Beyond this land...There will be Dragons!

[Lsbcal]

A few questions for you NYEXPAT. Every time I think of doing short term trading, I get turned off by this line of reasoning:

1) I don't want to loose too much money (if I blow it) so that means trading with a small amount of assets, say no more then 5%
2) That 5% might go up only about 20% if I really do things right over a year. Note I cannot imagine using leverage.
3) That means an increase of assets of 5% * 20% = 1% which is pretty nice in our case but won't change our basic financial position
4) For that 1% asset increase I will have to spend a lot of time/energy/worry.
5) Will I miss out on other opportunities because I'm looking at that small position instead of the big picture? Will I miss out on other life experiences because I get caught up in market movements and such?

OK, you don't have to answer any of my worries. But how do you view this and what does a successful year do for your overall portfolio in percentage terms?

Note I am just trying to learn something here and not at all critical. I do trading in a 60/40 portfolio and am not a strictly buy-hold investor. More of a buy-mostly-hold investor with some exchanges during the year (like growth funds to value funds, US to foreign).

 

[OldShooter]

On a similar note ...
If my understanding is correct, the results of active mutual funds that fail or are absorbed vanish from most statistics showing overall mutual fund results.

Yes. Absolutely. They really are similar. I never thought of that before.

The effect of mutual funds folding (they fold at about 7% per year) is called "survivorship bias." The answer to your "understanding" is both yes and no.

The "yes" comes from stock-picker mutual fund hucksters, who will say things like "all of our equity mutual funds beat their Lipper peers at laest four years in the past five." Of course, as you understand, this boast does not include the dogs that were taken out and shot in the past five years. (Using Lipper as a benchmark is hucksterism too but that's another thread.)

There is a closely related game that the hucksters play, too, called "incubated" funds. Here, they start maybe five funds with different managers and run them for a year with only tiny money invested. They kill off all but the luckiest one and then offer it to the public together with its incredible track record. Of course, when serious money comes in the track record collapses. See also https://www.investopedia.com/terms/i/incubatedfund.asp

The "no" comes from serious researchers like Fama and French, Vanguard, Morningstar, and the S&P SPIVA and Manager Persistence studies. IMO all of these are trustworthy/ consider survivorship bias.

Here is a clip from one of my adult-ed investment class slides, based on Vanguard data. (The left hand bright green square represents the top quintile of fund performance for the first five years. The arrows show the results of those funds after a second five years.) Its main point is to say that a manager's past performance is based on luck and that luck rarely persists into the future. But you can also see how the closed funds affect the numbers.

​

 

[ERD50]

...

Here is a clip from one of my adult-ed investment class slides, based on Vanguard data. (The left hand bright green square represents the top quintile of fund performance for the first five years. The arrows show the results of those funds after a second five years.) Its main point is to say that a manager's past performance is based on luck and that luck rarely persists into the future. But you can also see how the closed funds affect the numbers. ...

Wow. Powerful chart. Any idea on how the bottom funds did the next five years? Contrarian opportunity?

-ERD50

 

[NYEXPAT]

A few questions for you NYEXPAT. Every time I think of doing short term trading, I get turned off by this line of reasoning:


OK, you don't have to answer any of my worries. But how do you view this and what does a successful year do for your overall portfolio in percentage terms?

Note I am just trying to learn something here and not at all critical. I do trading in a 60/40 portfolio and am not a strictly buy-hold investor. More of a buy-mostly-hold investor with some exchanges during the year (like growth funds to value funds, US to foreign).

People have different investment styles, for example I have never owned a bond,bond fund,mutual fund. I have owned individual stocks,ETF's,treasuries and on a few occasions a CD.

If I were you (looking at your questions) I would not bother with it at all and would stick with what makes you comfortable.

My own returns are posted monthly and on some occasions I may reference a particular trade in a separate thread like this one.

 

[Murf2]

I am always impressed with traders with constant positive gains. I would like to hear how one would hedge other than shorting the stocks.



I tried covered calls, but you give up too much on the up-side.

Buying puts as insurance is also costing me.

I better go back to stay with my 60/40 B&H and always want to hear.

