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The idea of risk/reward is actually counterproductive, I find.
Its rather more about volatility/reward. If you look at the average returns on the stock market over the last 40 years or something, its like 11% - which is an amazing return, but the only way you got that is if you left your money in an index for the entire 40 years. If you had to take your money out at a bad time, you probably lost 20% on your investment. If you'd put it into Treasury bonds, you'd have made 4-5% max, but you would have made it every single year, without fail, and the only way you'd have lost money was if you had to sell bonds during a bad time to shore up your money.
If you know for a fact that you don't need to take the money out for 10+ years, it is flat out retarded to invest in anything except that which returns the highest on average. There's no risk in stock investing (unless you speculate), but there is risk on getting out of the investment.
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On November 22 2010 08:05 TunaFishyMe wrote:
That's a very lazy way to look at the market. Trading is like anything. The person who has the most information wins. It takes time and skill to find a promising stock. It is not easy to make more than 10% on your investments but it is very possible and takes a lot of time and effort just like everything else.
Again, we're talking investing vs trading. If you want to talk about trading, go make your own thread.
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On November 22 2010 07:33 kzn wrote:
Index funds will consistently and reliably return market average growth, unless you pick some ridiculous index that "indexes" like 4 stocks in some tiny industry.
Define "consistently and reliably." I think you would be surprised how difficult it is to construct said portfolio. Eg; commodity delta ones and contango / equity delta ones and correlation spikes.
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On November 22 2010 08:27 InsideTheBox wrote:Show nested quote +On November 22 2010 07:33 kzn wrote:
Index funds will consistently and reliably return market average growth, unless you pick some ridiculous index that "indexes" like 4 stocks in some tiny industry. Define "consistently and reliably." I think you would be surprised how difficult it is to construct said portfolio. Eg; commodity delta ones and contango / equity delta ones and correlation spikes.
Constructing an actual index fund is easy as hell, unless you have less than the necessary amount to purchase at least 1 share of each stock.
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We believe that these high levels of trading can be at least partly explained by a simple behavioral bias: People are overconfident, and overconfidence leads to too much trading.
Overconfident investors will overestimate the value of their private information, causing them to trade too actively and, consequently, to earn below-average returns. Consistent with these behavioral models of investor overconfidence, we provide empirical evidence that households, which hold about half of U.S. equities, trade too much, on average. Those who trade the most are hurt the most.
Don't trade bro, you don't know what you're doing.
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but why isn't a fund not included in the efficient market theory. They can go up or down based on the same principals right?
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On November 22 2010 08:05 TunaFishyMe wrote:
That's a very lazy way to look at the market. Trading is like anything. The person who has the most information wins. It takes time and skill to find a promising stock. It is not easy to make more than 10% on your investments but it is very possible and takes a lot of time and effort just like everything else.
What you're describing is more like investing. For long-term risk-averse portfolios this is what you want to do. Flash trading, however, is a different animal. StatArb lives and breathes on the $0.01 differences described above, trading millions of shares in tenths of a second. Most of the daily trading volume is just computers moving millions of shares very very quickly.
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On November 22 2010 14:06 geometryb wrote:
but why isn't a fund not included in the efficient market theory. They can go up or down based on the same principals right?
No. Funds are essentially companies whose entire business model is the holding of an index of stocks. The value of a mutual fund fluctuates with the value of its entire portfolio, while the value of a stock fluctuates with the value of that individual company.
Yes, in theory, you could (and people probably do) speculate on index fund stocks, but the degree to which you'd have to be right and the market would have to be wrong to make a lot of money is much larger than with individual companies (and its much harder to evaluate a portfolio than a company accurately).
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On November 22 2010 14:34 kzn wrote:Show nested quote +On November 22 2010 14:06 geometryb wrote:
but why isn't a fund not included in the efficient market theory. They can go up or down based on the same principals right? No. Funds are essentially companies whose entire business model is the holding of an index of stocks. The value of a mutual fund fluctuates with the value of its entire portfolio, while the value of a stock fluctuates with the value of that individual company. Yes, in theory, you could (and people probably do) speculate on index fund stocks, but the degree to which you'd have to be right and the market would have to be wrong to make a lot of money is much larger than with individual companies (and its much harder to evaluate a portfolio than a company accurately).
i still don't see how if you buy one stock you are flipping, but if you buy a collection of stocks you aren't flipping anymore? The EV of 1 flip and 100 flips should be the same, isn't it? Why do we distrust the month of research on 1 stock and believe in no research on 100 stocks? Also, buying anything and hoping it will go up is speculating right whether its a fund or a stock? sorry i am new to this.
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On November 23 2010 02:41 geometryb wrote:Show nested quote +On November 22 2010 14:34 kzn wrote:On November 22 2010 14:06 geometryb wrote:
but why isn't a fund not included in the efficient market theory. They can go up or down based on the same principals right? No. Funds are essentially companies whose entire business model is the holding of an index of stocks. The value of a mutual fund fluctuates with the value of its entire portfolio, while the value of a stock fluctuates with the value of that individual company. Yes, in theory, you could (and people probably do) speculate on index fund stocks, but the degree to which you'd have to be right and the market would have to be wrong to make a lot of money is much larger than with individual companies (and its much harder to evaluate a portfolio than a company accurately). i still don't see how if you buy one stock you are flipping, but if you buy a collection of stocks you aren't flipping anymore? The EV of 1 flip and 100 flips should be the same, isn't it? Why do we distrust the month of research on 1 stock and believe in no research on 100 stocks? Also, buying anything and hoping it will go up is speculating right whether its a fund or a stock? sorry i am new to this.
lol, you're absolutely right and I specifically replied to you in my next post. not really sure if the other guy doesn't understand what you're asking, if he's just framing his answer wrong, or doesn't know what he's talking about =/
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On November 23 2010 02:41 geometryb wrote:Show nested quote +On November 22 2010 14:34 kzn wrote:On November 22 2010 14:06 geometryb wrote:
but why isn't a fund not included in the efficient market theory. They can go up or down based on the same principals right? No. Funds are essentially companies whose entire business model is the holding of an index of stocks. The value of a mutual fund fluctuates with the value of its entire portfolio, while the value of a stock fluctuates with the value of that individual company. Yes, in theory, you could (and people probably do) speculate on index fund stocks, but the degree to which you'd have to be right and the market would have to be wrong to make a lot of money is much larger than with individual companies (and its much harder to evaluate a portfolio than a company accurately). i still don't see how if you buy one stock you are flipping, but if you buy a collection of stocks you aren't flipping anymore? The EV of 1 flip and 100 flips should be the same, isn't it? Why do we distrust the month of research on 1 stock and believe in no research on 100 stocks? Also, buying anything and hoping it will go up is speculating right whether its a fund or a stock? sorry i am new to this.
Are you talking about buying one stock, chosen at random? Because then, yes, the EV is identical to an index fund. However, the actual value you're going to get is much more variable (which is what I was talking about before), and in the case of buying a random stock every year you might not ever make a positive return before you die, because there are so many stocks. I'm talking more about trying to pick the stocks that are going to rise, which has proven consistently difficult for people to do even when they're being paid millions to do it.
When I say speculation, I mean what I just talked about: trying to buy a stock shortly before it goes up, and selling it rapidly to crystallize that gain (and doing the reverse). Index fund investing is theoretically open to speculation, most people who invest in index funds do so with the intention of just getting growth equal to the average market growth - they don't particularly care if the index fund is overvalued or undervalued, they just care what kind of % return they're going to see on their money.
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EPT
