Wanted: debunking of financial advisors, managers, planners, stock brokers...

[yrreg]

Please read the following citation and contribute your comments.


Taken from SKeptics Society Forum, http://www.skepticforum.com/viewtopic.php?t=7664

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yrreg
Valued Contributor



Joined: 07 Nov 2005
Posts: 62

Posted: Mon May 14, 2007 3:21 am Download Post #1 Post subject: Are make-money experts essentially gambling with your money?

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By make-money experts I understand all kinds of people who enable you to make money from your money, like financial planners, advisers, stock brokers, etc., and you pay them for the service.


http://ie.encyclopedia.thefreedictionary.com/Financial%20Planner


A Financial Planner or Personal Financial Planner is a practicing professional who helps people deal with various personal financial issues through proper planning, which includes but is not limited to these major areas: tertiary education planning, retirement planning, investment planning, risk management and insurance planning, tax planning, estate planning and business succession planning (for business owners). The work engaged in by this professional is commonly known as personal financial planning. In carrying out the planning function, he is guided by a process known as the financial planning process which should result in creating a detailed strategy for making their clients as wealthy as possible. [Bolding provided by Yrreg]



[The article is copied from Wikipedia but it is not the up to date version of the Wikipedia article which is being edited continuously.]


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When I read the line in bold I laughed loudly.

Skeptics deal with so many topics but this is one topic that they have not gone or do not go into. [Buddhism is another one.]

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Questions:

1. Are not make-money experts essentially gambling with their clients money and getting paid handsomely for it?

2. Can we get to see the records of their successes with one particular client and with all their clients -- in a specified period of years?

3. What then is their kind of knowledge and skills qualifying them to be make-money experts for other people with the latters' money?

4. If they are experts in making money for others, shouldn't they be using their knowledge and skills to make money for themselves with their own money or borrowed money?

.

What do the financial or economic or monetary experts in this forum say?


Yrreg

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yrreg
Valued Contributor



Joined: 07 Nov 2005
Posts: 62

Posted: Fri May 18, 2007 12:45 am Download Post #2 Post subject: Well, I am right...

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...that skeptics talk about so many things which have been talked to death, but there are things which they prefer not to talk about, like money-expert people who get paid to help you make money with your own money, and whether you gain any profit or not and even lose money, they get paid handsomely just the same.


I invite skeptics to give their attention to this kind of people and show how their profession is beyond debunking or really full of debunkable premises and unjustifiable confidence from their clients.


Yrreg

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Thanks for your contributions if any.


Yrreg

[Hawk one]

Appreciate that you put this in humour, to save us the time pointing out how laughable it is. And nice how you managed to put in yet another lie about skeptics and buddhism. I mean, you wouldn't be yrreg if you couldn't show your prejudices against buddhism in every thread you make, would you?

[yrreg]

I am going into sacred cows that skeptics don't go into; the run of the mill are so self-complacent beating dead horses they can't see anything else to investigate, thereby they have not seen anything new or different to exercise critical thinking on and exact empirical evidence over, unlike yours truly who is the genuine, universal, all around, and open ended skeptic, for whom there are no sacred cows.


Just for humor, please, no offense.


Yrreg

[Hawk one]

Zzzzzz....

Wake me up when you have something informative to say and aren't just being self-congratulatory and arrogant, will you?

[roger]

I suggest you search this forum for terms like efficient market hypothesis, EMH, random walk theory, Malkiel, Warren Buffett, Berkshire, Fama and French, to see that in fact we have discussed these things in detail, and with a sceptical eye.

But it sounds like you have reached a conclusion, and are now looking for an argument, so that's all I'll say for now until I see how the thread progresses.

[yrreg]

Congratulations!

That is what I found so disappointing in my discussions with the Buddhists of this JREF forum who claim to be skeptics but are Buddhists, and they don't see any inconsistency, why? because they resort to the expediency of defining Buddhism and specifying the genuine, original, authentic, etc. message of Buddha, so that there is nothing in their kind of Buddhism that Buddha himself could recognize to be any teaching from him.

Do we have any kind of people here? who are genuine experts of critical thinking and adepts at empirical evidence who can be approached for their determination whether a discussant is being true to the canons of skepticism in any particular question or just exploiting the label of skeptic even though acting against critical thinking and empirical evidence.

=================


There are to my impression so many subjects that skeptics can train their attention on to unearth the facts and expose the myths in current society and civilization, but they have concentrated on paranormal phenomena and pseudoscientific materials of a limited enumeration, and thereby miss helping ordinary people know answers to questions like the ones I put forward in my OP about all kinds of make-money experts.

Good for a laugh, my impressions; well, you are welcome.

===============

Take for example this question, is the challenge of Randi in consonance with the canons of skepticism or not. I have always wondered how he can set himself up to be the judge on whether an event or an action is factual or chicanery, when right away anyone with critical thinking will say that no one can be judge in his own cause.

===============


I suggest you search this forum for terms like efficient market hypothesis, EMH, random walk theory, Malkiel, Warren Buffett, Berkshire, Fama and French, to see that in fact we have discussed these things in detail, and with a sceptical eye.

But it sounds like you have reached a conclusion, and are now looking for an argument, so that's all I'll say for now until I see how the thread progresses.


I searched in JREF forum the word financial before I introduced my topic, and it did not return anything reminiscent of my interest.

You being a veteran here, perhaps can refer me to a board here where the questions dealt with are focused on financial -- if I may use the term, myths.


Just the same, I congratulate you for the first one to my impression to have issued a sensible reaction to my OP.