Me too but I know a lot of people that always win at the casinos too.[emoji848]

 

[OldShooter]

Wow. Powerful chart. Any idea on how the bottom funds did the next five years? Contrarian opportunity? ...

Nope. Once you grasp the completely counter-intuitive idea that stock-pickers' results are random, showing no evidence of skill, then you also see that past performance (good or bad) really is absolutely no predictor of future results.

Charles Ellis, in "Winning the Loser's Game" argues that there are so many smart managers and smart computer programmers these days that they basically cancel each other out. This leaves us with the random walk and the observation that results can only be due to luck. (https://en.wikipedia.org/wiki/Charles_D._Ellis) In support of that argument, consider that there are about 10,000 mutual funds and only IIRC about 4,000 stocks in the US NYSE/NASDAQ market. So each stock, on average is covered by maybe ten or more stock-pickers. How can any undiscovered merit or inefficient pricing exist in such an environment? Edit: Here is guru Ken French arguing the same conclusion: https://famafrench.dimensional.com/videos/identifying-superior-managers.aspx

Now there is one twist to this: The results of the worst-performing managers tend to persist. This is because these are usually high-fee funds as well and it is almost impossible, even when you are lucky, to overcome the drag of the fees. So, if you want persistence, buy only losers and you will get it.

 

[Lsbcal]

People have different investment styles, for example I have never owned a bond,bond fund,mutual fund. I have owned individual stocks,ETF's,treasuries and on a few occasions a CD.

If I were you (looking at your questions) I would not bother with it at all and would stick with what makes you comfortable.

My own returns are posted monthly and on some occasions I may reference a particular trade in a separate thread like this one.

Maybe you are right. My minimum holding period has been 1 month.

If I were to trade tomorrow, I'd consider buying VUG (Vanguard Growth ETF) and closing the position at a 5% gain. Chart here: https://finance.yahoo.com/quote/VUG/chart?p=VUG#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

 

[gstillson]

To have any real gain you have to be willing to take a big loss. Trading with 5% of your portfolio is, like you said, only going to make you overall 1% gain if it goes up 20%. I mean, yes, that is 25% of a person's yearly need if they are using a 4% SWR but is it worth the trouble?

I take much bigger risks. Example: Friday I purchased 2000 shares of Gilead at $65.50. I plan to sell it this coming week for $66.50 or better. Hopefully I will dump it as early as Monday morning if the gods are crazy but there is always the risk that really bad news comes out (thank goodness they don't make baby powder) or the whole market just turns over.

I really didn't want to buy anything but the greed just took over when I saw it fall below $66. This is going to one day be my downfall.

But odds are good that Monday I will sell it and pocket $2,000 for a holding time of just a few days.

 

[Running_Man]

Nope. Once you grasp the completely counter-intuitive idea that stock-pickers' results are random, showing no evidence of skill, then you also see that past performance (good or bad) really is absolutely no predictor of future results.

Charles Ellis, in "Winning the Loser's Game" argues that there are so many smart managers and smart computer programmers these days that they basically cancel each other out. This leaves us with the random walk and the observation that results can only be due to luck. (https://en.wikipedia.org/wiki/Charles_D._Ellis) In support of that argument, consider that there are about 10,000 mutual funds and only IIRC about 4,000 stocks in the US NYSE/NASDAQ market. So each stock, on average is covered by maybe ten or more stock-pickers. How can any undiscovered merit or inefficient pricing exist in such an environment? .

And yet Ellis was in charge of Yale’s endowment fund where he invests 89 percent of the portfolio in natural resources and private equity firms, from the annual report "The Endowment’s long time horizon is well suited to exploit illiquid, less efficient markets such as venture capital, leveraged buyouts, oil and gas, timber, and real estate.” How can you argue markets are efficient, do a leveraged buyout to take a company out of the stock market and claim this is the advantage of “inefficient” markets and claim at the same time the market is totally efficient. Like Buffet, who also employs hedge fund managers and pays high fees for over S&P500 performance, this is a case of do what I say while I make money taking advantage of what I say is impossible. 11 percent of Yale’s endowment fund is in passive investments, the remainder is actively managed.

