Lillailler's Investment Philosophy

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Lillailler
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Lillailler's Investment Philosophy

Post by Lillailler »

I am posting this in the hope of getting some feedback on my facts and logic, and alternative assumptions other people make.

The TL:DR version

1. Diversify in terms of companies, industries, countries, investments and intermediaries in order to spread risk and reduce the impact of bad luck.
2. Once a year check on market values and diversity, and then reinvest cash income, invest new savings, and if necessary sell and buy to re-establish diversity which has been eroded, for example by exceptional growth in one company's shares.
3. Ignore all news and don't trade except to invest new money, reinvest cash income, or reestablish diversity.

The long version
I have set this in the form of definitions, axioms and deductions in order to clarify the logic, even though this tends to reduce readability (sorry). The axioms are supposed to be things that nearly everyone would agree with, and the deductions are supposed to follow from the axioms, so that overall watertight logic is maintained. This helps me clarify my thinking (in my opinion, at least).

Definitions:
I define three types of investors:

Capital investors, who typically execute a 'buy, improve, sell' strategy, requiring a large stake in each company invested in. We see this in the form of Venture Capital, the TV programmes 'The Profit' and 'Shark Tank', and in the people who buy houses, fix them up, and sell them on for occupation. This requires both technical skills and capital, and comes with unavoidable risks. They depend on inside knowledge.

Professional investors, who work full-time on salary making investments on behalf of pension funds, insurance companies, and funds which are sold to retail investors. They typically have access to a flood of public and semi-private information through news services and company investor briefings. They may have inside knowledge.

Retail investors, who on their own behalf make small investments in company shares, Unit Trusts, OEICs, ETFs, Money Market Funds, etc, and later sell them, with the object of getting some mix of capital gain and income. Their investments are not big enough to give them any influence over the running of the company. They do not have inside knowledge.

Axiom 1: Non-investors simply won't get to Financial Independence because inflation will dramatically erode uninvested cash savings over any decades-long period of time.

Deduction 1: Those who seek to retire with Financial Independence must sooner or later become retail investors, whether by investing their wages or by retiring as capital investors and becoming retail investors.

Axiom 2: Every time you buy an investment you are buying from someone who thinks it is advantageous to sell at the price you are agreeing to buy at.

Axiom 3: Every time you sell an investment you are selling to someone who thinks it is advantageous to buy at the price you are agreeing to sell at.

Axiom 4: The majority of investment trading decisions are made by professional investors, who thereby set the prices at which investments are traded.

Deduction 5: Most of the time the buyer or seller you are trading with is a professional investor and therefore has more information than you do about the investment being traded and the latest business and financial news.

Deduction 6: By the time new information reaches you as a retail investor it has already been included in the prices set by the professional investors.

Deduction 7: Do not allow the news to influence your buy and sell decisions.

Axiom 5: The average investor in the financial markets, including both retail and professional investors, gets average market returns.

Axiom 6: The average investor in the financial markets is a professional investor, since although there are fewer of them, they have much more money invested than retail investors.

Deduction 8: As a retail investor you will be doing well if you get average, or close to average, market returns.

Axiom 7: If there is a secret body of knowledge that would make anyone who learned it an expert retail investor, then the professional investors would master it before retail investors, and retail investors would be unable to match the returns professional investors of by getting average, or close to average returns.

Axiom 8: There are strategies, such as tracker-fund investing, which allow retail investors to get close to stock market average returns.

Deduction 9: There is no secret body of knowledge you can master to become an expert retail investor.

Deduction 10: There are no expert retail investors. There are only lucky retail investors and unlucky retail investors.

Axiom 9: You can't learn to be lucky.

Axiom 10: It is much more important for a retail investor not to be unlucky than it is to be lucky, especially if they have reached or are close to reaching Financial Independence.

Axiom 11: You can take steps to limit the adverse effects of being unlucky.

Axiom 12: Diversification is an effective way to limit the adverse effects of being unlucky.