About my request to you as a veteran member here, to tell me a specific board where financial myths are treated, you will perhaps tell me to do my own homework; that is the recurring dodge of Buddhist skeptics here.

If you know for being a veteran skeptic here, you can do me the favor; if not, just say you don't know.



I put this topic here in humor because in humor there is truth or there is the fact.



Yrreg

[Simon Bridge]

Efficient Market Hypothesis
http://forums.randi.org/archive/index.php/t-9300.html
http://www.randi.org/forumlive/showthread.php?t=44071&page=3
http://www.shanekillian.org/jref/macroeconomics.html

Random Walk
http://forums.randi.org/showthread.php?t=79200
http://forums.randi.org/archive/index.php/t-79622.html

There is a tendency for skeptics to discuss specific theories that financial firms are often misguided by (or misguide their clients with) rather than go for a blanket denouncement.

Financial planners don't get the wholesale debunking (or financial services in general) in skeptic forums (fora?) ... as opposed, say, to psychics... because there is already so much healthy skepticism out there and many regulatory bodies, watchdog groups, and so on, looking out for the more fraudulent.

In general, financial planners (particularily the certified variety) are honest about the limitations of their profession and what they are actually doing for you.

Any "psychic" who says, "actually, I have no special insight; I am charging you so I can cold-read you, provide vague allusions for you to self-validate, to produce the illusion of special powers." I have no problem with.

[Simon Bridge]

I found the freedictionary article quoted in OP a tad odd... it seemed way to offhand for a responsible resource... I checked. And, indeed, the definition is there.

However, the rest of the entry qualifies the earlier statements quite nicely, then it moves on to a direct crib of the wikipoedia entry for the same... a much more sober approach.
http://en.wikipedia.org/wiki/Financial_plannerA Financial Planner or Personal Financial Planner is a practicing professional who helps people to deal with various personal financial issues through proper planning, which includes but not limited to these major areas: tertiary education planning, retirement planning, investment planning, risk management and insurance planning, tax planning, estate planning and business succession planning (for business owners). The work engaged in by this professional is commonly known as personal financial planning. In carrying out the planning function, he is guided by the financial planning process to create a detailed strategy tailored to a client's specific situation, for meeting a client's specific goals.

I think the quoted entry says more about the deficiencies in the dictionary than it does of Financial Planning.

Taken skeptically - which, I note, you have not done (you merely invited skeptical comment from others) - I see that the bold text does not offer anything concrete... the aim: "to make the client as wealthy as possible" is qualified by that "possible".

To specific topics next post.

[Simon Bridge]

Questions:

1. Are not make-money experts essentially gambling with their clients money and getting paid handsomely for it?

No. You are thinking of financial investors, like stockbrokers.
But there is nothing wrong with that unless the investor deliberately leads yau to think that a particular investment is a "sure thing".

2. Can we get to see the records of their successes with one particular client and with all their clients -- in a specified period of years?

... in NZ, these things are covered by privacy legislation. However, financial companies are required to publish a prospectus and there are conditions under which an audit can be performed. Various certification authorities may require some "openness" to the books as well.

The principles that financial planners use have been researched and peer reviewed in academic institutions around the world - though the feild is far from exact. Of course, there are crooks in any profession.

3. What then is their kind of knowledge and skills qualifying them to be make-money experts for other people with the latters' money?

They have the benefit that comes with any specialist study. Anyone can manage anyones money, some people are better at it than others. These people have been trained to be better at it than others. Refer to the dictionary or wiki for specifics. If you have a specific objection, then voice it.

4. If they are experts in making money for others, shouldn't they be using their knowledge and skills to make money for themselves with their own money or borrowed money?

They do. Financial planners naturally take advantage of their own services. Part of this is making money by offering their services for sale... thus, they are following a course they would advise to their clients.

If a client had a skill set that wasn't being exploited, it would be sound to advise them to do so don't you think?

[yrreg]

Simon Bridge, again, thank you very much.


That distinction between stock brokers and the broad term financial expert, whatever, is truly enlightening.

Enlightening myself with folks here more learned and more experienced than myself, is what I am after. No, not endless arguing where discussants go into all kinds of semantic acrobatics just to not admit something on first sight already fishy from as I said the standpoint of critical thinking and empirical evidence.

I will digest your responses more attentively, in the meantime, may I just ask you what you think about the lie supposedly I am making with my opinion on the inconsistency between being skeptics and being Buddhists, and also about the challenge by Randi not in accordance with the canons of skepticism for appointing himself judge as a conditio-sine-qua-non for anyone taking on his challenge.


Again, thanks a lot!!!


And I am very glad to know you who don't hurl accusations of lying around in your messages -- well, so far not.



And let's see what other skeptics have to say about my topic.



Yrreg

[blutoski]

No. You are thinking of financial investors, like stockbrokers.
But there is nothing wrong with that unless the investor deliberately leads yau to think that a particular investment is a "sure thing".

The worst of the lot are the "stock promoters". You find a lot of them in jail these days. That industry could be a little better policed, IMO.

Financial planning as a profession provides value, but individual planners vary in quality. That profession could use a better certification process.

My wife and I hired a Financial Planner when we got married and set up her medical practice, to ensure that our investment and insurance planning was sound.

In contrast, I hired a CA/Management Consultant to assist with the legals, orgchart, and launch of my business.

I think they're a great investment, allowing you to tap into decades of experience and thousands of hours of research for a small one-time cost.

[Explorer]

"The value of your investment can go down as well as up!"

That well used warning by financial advisers covers just about all of the above, so why all the fuss?

