". If they're right, they were "smart".

Now the rules break apart a bit on smaller companies, since you get to a statistically smaller list of people staring at the information, and it becomes more likely that there are inefficiencies in the stock prices. That's why many smart individual investors look at smaller cap stocks rather than the Microsoft/Googles of the world.
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Re: Four Pillars of Investing - Efficient Market Theory!?!?
Old 04-03-2007, 01:23 PM   #26
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Re: Four Pillars of Investing - Efficient Market Theory!?!?

Ceberon...

I was not kidding... one was strong buy, the other avoid.. and it is one of the Dow 30.. so, not a small company..

that is also whay I said a 'stong' version of the EMT.. I think 'over time' that it is very efficient... but the theory (as far as I remember) is that you can not make money in the market because the price of the stock has all information in pricing it.. so that it is 'correctly priced'... well, if there is such a divergence in OPINIONS as to the value from two research firm (Market Edge and Ford Equity Research)... how does the average person know what to value it at??

But, if the market is not 'efficient', then you can make some money in the arbitrage when the price moves away from the true value... now, is the value difference a hugh amount?? Probably not...
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Re: Four Pillars of Investing - Efficient Market Theory!?!?
Old 04-03-2007, 01:50 PM   #27
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Re: Four Pillars of Investing - Efficient Market Theory!?!?

I suspect that on the short term the market is not as efficient as many think. The reason? Most trading is done on advance guesses on momentum. In other words - In order to buy the right stock you used to buy a company on good results - then you bought based on what you think might get good results - then you buy on what other think, that others think might get good results and so on. Much short term valuation has little to do with reality IMHO.

Having said that, I'm not sure that I can profit from this. I watch CNBC and they will have two economists on that work for large equity firms. One will say the market is going up - the other says we are heading for a recession. These are PHD's making 10 times what I make and they can't agree on what is happening. Ignoring the fact that at least one of them should be fired - if they can't figure it out with their education and information then I doubt that I can so I index and let it ride.
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Re: Four Pillars of Investing - Efficient Market Theory!?!?
Old 04-03-2007, 02:11 PM   #28
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Re: Four Pillars of Investing - Efficient Market Theory!?!?

"one was strong buy, the other avoid ". Note the analysts make their money selling you their personal opinion, not by actually buying or selling on their opinion. And its been shown, that for the most part, analyst can't analyze with accuracy. And if they believed their own opinion, their buying or selling would push the market price up or down. (Ben Graham noted - circa 1976 - that his in depth methods had become less valuable as market information became more easily available).
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Re: Four Pillars of Investing - Efficient Market Theory!?!?
Old 04-03-2007, 02:13 PM   #29
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Re: Four Pillars of Investing - Efficient Market Theory!?!?

As with any theory, it is only valid if it can be proven with empirical data. Also many buyers and sellers are doing os without adequate interpretation of the available data. After all, what is accessible today at our fingertips is far more comprehensive than anything in the past. This can make us better equipped to make a decision. But it can also make us more confused...
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Re: Four Pillars of Investing - Efficient Market Theory!?!?
Old 04-03-2007, 02:32 PM   #30
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Re: Four Pillars of Investing - Efficient Market Theory!?!?

One problem I have with the efficient market theory is that while everyone has access to the same data, how they react to the data and actually invest is wildly different. Add this to the herd mentality and you get the dot.com bubble where the market was willing to pay a hundred times more for a dollar of dot.com revenue than one from another business.

I am curious how the efficient market theory explains this. The explanation I heard was that in the long term things became efficient. I would think that in the short term, money could be made by shorting the stocks or buying stocks that were ignored.
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Re: Four Pillars of Investing - Efficient Market Theory!?!?
Old 04-03-2007, 03:33 PM   #31
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Re: Four Pillars of Investing - Efficient Market Theory!?!?

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Originally Posted by bssc
One problem I have with the efficient market theory is that while everyone has access to the same data, how they react to the data and actually invest is wildly different. Add this to the herd mentality and you get the dot.com bubble where the market was willing to pay a hundred times more for a dollar of dot.com revenue than one from another business.

I am curious how the efficient market theory explains this. The explanation I heard was that in the long term things became efficient. I would think that in the short term, money could be made by shorting the stocks or buying stocks that were ignored.
I read quite a few articles from the dot.com bubble time period, and it's very interesting that even those people who made it through the bubble in good shape (WB for instance), generally admit that they weren't all that sure about their choices. The dot.com bubble looks funny looking back over our shoulders, but there was a huge potential in that growth.

