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The investing game is rigged. To win you have to be an insider.
Markets are so efficient they can't be beat by the average person.
The investing game is what you make it to be, and it can be won.
The investing game is total luck. That's why I buy lottery tickets.
Other?

Click here to see results so far.

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No. of Recommendations: 6
Thus I see indexing, fixed-income or otherwise, as a losers' strategy, and it isn't a game I play.

I must take issue with this. If you define winning as getting above average returns, then yes, indexing is a loser's strategy. But if you define winning as getting enough returns to live well, without running a separate investing business, then indexing can easily be a winning strategy. It all depends on how you define your game, in the narrow sense of beating the market, or in the broader sense of winning at life.
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Greetings,

I chose other in the poll. :)

What do you think is the single most important factor in obtaining investment success?

The single most important factor in obtaining investment success is knowing what kinds of investments suit you, in terms of risk, you like to research, etc. and to stick with those. IOW, while you'll make your own path through the investment universe, there are more than a few good ones and the key is to find one of those that isn't brutally tough to stay on.

Another way to put this is that after you pick a good course of action, an investment plan, that you then stick to it. A Bogleism here would be that "Stay the course" is one of the toughest things to do but it can be rather rewarding.

Regards,
JB
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The key is one you did not list:

Time.

The longer you stay in, the more likely you will "win."
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I figured I might add a bit to this:

A study was done a couple of years ago (I forget who and where) and found that the average duration for holding a mutual fund was about two years. For those surveyed that held their funds five years or longer, had a much greater likelihood of positive returns.
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spinning,

Good answer. You know your game, and you play it.

That's winning in my book, too.

Charlie
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JB,

You stress the importance of the investor himself (or herself). I'll totally agree. And the importance of a plan that suits who that investor is which enables to plan to followed.

Charlie
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Hawkin,

It's not just time itself, but also the wide, implied stops that become a part of those long holding periods that help to create those larger profits. The big money in investing accrues to those who don't zip in and out of positions, but are long-term trend followers, the Warren Buffets and the like, (though he really isn't a good model to hold up to the "average smal investor" becasue he is a "control investor" --in Marty Whitman's terms--, someone who buys whole companies not just a small fractional share of it).

Now comes a confession. It takes more guts to be a long-term investor than I have. That's why I trade. I cannot handle the discomfort of having a position move against me in a major way. Small losses? No problem, just a part of doing business. But that also sets a cap on what profits might become.

Charlie
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"Now comes a confession. It takes more guts to be a long-term investor than I have. That's why I trade. I cannot handle the discomfort of having a position move against me in a major way. Small losses? No problem, just a part of doing business. But that also sets a cap on what profits might become.

Charlie "

I hear ya. I bought FMD last year at something like 36. It went to something like 24 and I was starting to flip out. Instead, I doubled up and sold at 32 for a modest 10% or so profit.

It is the typical investor mentality to sell low and buy high.
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Hawkin,

Averaging down on a position? [cringe, cringe, cringe.]

That's a highly speculative technique, universally warned against.

I've done it on occasion and gotten away with it, just as you did. But it's a scary, scary thing to do, and I've always sworn afterwards that as trader I'd never do it again.

But as an investor, averaging down is often the most sensible way to build a position, because you're looking farther ahead than the market currently is, and if you've done your DD well, you know that you are buying value at a baragin price.

Different game. Different rules.

C



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*nod*

It was a speculative move -- just as the original purchase was. I intended to hold onto the stock until it hit 10% and sell it. I never intended to hold it for LTG.

It hit 24 on a lot of overselling and negative news. The board announced a buy back around that same time of something like 500,000 shares. Chase was in the works of redoing their deal for a longer contract so it was very unlikely that it could stay at 24 for long. As it turned out, it was back up to around 30 in two weeks and when it got to 10% total return for both holdings, I dumped it.

I would never have gotten into the above mess with an IRA account; though I do like to make long term additions based on temporary value buys. The crash of 01 and 02 was a buying opportunity for someone my age.
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I voted total luck, though other and loaded dice were tempting. I didn't see anything resembling my actual views.