 

[Running_Man]

And in case one thinks Ellis is not a total two faced outright liar, here is his comment from 2001 YALE endowment report:

Despite recognizing that the U.S. equity market is highly efficient, Yale elects to pursue active management strategies, aspiring to outperform market indices by a few percentage points annually. Because superior stock selection provides the most consistent and reliable opportunity for generating excess returns, the University favors managers with exceptional bottom-up fundamental research capabilities. Managers searching for out-of-favor securities often find stocks that are cheap in relation to current fundamental measures such as book value, earnings, or cash flow. Yale’s managers tend to overweight small-capitalization stocks, as they
are less efficiently priced and offer greater opportunities to add value through active management. Recognizing the difficulty of outperforming the market on a consistent basis, Yale searches
for exceptional managers with high integrity, sound investment philosophies, strong track records, superior organizations, and sustainable competitive advantages.

 

[Lsbcal]

To have any real gain you have to be willing to take a big loss. Trading with 5% of your portfolio is, like you said, only going to make you overall 1% gain if it goes up 20%. I mean, yes, that is 25% of a person's yearly need if they are using a 4% SWR but is it worth the trouble?

I take much bigger risks. Example: Friday I purchased 2000 shares of Gilead at $65.50. I plan to sell it this coming week for $66.50 or better. Hopefully I will dump it as early as Monday morning if the gods are crazy but there is always the risk that really bad news comes out (thank goodness they don't make baby powder) or the whole market just turns over.

I really didn't want to buy anything but the greed just took over when I saw it fall below $66. This is going to one day be my downfall.

But odds are good that Monday I will sell it and pocket $2,000 for a holding time of just a few days.

Sounds like you have a plan.

Regarding my thoughts, what you don't know is how much in $'s that 1% portfolio gain represents. We have a very nice lifestyle.

As you state, it means 25% or so of one's spending needs for the year. Done year in and year out that can be a substantial difference. If one is good enough to pull it off. I'm not sure I could do it that consistently. When I look at VUG in today's chart, it looks like a pop of 5% is indeed possible but maybe it's just an illusion. I felt kind of confident at the beginning of last week but am glad I didn't follow that up with a bet as it didn't work out so well last week.

 

[Helena]

You are playing the market and market timing. The Fed has no obligation to come in on a white horse and bail you out.

No obligation and no intention.

 

[NYEXPAT]

No obligation and no intention.

Hmmm, maximum employment, stable prices, and moderate long term interest rates VS Global Meltdown?

That's a tough one for sure!

 

[Running_Man]

Hmmm, maximum employment, stable prices, and moderate long term interest rates VS Global Meltdown?

That's a tough one for sure!

You have certainly stated the bull case adequately, however in 1981 unemployment was over 10 percent inflation was 10 percent, companies were going bankrupt as they struggled to make a profit with rising costs and recessionary forces. That was the best time to purchase stocks most likely in your lifetime.

In December I saw where it will be the first month since October 2008 that a High Yield bond placement will not be able to be done. 3 planned placements were cancelled because of lack of demand - the Leveraged Loan market, which has been fueling takeovers is freezing up, of course this market which was 200 billion in 2007 is now nearing 1.5 trillion as the leveraged loan have been collateralized and sold to pension funds as a way to goose up yields.

I myself agree that most everything in October 2018 to Dec 2018 is about as good as numbers can be from an economic activity point of view, which they should be when the government is spending 7 percent more than they take in of the GDP with another 120 percent of GDP in debt. So long as everyone can borrow forever at historic low interest rates there will be no issues and a bull market can march on.

 

[OldShooter]

Well, @Running_Man, do you have any strong feelings about Charles Ellis (Posts 34 and 35)? I'll try to respond a little at least.

1) If you re-read my post I think you can see that I did not say I agreed with Ellis; I just reported his argument. Basically, Ellis' book is another way of arguing the EMH and I do not totally believe in the EMH. Fama/French with a healthy dose of Thaler is more what I believe.