Instead of stocks crashing, we could have had a Google rise up. China could have opened their borders. Wiring homes could have continued and we might have all ended up with $5 yearly internet costs, where every single home would be wired. Imagine if Blockbuster was out of business because every single movie ever made was available online. And not only is it online, but you have Terabit connections into your home, so you can download movies within a couple seconds.

Anyway, the point being, the data at the time didn't point heavily towards a dot.com crash. There were other options besides a crash. Stock prices could have slowed down, or just had a minor correction. The point being that many people didn't know what would happen, even if it seems obvious now.

I laughed at the idea of Peapod, thinking it would be the first to crash since who could afford to run an online grocery store, but they're still running. On the other hand, I thought Altavista was going to own the world due to their awesome search, but they were crushed by their competition.

Again, the efficient market theory says that markets are efficient taking into account current information. It does not mean the market is correct. It means that a person cannot say that it is obvious that stocks will do XYZ, because there will always be a logical counter argument. If it was obvious that XYZ would happen, enough people would move in that direction to alter the profit potential.
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Re: Four Pillars of Investing - Efficient Market Theory!?!?
Old 04-03-2007, 03:42 PM   #32
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Re: Four Pillars of Investing - Efficient Market Theory!?!?

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Originally Posted by Texas Proud
that is also whay I said a 'stong' version of the EMT.. I think 'over time' that it is very efficient... but the theory (as far as I remember) is that you can not make money in the market because the price of the stock has all information in pricing it.. so that it is 'correctly priced'... well, if there is such a divergence in OPINIONS as to the value from two research firm (Market Edge and Ford Equity Research)... how does the average person know what to value it at??

But, if the market is not 'efficient', then you can make some money in the arbitrage when the price moves away from the true value... now, is the value difference a hugh amount?? Probably not...
The average person doesn't know how to value it, that's the point of the efficient market theory. The researchers also don't know how to value it. Nobody does. So when you're talking about a price moving away from the true value, nobody knows what that value is.

It is like a bunch of people trying to guess how many pennies are in a big gallon jug. Everyone can see the pennies, anyone can take a logical guess. The idea is that there is no better guess than the average value of everyones guess. It's still a guess, it could still be off, but the idea is that you're most likely better off just going with the average guess than trying to guess on your own.
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Re: Four Pillars of Investing - Efficient Market Theory!?!?
Old 04-03-2007, 04:03 PM   #33
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Re: Four Pillars of Investing - Efficient Market Theory!?!?

You might find this artcile interesting:

http://www.travismorien.com/FAQ/port...tcriticism.htm

-h
p.s What he is basically saying is MPT is a model nased on some assumptions. Some of the assumptions are off ie taxes matter, trading costs exist and behavioural things lead to people not be rational. This is what leads to inefficiencies but these are not easy to capture.


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Re: Four Pillars of Investing - Efficient Market Theory!?!?
Old 04-03-2007, 04:22 PM   #34
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Re: Four Pillars of Investing - Efficient Market Theory!?!?

The reason the best performers become the worst performers is because they are the riskiest; the more upside, the more down. You should always look at risk-adjusted returns.
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Re: Four Pillars of Investing - Efficient Market Theory!?!?
Old 04-03-2007, 04:35 PM   #35
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Re: Four Pillars of Investing - Efficient Market Theory!?!?

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Buffet is also a poor example because he (and the rest of the B-H team) actively get involved with many of the companies they own. They are more than investors, they actively add value to the company and the stock. This is not something an individual investor can do.

DING DING DING! (Sorry CFB) The most salient point wrt Warren. He's doing to companies what people who buy fixer-upper houses are doing with Real Estate.
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Re: Four Pillars of Investing - Efficient Market Theory!?!?
Old 04-03-2007, 05:16 PM   #36
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Re: Four Pillars of Investing - Efficient Market Theory!?!?

Certainly there was potential in some of the dot.com's to do well (and some did). However, it was possible at the time to look at the ridiculous levels of prices that dot.com stocks were trading at and realize that the vast majority of them were going to be terrible investments.

