Why I believe we are about to embark on a historic bull market run

[bmcgonig]

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Originally Posted by Fermion The SPY S&P500 spider was 255 at the start of 2019. I don't have the exact number, but I can estimate that a Jan 2020 $260 call back then was priced at about $15. If I had put 1% of our investment portfolio back then into said calls, I would have purchased 10 of these calls for about $15,000. Today those calls are worth $62.50, or $62,500. I mean it would have been a nice gain, but it isn't game changing money. How does 1% get you to game changing money if you can't do it during a year like we just had?

I suggest you just read the first two lines of the OPs first post. He's suggesting a quadruple over 2-5 years. Much different than this year[emoji16]

[bmcgonig]

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Originally Posted by Lsbcal While many people responding do not agree with the OP's reasoning for why the market should explode up, don't we all want to see further gains? Well maybe if gains get too high that brings on potential instability in the real economy. So as I mentioned before, I have no problem with the direction of the prediction. Just not too far, too fast please. And let's not forget that Running Man is talking about his 1% bet on this outcome. I personally have a 60% bet on further gains.

Well actually one of the posters on this thread who has shown hostility to the OP has stated that he is underinvested and waiting for the big pullback. So RMs scenario would definitely not suit him and maybe others like him?

[OldShooter]

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Originally Posted by Lsbcal ... I personally have a 60% bet on further gains.

Yeah. We are 75%. I guess it's a bet but I have never thought of it quite that way.

We see ourselves as riding the positive trend that has persisted for 100 years or more while understanding that 75% will definitely be like riding a bucking bull from time to time. Since 1987 we've become quite used to that.

[Lsbcal]

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Originally Posted by bmcgonig Well actually one of the posters on this thread who has shown hostility to the OP has stated that he is underinvested and waiting for the big pullback. So RMs scenario would definitely not suit him and maybe others like him?

Well I think over the long term it has paid off in investing (and life) to be an optimistic person.

That said I do have an exit strategy, or let's call it a Plan B.

[Lsbcal]

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Originally Posted by OldShooter Yeah. We are 75%. I guess it's a bet but I have never thought of it quite that way. We see ourselves as riding the positive trend that has persisted for 100 years or more while understanding that 75% will definitely be like riding a bucking bull from time to time. Since 1987 we've become quite used to that.

From your posts I would never have guessed 75%. Good luck in 2020.

[JJpop]

1 pct does not show much conviction.Why spend the countless hours and then go 1 pct?1 pct is a waste of time and more An exercise of ego than anything else.

[bmcgonig]

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Originally Posted by JJpop 1 pct does not show much conviction.Why spend the countless hours and then go 1 pct?1 pct is a waste of time and more An exercise of ego than anything else.

I really don't think you're in any way clear on the OPs concept at all.

[JJpop]

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Originally Posted by bmcgonig I really don't think you're in any way clear on the OPs concept at all.

I disagree but life goes on.1pct is 1 pct.

[audreyh1]

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Originally Posted by dixonge well, it does indeed look like passive money is about to overtake active money... passive-investing-now-controls-nearly-half-the-us-stock-market

But that is just for mutual funds which is still way less than the total equity market.

[NW-Bound]

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Originally Posted by NW-Bound ... My point here is that if you count only the funds with the word "index" in their name, you miss a lot of the "closet indexers". How much you miss? I don't know, but it is significant, even 20 years ago.

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Originally Posted by OldShooter Yes. Absolutely. And of course the large pension funds and other pros* who are passive are probably not using retail funds, so are not counted when only funds are examined....

Glad that you agree. Then, it means that the negative effect of not having enough active investors may be more pronounced than people think.

What negative effect? People can search the Web to see a few that even the late Bogle warned about.

[NW-Bound]

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Originally Posted by JJpop I disagree but life goes on.1pct is 1 pct.

The OP applies leveraging so that he might gain a lot more than 1% if the market will go crazy. How much gain is the question, but if he's wrong he will lose only 1%.

[NW-Bound]

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Originally Posted by Closet_Gamer This. Passive investing is taking a free ride on the price discovery process. To the extent price discover weakens, there will be excess returns available and people will move in to capture them. I don't know the math, but I suspect that if even 1 or 2% of trades were "active", the market would remain pretty efficient and if not would quickly rebound back to the point of price efficiency. The fact that we still see big moves in individual stocks in response to news (good or bad) and that other specific stock's prices hold based on sentiment about long term potential tells me that price discovery is alive and well. Finally, while I don't agree with the OP, I do appreciate the creation of a fun thread!

