Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Old 08-13-2020, 04:37 PM   #181
Full time employment: Posting here.
Lawrencewendall's Avatar
 
Join Date: Feb 2017
Location: Severn
Posts: 768
Quote:
Originally Posted by OldShooter View Post
The punch line on stocks over the long haul is to own what Eugene Fama refers to as "the market portfolio." Everything. This video is a bit long at 37 minutes but it's a great way to get Fama's thinking. I've viewed it repeatedly and get something new every time. https://www.top1000funds.com/2015/12...the-moon-fama/
+1 This really hit home. Watched the entire thing. Fascinating.

At 35.45

"What chance do people in this room have of choosing a good manager?"

"You haven't got a hope of doing it."
Lawrencewendall is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 08-13-2020, 05:30 PM   #182
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
OldShooter's Avatar
 
Join Date: Mar 2017
Location: City
Posts: 6,542
Quote:
Originally Posted by Lawrencewendall View Post
+1 This really hit home. Watched the entire thing. Fascinating.

At 35.45

"What chance do people in this room have of choosing a good manager?"

"You haven't got a hope of doing it."
Yeah. Here is Fama's partner Ken French on picking a manager: https://famafrench.dimensional.com/v...-managers.aspx
OldShooter is offline   Reply With Quote
Old 08-13-2020, 05:59 PM   #183
Full time employment: Posting here.
Lawrencewendall's Avatar
 
Join Date: Feb 2017
Location: Severn
Posts: 768
Quote:
Originally Posted by OldShooter View Post
Yeah. Here is Fama's partner Ken French on picking a manager: https://famafrench.dimensional.com/v...-managers.aspx
Bottom line: Don't try.
Lawrencewendall is offline   Reply With Quote
Old 08-13-2020, 06:09 PM   #184
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
OldShooter's Avatar
 
Join Date: Mar 2017
Location: City
Posts: 6,542
Quote:
Originally Posted by Lawrencewendall View Post
Bottom line: Don't try.
It is extremely un-intuitive, thus extremely difficult, to believe that prices are very close to being totally random. But once you get over that high hurdle, it is easy to understand why there is no discernible manager skill, only luck.

In Misbehaving, Richard Thaler tells a story about a consulting gig where he and a couple of grad students were brought in to look at the trader bonus system at a big Wall Street firm. The study conclusion was that the traders were simply being paid for being lucky. The client totally ignored it.
OldShooter is offline   Reply With Quote
Old 08-13-2020, 08:31 PM   #185
Dryer sheet aficionado
 
Join Date: Sep 2018
Posts: 37
I interviewed a bunch of managers. The smartest one leveled with me; he said, if you could make $50k a year somehow, youíd be fine, but you need that to make your portfolio work. Since that was equivalent to what Iíd have to pay him, I decided to not hire him, or any other financial manager. And itís worked out fine.

I did panic a little and sold $100k of investments back in early March, but whatever, thatís only 2% of what I have in the market. We are back to where we were financially last October and have a lot of upside to go.
smoghat is offline   Reply With Quote
Old 08-14-2020, 08:25 AM   #186
Thinks s/he gets paid by the post
Markola's Avatar
 
Join Date: Nov 2013
Location: Twin Cities
Posts: 2,135
Quote:
Originally Posted by OldShooter View Post
... it is easy to understand why there is no discernible manager skill, only luck.... The study conclusion was that the traders were simply being paid for being lucky.

It is really remarkable how, in just about every other field besides investing imaginable, skill, education, accomplishment and hard work are required at the elite levels. But in investing, picking index funds and then leaving them the heck alone for decades, with the possible exception of rebalancing, is a proven and repeatable method for an average person to absolutely crush the pros over the long run. Of course, the Dalios of the world leverage other peopleís money and take huge fees, so Iím not talking about that kind of investing, but even at their levels, itís possible they succeeded only because SOMEONE has to reside in the tails of a random distribution and they were the lucky ones to find themselves there.
Markola is offline   Reply With Quote
Old 08-14-2020, 08:48 AM   #187
Thinks s/he gets paid by the post
Rianne's Avatar
 
Join Date: Aug 2017
Location: Champaign
Posts: 3,456
Go to any casino in the world and you'll see thousands of active managers. Two of my DB play the market as though they were at a casino. Both love to gamble and frequent casinos. I'd say they've been lucky for the most part, but they rarely talk about it. And there's always someone whispering in your ear, that table, that slot machine...it's that addictive emotional release. You can insert a specific stock into the term "table" or "slot machine."
__________________
"If you want to go fast, go alone. If you want to go far, go together.
Rianne is offline   Reply With Quote
Old 08-14-2020, 09:10 AM   #188
Thinks s/he gets paid by the post
Markola's Avatar
 
