Is the Federal Reserve ruining American Savers

[Slava]

Originally Posted by macker

http://www.investopedia.com/articles...#axzz1l9D0QXbr

OK.....and?

[Cowboy89]

Originally Posted by macker

http://www.investopedia.com/articles...#axzz1l9D0QXbr

I agree with Slava in a lot of ways and the big reason why is that methods of quantifying risk seem to ignore the fact that the Efficient Market Hypothesis is incorrect. Behavioral finance often misprices securities, and that mispricing has a way of throwing off Beta and 'Expected Return' in such ways as to make them unreliable in a lot of cases.

Some examples in history go back to the financial crisis in 2008-2009, prices on a lot of things were they way they were because of money moving around for reasons other than the underlying business fundamentals of particular stocks. There were quite a few stocks with higher liquidation value than what the stock price was indicating. If you took a value investor approach some of these unloved securities were mispriced and worth buying. If you took a MPT view, these were stocks that were riskier than the market because beta would have been higher than 1 (As their stocks would have declined greater than the overall market). But in reality how risky would investments like these be if their liquid assets (Net of liabilities of course) were greater than the price you were paying for them?

[Knalus]

Originally Posted by Cowboy89

I agree with Slava in a lot of ways and the big reason why is that methods of quantifying risk seem to ignore the fact that the Efficient Market Hypothesis is incorrect. Behavioral finance often misprices securities, and that mispricing has a way of throwing off Beta and 'Expected Return' in such ways as to make them unreliable in a lot of cases.

Some examples in history go back to the financial crisis in 2008-2009, prices on a lot of things were they way they were because of money moving around for reasons other than the underlying business fundamentals of particular stocks. There were quite a few stocks with higher liquidation value than what the stock price was indicating. If you took a value investor approach some of these unloved securities were mispriced and worth buying. If you took a MPT view, these were stocks that were riskier than the market because beta would have been higher than 1 (As their stocks would have declined greater than the overall market). But in reality how risky would investments like these be if their liquid assets were greater than the price you were paying for them?

Just curious, is this like saying, if the market was efficient, there wouldn't be bubbles, ie. the housing bubble, or the tech bubble, ect?

[Cowboy89]

Originally Posted by Knalus

Just curious, is this like saying, if the market was efficient, there wouldn't be bubbles, ie. the housing bubble, or the tech bubble, ect?

Yes. Efficient Market Hypothesis assumes that all possible public information about a stock or asset is taken into account and priced into the asset at any given time and that all purchasers/sellers are perfectly rational and understand the fundamentals of the asset.

Bubbles occur when people buy for no other good reason than 'this asset has been going up' and the mass effect of all those people diving in for that very reason creates a positive feedback cycle that can go on basically as long as buyers have capacity to buy more.

The opposite can happen in crashes, where people sell , just out of fear it will go down more.

[Knalus]

Originally Posted by Cowboy89

Yes. Efficient Market Hypothesis assumes that all possible public information about a stock or asset is taken into account and priced into the asset at any given time and that all purchasers/sellers are perfectly rational and understand the fundamentals of the asset.

Bubbles occur when people buy for no other good reason than 'this asset has been going up' and the mass effect of all those people diving in for that very reason creates a positive feedback cycle that can go on basically as long as buyers have capacity to buy more.

The opposite can happen in crashes, where people sell , just out of fear it will go down more.

Yeah, I know people who make more money dealing in the psychology of other people's actions on a given stock than in the actual fundamentals of the company they are trading in. To them, it doesn't matter what the company is doing, what matters is what other people are thinking. Seriously weakens the idea of the perfectly efficient market.

[Slava]

Originally Posted by Cowboy89

Yes. Efficient Market Hypothesis assumes that all possible public information about a stock or asset is taken into account and priced into the asset at any given time and that all purchasers/sellers are perfectly rational and understand the fundamentals of the asset.

Bubbles occur when people buy for no other good reason than 'this asset has been going up' and the mass effect of all those people diving in for that very reason creates a positive feedback cycle that can go on basically as long as buyers have capacity to buy more.

The opposite can happen in crashes, where people sell , just out of fear it will go down more.

There are really four types of bubbles:

1. Rational/Near Bubbles: people know that the bubble will collapse, but don't know when. The prices increase because while people know its a bubble the compensation for that risk increases as well.

2. Intrinsic Bubbles: This is where people use fundamentals and either over-react to the news or extrapolate that information to suggest ever increasing prices/growth.

3. Fads: This is basically the "this time is different" way of thinking, or a things can never change way of thinking. Companies that seem great are awesome and can never possibly be "un-great". In essence there is a lesser comprehension of the risks associated and people buy and hold no matter where the prices go.

4. Informational: This is where the prices fail to reveal relevant information and then prices deviate from fundamental value.