[blutoski]

That is the ultimate disclaimer, isn't it.

I recall a few years ago when Warren Buffet was asked about whether he knows with any degree of certainty what the market will do, say, over the next quarter. He said, "Yes! I know exactly what the market will do over the next quarter! It will fluctuate unpredictably."

[roger]

yrreg,

I know of no forum that specifically devotes itself to sceptical analysis of finances. There are forums out there devoted to things like Benjamin graham style investing - who is quite the sceptic.

I assert that finances have come under significant sceptical analysis, albeit not by JREF groups (though we have addressed it, it's just not a focus on this forum). Broadly, my thoughts on the topics:

There are classes of knowledge that are helpful: how to minimize your tax exposures, risk/rewards of different asset classes, how to arrange for retirement, etc. None of these disciplines is a "get rich quick" scheme; it stands to reason that people would choose these careers as a career - a way to make a steady stream of income.

Then there are endless "newletters" which promise to pick hot stocks, predict the market, etc. They are widely regarded as woo in the investment community. No one has demonstrated the ability to predict the market. These are classic get rich quick schemes - i.e. the auther gets richer, the buyers get poorer.

There are two broad methods of analysis in stocks: technical and fundamental. Technical analysis consists of looking at past prices, 'analyzing' (i use the term loosely) trends, and predicting what the future will bring. IMO, it's shear voodoo. Studies back me up. MACD, one instrument, has a success rate in the low 30 percent range.

Fundamental analysis works by looking at the underlying performance of the company - what cash flows does it generate, what are the likely cash flows in the future, and what price should we pay today for that future cash flow.

It's a more rational approcah, but it has it's detractors. The biggest thing is that you are trying to predict the future based on past performance. The second biggest thing is that if enough people are doing this analysis, won't the future performance of the stock be priced into the stock, giving it no advantage?

I won't go into my thoughts on the latter, but I recommend reading Malkiel's "A random walk down wall street", where he analyzes these issues in great detail. He is often described as an efficient market theorist - someone who argues that stock prices are as efficient as possible - that all known data is already priced into them, and thus we cannot find an 'edge' and pick a stock that will perform better than others. He is not, in my opinion. He has significant intellectual sympathy for fundamental analysis, and agrees that markets are often very irrational. However, he argues that we haven't gathered enough data to show that we can take advantage of these irrationalities. If we cannot, then the market is weakly efficient. Prices may be stupid, but we don't have enough information to take advantage of it.

From that we have modern portfolio theory (I left out decades of research and huge names in the field - I'd get an F if I wrote that for a class, but bear with me, this is already too long). Google is your friend here, but the general idea is forget about picking individual stocks. You are basically rewarded for risk - a treasury bond has no risk, so the return is low. Corporate bonds are more risky, so the returns are higher. Stocks are more risky, so the returns are higher still. As risks increase,so does the flucuation in prices, so it's not a slam dunk just to invest in the riskly stuff. MPT looks at your time horizon - how long can you leave the money in the market, and chooses a portfolio that minimizes risk relative to that time period while maximizing gain. You generally invest in broad asset classes - the S&P 500, an index fund for mexico stocks, an index fund for junk bonds, etc. There's the further idea of how to hedge - choosing investments that are orthogonal or even have negative correlation, so that if investment A goes down B goes up, but that is far beyond the topic of this post.

In short, this topic has received ample sceptical attention in acedemia. I would not be adverse to JREF focusing more attention on the clear charlatans - cold callers (stock salesman), the newletter writers, etc., because they are out to deceive and take your money as are psychics. But Randi is a magician; no insult, but he has no special insight into financial markets, but he has keen insight into magic fakery so often used by dowsers, psychics, etc. It's not hard to see why JREF does not pay attention to financial 'advisors'.

[Pup]

You are basically rewarded for risk - a treasury bond has no risk, so the return is low. Corporate bonds are more risky, so the returns are higher. Stocks are more risky, so the returns are higher still. As risks increase,so does the flucuation in prices, so it's not a slam dunk just to invest in the riskly stuff.

Good summary. I think a huge distinction can also be made between investing/gambling money in situations where the average outcome results in a loss vs. a gain.

Casinos, lotteries and commodity or stock options generally just redistribute the investors' money, with the house or brokers taking their cut. The total money paid out is equal to the total money coming in, minus fees. So the "average" investor will lose by the amount of fees, though some will gain. It requires some particular skill or luck to make money in those cases.

Stocks, on the other hand, can actually pay out more than was put in, because they take wealth from the economy at large, not just from the pool of investors. So the "average" investor gains over the long run, making the odds extremely high that a diversified portfolio, like an index mutual fund, will go up over a long period of, say, ten or fifteen years, without any particular skill or luck.

[LostAngeles]

I am going into sacred cows that skeptics don't go into; the run of the mill are so self-complacent beating dead horses they can't see anything else to investigate, thereby they have not seen anything new or different to exercise critical thinking on and exact empirical evidence over, unlike yours truly who is the genuine, universal, all around, and open ended skeptic, for whom there are no sacred cows.


Just for humor, please, no offense.


Yrreg

The title of this post is now my sig line.

[Paul C. Anagnostopoulos]

Man, I've seen broad brushes before, but this one is the width of a small planet.


4. If they are experts in making money for others, shouldn't they be using their knowledge and skills to make money for themselves with their own money or borrowed money?
My primary financial planner is my father. Trust me, he's investing his own money, too.