I know that average returns will always be average (actually average minus expenses). I know there is no way as yet found to prove that above average returns for any length of time are the result of greater skill and knowledge as opposed to pure luck—it may be, but cannot be proven. I know that even if we accept that attaining skill and knowledge is possible, circumstances change and keeping ones skills and knowledge honed to new circumstances makes the likelihood of success even less than attaining such skills and knowledge in the first place. I know that all the hundreds and thousands of claims of sure fire strategies for beating the average pushed by market marketeers over the years, including those used for personal and institutional gain by the best and the brighest with the biggest equipment, have no succeeded in beating the average on the average. I have no seen a strategy, except slice and dice with rebalancing and no taxes and low expenses, that I take seriously.

So, my personal approach is to aim low and save high, keep as little as possible in the total stock index, expecting less than historical returns, as I think necessary to boost long term overall returns above inflation beyond what I expect to get from nominal principal preserving assets.

I've said this before. I think I can retire with a low enough initial withdrawal rate that I don't need to beat the average. In fact, I don't even need historically average returns: if I can get 2% above inflation on "fixed-income" and 3% above inflation over the next 30 years on stocks, I'm sitting pretty, even if social security dies and I don't. Sure there are disaster factors I can contemplate about health coverage and plenty of disaster scenarios I can think of regarding the world (it's 52 mid-January in Michigan). But these risks are, in my view, less (or so disasterous nothing can help) than the risks to my survivability if I choose to try to beat the markets and lose.

If I required a 5% or more initial withdrawal rate, I would think much differently. I would have to go for a high % stock index investment and hope historical statistics repeat themselves, despite my knowledge of how demographics and energy use have been key factors in past economic growth (not to mention unrepeatable factors that have inflated P/E ratios that at best can be sustained). Or I would have to decide that, despite my understanding of why I am unlikely to succeed, I would have no choice but the try to beat the average on my own.
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“So my personal approach is to aim low and save high

Great summary, Loki. Thanks.

I love the diversity of answers this poll is provoking, with each person saying, This is what I'm doing, and it's working just fine for me. That's Fooldom at its best. No “one-size” fits all, which should help dampen the polemics (of which I'm as guilty as anyone else) about THE BEST WAY [sic] to do things.

Yeah, I get those sorts of “Miracle Financial Strategies” in the mail, too, as we all do, with “Guaranteed trading system: 80% accuracy” splashed across their covers. And they go right into the trash, unread. Anybody who claims to have a (trend-following) trading system that can trade forward with a better than 30-40% win/loss ratio is likely a fraud. There are a few people out there whose win/loss ratios are above that, but they are statistical anomalies, and the systems are proprietary.

Successful investors don't show much better averages, either. In one of his books Peter Lynch reports his statistics for particular portfolio. About third were losses. About a third were scratches. About a third were winners. Of the winners, only a few were “ten-baggers”, as he uses the term, maybe 5%. But he had no ten-bagger losers. In fact, his losers, though not insignificant, were very journeyman, maybe some 1-4 baggers. So, by keeping losses smaller than winners, the net effect across the portfolio, was a gain, and he did it year after year, in a very journeyman-like fashion.

But I'd have to disagree with you that the possibility of the persistence of out-performance remains unproven, a topic Talib explores in his book, FOOLED BY RANDOMNESS. There are just too many investing and trading giants out there with multi-decades long track records to say that their success wasn't due to skill, rather than mere survivorship (as the coin-flipping arguments attempt to prove). Can they be emulated? Likely not. But were they never to age (or tire of the game) I have no doubt of the money they would continue to make for their ability to understand markets and themselves and to bring the two into alignment, on average and over the long haul. Soros and his former partner, Rogers, are two prime examples of thoughtful and persistently successful investors.

