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Old 02-04-2011, 10:21 AM   #41
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Originally Posted by ERD50 View Post
Seriously - they are equally priced, but you do need to adjust for any in-out of the money shift, and the log-normal shape of the curve as the stock can't go below zero.

-ERD50
Sure but B-S doesn't account for vol. It's a lopsided smile.



Edit: Yes, B-S does account for vol. It doesn't account for changing vol, however. Puts are often valued higher than they "should" be. Anyway, this is getting away from the point of the paper.
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Old 02-04-2011, 11:50 AM   #42
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Explain this using what derivative, please. A forward contract? A forward start? A future? A forward option?
If you asking what the forward price is, it's the spot price plus the cost of carry until the option expiration.
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Old 02-04-2011, 05:46 PM   #43
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You are a bad bad person. That is not the right way to start a morning.

You are all way too sophisticated for me - absent dividends ALL stocks look like they are just Pokemon trading cards. Only given value because other people want them. My simple mind wants to see why something is of value - can you eat it? Is it good? Does it make heat or cold? Does it keep the rain off?

I am so glad you posted this because I think it is a very very common sentiment. Most often expressed as stock investing is really a casino and the system is rigged, because the bookies have bought off the cops.

I contend that most investor have no way of valuing an investment absent the market giving them pricing information. In Graham/Buffett's words they have no tools for determining the intrinsic value of an asset. Without this fundamental understanding, stocks do in fact look just like Pokemon cards eventhough they are very different. I can argue tell I am blue in my face that stocks really are different, but because the price of stocks on a given day, month or even several years, behaves much like the price of bennie babies, many intelligent people reach Calmoki conclusion.

But I think this is true for lots of investment not just stocks. Based on Calmoki many real estate posts, I am pretty sure that you have intuitive sense and the analytical skills to determine the intrinsic value of most houses. In fact, I bet you could fly here to Honolulu spend a day looking at the market, reading ads and the web, and then we would drive around the island looking at for sale properties without knowing their price. At the end of the day we'd make a appraisal of the various properties and despite me living here for 11 years and paying some attention to real estate your appraisals would be much more accurate. On the other hand if we had were given the financial information on a dozen companies and asked to make an estimate of their stock price, my appraisal would be better.
BTW this is how Buffett works he start with the financial information and then looks at the stock price.

In my case the only reason I know that 2000' 4 bedroom 2 bath house is worth $1 million in Kahala and only $500 K in Kalihi (a nice and not nice neighborhood roughly equidistant from downtown, Kalihi in my opinion is prettier location) is because real estate broker and Zillow tells me what the prices are. Lots of people have tried to explain why Kahala is intrinsically a better place to live than Kalihi, but I don't understand. I've finally figured out that since I don't understand the basic I should not invest in real estate except via REITs .

I suspect that because real estate is tangible more people have the ability to evaluate it independently than intangible asset like stocks. I imagine that many Realtors could actually do the same as Calmoki- go into a new city and make fairly accurate appraisal, but a very small number of stock brokers could start with financial reports and tell you the price of stock.

In the case of bonds, with exception of Brewer, I doubt any of us are really able to make accurate independent evaluation. I am sure that not one person in a hundred, before they buy 3 year CD with 1% interest rate, thinks I am betting that in the next three years, my bank won't go broke, and the FDIC won't run out of money. Sure these are unlikely events, but if I am only getting 1%/year are the odds of a financial meltdown less than 1 in 100? It seems to me that 100 year floods and 100 year blizzards are more frequent than government experts predict. For me a 1% CD or 1% government bond doesn't provide a sufficient margin of safety for me to invest.

The one thing I am confident in the next 30 years is that the crowd will run frenetically between one asset class to another, largely clueless about why they are running, but afraid to be left behind. A few of us, who are arrogant/skilled will on occasion say the herd has gone mad and run the opposite direction. The majority of the board, will recognize the futility of charging back and forth, adopt a sensible AA, re balance, and use index funds, and avoid the wasted energy of stampeding.

Article like this which try and predict long term trends, yet only discuss greater fool investing theory and ignore intrinsic value analysis aren't worthy of much serious discussion.
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Old 02-04-2011, 08:20 PM   #44
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Article like this which try and predict long term trends, yet only discuss greater fool investing theory and ignore intrinsic value analysis aren't worthy of much serious discussion.
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Old 02-05-2011, 01:50 AM   #45
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Article like this which try and predict long term trends, yet only discuss greater fool investing theory and ignore intrinsic value analysis aren't worthy of much serious discussion.
Reliance on the greater fool theory is baked into a total return, portfolio liquidating strategy. It could not be otherwise. If the dividends and interest from a $1mm portfolio will not support a frugal lifestyle for a single person in most cities, which they won't today, what choice does he have other than to chase asset appreciation (which used to be called speculation)? Once investors must liquidate shares to live on, they are on the greater fool treadmill. If they are luckly, they don't fall off before they die. The idea that this is avoided by having a few years expenses in cash, or some buckets, is misguided. That is the takehome from these papers cited. It might work out fine, but when it does, it is luck, not any clever design.