2) In Post 34, you are putting words in Ellis' mouth. He did not say that "markets are efficient," he essentially argued that the stock market is efficient. Of course there are many markets that are not efficient -- I think it roughly correlates with illiquidity and lack of information. For example, one of the things my company did was to buy and sell used capital equipment nationally. That's a very inefficient market and, hence, we were able to capture very high margins with very little risk. I wouldn't do a deal if I couldn't see immediately doubling my money. In an inefficient market, he who has the best information is king. We had the best database and my sales guys made about 5,000 phone calls a month. We had the best information. So don't jump on Ellis for buying natural resources, doing private equity, etc. -- he never said those markets are efficiently priced because they are not.

3) Regarding your quotation from 2001 and calling him a "two-faced outright liar:" Is your understanding of the markets different today than it was 17 years ago? Does that make you a liar 17 years ago? If you met Ellis and challenged him on this, he might say what Keynes supposedly said: "When the facts change, I change my mind. What do you do, sir?" In fact, in the Forward to the sixth edition (2013) of his book he says: "The securities markets have changed massively ... "
​

But none of your carping or mine really matters. What matters is the data. The data in the S&P Manager Persistence reports shows us again and again that stock-pickers' results are random. Fama and French are a little more rigorous, hence a little more cautious. They will say only that if there is skill it is so rare as to be undetectable in the data. But the bottom line for us investors is the same, Ellis or no Ellis: Passive works and there is no data and no academic research that argues for any other strategy.

 

[NYEXPAT]

You have certainly stated the bull case adequately, however in 1981 unemployment was over 10 percent inflation was 10 percent, companies were going bankrupt as they struggled to make a profit with rising costs and recessionary forces. That was the best time to purchase stocks most likely in your lifetime.

In December I saw where it will be the first month since October 2008 that a High Yield bond placement will not be able to be done. 3 planned placements were cancelled because of lack of demand - the Leveraged Loan market, which has been fueling takeovers is freezing up, of course this market which was 200 billion in 2007 is now nearing 1.5 trillion as the leveraged loan have been collateralized and sold to pension funds as a way to goose up yields.

I myself agree that most everything in October 2018 to Dec 2018 is about as good as numbers can be from an economic activity point of view, which they should be when the government is spending 7 percent more than they take in of the GDP with another 120 percent of GDP in debt. So long as everyone can borrow forever at historic low interest rates there will be no issues and a bull market can march on.

RM,
Your points are well taken and maybe be argued by others here, but certainly not me! Over the medium term I am not a bull, I was quite short Nov 2016 and have been 85% cash (treas bills) since late September. I do not believe the Fed can stop what is happening only try to engineer a "softer landing". I have found the selloff to date to be quite orderly and have profited from it.

Having said that, I would still like "one last glass of punch" before NYE is over!

 

[NYEXPAT]

To have any real gain you have to be willing to take a big loss. Trading with 5% of your portfolio is, like you said, only going to make you overall 1% gain if it goes up 20%. I mean, yes, that is 25% of a person's yearly need if they are using a 4% SWR but is it worth the trouble?

I take much bigger risks. Example: Friday I purchased 2000 shares of Gilead at $65.50. I plan to sell it this coming week for $66.50 or better. Hopefully I will dump it as early as Monday morning if the gods are crazy but there is always the risk that really bad news comes out (thank goodness they don't make baby powder) or the whole market just turns over.

I really didn't want to buy anything but the greed just took over when I saw it fall below $66. This is going to one day be my downfall.

But odds are good that Monday I will sell it and pocket $2,000 for a holding time of just a few days.

Looks like a nice "call" again! I looked at it on Sun after you posted and did not see it as a "trade". This morning when it hit $65, it triggered a buy signal! Continued good fortune to you!

 

[gstillson]

Looks like a nice "call" again! I looked at it on Sun after you posted and did not see it as a "trade". This morning when it hit $65, it triggered a buy signal! Continued good fortune to you!

Thanks. Yes it did drop to $65 but now has hit my target and I have sold out. I said I am not really ever able to pick the bottom nor sell at the top but I get the juicy middle. I'll take my $2,000 and grab some coffee and watch some news.