Charlie


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No. of Recommendations: 5
Investing is a lot of work. If you enjoy doing the research, studying company reports, drawing your own conclusions, you can do well.
Mutual funds are major stockholders in most companies. They can be in and out very quickly and move prices very fast. You want to buy or sell before they do. Checking on block trades and how they change over time can give you a clue, as well as persistent (over a couple of weeks) increases in volume. Your buying or selling doesn't move the market.
Mutual fund managers must buy or sell at inconvenient times. It is their nature that most of their shareholders are people who did not want to do their own research, and they will tend to buy mutual fund shares when the price has been going up and sell, disgruntled, when prices have been dropping. With your own money, you do not have to do that. Since the mutual funds, and institutional investors, by and large, make the market, and the managers' performance is hampered by floods of money coming and going at the wrong times, it is not particularly difficult to beat the market. I've done it persistently for the past almost 40 years, and so can you if you want to do the homework.

The single most important factor: joy in doing the work. Remember Thomas Alva Edison's assessment: "Genius is 1% inspiration and 99% perspiration."

Best wishes, Chris
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You've all heard those little quips about, don't know where your going or how to get there without a map, How can you hit the bullseye, if you don't even know where the target is....

Well First, I would say that winning is knowing where you want to get, how you want to get there and when you actually got there, that you are with the right people. To me, playing so that I don't fail - is winning. Hell, second place at the US open may be first loser, but who cares? You still got to play.... As far as winning the investment game - I say it is all luck.

And the harder I study and practice, the luckier I get.

DrTarr
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What do you think is the single most important factor in obtaining investment success?

In a phrase. Mitigating risk.

I once made the flippant remark to one of my mentors that you can do something about the bullets addressed "to whom it may concern" but you can't do anything about those addressed specificly to you. His sage reply was "You would be suprised by how much you can do to affect those ones as well".

I spent three years in the Marine Corps, 14 years in fire and disaster services. I've watched wind events stomp full grown pine trees flat. I've seen fire rush up a canyon consuming most everything in its path. I've stood on a road with fire below and fire above and chatted. I've entered house-trailers that were behaving like blow torches.

I say none of this to thump my own chest. I say none of it to demonstrate my bravery. I could do all of the above with confidence because I understood my situation. I knew from what options to choose to mitigate each event. I knew what the aggresive moves were and their chances of success. I knew what the "safest" moves were and their chances of success. I knew what kind of personel and equipment I needed. Most importantly I knew where to bail out and take my crew if things turned ugly. I always new where safe harbor was and the best route to it.

The funny thing is inspite of all the above I would describe myself as risk adverse. I do not like situations where the risks are unknown, too great or too fluid. If I can't mitigate the risk I'm not taking the risk. I'm not paranoid but I don't use the crosswalk when the light is in my favor without looking for traffic.

I enter a burning building on my terms, as odd as that may sound. I recognize that fire and smoke are only partially predictable, but I can mitigate that with the right equipment, the right training and most importantly the right partners.

Why would I approach investing any other way? I play to may strengths which takes me to risk mitigation.

jack
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I know there is no way as yet found to prove that above average returns for any length of time are the result of greater skill and knowledge as opposed to pure luck—it may be, but cannot be proven

The funny thing is I don't think you can prove this statement with any more certainty then the opposite camp. The primary thing that keeps EMH flying is that academicly the modeling is easier to do. Every time somone points out the moments in time where it fails it gets academicly labeled an outlyer and thus legitematly ignored. If you point out the people who have done it succesfully for decades they are described as an outlyer and thus legitematly ignored.

To be blunt I don't think you can know this to be true.

I know that even if we accept that attaining skill and knowledge is possible, circumstances change and keeping ones skills and knowledge honed to new circumstances makes the likelihood of success even less than attaining such skills and knowledge in the first place.

To hear this from a member of the academy is disapointing. All areas of human activiy change and remain the same. Many voices often bullyish voices kept screaming in 1999 that the economics of the new millenium were diffrent and thus the market was different; a p/e of 40 and up is what we must chase. The rest of us waited, with some discomfort, for the market to behave more like it usualy does.

It takes different tools to assess new technology IPO firms, but mostly we use the old ones too. Its no different then campus language labs taking advantage of first real2real tapes and then computers. Its no different then campus writing labs using "word processors" then computers with dictionaries, grammer checks and the like.