~~ Paul

[roger]

This thread hasn't built much steam, but I thought I would quote from Philip Fisher's 1958 classic "Common Stocks and Uncommon Profits". To put the quote in context, he is writing about the amount of effort people put into predicting the future of the markets, and how fruitless it is.

The amount of mental effort the financial community puts into this constant attempt to gues the economic future from a random and probably incomplete series of facts makes one wonder what might have been accomplished if only a fraction of such mental effort had been applied to something with a better chance of proving useful. I have already comapred economic forecasting with chemistry in the days of alchemy. Perhaps this preoccupation whith trying to do something which apparently cannot yet be done properly permits another comparison with the middle Ages.

That was a period when most of the Western world lived in an environment of unnecessary want and human suffering. This was largely because the considerable mental ability of the period was devoted to fruitless results. Consider what might have been accomplished if half as much thought had been given to fighting hunger, disease, and greed as was devoted to debating such points as the number of angels that could balance on the head of a pin. Perhaps just part of the collective intelligence nowadas employed in the investment community's attempt to guess the future trend of the business cycle could produce spectacular results if it were harnessed to more productive purposes.

A perfect example of an sceptical analysis of the field, and of an astute mind recognizing how much time we spend pursuing fruitless activities. I feel Mr. Fisher would be quite at home on this forum, or rubbing elbows with Dawkins, Sagan, et. al.

[The Atheist]

I must congratulate you on your choice of target, yrreg, you certainly don't make life easy for yourself.

Let me tell you how it works, as a former senior manager of a large bank - as opposed to the jack-#### outfits you're talking about:

Financial advisors & brokers make suggestions to their customers about investment strategies. Some work, some don't. Over a long period of time, it is very simple to tell whether an advisor has made + or - returns for his investors.

Those who consistently make a good + return live to fight another day.

Those with - don't.

I don't know about USA, but in NZ, Oz, UK, the rules for all people who participate in the finance industry in any way, but especially in advisory capacities, have very strict regulations covering their operations.

Maybe you could find an easier target? Like real estate agents and used-car salesmen, finance brokers are a thin veneer of respectability over a con, but you're wasting your time - nobody is forced to use advisors.

Caveat emptor.

The end.

Looks like nobody gives a rat's arse about your war against Buddhists (shocking target, by the way) and you're on a dead-set loser here.

Have fun.

[Loss Leader]

Skeptics deal with so many topics but this is one topic that they have not gone or do not go into.


Do you have any evidence that skeptics are not appropriately skeptical of financial and investment advisors?


Parenthetically, I was talking with my own financial advisor today about a client who had a $600,000.00 whole life policy payable to his sibling. He was paying $15,000.00 a year, had built up a lousy $40,000.00 equity and the money would go on death to a person who isn't even dependent on his income in life. He's unmarried and has no children. The financial advisor told him to get a $100,000.00 term policy for about $500.00 a year. He saved the guy $14,500.00 per year. And, since the advice did not result in the purchase or sale of securities, he was paid exactly nothing for it.

Good financial advisors make themselves known by producing happy clients. The money they earn for their efforts is the result of a valuable service. The ones who suck, who are just salesmen or who are criminals may survive for a while but will never thrive for long. The market polices itself (with the help of actual police). Skepticism in whom to trust and what methods they employ is appropriate at the micro level. I'm not sure what exact skepticism needs to be applied at a macro level.

[yrreg]

I would like to imagine an ideal assets and liabilities manager or credits and debits manager, or in short a money consigliere, who should do the following three acts for me:

1. Keep my money safe.

2. Get me things I want that money can buy, on the criterion of the best pick for the least money.

3. Make my money increase, i.e., return big, easy, quick additional money, and beyond questioning from the law.

#1 and #2 are easy to achieve by any money adviser, it is #3 that is to my intelligence almost impossible to consistently realize.

This is the arena of winners in stocks like Warren Buffett.


I like to ask the veteran skeptics here, how people like Warren Buffett beat the stock market as to make fabulous fortunes down the years of their stocks activities.

Is there a science and methodology there like there is a science and technology in planting wheat or raising pigs?


If not, how then do they succeed?


There is something uncanny with these people, if they are absolutely honest and are not in the business of anomalously by stealth outsmarting the system or the people in charge of the system.

What is that uncanny factor responsible for their success? Is it what skeptics here like to call chance, spell that luck? so that people like Warren Buffett are just lucky for all the years to the present that they have made massive money from stocks?

What kind of luck? Like the kind skeptics prefer to assign to acupuncturists who effect cures whereas scientific doctors of medicine cannot help, or have given up on patients with ills they find absolutely baffling to their conventional medicine science and therapeutic skills?


Wanted: explanations by skeptics on critical thinking and empirical evidence for the successful careers of people like Warren Buffett who make exorbitant wealth from stocks.



[Disclaimer: I confess myself to be quite ignorant about the inner workings of the stock market; so it is very possible that I don’t know what I am talking about –- in which case I need some beneficent education from the financial cognoscenti and veteran skeptics here.]



Thanks for any contribution to my education.


Yrreg

[Loss Leader]

I like to ask the veteran skeptics here, how people like Warren Buffett beat the stock market as to make fabulous fortunes down the years of their stocks activities.


Start here (http://en.wikipedia.org/wiki/Warren_Buffett), here (http://www.investopedia.com/articles/01/071801.asp), and here (http://www.buffettsecrets.com/).

[yrreg]

Thanks, Loss Leader, for you kind attention to an inquiring mind.


I asked in above message #21: "Is there a science and methodology there [re: stock trading] like there is a science and technology in planting wheat or raising pigs?"