Most investors today have no interest in assessing valuation of asset classes apart from price. In fact, the orthodox position here and in academia is that there is no value independent of price. This is actually very helpful over a long period to those who either value independently and invest in individual issues, or value aggregates like the S&P and use dynamic guidlines to pick allocations that vary with conditions. Necessarily, investors using either of these methods will not as diversified as those who buy the market, and some will reject this approach on this basis alone.

One who invests passively does not avoid the misallocation caused by the lemming like rushing back and forth that you mention. He does attenuate or dampen these swings by rebalancing, but to the extent that market value determines amount invested in a given class, the passive investor is sure to have a large part of his money in the next class to go bad. Passive investing is actually passive trend following, and most of the time trend following is a good strategy. Especially in recent years since the Federal Reserve has taken it upon itself to support asset prices.

Ha
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Old 02-05-2011, 03:56 AM   #46
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Reliance on the greater fool theory is baked into a total return, portfolio liquidating strategy. It could not be otherwise. If the dividends and interest from a $1mm portfolio will not support a frugal lifestyle for a single person in most cities, which they won't today, what choice does he have other than to chase asset appreciation (which used to be called speculation)? Once investors must liquidate shares to live on, they are on the greater fool treadmill. If they are luckly, they don't fall off before they die. The idea that this is avoided by having a few years expenses in cash, or some buckets, is misguided. That is the takehome from these papers cited. It might work out fine, but when it does, it is luck, not any clever design.

Most investors today have no interest in assessing valuation of asset classes apart from price. In fact, the orthodox position here and in academia is that there is no value independent of price. This is actually very helpful over a long period to those who either value independently and invest in individual issues, or value aggregates like the S&P and use dynamic guidlines to pick allocations that vary with conditions. Necessarily, investors using either of these methods will not as diversified as those who buy the market, and some will reject this approach on this basis alone.

One who invests passively does not avoid the misallocation caused by the lemming like rushing back and forth that you mention. He does attenuate or dampen these swings by rebalancing, but to the extent that market value determines amount invested in a given class, the passive investor is sure to have a large part of his money in the next class to go bad. Passive investing is actually passive trend following, and most of the time trend following is a good strategy. Especially in recent years since the Federal Reserve has taken it upon itself to support asset prices.

Ha
Excellent points Ha. I'm not a fan of total return investing, although in this challenging investment environment the choices are quite limited. Still I am not overly pessimistic. The S&P P/E is around 16.7 for the last twelve months, and P/E 10 ratio is around 23 pricey but not unprecedented. This implies earning yields of 6% and 4.3% both capable of supporting decent lifestyle on $1 million portfolio. I even see some signs of corporation boosting dividends at pretty generous rate with UPS boosting its 11% this week and even tech darling like Cisco starting dividend payments. If payout ratio can start moving north of 50% there is some hope of staying off the greater fool treadmill.

You are right AA plus rebalancing doesn't avoid purchasing overpriced asset classes, it just keeps those people unable/unwilling of doing independent analysis from always buying high and selling low. A lot of successful retirement money management is much less about making smart investment moves, and much more about avoiding doing real dumb things. Something which I constantly have to remind myself of.
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Old 02-05-2011, 06:13 AM   #47
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....

A lot of successful retirement money management is much less about making smart investment moves, and much more about avoiding doing real dumb things. Something which I constantly have to remind myself of.
if retirement was dependent on people making smart moves investing... we would all be in trouble!

In the US we have been fortunate to ride the stock wave up.

IMO - If you have arrived... protect your Nut!

Unfortunately for many would be retirees and retirees... they have a bit of the gambler in them or hubris or both!
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Old 02-05-2011, 08:46 AM   #48
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You are a bad bad person. That is not the right way to start a morning.

You are all way too sophisticated for me - absent dividends ALL stocks look like they are just Pokemon trading cards. Only given value because other people want them. My simple mind wants to see why something is of value - can you eat it? Is it good? Does it make heat or cold? Does it keep the rain off?
That article made my eyes pop

I also like to keep it simple...I am a smart person academically and am not so bad in the street sense department, but I recognize that my knowledge base is pretty slim when it comes to individual stock picking.
So I let the VG fund managers do my thinking (market related) for me, at a small price (expense ratio).
The very few individual stocks I own are my casino chips. I only bring to that particular table the money which I am prepared to lose. If I win, all the better.
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Old 02-05-2011, 09:54 AM   #49
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You are right AA plus rebalancing doesn't avoid purchasing overpriced asset classes, it just keeps those people unable/unwilling of doing independent analysis from always buying high and selling low. A lot of successful retirement money management is much less about making smart investment moves, and much more about avoiding doing real dumb things. Something which I constantly have to remind myself of.
Great point, and pretty much why I stick to it and don't try to second guess myself and switch strategy in mid-stream. It is SO easy to make really dumb mistakes.

Audrey
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