 

[NYEXPAT]

This mornings downdraft took us below the closing low of the year for the SPY before turning around. Certainly looks like a "shot across the bow" of the Fed to me!

 

[Running_Man]

Well, @Running_Man, do you have any strong feelings about Charles Ellis (Posts 34 and 35)? I'll try to respond a little at least.

1) If you re-read my post I think you can see that I did not say I agreed with Ellis; I just reported his argument.​

From your post:

Charles Ellis, in "Winning the Loser's Game" argues that there are so many smart managers and smart computer programmers these days that they basically cancel each other out. This leaves us with the random walk and the observation that results can only be due to luck.

You drew a conclusion from his work, the drawing of a conclusion from another's work is a very strong indicator you agreed with the work especially in the absence in the form of a disclaimer.

I will state I believe not only are these studies flawed, the "academics" behind the study know they are flawed. In the latest Yale report, the DOMESTIC US EQUITIES, which are actively managed since the time Ellis took over the portfolio, have outperformed their benchmark by 4.9% per year and the foreign equities have outperformed their benchmark by 10.9% per year, for 20 YEARS. The YALE endowment fund is now over 29 Billion dollars. The smartest institutions in the land hire portfolio manager to pay for college professors to print academic books to say this is impossible. The higher and higher the percentage of the population that uses passive funds the more opportunity there is for the Endowment funds.​

 

[OldShooter]

From your post: You drew a conclusion from his work, the drawing of a conclusion from another's work is a very strong indicator you agreed with the work especially in the absence in the form of a disclaimer.

As you like.

I will state I believe not only are these studies flawed, the "academics" behind the study know they are flawed. In the latest Yale report, the DOMESTIC US EQUITIES, which are actively managed since the time Ellis took over the portfolio, have outperformed their benchmark by 4.9% per year and the foreign equities have outperformed their benchmark by 10.9% per year, for 20 YEARS. The YALE endowment fund is now over 29 Billion dollars. The smartest institutions in the land hire portfolio manager to pay for college professors to print academic books to say this is impossible. The higher and higher the percentage of the population that uses passive funds the more opportunity there is for the Endowment funds.

Wow! This is news. The academics are lying to us because they are being paid by the institutions to mislead the public. Pretty scary. Do all these guys travel in black helicopters, too? Do you think wearing tinfoil hats would help at all? Has anyone told the Nobel committee about this?

 

[Running_Man]

As you like.

Wow! This is news. The academics are lying to us because they are being paid by the institutions to mislead the public. Pretty scary. Do all these guys travel in black helicopters, too? Do you think wearing tinfoil hats would help at all? Has anyone told the Nobel committee about this?

Well in looking at the investment methods of every major university endowment fund, which is used to pay for the research that wins the Nobel prizes in passive investment theory, not a single major Ivy College endowment fund utilizes passive investment. It is your contention that they know passive investment cannot be beaten yet they all think they can (and virtually every one is in excess of passive index funds over 10 years by 3-6 percent) or do they just hire lucky monkeys at all these Universities? So I do say they know their research is flawed at these University Endowment Funds BECAUSE THEY DO NOT FOLLOW IT!!

 

[Lsbcal]

I think this thread was not about whether or not to time the market. Note the Forum title "Stock Picking and Market Strategy".

My thought on timing a short term purchase in a retirement acount of VUG is getting juicier.

 

[OldShooter]

Well in looking at the investment methods of every major university endowment fund, which is used to pay for the research that wins the Nobel prizes in passive investment theory, not a single major Ivy College endowment fund utilizes passive investment. It is your contention that they know passive investment cannot be beaten yet they all think they can (and virtually every one is in excess of passive index funds over 10 years by 3-6 percent) or do they just hire lucky monkeys at all these Universities? So I do say they know their research is flawed at these University Endowment Funds BECAUSE THEY DO NOT FOLLOW IT!!

Sorry, I am not interested in debating or trying to debunk crackpot conspiracy theories. I'm outta here.

 

[gstillson]

After selling my 2000 shares of Gilead that I bought Friday at 65.50 today for around $2000 profit, I bought 1000 shares again near end of day for $64.90.

It is small potatoes to you guys but it seems like real money to me.