I mean science and technology in stock trading like in wheat planting and pigs raising, so that there is effectivity and efficiency in stock trading for everyone to make money and get rich tremendously -- like if you do wheat planing and pigs raising, scientifically and technologically, you will produce huge quantity of wheat and pigs, so also in stock trading.

What do the scientists and technocrats among the veteran skeptics here say?

I am just an inquiring mind, I need answers from the experts here. Pleazzzzzz!


Okay, two questions:

1. Is there a science and methodology to stock trading?

2. Where do we go to read about this science and methodology?

Do you realize that if we do possess a science and technology in stock trading, like we have in planting wheat and raising pigs, all of us will just employ our money in stock trading scientifically and technologically and make a lot of money and all get very very rich. and not only those few like Warren Buffett.


By the way, has Warren Buffett ever said that he does stock trading scientifically and technologically, like he does his gardening -- if he engages in that chore?


Yrreg

[Loss Leader]

I asked in above message #21: "Is there a science and methodology there [re: stock trading] like there is a science and technology in planting wheat or raising pigs?"


The answer is that there are many methodologies for investing althout I'm not sure why you're asking here. Any trip to your local bookstore will uncover an entire section devoted to this subject. If you have access to a college library, you'll find hundreds of scholarly texts on investing. There are dozens of different philosophies. The most successful focus on identifying undervalued or overcapitalized businesses and avoiding the belief that one can get rich overnight.

There are a tremendous amount of resources at http://www.investopedia.com/articles/
They're dedicated to teaching investors about the markets with articles, tutorials, virtual portfolios and more. Spend some time there.

By the way, has Warren Buffett ever said that he does stock trading scientifically and technologically, like he does his gardening -- if he engages in that chore?


The links that I provided you gave lots of information about Buffetts own words on his investment strategies and successes. Refer to the links.

[yrreg]

The answer is that there are many methodologies for investing...



Skeptics seem to shun this topic, and I believe it is because they cannot or more correctly they opt to not apply critical thinking and empirical evidence to get to the facts if any of science and technology in stock trading.


There is none, proof of that is the multitudinous guesswork and super verbosity in self-proclaimed masters of stock trading, who at least know that they can make money selling their thoughts on how to beat the stock market.


Why don't skeptics just come out and proclaim that you can be as successful as throwing up coins to get heads or tails in the stock market, so either avoid it totally or just have fun gambling provided it is pure gambling and there is no monkey business from some smart operators behind all the facade of level playing field in the stock market.


Stock trading however is one sacred cow that skeptics don't go into because it is an alien territory to them, they would rather continue to beat the dead horses of the paranormal and the pseudoscientific, and then even in these domains they opt to limit to their convenience the materials they go into, overly dead horses already talked to death in so many skeptics websites.



Yrreg

[Complexity]

Yrreg - You seem intent on projecting your ignorance of a subject on the rest of mankind. Are you this silly in every domain?

People have given you what you asked for with more patience than you deserve. Read and learn.

[Pup]

Why don't skeptics just come out and proclaim that you can be as successful as throwing up coins to get heads or tails in the stock market, so either avoid it totally or just have fun gambling provided it is pure gambling and there is no monkey business from some smart operators behind all the facade of level playing field in the stock market.

Because if you're truly skeptical, that's not how it is. "Pure gambling" implies the odds are equal (or worse) between losing and winning. You're mistaking two things, stock trading to try to outperform the indexes, and long-term investing. Stock trading is where the "throwing coins" analogy comes.

Long-term investing in a broadly diversified portfolio, like a market index fund, has, skeptically speaking, been proven to be more profitable than chance. In other words, over a ten-year period, the odds are that you'll take out more money than you put in. Over longer periods, the odds get even higher.

Actually, one could say that holding onto a dollar bill has generally proven to be a losing proposition. Periods of inflation are more frequent than periods of deflation.

So would you also say that not investing money is a pure gamble? What is safe?

[Geckko]

Because if you're truly skeptical, that's not how it is. "Pure gambling" implies the odds are equal (or worse) between losing and winning. You're mistaking two things, stock trading to try to outperform the indexes, and long-term investing. Stock trading is where the "throwing coins" analogy comes.

Long-term investing in a broadly diversified portfolio, like a market index fund, has, skeptically speaking, been proven to be more profitable than chance. In other words, over a ten-year period, the odds are that you'll take out more money than you put in. Over longer periods, the odds get even higher.

Actually, one could say that holding onto a dollar bill has generally proven to be a losing proposition. Periods of inflation are more frequent than periods of deflation.

So would you also say that not investing money is a pure gamble? What is safe?

I would make a few clarifications here:

I would say gambling implies a zero expected return, not equal odds. E.g. a gamble is 20% chance of winning $100 and 80% chance of loosing $25.

Also, in addition to our long-term experience of an observed "equity risk premium", this has a logicial thoeretical grounding and is a testable hypothesis (of sorts).

[JonnyFive]

I'm really not sure where to start, because you're painting a very large, complex industry with a very broad brush.

There are a lot of different people in the financial industry - some of them are highly technical professionals, some are voodoo men, some are sales people out to make a commission, some are geniuses, some are lucky, and some are morons.

Financial planners, or advisors, are generally responsible for helping an individual or family secure their finances. They advise generally about what investments are appropriate for the client's level of risk tolerance, age, goals, career, income level, etc. Remember that many investment products are somewhat to highly technical in nature, and not everyone understands what is appropriate for them. Financial advisors often charge fixed fees for their services, and generally (if they are at all reputable) do not sell investment products.

