J. Hardy wrote:
Ghost of Igloi wrote:
It is good that you believe, most investors do not. DGTD posts generally reflect average investor market views supported and promoted by the stock selling industry.
I disagree.
OK. As they say differing views make a market.
I think what a lot of investors have done is this: they have built their portfolios over time. If the various positions have gone up, they continue investing. IF not, they generally stop or even take money back out.
So, for those in the market for a fair amount of time, they have a buffer before their shares go negative. Presumably, they very well might sell before loss of the original capital occurs.
When you see investors still in at 100% invested at market peaks, do not assume that they believe a downturn will not happen. Perhaps they simply believe that their portfolio has appreciated sufficiently to the point where they have a buffer before they need to protect the original investment.
And by building the position over time, it has taken a fair amount of the risk out of their position.
This notion is simple enough, but what gets complicated is in understanding market movements - with the widespread proliferation of computerized algorithims making the vast majority of trading at any given time - a particular market move may not be a simple reflection of investor sentiment. Maybe i have that wrong, but if i do, please correct me.
seattle prattle wrote:
I think what a lot of investors have done is this: they have built their portfolios over time. If the various positions have gone up, they continue investing. IF not, they generally stop or even take money back out.
So, for those in the market for a fair amount of time, they have a buffer before their shares go negative. Presumably, they very well might sell before loss of the original capital occurs.
When you see investors still in at 100% invested at market peaks, do not assume that they believe a downturn will not happen. Perhaps they simply believe that their portfolio has appreciated sufficiently to the point where they have a buffer before they need to protect the original investment.
And by building the position over time, it has taken a fair amount of the risk out of their position.
This notion is simple enough, but what gets complicated is in understanding market movements - with the widespread proliferation of computerized algorithims making the vast majority of trading at any given time - a particular market move may not be a simple reflection of investor sentiment. Maybe i have that wrong, but if i do, please correct me.
Seattle,
Agreed that is what investors believe. But their assumption is historically wrong. In regards to algorithms, human do the programming. It is all momentum driven where investors have become reliant on a flawed system. Like the well fed turkey just before Thanksgiving dinner. It seemed so perfect at the time. Who would have known?
Pretty simple calculation to estimate the stock market risk in a portfolio. Simply cut the equity portion by 60%. If at that point someone is comfortable, then fine.
If one feels this is an exteme point of view, well that position runs counter to market history.
Igy
Ghost of Igloi wrote:
Pretty simple calculation to estimate the stock market risk in a portfolio. Simply cut the equity portion by 60%. If at that point someone is comfortable, then fine.
If one feels this is an exteme point of view, well that position runs counter to market history.
Igy
That's a fair calculation for someone nearing retirement who will be counting on their stock portfolio to fund their retirement. Otherwise, not so much.
Ghost of Igloi wrote:
seattle prattle wrote:
I think what a lot of investors have done is this: they have built their portfolios over time. If the various positions have gone up, they continue investing. IF not, they generally stop or even take money back out.
So, for those in the market for a fair amount of time, they have a buffer before their shares go negative. Presumably, they very well might sell before loss of the original capital occurs.
When you see investors still in at 100% invested at market peaks, do not assume that they believe a downturn will not happen. Perhaps they simply believe that their portfolio has appreciated sufficiently to the point where they have a buffer before they need to protect the original investment.
And by building the position over time, it has taken a fair amount of the risk out of their position.
This notion is simple enough, but what gets complicated is in understanding market movements - with the widespread proliferation of computerized algorithims making the vast majority of trading at any given time - a particular market move may not be a simple reflection of investor sentiment. Maybe i have that wrong, but if i do, please correct me.
Seattle,
Agreed that is what investors believe. But their assumption is historically wrong. In regards to algorithms, human do the programming. It is all momentum driven where investors have become reliant on a flawed system. Like the well fed turkey just before Thanksgiving dinner. It seemed so perfect at the time. Who would have known?