Deduction 11: Retail investors should diversify their investments across all sources of risk, by investing in different companies, in different industries, in different countries, using different intermediaries (advisors, fund managers, brokers, bankers), and in different types of investments.

Axiom 13: The company you invest in today will not be the same company in 10 years time. Mergers, spin-offs, changes in management, technology, competition, customers and strategy will all have effects over time.

Axiom 14: The industries and countries you invest in today will not be the same industries and countries in 10 years time. Technology, politics, and random chance will have effects over time.

Axiom 15: The intermediaries (advisors, fund managers, brokers, bankers) you use today will not be the same in 10 years time.

Deduction 12: In order to maintain reduced risk through portfolio diversity, retail investors should periodically review their portfolio and make adjustments. This review should include reviewing companies, industries, intermediaries (advisors, fund managers, brokers, bankers), and types of investments.

Axiom 16: Trading your portfolio costs money, both in transaction fees and the spread between buy / sell prices.

Deduction 13: Unnecessary or unduly frequent trading should be avoided. The interval period between reviews should be long enough for real changes to dominate normal random fluctuations. Ten years is too long, ten weeks is not long enough.

In summary, retail investing strategy should focus on diversity and avoid unnecessary trading and in particular ignore all news.

The Old Man
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Re: Lillailler's Investment Philosophy

Post by The Old Man »

Question: Is the universe of investments limited to stocks and stock equivalents?

jacob
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Re: Lillailler's Investment Philosophy

Post by jacob »

Hehe, lots of stuff to pick apart here. Where to begin? Lets start with axiom 1.

If you have enough non-interest bearing cash relative to the number of years you have left to live, you don't have to worry about inflation. Even with inflation eating away at the principal, there's no way (hyperinflation aside) that inflation and consumption can eat it all, before you die. For example if you have 100 years of expenses saved and inflation is 3%, it'll be 33 years before you run out. That's quite a while, so imagine you had 200 years .. or inflation was 2% ... or 0% like in Japan.

What does this mean in practice? It means that not everybody who wants FI become investors. It means that people who were investors might stop being investors. With more nuance, it means that some people might prefer safer investments overall. It could however also mean that some people being more speculative with part of their investments being willing to shoot for the moon.

What implications does this have for the following deduction (1) and by implication the rest of the theory?

Jason

Re: Lillailler's Investment Philosophy

Post by Jason »

Not to denigrate the post, its the typical marketing spiel of retail investing which most people are dependent upon (or at least should be) to attempt to accumulate some type of net worth. Average people like myself aren't smart enough, ambitious enough, eccentric enough, strong enough, innovative enough, not lazy enough or have enough to go about it another way. Most personal finance columns are some variation of this message/approach. It's essentially the middle class route.

So if you find yourself within this system, most of the post progresses logically as the basic premise of the retail system is that it rewards discipline and savings habits as opposed to knowledge, skill and financial savvy i.e. you are in the retail system because you are average so don't pretend or play in it as though you're not.

That being said, the retail system is far from the only way to accumulate wealth.

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Re: Lillailler's Investment Philosophy

Post by jacob »

Actually, after mulling it over, I'm not sure a public step-by-step evisceration inevitably followed by "education that's confused with debate" (aka a long and frustrating thread) is such a great idea. (Although it would be fun---at least to me---to go through your list at an ERE meetup).

I would say three things:

1) Be careful about using "facts and logic" (complete with axioms and deductions no less) as the epistemic foundation of a financial system that's often guided by popular delusions and the madness of crowds.

2) Specifically, observe how you actually have more axioms than deductions. Worldviews with that characteristic are more typical of religions than math or physics; yet you're using STEM language which implies you're using STEM thinking to understand what's going on. That may not be a good idea because it doesn't match the humans who are part of it nor how their interests align and consequently how they interact. Mathematical logic how humans who eventually make it into finance and business tend to think.