There were at least four "online drugstore" stocks like drugstore.com. They were all offering deals of the "$25 order free, just pay shipping" type. I took them all up on the offer and got my MACH3 razors for almost nothing. It was years before I had to buy razors again. My fiancee (I didn't know her at the time, but it is a mark of why we are compatible :>), took it one step further and made similiar orders from home, from work, from her parents house, etc. The online drugstore companies were willing to do this because they were never really about making a profit. They were trying to show explosive growth so that their stocks would fly, because investors had stopped caring about earnings. They would book $30 in revenues ($25+$5 shipping), show a $25 "marketing" expense, and ship product that cost them $20 to a customer. They were losing $15/order, but the orders were flying off the shelves : It is always easy to sell $1 for 50 cents, but you really don't want to scale it up too much No one who was buying these stocks had any real understanding of basic business principles. They bought them because they were hot, plain and simple.

Another example of inefficiency during the dot.com days was the PALM spin-off from 3Com. PALM was one of the hottest IPOs around. Something that was strange though, was that if you calculated the value of the PALM shares that 3Com still owned after the spin-off, you discovered that those shares were worth 2-3 times what 3Com the company was trading for. So if you wanted to buy PALM shares, you were massively better off buying 3Com, since it effectively bought you 2-3 times the number of PALM shares for the money. The prices of 3Com and PALM were contradictory-- one of the prices HAD to be incorrect. Anyone buying PALM was playing the greater fool game, or a complete idiot.

The market is very often efficient, but not always efficient.


Quote:
Originally Posted by Ceberon
I read quite a few articles from the dot.com bubble time period, and it's very interesting that even those people who made it through the bubble in good shape (WB for instance), generally admit that they weren't all that sure about their choices. The dot.com bubble looks funny looking back over our shoulders, but there was a huge potential in that growth.

Instead of stocks crashing, we could have had a Google rise up. China could have opened their borders. Wiring homes could have continued and we might have all ended up with $5 yearly internet costs, where every single home would be wired. Imagine if Blockbuster was out of business because every single movie ever made was available online. And not only is it online, but you have Terabit connections into your home, so you can download movies within a couple seconds.

Anyway, the point being, the data at the time didn't point heavily towards a dot.com crash. There were other options besides a crash. Stock prices could have slowed down, or just had a minor correction. The point being that many people didn't know what would happen, even if it seems obvious now.

I laughed at the idea of Peapod, thinking it would be the first to crash since who could afford to run an online grocery store, but they're still running. On the other hand, I thought Altavista was going to own the world due to their awesome search, but they were crushed by their competition.

Again, the efficient market theory says that markets are efficient taking into account current information. It does not mean the market is correct. It means that a person cannot say that it is obvious that stocks will do XYZ, because there will always be a logical counter argument. If it was obvious that XYZ would happen, enough people would move in that direction to alter the profit potential.
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Re: Four Pillars of Investing - Efficient Market Theory!?!?
Old 04-03-2007, 05:39 PM   #37
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Re: Four Pillars of Investing - Efficient Market Theory!?!?

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Originally Posted by samclem
Buffet is also a poor example because he (and the rest of the B-H team) actively get involved with many of the companies they own. They are more than investors, they actively add value to the company and the stock. This is not something an individual investor can do.
Yeah, I think his last letter said that the "B-H team" had blown up from 11.8 to 17 people.

One of Buffett's criteria for buying a company is "Management. We can't supply it." So what is it that you think the "team" does?
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Re: Four Pillars of Investing - Efficient Market Theory!?!?
Old 04-03-2007, 05:40 PM   #38
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Re: Four Pillars of Investing - Efficient Market Theory!?!?

I just finished listening to 4 Pillars. (The Hawaii library system only had an electronic audio version of the book). I am guessing that the book isn't really complete without lots of graphs and statistic table, cause I was not overwelmed just listening to it. Although, Berstein is an entertaining writer, and I generally agree with his points.

Put me down in the weak form of EMT, with Semi-Strong for the S&P 500. But I think there is opportunity for skilled investors to beat the market in smaller stocks. There are roughly 8,000 US stocks many of which have little or no analyst coverage, and low institutional ownership.