Loki, I really like you. I mean you no disrespect but the two quotes from above aren't good justification for slice and dice with some rebalancing. There is nothing wrong with your approach to be able to have a low initial withdrawl rate. There is nothing wrong with the numbers you are plugging into the model. But it is not consistent with your own starting point: things change and we can't adapt.

By using your starting point we must consider that slice and dice will fail and that we must adapt. What happens when someone does publish an article succesfully that undermines EMH or random walk? What happens when the acadamy that produces the operators of the markets question the things they accept today?

jack
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" I'm not paranoid but I don't use the crosswalk when the light is in my favor without looking for traffic."

In a college town, the average driver (median as well as mean) pulls into a crosswalk at a red light or stop sign looking left to make a right turn and not looking right to see if there are pedestrians. Usually they are also talking on a cell phone.

The average pedestrian is wearing head-phones and/or talking on a cell phone.

What amazes me is how few accidents there are.
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What happens when someone does publish an article succesfully that undermines EMH or random walk? What happens when the acadamy that produces the operators of the markets question the things they accept today?

Got to agree,

Research has shown, the EMH is not as efficient in reality as in acedemia*. Lets face the piper - Enron, financials 1 year ahead seemed to have indicated severe financial distress. Internet bubble, or irrational exuberance. And is it truly a random walk. No, the distributions are typically leptokurtic, skewed and have fat tails. But, I better watch it here because this brings up such things as time diversification (sorry jack, it happens)

*And as some one always quips, ya what research? Here are a few papers you can find just simply use GOOG, another example of efficient markets.

First I like,
On the Impossibility of Weak-Form Efficient Markets: Steve L. Slezak (2003)
Another favorite, cause who really thought differently?
Abnormal Stock Returns from the Common Stock Investments of the U.S. Senate: Ziobrowski^2, Cheng, Boyd (2004)
And why I think Emerging Markets has possibiliy for active managed funds,
How Stock Flippers Affect IPO Pricng and Stabilization:
Fishe (2002)

For others:

Options Expiry: Akash Gupta, Samik Metia
& Prashant Trivedi (2003)

The January Effect: Rozeff and Kinney (1976) Bhardwaj and Brooks (1992) Eleswarapu and Reinganum (1993) Gultekin and Gultekin, (1983)
Chang and Pinegar (1986) Maxwell (1998) Bhabra, Dhillon and Ramirez (1999)

The Weekend Effect (or Monday Effect): French (1980) Kamara (1997) Agrawal and Tandon (1994) Steeley (2001)

Other Seasonal Effects: Ariel (1987) Cadsby and Ratner (1992) Ziemba (1991) Hensel and Ziemba (1996) Kunkel and Compton (1998) Lakonishok and Smidt (1988), Ariel (1990), and Cadsby and Ratner (1992) Brockman and Michayluk (1998)

Small Firm Effect: Banz (1981) Reinganum (1981)

P/E Ratio Effect: Sanjoy Basu (1977) Campbell and Shiller (1988b) Fama and French (1995) Dechow, Hutton, Meulbroek and Sloan (2001)

Value-Line Enigma: Stickel, 1985

Over/Under Reaction of Stock Prices to Earnings Announcements: DeBondt and Thaler (1985, 1987, 1990) Bernard, (1993) Ou and Penman (1989)

Standard & Poor's (S&P) Index effect: Harris and Gurel (1986) and Shleifer (1986)

Pricing of Closed-end Funds: Malkiel (1977) Brickley and Schallheim, (1985) Lee, Shleifer and Thaler, (1991).

The Distressed Securities Market: The shares of Continental Airlines continued to trade on the AMEX at or about $1.50 per share even after the company had negotiated a plan with its creditors that would provide no distribution to the pre-petition equity holders (WSJ, 1992).

The Weather: - This is wonderful
Hirshleifer and Shumway (2001) 26 countries from 1982-1997
The market returns are positively correlated with sunshine. Loughran and Shultz (2004)

DrTarr
Who hopes he got all the <,b's,> in the right places.
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Jack,

First of all, I believe for most things it is possisble, indeed necessary, to attain a body of knowledge and skills, as well as what has been called "detero-learning," learning how to learn, which allows us to adapt to endlessly changing circumstances.