3) Your distinction between highly-informed professionals and bumbling retailers is somewhat naive and lacking of nuance. There are way more professionals who turn out to be 23 year old greenhorns who only think (if you can call it that) about markets during work hours while rocking away to their smart phone playlists; kids in oversized business suits who would be caught flatfooted if pop-quizzed as to whether the E in P/E stands for earnings or equity. Yeah, it was on a test that they passed with flying colors, but it was never really internalized in any way(*). Of course there are some deep thinkers as well known for their pithy insights and years of wisdom. But there aren't that many and not that many listen to them anyway. Conversely, there are also retail investors who think about how the markets interact with the world all the time and what effect a developing news story will ultimately have on the market a few years from now. Of course there are A LOT of retail "people" who call themselves "investors" whereas in reality what this means is that they have a retirement account that automatically gets 5% of their paycheck on the 25th of the month, every month, regardless.

(*) Okay, that wasn't a nice way to say it---taking too many cheap shots at the millennial workforce :oops: ---but it's pretty typical. More specifically: The people responsible for setting the prices are mostly not the J.A.R.V.I.S-like high geniuses that "you" think they are or that the EMH presumes they are [for reasons of mathematical tractability]. In many cases, it's people being hired straight out of institutions that the finance industry refers to as either "prestigious" or "top-tier". BTW ... if you want a job in high-finance, you don't need to have attended a "bigly" institution. It's just that they want to be reasonably sure that these kids are able and willing to work 80-100 hour weeks doing work that's mostly meaningless in the grand scheme of things. Since this capacity is demonstrated from years of doing very similar to assignments in tertiary education, as long as you didn't get your sheepskin from a party school, it's top-tier enough. Why not older? Because once you acquire a home, a spouse, and possibly children or some other form of meaning in your life, working yourself to death just ain't that fun/meaningful anymore. ... So, say you're a random analyst, aged 25. You get assigned a portfolio of companies. Your job is now to "maintain it" and write little essays/reports (think of it like those S&P reports or Valueline sheets you can download or buy). Most of the time, this work just sits in a binder or a database and gets ignored. (So it's like working in academic research, except without being allowed any originality or getting any credit, but to make it "fair" the salary is 2-4x higher) If there's so-called "material news", your responsibility is to update the report you keep ASAP (like ferking today if not before! Actually if you're smart enough, you would already have worked it out in the past (think cut and paste :-P )) Occasionally, some portfolio manager (typically an older guy, sometimes an older woman... by old, I mean at least 30 but preferably a lot older so they're not making their decisions based on the experience of half a market-cycle :-P ) will read it and make a buy/sell decision that constitutes a slight change to some ETF's composition of which you function as the support-cog... kinda like a the suspension of a tank track. This gets handed off to a broker, usually in another company---some small shops will have their own traders: Go buy/sell $30M worth of shares. Back down the chain of juniority this goes in another company until we have another rocking kid trying to acquire half a million shares in small bunches without signalling to some lazy lion-like trader (in a third company) waiting to pounce and "scalp" that someone is buying (it may eventually have to be reported to the SEC). This particular trader doesn't really care about whether the price is 60 or 30 (like the first guy) but more like whether it's 30.42 or 30.74 because his job is just to get a good VWAP (pronounced vee-wop in case you're interviewing and don't want to sound book-learned).

If you do want to build a model of the markets, I suggest taking your inspiration from the water/sanitation-system of a large-sized city complete with all the different kinds of persons who use it and all the different kinds of workers who are responsible for running it.

A book that I like that peels away a lot of the inner machinery of the financial plumbing system, which is really what it is, is: https://www.amazon.com/Complete-Quantit ... 0071468293

Jason

Re: Lillailler's Investment Philosophy

Post by Jason »

The basic message of retail investing is that you are unqualified to be an investor, so be a saver and we will invest for you. But underneath it is actually a discussion of human nature.

The Calvinist View: John Bogel represents this view and is the basis of index funds. Simply put, you are a depraved, ignorant piece of shit living in utter darkness and you need a savior. But this also applies to the douchebag with the shiny Rolex driving his sports car on the fees you've been paying him. Therefore, we must remove both you and the "priestly" class i.e. the specialists who purport to have secret knowledge and greater access to the Gods and give your money to a non-human mediator - the market. In return, we just ask for a minimal tithe. God bless you and we will see you in forty fuckin dollar cost averaging years.