Join Date: Nov 2013
Location: Twin Cities
Posts: 2,135
Yes, agree there is an emotional or hormonal high some people get from trading, and intellectual stimulation. A family friend died yesterday at 80+ y.o. and I donít think heíd have known what to do with himself in retirement without studying stocks and day trading. But those are different kinds of returns than financial ones.
Markola is offline   Reply With Quote
Old 08-14-2020, 09:17 AM   #189
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
OldShooter's Avatar
 
Join Date: Mar 2017
Location: City
Posts: 6,542
Quote:
Originally Posted by Markola View Post
It is really remarkable how, in just about every other field besides investing imaginable, skill, education, accomplishment and hard work are required at the elite levels. But in investing, picking index funds and then leaving them the heck alone for decades, with the possible exception of rebalancing, is a proven and repeatable method for an average person to absolutely crush the pros over the long run ...
Yes. It certainly seems that way. But try this:

Imagine a flowing trout stream. Ripples, eddies, waves lapping gently on the shore. Relax for a moment and enjoy this thing of beauty. Now suppose that you would like a prediction of the exact state of the stream an hour from now; all the ripples, eddies, and waves. Would you expect to find an expert rippleologist with skill, education, and accomplishments who could give you that information? I don't think so. Why? Because the stream behavior is random. No one can predict the results of a random process.

But is the behavior truly random? Well, we understand the physics of incompressible fluid flows very well, so why can't the rippleologist just calculate the future state? Here's why: To calculate a future state the rippleologist would have to know the sream's current state very exactly -- probably millions of parameter values. The problem is too complex by many orders of magnitude. The stream is effectively random.

As I said a couple of posts ago, if one accepts the almost-unacceptable fact that market's behavior is effectively random, then it is not remarkable at all that no one can predict it. Or turn the coin over: The fact that no one can predict the market's behavior is solid evidence that it is effectively random.

But that's not quite the end of the story. We have to look at the distribution of values in the random process. Fat tails, particularly the left tail, lead to lots of excitement but are not of much interest to a long-term investor. The thing that is of interest is the fact that the distribution is not centered on zero like a classic bell curve. If it were, there would be no sense in investing because prices would never go anywhere. It isn't, though. It drifts to the right (higher prices) at something like 7% +/- per year. That's why long term investing works.

So, ... why does it drift to the right? It drifts because this is not some mathematical game. Underneath all the furor of the market is the fact that we are talking about owning shares in enterprises with employees who are working diligently to make the profits that move the share prices rightwards. Not all the enterprises make profits, of course, and many of them don't even survive. But the net effect of all of them is that 7% rightwards movement.

This is how I have come to understand the apparently-remarkable situation you describe.
OldShooter is offline   Reply With Quote
Old 08-14-2020, 05:26 PM   #190
Recycles dryer sheets
 
Join Date: Mar 2012
Posts: 384
Quote:
Originally Posted by OldShooter View Post
Yes. It certainly seems that way. But try this:

But is the behavior truly random? Well, we understand the physics of incompressible fluid flows very well, so why can't the rippleologist just calculate the future state? Here's why: To calculate a future state the rippleologist would have to know the sream's current state very exactly -- probably millions of parameter values. The problem is too complex by many orders of magnitude. The stream is effectively random.
Good example but knowing the current state even with 100% precision in the stock market won't get us anywhere. In your example of fluid dynamics, which is essentially a deterministic process, you can predict the future state knowing with precision the initial conditions and all the governing equations.

With the stock market, which I agree is entirely unpredictable and for the most part pure random noise, knowing the initial conditions does not help and there are certainly no equations that govern it.
__________________
FIRE'd---4/27/2018 @ 54. DW--RE date 03/01/19.
tdv2 is offline   Reply With Quote
Old 08-14-2020, 05:33 PM   #191
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
OldShooter's Avatar
 
Join Date: Mar 2017
Location: City
Posts: 6,542
Quote:
Originally Posted by tdv2 View Post
Good example but knowing the current state even with 100% precision in the stock market won't get us anywhere. In your example of fluid dynamics, which is essentially a deterministic process, you can predict the future state knowing with precision the initial conditions and all the governing equations.

