Big political events often have big impacts on the stock market. But often it’s not immediately apparent what that impact will be. This article points out that on Monday the Spanish and broader European markets were pretty calm. Though the author could…
Your asset allocation is the blueprint for your portfolio. You want to spend the time to make sure that you design the right portfolio for you. But your asset allocation is static – the markets are decidedly not. They are constantly bouncing around. Wh…
It seems that the general public is starting to see the light on active management. It doesn’t work. There is simply no way to consistently beat the market. Identifying the best active manager is akin to finding the best coin flipper. Someone’s got to …
We’ve seen increasing interest in the media about bitcoin and other cryptocurrencies lately. And we’ve already talked about whether it makes sense for most people to include them in their investment portfolios (short answer: no). Now, I have no idea whether there’s a bitcoin bubble. Bubbles are slippery things. If you ask financial academics, you can get an interesting conversation going about whether bubbles even exist, or if it’s just “rapid discounting of risk.” In financial media, calling something a bubble usually just means that something has been going up for a while, and you want to write a story about why it “has to” go down. It would be nice if we could call when a bubble will pop, but there’s just no evidence that anyone can effectively time the market. Plus, the article points out that there’s not really a good way to short bitcoin right now anyway. But I want to stop for a minute and defend the poor, helpless short sellers of the world. While it’s easy to vilify them – and they often make it so easy – they are crucial to a well-functioning market. No one really likes people who profit off other people’s […]
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I spend a lot of time complaining about the financial media, but occasionally something good sneaks through the cracks. This is one of those times. Everything in this article is something I would agree with. I want to expand on one point in particular: you shouldn’t focus on past returns. It’s easy to say past performance is not indicative of future returns (as the SEC dictates), but it’s another thing to follow through on it. How else are you supposed to figure out which are the good or bad funds? At the end of the day, you invest so that you’ll have more money in the future. So, it stands to reason that you want to invest with someone who has made money for their investors. The problem is that risk and return are related. To get higher returns, you need to take on more risk. There don’t seem to be many folks out there who can consistently beat the market. As nice as it would be to pick the best funds from the past couple years, it just doesn’t work. The funds that won last year are no more likely to win again this year. You need to focus […]
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Warren Buffett is a pretty good investor. He’s also a very different investor from you or I – in many ways. With Berkshire Hathaway becoming Bank of America’s largest shareholder, it’s worth looking at one of those differences from a typical investor. When you or I invest in a company, we pretty much get what we get. I can’t call Tim Cook and offer suggestions about the next iPhone (I mean, I could – but I doubt Tim Cook would take my call). We’re along for the ride. Warren Buffett, and Berkshire Hathaway, are not along for the ride. Tim Cook would be more than happy to take Warren’s call – and he would seriously consider what they discussed. A lot of people seem to think about Berkshire Hathaway as something akin to a mutual fund, with Warren Buffett as the masterful portfolio manager figuring out which companies will beat the market. This is the wrong mental model. Berkshire Hathaway is a conglomerate. They invest in or buy businesses in multiple industries – and then help them operate more effectively. In a lot of cases, conglomerates end up subtracting value, but Berkshire Hathaway sure seems to be doing a good […]
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Most people secretly believe it’s possible to predict what the stock market will do next. If you are just clever enough, and have access to the right information, you will be able to predict where the market is going. But the ugly truth is that we just can’t. No matter how clever you are, or what information you have, the market is still smarter than you. You may get it right – you have a 50/50 shot of guessing the right direction – but that’s just luck. There’s no evidence that active managers can consistently beat the market. And that consistency is the key. Articles like this one, touting things the rest of the market “overlooks” are annoying. If these “overlooked” metrics really had any predictive power, they wouldn’t be overlooked for very long. And the author certainly wouldn’t be writing about them. He would be trading on them. He would be trying to make sure that people didn’t find out about them. The fact that he’s writing about them suggests they’re more valuable to make him look smart than as a long-term trading advantage. This is an example of the gratuitous noise in the financial press. I only grabbed […]
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Technical analysis is always fun to pull apart. This article quotes several analysts predicting a potential 3 to 5 percent drop over a short, but unspecified, term – depending on how some of their indicators move. One of the great things about technical analysis is that it’s usually unverifiable. If we do see a drop (of really any magnitude) they get to claim success and talk about how brilliant they are. If the markets keep going up, then the conditions just weren’t right. Plus, how many people are really going to complain about the markets going up? But let’s take them at their word. I’m sure the folks this article quotes truly believe in what they are saying. So let’s do a quick and dirty analysis to see how common short term moves of this magnitude are. To keep things simple, let’s just look at the daily returns of the S&P 500 Index from 1/4/50 – 8/10/17. Over this period, the average daily move (the absolute value of the daily return) was 0.65 percent and the standard deviation of the daily moves was 0.71 percent. So a week of average daily movement puts us pretty close to the top range […]
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