Semi-Pelagian: Yes, you are fallen and finite but you have the ability to help yourself but that would take you away from your pathetic hamster wheel existence so you should let our impeccably dressed trained monkeys running this Five Star, slam banging your step-momma mutual fund do it for you. Thank you, now please get the fuck out of my office so I can call my coke dealer and that hot community college chick I met at happy hour.

Pelagian: Don't listen to those pessimistic and semi-pessimistic assholes. Just give me 10K and a weekend and I'll show you how a dumbass like myself made a million dollars with this full proof system that came to me when I when I was living full time in my Pinto and decided that there must be a better way.

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Lillailler
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Re: Lillailler's Investment Philosophy

Post by Lillailler »

Thanks for the responses, Jacob, and for the book recommendation.
Feel free to correct my mistakes and misunderstandings. What do they say? "On the internet, no-one knows you're [str]a dog[/str] being eviscerated".

1. With regard to inflation, I remember the inflation in Britain during the years 1968 to 1982, when the value of the currency - according to the British government's own statistics - fell by a factor of 4.73 That would turn 100 years worth of expenses into 21 years worth. My views are also coloured through having acquaintances who were affected by periods of devastating inflation in Russia, Yugoslavia, Argentina, and Iran. Consequently, I would not bet my future on inflation never rising to high levels again, but this is a personal view and others may be willing to take that chance. I would therefore agree that Axiom 1 is worded too strongly, but surely it is axiomatic that cash held for decades is at risk of erosion by sustained periods of lower inflation or shorter bursts of high inflation, and therefore a risk-averse saver seeking FI should become an investor rather than hold only cash. Changing this does not change anything else.

2."Your distinction between highly-informed professionals and bumbling retailers is somewhat naive and lacking of nuance".

I share a lot of your cynicism regarding the analysts and other employees of the Finance industry - I went to University with some of them. I absolutely agree that the professionals having more information to hand does not make them wiser or better at making decisions. However, I don't think this undermines the points I was trying to make, if anything it supports my Deduction 9 that there is no secret body of knowledge that makes you an expert.

3. I don't know what 'epistemic' means, even after I looked it up, but I tend to believe that share prices are 'chaos system' phenomena, and thereby not susceptible to cause-and-effect in the everyday way. However, we can use cause-and-effect to guide our response to them, which is what I am trying to do.

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Lillailler
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Re: Lillailler's Investment Philosophy

Post by Lillailler »

General Snoopy wrote:
Sat Oct 21, 2017 3:16 am
Question: Is the universe of investments limited to stocks and stock equivalents?
No. In my view it certainly includes cash, bonds, commodities, derivatives, bullion, and property, with the condition that if you actively manage your property, by selecting tenants, and setting rents, etc you are a capital investor. However, some types of investment are inconvenient through being illiquid or requiring specialist knowledge.

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Lillailler
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Re: Lillailler's Investment Philosophy

Post by Lillailler »

Jason wrote:
Sat Oct 21, 2017 3:32 pm
the douchebag with the shiny Rolex driving his sports car on the fees you've been paying him
You have put your finger on another thing that bothers me about the whole 'investment advice professional' business. "If you, Mr professional advisor, are so good at making money in the market, why are you here in this office trying to make a few bucks off me, rather than sitting on a yacht in the harbour at Monaco, sipping champagne and nibbling on madeleines?"

Jason

Re: Lillailler's Investment Philosophy

Post by Jason »

I think the truth came out recently when they tried to designate financial advisors as fiduciaries and the entire industry objected. They outright said "we will lose money if we put your interests ahead of ours." They want to be considered along the lines of your doctor, your lawyer, your accountant without the responsibility and liability.

This is embarrassing but whatever: I bought an annuity. In my 30's. And not only did I buy an annuity. I bought an annuity within a SEP IRA. You would think they would send you a complimentary case of vaseline after you get fucked like that. I have liquidated about 2/3's of it but in any other industry it would be malpractice and he would lose whatever bullshit license he obtained.