With the stock market, which I agree is entirely unpredictable and for the most part pure random noise, knowing the initial conditions does not help and there are certainly no equations that govern it.
Agree completely. My point was slightly different: Even something that is theoretically deterministic can be effectively random as far as how we interact with it. Taleb pounds on this point in "Antifragile." I think he was defending against those who say that the market behavior is the result of a collection of individual decisions which, if known, would make the market knowable.

It's a very fine point, though. The tough one, and it took me a long time, is to finally abandon the idea that the market is predictable if we can just find the right expert(s).
OldShooter is offline   Reply With Quote
Old 08-14-2020, 06:27 PM   #192
Recycles dryer sheets
 
Join Date: Mar 2012
Posts: 384
Quote:
Originally Posted by OldShooter View Post
I think he was defending against those who say that the market behavior is the result of a collection of individual decisions which, if known, would make the market knowable.
I have to ponder that one for a while. I guess if you did have insight into that collection of individual decisions, you might have something. Certainly the aggregate of these is the market itself.
__________________
FIRE'd---4/27/2018 @ 54. DW--RE date 03/01/19.
tdv2 is offline   Reply With Quote
Old 08-14-2020, 08:22 PM   #193
Thinks s/he gets paid by the post
Markola's Avatar
 
Join Date: Nov 2013
Location: Twin Cities
Posts: 2,135
Quote:
Originally Posted by OldShooter View Post
Yes. It certainly seems that way. But try this:

Imagine a flowing trout stream. Ripples, eddies, waves lapping gently on the shore. Relax for a moment and enjoy this thing of beauty. Now suppose that you would like a prediction of the exact state of the stream an hour from now; all the ripples, eddies, and waves. Would you expect to find an expert rippleologist with skill, education, and accomplishments who could give you that information? I don't think so. Why? Because the stream behavior is random. No one can predict the results of a random process.

But is the behavior truly random? Well, we understand the physics of incompressible fluid flows very well, so why can't the rippleologist just calculate the future state? Here's why: To calculate a future state the rippleologist would have to know the sream's current state very exactly -- probably millions of parameter values. The problem is too complex by many orders of magnitude. The stream is effectively random.

As I said a couple of posts ago, if one accepts the almost-unacceptable fact that market's behavior is effectively random, then it is not remarkable at all that no one can predict it. Or turn the coin over: The fact that no one can predict the market's behavior is solid evidence that it is effectively random.

But that's not quite the end of the story. We have to look at the distribution of values in the random process. Fat tails, particularly the left tail, lead to lots of excitement but are not of much interest to a long-term investor. The thing that is of interest is the fact that the distribution is not centered on zero like a classic bell curve. If it were, there would be no sense in investing because prices would never go anywhere. It isn't, though. It drifts to the right (higher prices) at something like 7% +/- per year. That's why long term investing works.

So, ... why does it drift to the right? It drifts because this is not some mathematical game. Underneath all the furor of the market is the fact that we are talking about owning shares in enterprises with employees who are working diligently to make the profits that move the share prices rightwards. Not all the enterprises make profits, of course, and many of them don't even survive. But the net effect of all of them is that 7% rightwards movement.

This is how I have come to understand the apparently-remarkable situation you describe.


Very nice, elegant analogy, Old Shooter, and one I can heartily appreciate as a fly fisherman myself. Thank you. Personally, I trust that the global population and its consumption will keep growing during my life and, one way or another, that growth will be translated into the securities markets long term, of which I own a participatory slice. Your metaphor is far more poetic and, I think, edges into chaos theory and its beautiful, whirling and mysterious fractals. To me, watching and participating in the whole giant, undulating, growing swirl of the global economy is the exciting beauty and power of it, versus the hubris of assuming I can possibly know the true state of such a complex system so well that I can crudely bet on the future of this tiny part or against that tiny part.
Markola is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Real Estate: Sell first; buy later. Or Buy First Sell later Livin Large in MT Life after FIRE 36 01-31-2020 09:17 PM
10 year plan still 10 years away...19 months later 10years away Hi, I am... 13 08-02-2013 09:46 PM
ER in 4 months...or 11 months...or 24 months... BarbWire Hi, I am... 3 01-05-2012 06:50 AM
Logistics of paying off balloon mortgage, then selling house 1-2 months later RunningBum FIRE and Money 9 05-28-2008 11:04 PM
19 months later - update igsoy FIRE and Money 6 09-29-2007 01:52 PM

» Quick Links

 
All times are GMT -6. The time now is 01:29 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2021, vBulletin Solutions, Inc.