Comments on: Why it pays to ignore the market A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: TFF Fri, 25 Feb 2011 15:46:45 +0000 Good insight, najdorf. One of the fictions promoted by index investing is that there are only two distinct securities in the world: “stocks” and “bonds”. People forget that different segments of the stock market have very different characteristics.

Note that this isn’t necessarily an attempt to “beat the market”. Some stocks are at risk of losing 90% of their value in a recession. Some are not. Pretty easy to tell the difference between the two classes. The riskier stocks will almost certainly produce better returns as long as things go well, but individual investors have to decide whether or not that additional return is worth the additional risk TO THEM.

By: DanGroch Fri, 25 Feb 2011 07:12:42 +0000 Felix, re your “extend and pretend” or “delay and pray” comment; I think this is where one has to acknowledge the feedback mechanisms between financial markets and the events they purport to estimate. “Reflexivity” is the term Soros coined for this phenomena.

For example, analysing the extent to which equities forecast recession is difficult given that broad-based declines in equities may in fact contribute to recession (e.g. by triggering minimum coverage clauses in loan agreements, etc). You might also ask whether the market was adroit in anticipating the collapse of Bear Sterns, or whether the market was the driving cause of the event it sought to predict.

Unlike betting on the outcome of a horse race, the bet and the outcome of the event are not independent. As a result we see the apparent “irrational” outcomes described in your post.

By: najdorf Fri, 25 Feb 2011 07:01:11 +0000 Stocks are frothy? Depends where you look. The S&P level is a very poor way to assess the valuation of individual stocks, given that the S&P includes companies that still aren’t generating regular profits due to the financial crisis (BofA, AIG), young companies with questionable moats that are at 80x earnings on speculative momentum (Netflix), and megacaps that have seen no real earnings impairment from the financial crisis and are at 10-15x earnings (Microsoft, Walmart, Target, Abbott, J&J, etc.). I don’t think people who pick from the last list need to worry that much about how many covenant lite bonds idiots want to buy, when $8.8b is just not that significant compared to the size of equity and debt markets. I’m also pretty sure that quality equities are less risky than long Treasuries for the reasons mentioned above.

By: y2kurtus Thu, 24 Feb 2011 22:49:24 +0000 “how else can you make money off your money, without working?”

Master Limite Partnerships still pay +5% and their distributions are still trending upwards which offers a bit of protection if rates rise. Spread your money around though because MLP’s are risker than most people realize.

You can make a pretty compelling case for private investment in real estate if you can stomach buying destressed properties.

I think the oil and coal sector is STILL undervalued by 20% if not more.

While equities in general are 100% higher than the March 09 lows I’ll also point out that interest rates at zero means this time actually IS DIFFERENT. Assume that the Fed will not move rates until US unemployment drops below 7% no matter what inflation does. If that happens than the dollar is going to get totally trashed and equities will very like hurt you less than cash or bonds.

Think about this… right now 5 year treasuries are paying ballpark 2.25. If you assume that in 5 years they will be paying 5% (which is about what they were paying about 5 years ago) than todays 10 year treasury at 3.50 is going to be a 5-year 150 basis points behind the new issues. Your “safe” T-Bonds are going to be trading at 90 cents on the dollar! If you think we’re going to face 5% inflation in the next 5 years (which I think is very likely) then the “safest” investments are totally shot.

I’d rather take a big risk in exchange for a small return than take small risk for no return.

By: KenG_CA Thu, 24 Feb 2011 22:15:23 +0000 Debt and equity markets look frothy now because, after the dust from the 2008/9 wealth re-distribution plan settled, those who still had wealth wanted somewhere to put it, and 0.5% interest-paying bank accounts and mattresses just don’t cut it. The money has to be somewhere, so those two markets are a good place to park the cash. Just by the very nature of more money going into those markets, asset prices will rise. And then, at some point, some people will say “that’s as high as they will or should go”, and start selling. And when that happens, prices will drop, because there will be lots of people selling.

So if you don’t time it right, you will look foolish. But how else can you make money off your money, without working (or devising innovative financial products)?

By: TFF Thu, 24 Feb 2011 19:08:49 +0000 That’s funny… :) Mean reversion is essentially a fancy way of saying that the market is always WRONG. The exact opposite of your earlier principle.

I like your new principle better, “It’ll just drive you mad.”