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  • New approach to the stock market

    There is an on-going thread on the value of BP shares. I did not want to take that thread into an unintended path, so I would like to open up a discussion here about the nature of investing and the stock market.

    My understanding is that the way the market operates now is to allow for most liquidity of funds. People ride the waves and throw money into whatever they perceive will earn them the most. These earnings are through market ups and downs, dividends, options, or all of the above.

    But this has become for the most part a game where people look at performance more so than who and what they support. We have on C2E an on-going discussion about LUSH's stance on the status of the oil sands production. But what if your portfolio includes a percentage of LUSH stock and a percentage of any of the players in the oil sands? Do you even know? Does it matter? Would you sell one or the other depending on your opinion of the issue if both stocks provide you with a good return?

    Similar game was playing out with banking and undervalued mortgages. People were advised to invest into equity-heavy funds, while the equity did not hold the promised value.

    The point I am getting to is to what extent is this pure speculation game when people simply trend watch as lines go down–BUY!!! and lines go up–SELL!!!. With such gains on a whim do not produce anything of value in the time that the fluctuation has taken place. And, as they say, historically the markets are going up, all this is doing is creating a parallel form of inflation and not, as claimed by financial experts, staying ahead of it.

    My specific questions are:
    1. Should all investing be more individually measured and company, product, activity-specific?
    to that end
    2. Should all investing be done locally with companies and people you have a personal relationship with and in the market you actually know about?
    3. Has this become too much of a gambling addiction rather than an actual and legitimate business practice?

  • #2
    Originally posted by grish
    1. Should all investing be more individually measured and company, product, activity-specific?
    No. Academically there is very little support for anything other than index investing for the average person, which I will get to later. You don't hear about it because there's virtually zero money to be made by the financial industry with buy and hold index investing.

    2. Should all investing be done locally with companies and people you have a personal relationship with and in the market you actually know about?
    Same as above.

    3. Has this become too much of a gambling addiction rather than an actual and legitimate business practice?
    Absolutely yes. Although I wouldn't say it's a "gambling addiction." The financial industry has grown far too large and for the most part does little or nothing to improve returns for investors. It's a giant shell game. Economic growth is generated by companies investing money, researching and developing new products and finding new markets. Provided the financial system is properly allocating investment funds to businesses, anything more than that is essentially waste. Just listen to any talk by John Bogle or Warren Buffet. The financial industry for the most part is actually a leach on the economy once it gets past a certain size, not a driver of it. In the past 30-40 years the financial industry has grown and grown to become one of the largest parts of the economy, and that's not necessarily a good thing.

    Read more about index investing here: http://www.investopedia.com/university/indexes/

    A very basic, easy to read book about it: http://www.amazon.com/Little-Book-Co.../dp/0470102101

    The summary is that outside of a very few exceptions, most mutual funds and investment advisors don't even perform as well as the basic stock market index over the long term, BEFORE they deduct their fees. So even if they did match the stock market's average performance (which they don't), you'd still be better off index investing as their fees will knock another percentage or two off your returns, whereas low cost index funds typically have MER's well under 0.5%.

    The above is strictly from a "returns" basis. Throwing morality, sustainability etc in to the mix obviously complicates things.

    Comment


    • #3
      Originally posted by Marcel Petrin View Post
      No. Academically there is very little support for anything other than index investing for the average person, which I will get to later. You don't hear about it because there's virtually zero money to be made by the financial industry with buy and hold index investing.
      .
      Academically there is a split in finance between those who believe in the efficient market hypothesis and those who don't. Most recent evidence suggest that markets are not efficient - this means that they can be consistently beaten. In saying that, it likely isn't easy. Undergraduate texts tend to blindly follow EMH suggesting tools based on it (like the CAPM), that probably aren't that accurate (there is no reliable means to measure beta), but give people some false confidence to make decisions with.

      Some funds do a pretty good job and seem to be able to consistently generate returns above the market index without an excessive risk profile. Index funds are only one option, and provide only one aspect of a portfolio, I think it can make sense to have a bit more of a mix of assets than just one index and just shares.