They may also offer advice about taxes, insurance, etc. The financial advisor serves to provide general advise about all areas of personal money management. In the US, at least, there is standard certification for financial advisors.

A financial/investment/asset manager, by way of contrast, would imply a more direct control over assets. Rather than simply advising a client, they will actually invest the client's money. Their goal is to provide the client with an acceptable return at a tolerable level of risk, which can vary greatly from client to client. Asset managers may be paid a fixed fee, or they may make a percentage of the amount they manage, depending on the arrangement. A good manager will use various methods of determining what the best investment products are based on past performance, the risk of the underlying investment, etc.

Neither an advisor nor a manager is promising guaranteed results, unless they're an idiot. They don't try to "beat the system" or anything, just to move their client's funds (or advise their clients to move their funds) into investments that are suitable for their needs. Largely, it's about statistical returns. A good manager looks to place the money where it will earn a decent return over time by examining underlying market trends (things like company performance, cash flow, real value, production, business risk, etc.). If the manager has a large amount of capital to work with, they may be able to exert some kind of control over the fund using various macro-level investing strategies (http://en.wikipedia.org/wiki/Hedge_fund#Strategies).

Also, keep in mind that many fund managers don't do any better than the index funds. A good asset manager isn't going to try to get you rich quick, he or she is going to try to get you a decent level of return by choosing the appropriate investments and moving your money around to protect it from catastrophic down-turns when possible.

Stock brokers, insurance brokers, insurance agents, and their ilk are all sales people. Ultimately, they are trying to get you to buy something. They may advise you as well, but their advice may be colored by their desire to sell a product. A perfect example is the pushing of whole life ("cash value" life insurance) on clients by insurance agents. Generally, it's a horrible, horrible product... but it makes a nice commission for the agent because they get a percentage of first-year premium.

I would like to imagine an ideal assets and liabilities manager or credits and debits manager, or in short a money consigliere, who should do the following three acts for me:

1. Keep my money safe.

Yes, most advisors or managers try to keep your money as safe as possible, given your risk tolerance. There is, however, always some risk involved with investing. The very act of having money involves some risk, albeit very, very little.

2. Get me things I want that money can buy, on the criterion of the best pick for the least money.

You mean advise you on purchases? Probably not. A financial advisor might give you general advice on big ticket items like a home, but that's not really their job. A manager or sales person doesn't give a good god damn what you do with the money you aren't investing with them.


3. Make my money increase, i.e., return big, easy, quick additional money, and beyond questioning from the law

What you say here sounds kind of jumbled.

Generally, the job of an asset manager is to increase your capital, yes, but that doesn't always mean big, quick returns. A good manager is going to try to get you the best return for your risk tolerance level. If you can accept huge risk, you are probably going to get better returns as compensation for this, but you risk losing your money. Similarly, a manager for a financially conservative client is probably going to go for lower-return, lower-risk investments to protect their client's assets.

The idea of fast, easy money is a myth. Sometimes smart investors see trends of undervaluation that will allow them to make some excellent returns for the risk level involved, but that doesn't mean there's a sure-fire way to do it.

The people saying they can get you tons of money fast with no risk and little (or no) startup capital are crooks, not good advisors.

This is the arena of winners in stocks like Warren Buffett.

Buffett was a serious capital investor. He didn't just "win" at stocks, he used leverage on companies to make them more profitable, as well as using various macro strategies to manage funds. He worked with a huge amount of capital, which let him do things your average Joe Schmoe fund manager would have a hard time doing. Like, you know, buying majority shares of companies.

Buffett was a shrewd investor, and few people can do what he did.

I like to ask the veteran skeptics here, how people like Warren Buffett beat the stock market as to make fabulous fortunes down the years of their stocks activities.

He didn't beat it, that's all. A lot of Buffett's investing activity was active and based in active management and capital control. He didn't just pick stocks, he invested in the underlying businesses and improved them so they would make money. To try to reduce what he did to "beating the market" is a bit silly.

There is something uncanny with these people, if they are absolutely honest and are not in the business of anomalously by stealth outsmarting the system or the people in charge of the system.

What is that uncanny factor responsible for their success? Is it what skeptics here like to call chance, spell that luck? so that people like Warren Buffett are just lucky for all the years to the present that they have made massive money from stocks?

Again, Buffett wasn't just a stock investor. Wiki's article should help (http://en.wikipedia.org/wiki/Warren_buffet), and there are various books on him if you're interested.

There was nothing "uncanny" about his success. He was highly intelligent, he understood the economics behind his investments, and he made smart decisions. There was surely some luck involved, but also a lot of foreward thinking and smart planning.

[Disclaimer: I confess myself to be quite ignorant about the inner workings of the stock market; so it is very possible that I don’t know what I am talking about –- in which case I need some beneficent education from the financial cognoscenti and veteran skeptics here.]

Remember that the stock market is only one facet of a very large whole. There is more to investing than simply buying and selling stocks. Remember that those stocks represent the value placed on an underlying product or company by investors.

[Loss Leader]

There is none, proof of that is the multitudinous guesswork and super verbosity in self-proclaimed masters of stock trading, who at least know that they can make money selling their thoughts on how to beat the stock market.

Why don't skeptics just come out and proclaim that you can be as successful as throwing up coins to get heads or tails in the stock market, so either avoid it totally or just have fun gambling provided it is pure gambling and there is no monkey business from some smart operators behind all the facade of level playing field in the stock market.


My word, Yrreg, you really just like telling people your conclusions, don't you?

You started asking questions about what methodologies there were to stock trading? You asked if the very successful traders were anything more than lucky.