Just 1% or 2% of active trades will make the market efficient? I think we need a lot more than that, but I guess nobody knows.

I think of an analogy with the election process. Suppose only 1% or 2% of the electorate bothers to go to the voting booth while the rest stays home. The outcome would be easily be manipulated and the results go berserk.

[OldShooter]

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Originally Posted by NW-Bound Just 1% or 2% of active trades will make the market efficient? I think we need a lot more than that, but I guess nobody knows. ...

Yup. Quote of the day. We may never know.

I think there are three factors that will limit penetration of passive investing:

First, we have 100,000 years of evolution that has rewarded risk takers and optimists. That's why casinos and lotteries are so popular. The endorphin rewards for gambling are the same as for stock trading. We are genetically wired to gamble.

Second, there is a huge number (1M+) people in the investment business who for the most part rely on the myth that the markets are not essentially random. It's not only the stock pickers hawking their funds, it is also the portfolio managers whose big salaries are at risk if they admit to their bosses or clients that stock picking is a losing strategy. And, of course the publications like Barrons, the web sites like Motley Fool, and the hordes of people posting click bait and hustling investment advice. All of these people generate a huge amount of propaganda that Mr. Joe Average Citizen reads and believes.

But the most powerful factor, IMO, is that if the market does begin to be inefficient there is an army of stock pickers out there who will remedy the situation, trading like crazy. The problem is self-correcting.

[NW-Bound]

In the housing market bubble of 2005, how many active players were flipping houses and drove the price up, compared to how many home owners who quietly enjoyed seeing the price of their homes going up and up and did nothing?

Yes, the problem was eventually self-correcting. The aftermath was quite messy.

[Running_Man]

Quote:

Originally Posted by Fermion The SPY S&P500 spider was 255 at the start of 2019. I don't have the exact number, but I can estimate that a Jan 2020 $260 call back then was priced at about $15. If I had put 1% of our investment portfolio back then into said calls, I would have purchased 10 of these calls for about $15,000. Today those calls are worth $62.50, or $62,500. I mean it would have been a nice gain, but it isn't game changing money. How does 1% get you to game changing money if you can't do it during a year like we just had?

You are purchasing options too close to the money in your example, take an option 25% out of the money expecting a 35-40% move this year. The options you specify were 2% premium, which while providing a 300% return, is not the same as playing for a very large move by buying options 25% out of the money.

[Lsbcal]

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Originally Posted by Running_Man You are purchasing options too close to the money in your example, take an option 25% out of the money expecting a 35-40% move this year. The options you specify were 2% premium, which while providing a 300% return, is not the same as playing for a very large move by buying options 25% out of the money.

For those of us who do not understand options could you show a simple example of how you get a big multiplier on a 1% portfolio bet? Do you loose the options money if the move is "only" an average one? I think options must be done in a taxable account and if so is this a short or long term capital gain?

I am just curious and have never used options. I have heard the options lingo (like "in the money") but have not spent the time to get the hang of this stuff. Showing my complete ignorance of the subject.

[copyright1997reloaded]

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Originally Posted by dixonge Absolutely! However, until that trend becomes obvious, I'll stick with the long market history of slow, upward movement. Your statement contains a presumption that some people *can* time the market. Sure, everyone gets lucky now and then. The people that don't realize it's luck and think they have discovered a secret technique are the reasons Las Vegas exists. I like keeping an open mind as well, but I'm no longer open-minded about gravity or heliocentricity. Sometimes things can be settled. See the other thread re: market timing that was just started. Regarding a near-term 2-5 year rise in the S&P which will include one-month jumps of 20% - has that ever happened before?

Quote:

Originally Posted by OldShooter Yup. Quote of the day. We may never know. I think there are three factors that will limit penetration of passive investing: First, we have 100,000 years of evolution that has rewarded risk takers and optimists. That's why casinos and lotteries are so popular. The endorphin rewards for gambling are the same as for stock trading. We are genetically wired to gamble. Second, there is a huge number (1M+) people in the investment business who for the most part rely on the myth that the markets are not essentially random. It's not only the stock pickers hawking their funds, it is also the portfolio managers whose big salaries are at risk if they admit to their bosses or clients that stock picking is a losing strategy. And, of course the publications like Barrons, the web sites like Motley Fool, and the hordes of people posting click bait and hustling investment advice. All of these people generate a huge amount of propaganda that Mr. Joe Average Citizen reads and believes. But the most powerful factor, IMO, is that if the market does begin to be inefficient there is an army of stock pickers out there who will remedy the situation, trading like crazy. The problem is self-correcting.