I am have just seen nothing to convince me that investing (in the sense of stock picking or fund picking) is a learnable set of knowledge and skills. Certainly, more broadly speaking, there is a body of knowledge and skills about finance, and necessary deutero-learning, which is part of what we are trying to facilitate.

I am of an open mind about whether it is theoretically possible to prove that market beating results are the result of skill rather than luck. I have no doubt some such results are skill driven, and I'm sure Malkiel or Bogle would agree. The problem is, if you can't prove that certain successes were from skill and knowledge, especially skill and knowledge that can be passed to others or repeated or adapted to other circumstances, you are forced to use uncertain means for distinguishing skill driven successes from luck successes. Adaptable success just adds another dimension to this.

My view is that, under these uncertainties, believing you are one of those who can attain the skills and knowledge actually to beat the market, unlike so many others who have the same belief, is risky. If your only reason for taking this risk is ego (in my case, I don't think I need to take the risk to achieve my goals), then I think the risk is unncessary.

If you can't achieve your financial goals with "boring" investment choices, using conservative expectations, then I don't think there is much choice but to accept the risk that knowledge and skill in stock picking, market timing, and so on is a pipe dream and try to learn as best you can. At this point I think this is less risky than relying on historically average market returns, but I could certainly be wrong.

If I had to, I would probably try to figure out ways of distinguishing real investment skills and knowledge from all the claims for investment skills and knowledge (luckily triage is easy: most of the claims are obviously crap). I don't have to.

I think this is generally true. There are lots of areas where I am 100% certain there is a body of skills and knowledge, but I am happy to leave attaining that body of skills and knowledge to someone else and to rely on that someone else. I know my limits when it comes to home repairs (your skills in this area are clearly vastly superior to mine).

What came as a complete shock to me was the discovery that investment professionals were, in fact, not professionals but salesmen. In fact, I consider the guy trying to sell me a digital camera at Staples far more professional than I consider financial salespeople, though I admit I have become jaded. Between my skepticism that there is a body of knowledge and skills that I could learn about stock picking, should I choose to, the risks that I see if I failed in my quest, and the fact that learning these skills is not necessary for me, I would rather rely on the knowledge of finance in which I have confidence (fixed income supplemented by indexing).

I view "becoming an expert investor" for those who do not need to as a risky hobby, like repairing your own car, only with less assurance that you really become good at it. If you can't afford to pay a mechanic, learning car repair isn't a hobby, and neither is trying to become an expert investor if you can't make it by boring means. Given the choice between learning to repair a car and paying a mechanic, I pay the mechanic. Given the choice between learning to be an expert investor and relying on a so-called expert investor (been there, done that) I would choose to learn for myself, whatever my skepticism. Happily, I have learned enough of a real, unquestionable, body of knowledge about finance to have determined I don't need to have my car repaired at all: I can just walk to the finish line, and I am enormously skilled at walking (including looking both ways and watching for cell phones when I cross the street).

Speaking of which, I'm going to the Credit Union to get me a CD, in case next week they lower rates. And that is a very dangerous (not to mention rainy) walk.
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I better watch it here because this brings up such things as time diversification (sorry jack, it happens)

He he he that was funny, touche.

jack
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IMHO, the keys to investment success are too many to post. They are different for a trader than they are for a LTBH type investor. Since I ususally fall into the latter category I think the most important lesson I've learned is to be PATIENT. Do not buy until the stock is at "your" price or darn close to it. On the sell side, be PATIENT, also; many of the mistakes I've made fall into the category of selling too soon.
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What came as a complete shock to me was the discovery that investment professionals were, in fact, not professionals but salesmen.

Absolutly true. Most are salespeople and they spend more time selling then actually investment managing. They also sell vinyl siding to stucko houses, aluminum roofing to people who have slate tiles and all sorts of unnecessary stuff. The sad thing is, is that most honestly believe in their product and think they have helped the people that bought from them.

The problem is, if you can't prove that certain successes were from skill and knowledge, especially skill and knowledge that can be passed to others or repeated or adapted to other circumstances, you are forced to use uncertain means for distinguishing skill driven successes from luck successes.