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Re: Lillailler's Investment Philosophy

Post by ThisDinosaur »

Writing out your investment philosophy for others to critique is awesome. But it occurs to me that the important assumptions are probably the ones you're leaving out. I mean, the things you think are so obvious that you don't care to debate them because anyone who disagrees is clearly wrong/uninformed.

Couple other thoughts:

"Ignoring all news" strikes me as a bad idea. I don't mean you should invest however the CNBC talking heads say. But investment is inextricably connected to The Real World. Your investment philosophy should somehow be connected to the rest of your worldview.

"The Average investor...gets Average returns" by definition! What's more important is whether outperformers can consistently do so, or if it is as random as the lottery. Or if a specific subgroup of investors (i.e., economists vs. Physicists vs. Technical vs. Fundamental analysts) tend to get better returns.

EMH says that the market price of any security reflects the weighted average of all investors opinions of the "correct" price. I think thats a powerful concept, especially when you compare it to the history of specific market bubbles going back a few hundred years. Crowds can be wrong. At the same time, crowds represent all the brainpower of many individuals not so different from you. Not sure how to solve that riddle.

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Re: Lillailler's Investment Philosophy

Post by Dream of Freedom »

Axiom 2-3 Yes, but I would note that selling might have to do with their opinion of the investment, but also sometimes for the investor's cash needs or to recycle capital into the next trade.

Axiom 7 This assumes that the strategy and target of the strategy allows it to be scalable. Liquidity and small market caps are impediments to this.

Deduction 9 Well since there are more than a thousand books written on the subject many of which are are available though the public library I suppose it is no secret

Deduction 10 Why can't they be expert? You seem to think the professionals can.

Axiom 12 Normally, but when there is systemic risk asset prices tend to increase in correlation.

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Re: Lillailler's Investment Philosophy

Post by jennypenny »

Some quibbles ... (you asked ;) )

+1 to jacob's comments on axiom 1. Inflation matters when you purchase goods, so if your nut is small and/or you produce most of your own needs, inflation won't affect your financial situation if your nest egg is large enough relative to your nut. A prolonged period of hyperinflation will have other effects (political, social, etc) that make FI somewhat irrelevant to a person's well being.

re: luck -- You can learn how to be lucky. The more you know, the luckier you are. More importantly IMO, you must also learn to always be ready to take advantage of good luck when it happens. It doesn't matter how lucky you are if you don't have the capital and maneuverability to take advantage of it. <--That's the difference between seeing lucky and being lucky.

re: diversification -- I think diversification for the sake of diversification can expose you to more risk, not less. If I invest in five different assets, I have five chances for an investment to fail. I'll only lose 20% with each failure, but I have more exposure and more to manage. I'm not saying to put it all on red, but I don't think people should invest in something they aren't confident in or knowledgable about just for the sake of diversifying.

re: frequent trading -- If you make a mistake or an investment goes south (not goes down but materially changes), get out as soon as you realize it. Don't wait until some predetermined review period. (and how will you know if that happens if you don't keep up with the news?)

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Re: Lillailler's Investment Philosophy

Post by jacob »

Lillailler wrote:
Sat Oct 21, 2017 12:18 am
Axiom 2: Every time you buy an investment you are buying from someone who thinks it is advantageous to sell at the price you are agreeing to buy at.