In response, several people explained the various types of "financial advising" there are and how many different definitions there are of "success." I personally pointed you towards resources outlining Warren Buffet's strategies. Since Buffet actually has strategies and since they actually have worked for him, this would appear to be evidence that there are methodologies that make investing more than just a gamble.

I suspect that you did not read a single word of any of the websites I sent you to. I suspect that you have not gone to the library and checked out a single book on investing.

Just because you haven't educated yourself about the stock market does not mean that the information does not exist. It means that you are ignorant of it. You probably should reserve your opinion until you do some actual research.

As to whether skeptics are "soft" on investing, I have seen no such thing. In fact, I remember at least one thread where an individual claimed a market-beating strategy based on the cycles of the moon. He was roundly criticized. Who are those exposing "boiler rooms" and "pump and dump" scams if not skeptics?

Your opinions not being founded in evidence, they are dismissed.

[JonnyFive]

As to whether skeptics are "soft" on investing, I have seen no such thing. In fact, I remember at least one thread where an individual claimed a market-beating strategy based on the cycles of the moon. He was roundly criticized.

Yes, we had a spot of fun with that one. :)

[Paul W]

I've only just come upon this thread - by accident, as it happens. The date of the last posting suggests that it died a while ago, but nevertheless I think it worth a comment. Perhaps someone is still listening!

Have all of you read Nassim Nicholas Taleb: Fooled by Randomness. ISBN 978-0-141-03148-4. I think it answers the OP.

[yrreg]

...

Have all of you read Nassim Nicholas Taleb: Fooled by Randomness. ISBN 978-0-141-03148-4. I think it answers the OP.

I have read reviews about the book.

The author is telling us that everything is up to chance.

And I think he is telling us also and this is more important that we must master the control of chance.



As regards my thread, I have come to this idea about asking anyone expert in making money with other people's material assets, to make money for himself in tendering the service of making money for their clients.

Suppose they just earn for me every year an excess of the previous balance that is 1% over the year end inflation, and they can keep whatever percentage in gain they obtain from managing my material assets, on condition however if they don't succeed in achieving for me that 1% in excess of the year end inflation, then they must pay me from their own pocket so much as to make my year end balance show an excess in gain over the year end inflation.

Here is my computation:

Present year end inflation
6%

My previous year end balance
$100,000

Present year end balance
$105,000

Money expert must pay me from his own pocket
$7,000


If however my year end balance is
$110,000
then the money expert will keep
$3,000
still leaving me with a balance of
$107,000
which is 1% in excess of the year end inflation.


Do we have any such money experts?



yrreg

[The Central Scrutinizer]

What in the hell are you blathering on about?

[Pup]

Suppose they just earn for me every year an excess of the previous balance that is 1% over the year end inflation, and they can keep whatever percentage in gain they obtain from managing my material assets, on condition however if they don't succeed in achieving for me that 1% in excess of the year end inflation, then they must pay me from their own pocket so much as to make my year end balance show an excess in gain [of how much? 1 percentage point?] over the year end inflation.

Okay... But how much excess in gain?


Here is my computation:

Present year end inflation
6%

My previous year end balance
$100,000

Present year end balance
$105,000

Money expert must pay me from his own pocket
$7,000


Inflation plus 1% would be a balance of $107,000, which would mean the money expert would only need to pay you $2,000 to reach that amount. How are you calculating the $7,000?

Do we have any such money experts?

If your example is a mistake, and you mean a money expert who guarantees you a return of inflation plus 1% every year, even if he has to pay you out of his own pocket, um, well, hell yes.

I'd put your money in 20-year U.S. Treasury TIPS, calculated by definition to yield a fixed percentage over the inflation rate. I think the last batch went at 1.807%. No risk, no effort, and I'd pocket 0.807% of your money for twenty years. Sounds like a deal to me.

[devnull]

I know some advisors who consistently return much higher than market. They do this because they do the research, understand the research, and put effective plans into place.

Im sure alot of advisors flip a coin, invest in broad managed funds or just follow trends - but theyre the guys you dont want to hire.

With financial advice, the old adage "you get what you pay for" definitely applies.

[yrreg]

Okay... But how much excess in gain?

....

Quote:

Here is my computation:

Present year end inflation
6%

My previous year end balance
$100,000

Present year end balance
$105,000

Money expert must pay me from his own pocket
$7,000



Inflation plus 1% would be a balance of $107,000, which would mean the money expert would only need to pay you $2,000 to reach that amount. How are you calculating the $7,000?


.
Your are correct, my mistake; thanks for pointing that out.




If your example is a mistake, and you mean a money expert who guarantees you a return of inflation plus 1% every year, even if he has to pay you out of his own pocket, um, well, hell yes.

I'd put your money in 20-year U.S. Treasury TIPS, calculated by definition to yield a fixed percentage over the inflation rate. I think the last batch went at 1.807%. No risk, no effort, and I'd pocket 0.807% of your money for twenty years. Sounds like a deal to me.

...calculated by definition to yield a fixed percentage over the inflation rate. I think the last batch went at 1.807%. No risk, no effort...

If the yield is always more than 1% over inflation, then you deserve the yearly income of the excess over 1% for your knowledge and work.

If the yield is sometimes over sometimes under 1% relative to inflation, then you have to sometimes to pay me from your own pocket.

What is the history of yields in the last 20 years?

And can you just simply pay me every year 1% above the year end inflation? according to this formula:

pb + ir*pb + .01*pb

pb - previous balance
ir - inflation rate

That amount of .01*pb is what you have to pay me every end of the year, while I still start the new year with a bigger balance than last year's, namely, pb + ir*pb.