There is nothing wrong with this statement. Its a reasonable foil to test concepts against. What often happens is "researchers" or the "establisment" refuses to give credence to evendence that disagrees with they pet theory. It happens all the time. We have evidence. In fact all over Fooldom their are succesful investors. They come in many different forms and styles all of which have been tailored to their personalities, strenghts and weaknesses. But that isn't scientific, right? So it doesn't count. They are outlyers to be properly ignored.

If you want to make money but don't want to do manage it yourself I would get a list of the folks that have been running the Harvard Endowment fund. Their returns have been extrodinary for a significant period of time. People are going to leave that institution, one already has, and make money making money for others. BihKahuna studied in a similar program at U Wisconsin and has done well for himself and the organizations he's worked for.

(aside)One thing I like doing is tracking people from high quality management teams. Following them is often a good idea. Bank One's management was mentored by Citibanks team when C was eating everyone's lunch.

learning these skills is not necessary for me, I would rather rely on the knowledge of finance in which I have confidence . . .

<fast forward>

Happily, I have learned enough of a real, unquestionable, body of knowledge about finance to have determined I don't need to have my car repaired at all: I can just walk to the finish line, and I am enormously skilled at walking (including looking both ways and watching for cell phones when I cross the street).


I think this is your answer to Charles question. The rest either confuses, justifies or pacifies.

jack
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What do you think is the single most important factor in obtaining investment success?

Know thyself.

Hence, I chose "The investing game is what you make it to be...". I wasn't quite in agreement with the second half of that statement, "and it can be won", as the definition of "won" will vary from individual to individual, but I chose to use my own personal definition of "won" in supplying my answer.

"Won" to me means having enough of a nest egg to supply myself with a reasonably comfortable retirement when the time comes (hopefully soon).

I am currently doing 'catch-up' to save this nest egg. Therefore, I am utilizing different strategies to accomplish my goal. This is why I particularly liked this part of one of your recent posts:

Just because one declares oneself to be a Saver with respect to a portion of one's capital doesn't exclude the possibility of being an Investor with regard to other portions, a Trader with respect to still others, or even other postures and mind-sets with regard to still other portions. All I'm saying is that means and goals must be both compatible and consistent. If you decide you need or want to wear a Saver's hat, don't take on risks that are outside the proper boundaries of a Saver.

http://boards.fool.com/Message.asp?mid=23500302

As a motivated, goal-oriented person, who fully realizes I'm behind the curve on the size of my nest egg, I allocate a full 58% of my after-tax income to building the nest egg.

The "Saver" in me allocates 15% of those monies to a principal-protection strategy, while hoping to outpace inflation, even if by a small increment.

The "Investor" in me allocates 75% of those monies to a variety of mutual funds, both active and indexed, but all within certain allocation goals/guidelines that I have established for myself, hoping to realize at minimum "average historical returns".

The "Trader" in me allocates 10% of those monies to chasing higher than average returns.

As both an "Investor" and a "Trader" I only invest in mutual funds, because I have neither the time, nor the inclination, to do the research that I believe is required to invest in individual stocks--pouring over financial statements and various ratios and SEC filings would be torture to me. In addition, mutual funds appeal to the "Risk Mitigator" side of me--I'd rather have $10K invested in 100 companies than in one--IMHO that is also risk mitigation.

I like wearing these different hats. I think wearing all three helps me to be a more balanced individual. The "Trader" hat prevents me from getting too bored and doing something crazy. The "Saver" hat prevents me from getting too scared and doing something crazy. The "Investor" hat prevents me from getting too greedy and doing something crazy. 'Crazy' in all of the above is defined by me as "an act not in keeping with a rational, balanced individual".

I think even if I had the capital availability of Loki, I would still wear the "Trader" hat, at times, and with a limited amount of funds. Why? Because I know that I like challenges: I would like to challenge the claim that passive indexing returns more than active investing for the 'average' investor. But I'm not willing to bet the farm on proving to myself that I can meet that challenge.