There have been a lot of studies and experiments into bubbles (which are really interesting!). Simulations and such have turned up a lot of interesting things. Perhaps the least surprising was one done by a fellow named Vernon Smith who found that the fist time through study participants acted as if the bubble was a fad. The second time, although they sensed what was coming, it was a near rational bubble: they thought that they could get in, make some money and gt out before it burst.

EDIT: I just wanted to give credit where its due and note that I am using information that I first gleaned from a fellow named James Montier here, who is (IMHO) basically brilliant.

[missdpuck]

Just a thanks to all of you posting here. I'm so ignorant about economics. Now I'm going to sign up for one of those free Udemy courses haha.

[Cowperson]

Originally Posted by Slava

There are really four types of bubbles:

1. Rational/Near Bubbles: people know that the bubble will collapse, but don't know when. The prices increase because while people know its a bubble the compensation for that risk increases as well.

2. Intrinsic Bubbles: This is where people use fundamentals and either over-react to the news or extrapolate that information to suggest ever increasing prices/growth.

3. Fads: This is basically the "this time is different" way of thinking, or a things can never change way of thinking. Companies that seem great are awesome and can never possibly be "un-great". In essence there is a lesser comprehension of the risks associated and people buy and hold no matter where the prices go.

4. Informational: This is where the prices fail to reveal relevant information and then prices deviate from fundamental value.

There have been a lot of studies and experiments into bubbles (which are really interesting!). Simulations and such have turned up a lot of interesting things. Perhaps the least surprising was one done by a fellow named Vernon Smith who found that the fist time through study participants acted as if the bubble was a fad. The second time, although they sensed what was coming, it was a near rational bubble: they thought that they could get in, make some money and gt out before it burst.

EDIT: I just wanted to give credit where its due and note that I am using information that I first gleaned from a fellow named James Montier here, who is (IMHO) basically brilliant.

Bubbles typically involve leverage, some way, some how, and often revolve around an unregulated or loosely regulated loophole where no one is watching or able to say "no."

Some guy gets a bright idea, everyone piles in, it all starts to look like the norm (this time its different) and then, kerpow, right in the kisser when it explodes.

About every seven to ten years.

All of this has happened before, and all of this will happen again. Not exactly the same way . . . .

Cowperson

[macker]

Originally Posted by Slava

OK.....and?

What metrics are you using when you quant risk? You are basically just throwing out statements like ST is junk, Beta is garbage etc. etc. I have pointed out the flaws but you aren't really showing any reliable alternatives. The link is just a starting point and you can't completely classify it all as junk or garbage if you aren't presenting any better alternatives.

Regarding the markets being efficient this has been proven to be wrong over and over again and some would argue along the lines of Volcker and Grantham that the belief in EMH caused the financial crisis. It's a fact : you can only positively impact only one aspect of investment performance and that is your allocation of assets among broad asset classes. If over the past 20 years you had simply held a portfolio consisting of one quarter of the indexes of large stocks, small stocks, foreign stocks and high quality US bonds you would have beaten 90% of all professional money managers and with considerbly less risk. The amazing truth is that over a long enough time period almost any reasonably balanced indexed strategy will beat the majority of proressional money managers. If you look at the ETF growth in Canada in the last few years alone this is not a secret.

[macker]

Originally Posted by Cowperson

Bubbles typically involve leverage, some way, some how, and often revolve around an unregulated or loosely regulated loophole where no one is watching or able to say "no."

Some guy gets a bright idea, everyone piles in, it all starts to look like the norm (this time its different) and then, kerpow, right in the kisser when it explodes.

About every seven to ten years.

All of this has happened before, and all of this will happen again. Not exactly the same way . . . .

Cowperson

This book changed the way I look at bubbles :
http://press.princeton.edu/titles/8973.html

[Slava]

Originally Posted by macker

What metrics are you using when you quant risk? You are basically just throwing out statements like ST is junk, Beta is garbage etc. etc. I have pointed out the flaws but you aren't really showing any reliable alternatives. The link is just a starting point and you can't completely classify it all as junk or garbage if you aren't presenting any better alternatives.

Regarding the markets being efficient this has been proven to be wrong over and over again and some would argue along the lines of Volcker and Grantham that the belief in EMH caused the financial crisis. It's a fact : you can only positively impact only one aspect of investment performance and that is your allocation of assets among broad asset classes. If over the past 20 years you had simply held a portfolio consisting of one quarter of the indexes of large stocks, small stocks, foreign stocks and high quality US bonds you would have beaten 90% of all professional money managers and with considerbly less risk. The amazing truth is that over a long enough time period almost any reasonably balanced indexed strategy will beat the majority of proressional money managers. If you look at the ETF growth in Canada in the last few years alone this is not a secret.