      As to day trading and similar, I don't see the harm in it as long as people know what they are doing. Markets are important for setting prices, and trading helps to set the market, for better and worse. People speculate on real estate, on shares, on love, its all fair and good until you get hurt, it makes life a bit more interesting.
      Last edited by moahunter; 10-06-2010, 11:53 AM.

      Comment


      • #4
        Originally posted by Marcel Petrin View Post
        You don't hear about it because there's virtually zero money to be made by the financial industry with buy and hold index investing.

        The financial industry has grown far too large and for the most part does little or nothing to improve returns for investors. It's a giant shell game. Economic growth is generated by companies investing money, researching and developing new products and finding new markets. Provided the financial system is properly allocating investment funds to businesses, anything more than that is essentially waste. Just listen to any talk by John Bogle or Warren Buffet. The financial industry for the most part is actually a leach on the economy once it gets past a certain size, not a driver of it. In the past 30-40 years the financial industry has grown and grown to become one of the largest parts of the economy, and that's not necessarily a good thing.

        The summary is that outside of a very few exceptions, most mutual funds and investment advisors don't even perform as well as the basic stock market index over the long term, BEFORE they deduct their fees. So even if they did match the stock market's average performance (which they don't), you'd still be better off index investing as their fees will knock another percentage or two off your returns, whereas low cost index funds typically have MER's well under 0.5%.


        Outstanding !

        Top_Dawg really likes your post Marcel.

        Top_Dawg also wants to touch on what was and continues to be the major contributing factor that led to such growth in the financial / insurance industry. It's not talked about very much because some don't find it a very pleasant topic.

        It started in the late 1960s. Up until then universities admitted students who were the brightest, most capable, and who had the greatest chance of success. Academic programs were challenging and rigorous.

        Then there was a huge societal shift. Everybody was entitled to send their kids to university no matter how mediocre and academically unaccomplished they were.

        They funnelled them into Arts, Business, Science, Education faculties, dumbing down all the programs to suit this new breed of abject dumbpuck who was fast becoming the average university attendee.

        Then they graduated all these obtuse morons. And sadly it became evident that there were no jobs for these useless pieces of ****. This was very disconcerting. For students, parents, educators, - hell society at large. After all, they weren't now going to send them into the skilled trades. They had university degrees.

        So where did they end up ?

        In banks, brokerages, insurance companies etc. Producing nothing of value. The industry campaigns mightily convincing everyone that they so desperately need all this paper. And employs all these dummies to sell differing variations of the same paper.

        Top_Dawg thinks it would be really interesting if en massse everybody abandonned mutual funds and all their related nonsense and returned to putting their money exclusively into GICs, savings bonds and real estate.

        Comment


        • #5
          ^actually, most of the "brightest" students in terms of math, physics etc DO go in to financials, and are known as "quants." Typically because the money there is an order of magnitude or two higher than if they stayed in applied sciences or academia.

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          • #6
            At that level yes.

            Top_Dawg is alluding to the cube farm in all banks, brokerages, insurance companies etc. filled with dolts and bimbettes telling everybody they are ' personal banking specialists ' or the like.

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            • #7
              If you invest locally you may find that all your eggs are in one basket - your job as well as your savings both riding the local economy up and down. That said, you may be able to develop an expertise in the local enterprises that might give you an advantage.
              Last edited by KC; 13-06-2010, 09:21 PM. Reason: rewrite

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              • #8
                Forgot to provide this link earlier: http://www.sanfranmag.com/story/best...oull-never-get

                Comment


                • #9
                  There's current news out that is a great lesson in being wary of generalizing anything, any rule of investing. Sadly, equity indexing pretty much beats all other broadly available investment options over time but what happened to the NASDAQ is a great lesson in indexing and averaging into any market. The NASDAQ peaked in 2000 and then dropped. Only now, 15 years later did it hit that prior peak. Anyone that loaded up on a NASDAQ index fund/ETF near the peak hasn't done all that well. Much like buying a home near the 1980 peak in our housing bull market - it took about 15-20 to price at those levels again.