Another question is, who, if anyone, is 'the average investor'? I don't believe such a person exists. If we mean those that fall within the bulk of the bell curve on returns, I'm sure we'd find a huge diversity of investing styles and strategies just within that subset.

2old


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2old.

Thoughtful. Nicely said. Thanks for contributing.

Charlie
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I voted "Other" for several reasons:

1) I believe one needs to save as much as possible to have something to invest. Many today are not doing this, so they are doomed to failure.

2) I don't have the time to perform due dilligence to invest in individual stocks - family and job take precedence. I am also limited to investing in mutual funds by my 401k. So I have spent the last 5-10 years trying to understand:

a) Asset allocation
b) Macro economics in the world today
c) globalization and future implications

3) Taking Taleb's Fooled By Randomness to heart, there is always the possibility of the black swan appearing. My goal is to have enough to live comfortably on in retirement. Beating an index doesn't enter in, but minimizing risk does.

4) Never become desperate for yield. This can blind one to taking on risks one shouldn't assume.

5) Keep track of what works and what doesn't. Efficient Market Theory, index funds, hedge funds and any other latest and greatest will work for a while. About the time you hear about them, they have changed market behavior and will stop working. Kind of a financial Heisenberg Uncertainty Principle<G>

6) Always read the fund reports and Morningstar evaluations for direction changes. Asset allocation via funds is only as useful as the actual investment choices fund managers make.

Our current asset allocation is about 50/50 for stock funds and bonds. (We mostly use funds, but we do buy some individual bonds.) This is further divided by about a 50/50 split between US and international investments, with current emphasis on the Asia-Pac region.

Mom
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Mom posted

Efficient Market Theory, index funds, hedge funds and any other latest and greatest will work for a while. About the time you hear about them, they have changed market behavior and will stop working. Kind of a financial Heisenberg Uncertainty Principle<G>

Just kicking this thought around a bit because we hear it or at least read it often enough. I'm curious if we believe this to be true because we hear it often enough or is something else going on.

The theory behind this is that market inefficiencies are noticed, taken advantage of by enough people that the the inefficiencies disapear. In essence enough people join to force reversion to the mean. The method becomes the average maker or at least one of the average makers.

Is the cause and affect assumed here justified? Do other factors explain a reversion to the mean?(assuming reversion to the mean isn't a myth lol). Do market cycles play a greater roll then numbers of method adherents? Do macro economics play a greater roll then numbers of method adherents?

any thoughts?

jack
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The theory behind this is that market inefficiencies are noticed, taken advantage of by enough people that the the inefficiencies disapear. In essence enough people join to force reversion to the mean. The method becomes the average maker or at least one of the average makers.

Is the cause and affect assumed here justified? Do other factors explain a reversion to the mean?(assuming reversion to the mean isn't a myth lol). Do market cycles play a greater roll then numbers of method adherents? Do macro economics play a greater roll then numbers of method adherents?


I would say that all of the above play a part, as well as some other factors.

Macro economics has the most influence when there's a major shift in paradigm - a la China/India developing capabilities and capitalizing on them. (This tends to wreak havoc with indices.)

Certainly cycles play a part. The casual investor notes the trend and tries to follow it - usually late in the game.

Liquidity plays another part. If there's a lot of money chasing gains there will be some number of people who pile in at the end to hold the bag - cutting liquidity. This leads to...

Economic behaviorists observe that people are great at spotting trends - even if they don't exist or if they haven't taken into account all the factors. Trends change before people spot them and some number of folks don't see it. Consider:

A number of people gravitate to whatever is "hot". (In the late 90's, it was dot.com/tech stocks. After the downturn in 2000-2001, it was small caps. Then there was bonds, REITs, condos, hedge funds...)

And there's also "investor psychology". (One of the guys I work with mortgaged his house to buy Microsoft - just before the judge ruled against them and watched his investment shrivel.)

And lack of due diligence - MDH noticed (many years ago) that his bond fund grew when the stock market tanked. We borrowed money for home improvements about 9-10 years ago, but didn't need it immediately. He put it in bonds, expecting another increase but neglected to realize market circumstances were different. (He doesn't trust bonds to this day.)

I'm sure others can add to this discussion...

Mom




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