For instance, AAII has a screen for microcap stocks which is for profitable companies, that are selling for 80% of book value, and a price to sales ratio of 120% or less. One of the stocks showed up on the screen was Seneca Foods (SENEB). Now while this isn't a household name, I bet most of us have some of their products in our home. This company makes Libby, Stokely and Green Giant, canned and frozen vegetables. It has 3,000 employee and almost $1 billion dollars in sales and been business for almost 60 years.

Now what I find remarkable isn't necessarily its price (A P/E of 10 isn't screaming cheap) but rather the for two days running not a single share has traded hands. Nor is this particularly unusual average volume is 151 shares, and the typical bid ask spread is more than $2 for a $27 stock. With so little trading, so few owners and no analyst it is hard to say that the market is valuing the company correctly. Disclaimer I don't really know what it is worth either, but I think somebody with enough knowledge of the industry could figure it out.

It seems to be the stock picking, is a bit like poker. Over the short-run there is a lot of noise and a ton of luck, but over the long-term there is significant skill involved. If we go back to guessing the pennies in big gallon jar, now for most people averaging everybody else is guess is the smartest play. However, let say you had done hundred of experiments with counting the number of pennies in various size containers, you also were excellent at estimating distances, and a wiz at calculating PI* R^2 * H (the volume of cylinder) in your head. I think this person would be foolish to use the average, and if he went to several pennies count contest a day would win way more than his fair share.

Now I agree that for most people, most of the time indexing is the way to go. However,my agreement with indexing is not that people can't beat the market, but rather that is even harder to pick the expert penny picking guy, great poker player, or money manager than it is to pick individual stocks.
I imagine on this board there are a number of people who's returns exceed the market by a comfortable margin. (I wish I was one of them)

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Re: Four Pillars of Investing - Efficient Market Theory!?!?
Old 04-03-2007, 05:56 PM   #39
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Re: Four Pillars of Investing - Efficient Market Theory!?!?

Quote:
Originally Posted by clifp
Over the short-run there is a lot of noise and a ton of luck, but over the long-term there is significant skill involved. If we go back to guessing the pennies in big gallon jar, now for most people averaging everybody else is guess is the smartest play. However, let say you had done hundred of experiments with counting the number of pennies in various size containers, you also were excellent at estimating distances, and a wiz at calculating PI* R^2 * H (the volume of cylinder) in your head. I think this person would be foolish to use the average, and if he went to several pennies count contest a day would win way more than his fair share.
clifp that was a good response to the topic and Bernstiens book. I agree with what you are saying about stocks with low exposure and coverage.

Everything below is OT but about that penny counting competition I have a simple question. is the jar opaque or transparent. Becaue if it is opaque then I would say follow the crowd. Check this study out:

http://www.leggmasoncapmgmt.com/pdf/..._of_Crowds.pdf

-h
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Re: Four Pillars of Investing - Efficient Market Theory!?!?
Old 04-03-2007, 07:33 PM   #40
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Re: Four Pillars of Investing - Efficient Market Theory!?!?

Key point of the Four Pillars

The market can never be timed it must always be invested in. Bear market losses are unavoidable In one of the most unintentionally hysterical points in the 4 Pillars it quotes John Jacob Rascob who whipped up the frenzy of 1929. He told readers of The Ladies' Home Journal that now everyone could be rich by investing 15 dollars a month. What was not in the Four Pillars of Investing was the fact that as John Jacob Rascob was quoted as saying that, he privately was divesting his portfolio as he thought the market was extremely overvalued.

What is misunderstood is the fact that if a security or the market as a whole continues to rise it does not mean it is efficiently priced. Bernstein himself in the Four Pillars cheers for major bear markets because of the increased expected return the stock market will have over the long term.

How can the same market of stocks be efficiently priced if they offer 2 different expected rates of long term returns, dependent upon the distance from the last major bear market?

Answer: They cannot, a major fall causes an aversion to risk and causes the stocks to be undervalued for the long term.

It is impossible for me to believe that the stock market is always a good investment. It is very easy to convince yourself you could never tell it was overpriced. Yet despite being overvalued it can stay overvalued a long time, just as stocks stayed undervalued a long time while their dividend yield was greater than long term bonds.

15 years ago with yield of 10 percent REITS were viewed as an extremely risky investment . Now with yields at 3-4% they are viewed as conservative sure things.

Now if there was money to be made by being the best at estimating the number of jelly beans or pennies in a jar, you could be sure I would be studying that and not expecting to count on a group to get it right for me.

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