                  Thus I figure people in the past invested in equities without much of a realization that the "long term” isn’t just 2 or 3 years, it's potentially closer to 2 decades peak to peak - net of dividends. More people know otherwise today. And since most people start to really invest in their 40s or so after the mortgage is paid off, if a major down cycle occurs when they are 50, 55, 60 - they’d better have reserve funds to handle early retirement spending to avoid selling down their investments at 65 to 75 years if age. (They need pension income, cash or investments that pay dividends or something.) Ideally they could keep buying as the index fell in order to buy low and later sell high.


                  March comes in like a lion; Nasdaq roars above 5000
                  excerpt:

                  "The Nasdaq composite capped its long march back to 5000 on Monday, eclipsing, then closing above the long-hallowed mark for the first time since March 2000"

                  http://www.usatoday.com/story/money/...nday/24253319/
                  Basically, index funds aren't what they used to be when they appeared in Canada about 25 years ago. (I may be wrong, but believe Canada beat the US by a few years with the first index ETF.) At that time they were based on broad indexes (TSE and S&P) and very likely the DOW 30 but before the end of the 1990s with the tech bubble and all the "irrational exuberance" the product line was being diversified into things more like sector funds. Nasdaq which I think was more of a sector back then could be bought as an index funds or ETF because it was a popular investment at the time. So bottom line is that if people buy index funds in narrow sectors they'd better expect a lot more volatility than in a broad based fund and be prepared to ride out some very long down cycles.

                  http://stockcharts.com/freecharts/hi...etindexes.html

                  Lastly, positive investment returns reported after shorter periods of time (say 5 - 10 yrs) almost invariably include dividends (aka total return indexes). So people need to be aware that outside of RRSPs, TFSAs taxes are due on reinvested dividends and so those market reported returns are not attainable for many investors. Still, dividends provide cash flow, an insurance of sorts, as well as an opportunity to reinvest in down markets. Some narrow sector indexes don't pay much in dividends so you are left simply riding out the market hoping for it to eventually rise above your average cost.
                  Last edited by KC; 03-03-2015, 08:43 AM.

                  Comment


                  • #10
                    Originally posted by KC
                    Sadly, equity indexing pretty much beats all other broadly available investment options over time but what happened to the NASDAQ is a great lesson in indexing and averaging into any market.
                    I don't see how the NASDAQ's dismal returns are a great lesson on indexing investing, other than showing why it's so important to target a broadly diversified index and not attempt to target certain markets, sectors or industries. Anyone heavily investing in only the NASDAQ would be completely ignoring one of the core tenets of index investing.

                    Originally posted by KC
                    Thus I figure people in the past invested in equities without much of a realization that the "long term” isn’t just 2 or 3 years, it's potentially closer to 2 decades peak to peak - net of dividends
                    The S&P 500 index has only had, I believe, two periods of 10 years where returns were negative: the Great Depression and the Great Recession. If you broaden it to 20 years, then even those huge events aren't enough to wipe out the returns.

                    Originally posted by KC
                    (I may be wrong, but believe Canada beat the US by a few years with the first index ETF.)
                    Index funds long predate the invention of ETF's. John Bogle created the first index fund in 1976: http://en.wikipedia.org/wiki/The_Vanguard_Group#History

                    You don't have to buy ETF's to index invest. There are low cost mutual funds that can do essentially the same thing. Whether ETF's or mutual funds make more sense depends on a variety of factors that differ from one person to another.

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                    • #11
                      Investing in the stock market is like buying real estate. You have to be able to hold out for a profit. Nobody can predict how things are going to go. A company could be selling well then all of a sudden there is some unexpected glitch. We all know of companies that were riding high a few years back and are now struggling. If you have money in the stock market you are better off keeping your portfolio as diverse as possible plus be prepared to hold out for good returns. It also helps to read the business section of newspapers to see what is being developed etc. If you find out there is a new drug that shows great promise you could buy shares in the company that makes it. If you find out a company is expanding then buy shares etc. Multi-millionaires/billionaires usually have financial managers for their investments and I should imagine those financial managers will have inside information.
                      Gone............................and very quickly forgotten may I add.