Axiom 3: Every time you sell an investment you are selling to someone who thinks it is advantageous to buy at the price you are agreeing to sell at.
I see what you did there ;-) I'll immediately collapse those two into a more agreeable
Axiom 2+3: Each trade has a buyer and a seller with different motivations. (Trivial corollary: If they had the exact same motivation, the trade wouldn't happen.)
DoF pointed out the problem with the "thinks it is advantageous to [trade] at the price you are agreeing to" way of thinking. In the second-simplest models of market dynamics, there are three types of reasons:
  1. Price-insensitive traders, who trade regardless of whether the price is advantageous or not. (In the literature, these are also so-called uninformed traders. This is to be understood as in that they do not act on information. In particular, they don't care what the price is.)
  2. Momentum traders, who trade not based on whether the price is advantageous but whether the change in price is advantageous. (This is a kind of informed trader. Their behavior tend to boost prices.) You might think of these as the poker-players or "greater fool" players of finance.
  3. Value traders, who actually trade based on whether they think the price is advantageous. (Also a kind of informed trader. Their behavior tend to mean-revert prices.) You might think of these as the bridge-players of finance.
Here "trader" simply refers to someone that buys or sells a security, so in this context everybody is a "trader". This leaves 3x3 nine different kinds of trader interaction-combinations. Trade-types don't happen equally often because there are not the same number of species and nor do each specie trade with the same frequency. (This is covered in later axioms.)

The simplest model has two types: uninformed (1) and informed (2+3). Note how 2 and 3 swing between alignment and acting in opposition making this is a simple way to understand booms and busts which you don't see in the two-agent universe.

There's not really any distinction between being professional or being a retailer in the types. An investment banker/broker (think GS or BAC, for example) will, for example, often act as a price-insensitive trader because they make their money on commissions which usually but not always more than make up for the holding-risk before they get hedged(*) or unload ASAP. (Here the timeframe of unloading depends on size. Compare daily aware volume to see what you can get away with.)

(*) If I had to add a 4th category, it would be hedgers, not to be confused with hedge-funds which is completely different. If you want a concrete idea of what a hedger is, consider a midwestern farmer who needs to lock in their profit for the year. This is a good example of the market actually acting in an honorable way :-P But if I can't include a 4th category, I'd put hedgers in under the first, because getting hedged is often more critical than what you pay for it.

One can go into a lot more detail or nuance wrt the market eco-system, but most behaviors can be classified as one (or two) of these three types and most trades can be classified as an interaction between those three types. Now you can argue that a two-type model (informed/uninformed) model is better, but I think that violates Einstein's dictum that models ought to be as simple as possible but not too simple.

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Re: Lillailler's Investment Philosophy

Post by black_son_of_gray »

@ jacob

Any insight into what fraction/volume of trades are made by managers simply following fund rules? E.g. 1) have to buy/sell stock X because it is time to re-balance to market/index weighting, or 2) have to buy/sell (could be fairly specific things like "25+ year US bonds) because you are adjusting the fund composition for things like target date funds.

I would think that with so many index-tracking funds, and tons of target date retirement funds, that a substantial amount of trades could be of this type. Another flavor of 'price-insensitive traders'?

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Re: Lillailler's Investment Philosophy

Post by ThisDinosaur »

black_son_of_gray wrote:
Mon Oct 23, 2017 9:00 pm
Any insight into what fraction/volume of trades are made by managers simply following fund rules? E.g. 1) have to buy/sell stock X because it is time to re-balance to market/index weighting, or 2) have to buy/sell (could be fairly specific things like "25+ year US bonds) because you are adjusting the fund composition for things like target date funds.
There was an interview with Ray Dalio where he said he makes his money on that info. Specifically, he knows the asset allocations of large institutional investors and when they rebalance so he can trade ahead of them.

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Lillailler
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Re: Lillailler's Investment Philosophy

Post by Lillailler »

Axiom 2+3: Each trade has a buyer and a seller with different motivations. (Trivial corollary: If they had the exact same motivation, the trade wouldn't happen.)
I disagree with this statement. Both sides can have exactly the same motivation, but different opinions. Yes, some people go into the market willing to take a small loss now in order to reduce the likliehood of incurring a large loss in the future. Yes, Index-fund managers will be obliged to trade to match their index as prices are moved, but I can't see how they could set off movements in prices since they are by definition responding to movements which others have caused - quite possibly amplifying them, but not starting them.

That leaves plenty of scope for differing opinions to be enacted by buying and selling between profit-seekers.