Had to comment here given a couple of posts mentioning gambling and drawing an analogy to the market.

First, even with gambling, there are different games. Some are truly random (like Roulette and Craps) where each play is an independent event. Some are not (like Blackjack). Now the odds may be against you in each game, but the two types of games are NOT the same. In Blackjack, there is the basic "passive" strategy given the three known cards (your two cards, the one dealer card showing), and the passive strategy assumes no other information (knowledge) and is inherently better (in terms of expected value) than an active strategy that also has no other information (knowledge).

However, in Blackjack when playing with a finite and relatively small number of decks the subsequent hands are NOT independent events. Previous play of cards DIRECTLY affects the probability of subsequent cards, and knowledge of this can lead to a strategy that improves the expected value (i.e. through counting cards). This was shown mathematically by Edward Thorp way back in 1962 (and perhaps not ironically he was also a successful hedge fund manager).

To bring this back to the discussion at hand, 1) counting cards is very difficult, 2) casino's have reacted by increasing the number of decks and other factors (limiting max $ play, other rule changes) 3) Even with a positive expected value, there is still a rather large variability at any one sitting (which could result in a large loss of capital). But this doesn't mean it wasn't possible for the properly educated and talented player to enhance their expected value of play. But to those who don't understand this, "it is all luck".

Hey to each their own. We all have to make our own decisions regarding investing. I'm an econ major, and understand market theory (including the efficient market hypothesis), but I also believe (and am willing to bet some of my capital based on this) that many humans have non rational decision processes - that have been show by behavioral economics.

[ERD50]

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Originally Posted by NW-Bound Just 1% or 2% of active trades will make the market efficient? I think we need a lot more than that, but I guess nobody knows. ...

I'd bet it's pretty close.

One example, from July 31 to Aug 5, AAPL went from a $221.37 high to a $192.58 low, about a 14% delta. Over those 4 trading days, about 200M shares were exchanged, out of about 4,600 M outstanding shares. So that's about 4%, and some of those would be the same shares. Everyone is affected, but not everyone is trading. A pretty small % are trading.

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Originally Posted by NW-Bound .... I think of an analogy with the election process. Suppose only 1% or 2% of the electorate bothers to go to the voting booth while the rest stays home. The outcome would be easily be manipulated and the results go berserk.

But I think the analogy falls apart, because the market doesn't work that way. It would be more like an election that takes place over an entire month, with the results posted in real time. The people sitting on the sidelines would be motivated if they saw their favorite only a small % ahead, or behind. That would keep it in check.

Another analogy might be a toilet paper shortage. People hear the news, and many run out and buy extra, causing more of a shortage. But the shortage may have only been a 5% shortage. But when you need it you need it, no one wants to risk running out, they want 100%. And assuming no anti-gouging laws, the price will go up because some people are willing to pay for the assurance of having 100%. And the price will likely go up more than the 5% shortage.

-ERD50

[NW-Bound]

In any case, problems often arise when we assume that the world is rational, but history has shown us time and time again that it is not.

What the OP proposed in this thread is a thesis that the market may go temporarily insane, and he is willing to make a small bet that can pay off if it works out. The chance of a $1 bet paying $100 should be small, like a 1% odd. The OP thinks it can be higher, maybe a 10% chance of happening or higher. He certainly does not think it is a sure thing; he would bet his entire farm if he thought so.

I do not know what the odd of this scenario is. What I say is that craziest things have happened in life, and this scenario may just happen. I will not say that the chance is zero. It's definitely more likely than REWahoo's asteroid striking. Oops, hope I do not jinx anything by mentioning that scary asteroid.

[OldShooter]

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Originally Posted by copyright1997reloaded ... First, even with gambling, there are different games. ...

Whew.

The point about gambling is that we have evolved as humans to be gamblers. When we win we are rewarded with a shot of dopamine. Further, our brain will even give us an introductory shot when we think about or get near a gambling opportunity, whether in a casino or in the market. We don't get the reward when we don't win, which makes us tend to remember our wins and forget our losses. Basically we are wired to be stock pickers and casino gamblers. Jason Zwieg's "Your Money & Your Brain" explains all this and he fills in some pieces that behavioral economists Richard Thaler ("Misbehaving") and Daniel Kahneman ("Thinking Fast and Slow") do not cover.

Our urge to gamble is one of the reasons that passive investing will never get to 100% market penetration.

None of this has anything to do with the minutiae of contemporary casino games.