Oh, we're back to the active/passive again....good its been so long since we beat this one to death.

Truthfully I don't think that there is a "system" or one metric that can be used. I said before its basically research and work; you can either choose to do that yourself or farm it out.

[macker]

Originally Posted by Slava

Oh, we're back to the active/passive again....good its been so long since we beat this one to death.

Truthfully I don't think that there is a "system" or one metric that can be used. I said before its basically research and work; you can either choose to do that yourself or farm it out.

I agree, not the most efficient debate, but with less than 20% of active managers beating the index last year net of fees, some things will never change.

[Flame Of Liberty]

Originally Posted by SebC

If you had a fixed money supply, as technology/capital makes productivity go up, the nominal price of goods goes down, which means people are deterred from spending (since everything gets cheaper the longer you wait to buy it), and then the economy crashes.

Having the ability to print money and control interest rates to control inflation but setting a target rate of 0, you run the risk that you'll miss and go into deflation... and again, that's bad.

Small, controlled inflation is the way to go. You can beat inflation by investing.

Are complaining about deflation in the technology (computers, phones) industry? I hope you also feel bad for making tech industry crash by buying the same device today cheaper than it cost few months ago, but surprise surprise it seems to be doing just fine?

[Flame Of Liberty]

Originally Posted by Cowboy89

Yes. Efficient Market Hypothesis assumes that all possible public information about a stock or asset is taken into account and priced into the asset at any given time and that all purchasers/sellers are perfectly rational and understand the fundamentals of the asset.

Bubbles occur when people buy for no other good reason than 'this asset has been going up' and the mass effect of all those people diving in for that very reason creates a positive feedback cycle that can go on basically as long as buyers have capacity to buy more.

The opposite can happen in crashes, where people sell , just out of fear it will go down more.

http://mises.org/journals/scholar/Thornton13.pdf

[Slava]

nm. We've been through this before.

[macker]

Originally Posted by Slava

<yawn> how does this go again? You post some studies about things and I post some arguments and nothing gets setlled. After a while I bring up your other posts about investing in things like Shore Gold, Encana and in general thinking you can beat the market, whereas no one else can.

At some point I also point out that "beating the market" is just meaningless. That the "lost decade" that you suffered as a US investor (assuming you followed your advice to index) doesn't apply to almost anyone because the S&P500 is cap weighted. If you took out the cap weighting though the return was 66%.

Anyway, its pointless arguing with you about this because you don't take your own advice. You're happy to promote ETFs and their benefits but then put your money in single stocks that you pick up from vector vest. Its actually quite amusing to me!

Me, pretend to beat the market Come on Mr. Clairvoyant you used to tell us where the market was headed to next. Too bad you never give any specific picks or anything as that would give you more active management street cred. You got me on this one as you picked a couple of my real winners Do you have a spreadsheet somewhere to keep track of all this stuff At least mention AGU that is up 160% since I mentioned it in one of those old threads. Now more than ever it doesn't have to be an all or nothing strategy and every portfolio should consist of active and passive investments. I can see value in both as do most fund managers when you look into things closer and see the top holdings EEM, GLD, XGD, XIU etc.etc. Many of these "Active Managers" are employing very passive strategies so why would anyone pay them outrageous MER fees to do something that they can do better themselves without and MER. If you need the comfort of thinking like an active manager then go to morningstar and find out what the experts are holding and duplicate it. Call it the Passive agressive strategy.....I haven't quite figured out how to "beat the market" but I have consistently beaten the index huggers and active fund managers.

[Slava]

Forget it.

[Rathji]

Maybe it is just me and being over tired, but all I see is walls of text in this thread.

On the plus side, i think I now know how Slava felt like when we were trying to explain how to load Android apps on his Playbook.

[Slava]

Originally Posted by Rathji

Maybe it is just me and being over tired, but all I see is walls of text in this thread.

On the plus side, i think I now know how Slava felt like when we were trying to explain how to load Android apps on his Playbook.

Ya, I was trying to avoid this. I think I'll go delete and just abandon the argument for now.

[SebC]

Originally Posted by macker

Debt-laden governments encourage higher inflation, as that makes paying back what they owe easier. The higher the inflation the easier it is to pay back debts because revenue will be pushed up by the higher inflation while the amount owed stays the same. Monetizing debts = inflation.

Yup, that's why you don't let government set monetary policy.

Originally Posted by Flame Of Liberty

Are complaining about deflation in the technology (computers, phones) industry? I hope you also feel bad for making tech industry crash by buying the same device today cheaper than it cost few months ago, but surprise surprise it seems to be doing just fine?

Technology is kind of a special case. IIRC, inflation is calculated using equivalents (i.e. high end computer last years ago vs. different high end computer today) for precisely this reason.