Pretty simple calculation to estimate the stock market risk in a portfolio. Simply cut the equity portion by 60%. If at that point someone is comfortable, then fine.
If one feels this is an exteme point of view, well that position runs counter to market history.
Igy
I don't know where you come up with that. Really, the whole portfolio is at risk. One hundred percent.
If, on the other hand, you are trying to say that based on the worst downturn historically, a portfolio has been known to lose as much as 60% of it's value (based on S&P 500 downturn of 2008/2009. BUt taking a look at that, i think that what you are failing to understand is that a portfolio was down that much for only a brief time. In fact, if we assume a baseline of 33% off from the high, there was only about 9 or 10 months when it was down that much. and the rise from there was rather quick.
I am basing this on a quick perusal of the chart of its historical prices.
Or perhaps your projection is based on valuation levels.
If that is the case, i simply am not convinced that your theoretical model accounts for all the market forces relevant to the calculation.
agip wrote:
I just read an interesting counter-intuitive idea.
The worry as I understand it, is that since computer trading is so much of wall street, that is a risk because they all do the same strategies, for the most part. So they all buy at once and sell at once.
But we've seen volatility lower and lower. Until the last few weeks anyway. How does that square?
Could be that when humans are making decisions...they are the ones who all do the same thing at once. Greed and fear. But the machines are cold hearted b@stards. They dont' get sweaty armpits or have a bad day.
And maybe there are enough computer driven strategies that they aren't all doing the same thing anymore.
Maybe we're in for a period of more rational, less crazy stock market returns. Sure looks like the evidence is in that direction - one correction in how many years? And maybe that justifies a higher valuation to the market, if the market will have less volatility going forward.
I feel like the core of this idea makes good sense. As I understand it, the random fluctuations of a stock price are primarily a result of the actions of irrational agents making emotional decisions with imperfect knowledge. If a larger proportion of market participants are much more rational, that ought to reduce volatility.
As with any other situation, though, the law of unintended consequences tells us to be careful what we expect this means. It could imply low volatility and few severe corrections, or it could lead to substantially different bifurcations and unprecedented dramatic swings at times we wouldn’t otherwise expect.
JJKinahan wrote:
Ghost of Igloi wrote:
Pretty simple calculation to estimate the stock market risk in a portfolio. Simply cut the equity portion by 60%. If at that point someone is comfortable, then fine.
If one feels this is an exteme point of view, well that position runs counter to market history.
Igy
That's a fair calculation for someone nearing retirement who will be counting on their stock portfolio to fund their retirement. Otherwise, not so much.
Nah. That's just investment industry nonsense.
agreeing idiot wrote:
agip wrote:
I just read an interesting counter-intuitive idea.
The worry as I understand it, is that since computer trading is so much of wall street, that is a risk because they all do the same strategies, for the most part. So they all buy at once and sell at once.
But we've seen volatility lower and lower. Until the last few weeks anyway. How does that square?
Could be that when humans are making decisions...they are the ones who all do the same thing at once. Greed and fear. But the machines are cold hearted b@stards. They dont' get sweaty armpits or have a bad day.
And maybe there are enough computer driven strategies that they aren't all doing the same thing anymore.
Maybe we're in for a period of more rational, less crazy stock market returns. Sure looks like the evidence is in that direction - one correction in how many years? And maybe that justifies a higher valuation to the market, if the market will have less volatility going forward.
I feel like the core of this idea makes good sense. As I understand it, the random fluctuations of a stock price are primarily a result of the actions of irrational agents making emotional decisions with imperfect knowledge. If a larger proportion of market participants are much more rational, that ought to reduce volatility.
As with any other situation, though, the law of unintended consequences tells us to be careful what we expect this means. It could imply low volatility and few severe corrections, or it could lead to substantially different bifurcations and unprecedented dramatic swings at times we wouldn’t otherwise expect.
fair
Seattle,
Make your starting point March 2000. Also, for fun use the NASDAQ Composite for your index. Do you still feel comfortable?