I think such a deal will enable me to go into retirement on my accumulated material assets managed by you.


yrreg

[ben m]

If the yield is always more than 1% over inflation, then you deserve the yearly income of the excess over 1% for your knowledge and work.

If the yield is sometimes over sometimes under 1% relative to inflation, then you have to sometimes to pay me from your own pocket.


yyreg, the advisor you are looking for is called a "bank". They offer things called "accounts" into which you put your money; the bank offers you a rate of return, called "interest", on any money in these accounts, and this rate of return is usually bit higher than inflation. Unbeknownst to you, the bank actually invests your money elsewhere, with its own teams of managers. Your return, sometimes called "interest", is sometimes paid for by the success of these investments, and in bad times is paid for out of the bank's reserves.

A similar instrument is a Treasury Inflation Protected Security; these will guarantee that the money you put into them comes back ahead of inflation.

There ya go. Super-fancy, up-to-the-minute money management advice.

Of course, you're going to complain that the return rate of all of these "safe" investments is lower than the return rate of, e.g., an index fund, mutual fund, or penny-stock-market-timing-day-trader. No kidding. But that's what you asked for---zero risk.

[Pup]

If the yield is always more than 1% over inflation, then you deserve the yearly income of the excess over 1% for your knowledge and work.
Treasury Inflation Protected Security (TIPS) are a common security, introduced quite a few years ago. They require little knowledge and less work, if anyone knows anything at all about stocks and bonds.

The problem is that you asked for a rate of return so low that it can be achieved with virtually no risk and no work. Let's start talking about 4% or 5% above the rate of inflation--that's where financial planners would balk and start muttering about past results being no guarantee of future performance.

What is the history of yields in the last 20 years?

The yield is fixed, compared to inflation. You're told the yield and you can decide whether to purchase. If you purchase, you'll lock in the yield for the life of the bond--always the same percentage above the inflation rate. So right now, you could lock in a guaranteed rate of about 1.8 percentage points above inflation for 20 years. The history of past rates would be irrelevant.

The history of payment, though, is that Treasury securities have always paid what they've guaranteed to pay, so far as I know. It would take the collapse of the U.S. government, or close to it, for the government to withhold payment.

I think such a deal will enable me to go into retirement on my accumulated material assets managed by you.

I wish I was licensed to do it, because honestly, I'd feel like I'd found a sucker. Anyone can buy them though, either directly from the feds or through most any broker, and then you'd get the extra .8% yourself.

You have to pay taxes on the gain each year, so they're useless as a tax shelter unless they're in an IRA or something, but they have the advantage that you never need to pay state taxes on them.

[Loss Leader]

I'd just like to add that the "inflation rate" is not a fixed number. It varies from locality to locality and industry to industry. There are many, many different ways of deriving the rate of inflation. You would have to specify exactly which rate of inflation you were talking about.

There is also such a thing as deflation. Prices on some goods (and sometimes all goods) can go down. The technology and agricultural industries have, in recent years, seen sometimes staggering deflation. Your example presupposes a positive inflation rate and breaks down during periods of negative inflation. You would have to be more specific in defining what you were talking about.

[Pup]

I'd just like to add that the "inflation rate" is not a fixed number. It varies from locality to locality and industry to industry. There are many, many different ways of deriving the rate of inflation. You would have to specify exactly which rate of inflation you were talking about.

Good point. Yrreg's hypothetical contract with a money manager would obviously need to define what measure of inflation was being used and what happens during deflation, but I figure that would be fairly easy to work out.

As an example, TIPS are tied to the commonly reported US Consumer Price Index. During periods of deflation, the principal is adjusted downward just like it's adjusted upward during inflation, but if at maturity, the principal would be less than at the start, you still get the original principal.

[Paul W]

yrreg:

Firstly, I hate to point out that reading a review of a book is not quite the same as reading the book itself. I have read reviews after I have read a book and wondered if the reviewer was writing about the same book which I read.

Taleb's points are rather more complex than your comment would suggest.

Secondly, could you explain what you mean by "mastering the control of chance". By definition, and despite millenia of optimistic gamblers believing otherwise, chance is something you cannot control.

[e-sabbath]

Just because it's gotten up my left nostril, I believe the place our friend has missed is an 'abattoir'.

[yrreg]

Thanks, everyone, for your useful knowledge.

I will have to mull over all the information provided.

Thanks again.



About controlling chance, isn't it what we are all trying to do in life, get a hold over unpredictable vicissitudes; for example there is a chance that crossing the street in the midst of vehicular traffic can get you run over, but you calculate the risk by observing at what time and under what behavioral circumstances of the traffic, to conclude when and how the chance of getting run over by any vehicles would be the least probable, then you cross the street.


Another example, making love to a fertile woman can land you into a paternity suit and support demand from your partner, but you can control that chance by using some mechanical or pharmaceutical assist to pre-empt in a way that chance from ever occurring. That is control of chance, isn't it?

So, there is negative control by evasion or escape, and positive control by prevention, like physically disabling the possibility of the chance event from taking place.


Anyway, I am amenable to be shown that I am erroneous with my idea of what chance is and my idea of controlling chance.



Yrreg

[Loss Leader]

Anyway, I am amenable to be shown that I am erroneous with my idea of what chance is and my idea of controlling chance.



You can't be all that amenable because people here have already very clearly explained to you that there are risk-free investments in existence today that earn exactly what you want to earn. Precisely what is left to discuss?