                      Comment


                      • #12
                        The vast, vast majority of financial managers and mutual funds who actively try to trade on the market end up significantly under-performing the overall market, once you account for their fees. If you think that reading the business section of a newspaper is going to give you a leg up on the markets, then you are incredibly naive. There are hundreds of thousands, if not millions, of traders and analysts and advisors that literally spend nearly every waking hour poring over the most obscure data they can find, let alone the business section, just to get a leg up on everyone else. And the vast majority of them fail at doing so over the long term, and at best will get a return close to the overall index. But again, after their clients get charged 1-2% of their assets for the advisor's fee, they're way behind.

                        You know how most people in finance make money? By charging fees while managing other people's money. You're better off investing in the mutual fund company's stock, than you are buying their mutual funds. I'm not saying it's impossible to outperform the market, some people do for significant periods of time, but they are few and far between, and the chances of you getting lucky and hitching your wagon to them are fantastically small.

                        If you are genuinely curious about index investing, a good site that is specifically for Canadians is here: http://canadiancouchpotato.com/
                        Last edited by Marcel Petrin; 03-03-2015, 05:01 PM.

                        Comment


                        • #13
                          I don't think it's naïve reading the business section to find out who is expanding were and who is closing out and who is being taking over. Anyone buying stock has to be prepared to hold out for returns. Very few people buy shares then find them soaring to great heights after they buy them. If it happens they are exceptionally lucky. If a person bought Apple shares for a low price when Apple first started out I should imagine by now they have a tidy profit. If the bulk of a persons shares are in big food companies like Kraft etc. I should imagine they show modest returns. We all have to eat but I doubt the stock on those companies fluctuates much unless they buy someone else out or they invent a new product that everybody wants. Some people make money in stocks while directing their own portfolios but I should imagine if it's the average Joe their investments are very modest.
                          Gone............................and very quickly forgotten may I add.

                          Comment


                          • #14
                            Originally posted by Gemini
                            I don't think it's naïve reading the business section to find out who is expanding were and who is closing out and who is being taking over.
                            Yes, it is, if you think that's going to give you any sort of advantage when it comes to actively trading stocks. Again, there are countless people out there doing an immense amount of research on any number of industries, companies, sectors, or investment products. Spending half an hour reading the business section isn't going to do you a lick of good when that's your competition.

                            If you don't believe me, then believe the best investor in history, Warren Buffett:

                            http://www.marketwatch.com/story/war...und-2015-03-02

                            The Oracle of Omaha said athletes are often approached with investing ideas tied to restaurants or real estate, but James should buy a low-cost index fund, while also keeping a significant cash reserve — “whatever makes him comfortable.”

                            “Just making monthly investments in a low-cost index fund makes a lot of sense,” Buffett said.
                            And even the guys spending huge amounts of time and using some of the brightest minds in the world can't beat index funds: http://www.cnbc.com/id/102395788#.

                            The Vanguard S&P 500 Admiral index fund Buffett chose is up 63.5 percent since the bet began.

                            The five funds of hedge funds Protege picked were up roughly 19.6 percent.
                            You know why you've never really heard of this before? Because there's little or no money for financiers to be made in promoting index investing. They'd much rather you give them your money to play with, so you can pay them a couple percent a year while they mostly trail the overall market.
                            Last edited by Marcel Petrin; 03-03-2015, 05:25 PM.

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                            • #15
                              ^You're talking about high rollers I'm talking about your average Joe/Jane. I'm talking about investing hundreds/thousands. I'm talking about buying stocks for the long term for modest growth. The high rollers buy millions of stocks and usually take higher risks because they can afford it but I bet even they have stocks that just slowly gain over time. Average Joe will no doubt over time make money it's just holding out until that time. Don't risk more than you can afford to loose.
                              Gone............................and very quickly forgotten may I add.

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