Igy
In other news, looks like Canada's housing market is about to disintegrate
Racket wrote:In other news, looks like Canada's housing market is about to disintegrateThats a big fat nothing burger. Where you getting that from anyway?
agip wrote:
agreeing idiot wrote:
I feel like the core of this idea makes good sense. As I understand it, the random fluctuations of a stock price are primarily a result of the actions of irrational agents making emotional decisions with imperfect knowledge. If a larger proportion of market participants are much more rational, that ought to reduce volatility.
As with any other situation, though, the law of unintended consequences tells us to be careful what we expect this means. It could imply low volatility and few severe corrections, or it could lead to substantially different bifurcations and unprecedented dramatic swings at times we wouldn’t otherwise expect.
fair
agreeing idiot and agip,
So, the assumption is that equity selection based entiely by algorithms provides stability to the market. Equity price is determined by mathematical models, which just happen to move in the same direction, that is up. Human based equity selection is considered inferior for perceived risk, ie. may “panic.” Yet neither of you see this as a reason to be more fearful, as if this brings a durable stability to the market. That is what everyone believes. Misguided in my view.
Igy
The fallacy in the thinking can be easily deducted. The “superior” pricing model owns and encourages the coninued buying of the most over owned and most expensive equities. So overtime the the model portfolio becomes more narrow, more expensive, more over owned.
Igy, you are completely misinterpreting and misrepresenting my point of view. I am extremely fearful of a sudden sharp downturn, which is why I’ve got my trigger finger poised, and I liquidated 2/3 of my stocks at the 10% drop point. You strike me as a likeable guy, but you’re too brittle (hence you take all troll bait offered), and you tend to overgeneralize and project your assumptions and beliefs onto others without basis.
I tend to agree with your general expectation of a sharp correction. I don’t believe it’s timing can be predicted, however. I subscribe largely (but not entirely) to the random walk theory for market behaviour, and my investment decisions are made from that point of view. Also, I assign myself the nom de plume “idiot” not because I think I’m more or less an idiot than anyone else, but more because I believe we are all idiots form the point of view of trying to make good decisions (guesses) about the trading of securities.
idiot here,
I refer to your handle only in a sense of respect to your post. My post is neither a reference to you or agip but to the belief that algos provide some durable stability to the market.
Your criticism to my response to trolls or others is perhaps correct. I am generally a straight talk person perhaps undiplomatic at times. At my age I doubt that changes, even if I tried. Thanks though. I will try to be good.
Igy
idiot here,
Also, if you cannot predict the future and it is truly random, why would one not adjust their allocation to equities up or down over time. It seems to me investors place too much emphasis on randomness than the fact at certain levels of the market there is no return over a ten year investment horizon.
Igy
Ghost of Igloi wrote:idiot here,
Also, if you cannot predict the future and it is truly random, why would one not adjust their allocation to equities up or down over time. It seems to me investors place too much emphasis on randomness than the fact at certain levels of the market there is no return over a ten year investment horizon.
Igy
Of course it's not entirely random. Please read back what I wrote.
idiot here,
I guess why wait for the 10% drop to sell? A more logical approach would be to de-risk on an ongoing basis due to valuation. Pretty a 10% drop is more likely than a 10% rise.
Igy
Ghost of Igloi wrote:idiot here,
I guess why wait for the 10% drop to sell? A more logical approach would be to de-risk on an ongoing basis due to valuation. Pretty a 10% drop is more likely than a 10% rise.
Igy
I wasn't "waiting for a 10% drop," rather I was monitoring market activity, fearful of a huge drop. When we got to 10%, I did a careful analysis of past market behaviour, and based on past experience, decided my odds were better getting out partially.
What's "logical" for any given investor is situational, depending on their holdings, knowledge, risk tolerance etc. I've decided what's "logical" for me on the basis of my personal assessment of my own situation, not a hypothetical analysis of some imaginary typical investor.
OK, makes sense to me.