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Lillailler
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Re: Lillailler's Investment Philosophy

Post by Lillailler »

jennypenny wrote:
Mon Oct 23, 2017 3:30 am
Some quibbles ... (you asked ;) )

.... Inflation matters when you purchase goods, so if your nut is small and/or you produce most of your own needs, inflation won't affect your financial situation if your nest egg is large enough relative to your nut. A prolonged period of hyperinflation will have other effects (political, social, etc) that make FI somewhat irrelevant to a person's well being....
Indeed. A rational response to systemic risk in the financial system is to remove yourself from it as far as conveniently possible. Don't have cash in the bank, only borrowings, which you can repay with depreciated money. Learn useful skills so you don't have to pay tradesmen to fix things for you. Accumulate physical assets rather than ones which can vanish if the bank goes bust or be inflated away (I have a dim recollection of middle-class Argentinians, during one of the bursts of high inflation there, keeping new washing machines and other appliances in their garage as a form of savings that was not exposed to inflation or the risk of default).
re: luck -- You can learn how to be lucky. The more you know, the luckier you are. More importantly IMO, you must also learn to always be ready to take advantage of good luck when it happens. It doesn't matter how lucky you are if you don't have the capital and maneuverability to take advantage of it. <--That's the difference between seeing lucky and being lucky.
I'm thinking here of the type of luck that is rolling a six with a dice. I agree that rolling a six does you no good if you are not ready and willing to exploit it. I was thinking of the idea that Taleb wrote about in 'Fooled by randomness' (IIRC), that we humans tend to see patterns in things, even when the patterns aren't really there, and part of that is to see the bad things that happen to us as caused by chance, and the good things that happen to us as caused by our wisdom.

re: diversification -- I think diversification for the sake of diversification can expose you to more risk, not less. If I invest in five different assets, I have five chances for an investment to fail. I'll only lose 20% with each failure, but I have more exposure and more to manage. I'm not saying to put it all on red, but I don't think people should invest in something they aren't confident in or knowledgable about just for the sake of diversifying.
Yes. If you want to reduce possible losses, you will also reduce potential gains. Everyone has to find the balance they are comfortable with. With my 'hands-off' philosophy there would be very little extra management to do.
re: frequent trading -- If you make a mistake or an investment goes south (not goes down but materially changes), get out as soon as you realize it. Don't wait until some predetermined review period. (and how will you know if that happens if you don't keep up with the news?)
I guess here my view aligns with a weak version of the efficient market hypothesis, by the time I have found out about the news, the people who will buy my investment off me will also know, and have factored it into the price they offer me, so I have nothing to gain from acting quickly.

Finally, thanks for the thoughtful response.

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Lillailler
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Re: Lillailler's Investment Philosophy

Post by Lillailler »

Dream of Freedom wrote:
Sun Oct 22, 2017 7:56 pm

Deduction 10 Why can't they be expert? You seem to think the professionals can.
I don't think the professionals can either. I think there are no experts. The professional just have more information, but they don't seem to do much better than average, so in my view information does not translate into expertise in this case. The corrollary is I don't need to to try to handle a flood of information because it doesn't do any good.

jacob
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Re: Lillailler's Investment Philosophy

Post by jacob »

@bsog - If you're skilled with R (which IIRC you are?), you can actually find this effect yourself in public data. You need daily/historical numbers. Yahoo Finance has them in an easy to get way. Use e.g. SPY and BND as your time-series. (They have an API that allows for easy data pulls. Google for it.) Consider what happens right before the end of the month when companies start processing paychecks and sending out vast sums of monies for people's retirement plans. That's a material effect. In association with turning all those cash contributions into securities, there's rebalancing going on (cheaper to do both at the same time --- that way you're not buying .. and then selling what you just bought in the next step.)

Typically, if bonds have been doing well relative to equity since last paycheck, you will see bonds tend to underperform and equity tend to overperform in the few days around the end of the month as portfolios are rebalanced to hit their target ratios. It's not a surefire prediction, but it happens more often than not.

The https://en.wikipedia.org/wiki/January_effect is another example of a mass effect. Also https://en.wikipedia.org/wiki/Sell_in_May (and October)

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