Financial Markets

[The Atheist]

Hello, fellow businessmen & women.

If you're in business, I imagine you'll be watching at least one of the world's financial markets and I thought I'd have a try at having a markets thread. This kind of thing works really well in sports.

Come on in, pour yourself an Earl Grey tea [coffee, if you must], take a seat at the boardroom table and put your feet up.

I have an interest in the majority of markets - shares, FX, commodities and finance and have strong contacts in all of them, so should be able to answer, or find the answer, to any technical questions.

This has certainly all come online at an appropriate time - the world's markets are in more than just a little turmoil!

I see the Dow testing the 13,000 level today, but supported above that after the first half-hour which went as low as 12,970. 13,000 is really important psychological barrier and the market bounced off it twice this morning.

Anyone have details of how much the Fed's spent to date on liquidity?

[Rika]

I actually do have a question, but this is out of curosity. When the mortage bubble burst, did it affect other loan sources, such as educational loans?

[The Atheist]

Wow!

That 13,000 support has gone, gone, gone.

Market down 172 to 12,856.

[Grimoire]

I actually do have a question, but this is out of curosity. When the mortage bubble burst, did it affect other loan sources, such as educational loans?
I suspect it will affect all credit, not just mortgages. The markets are becoming very credit wary, and many of the lenders are pulling back or even out. Those that remain will likely increase their rates due to perceived higher risk.

In other words, borrowing money will be more expensive for everyone.

[The Atheist]

I actually do have a question, but this is out of curosity. When the mortage bubble burst, did it affect other loan sources, such as educational loans?

As Grimoire has noted, the crash is starting to affect all areas of finance and business. The situation at the moment is highly complex and I don't think there's an easy answer as to what happens next. We won't really know until the rout is over, but at the moment, the debt crisis has spread like wildfire and is being a bit self-fulfilling with every market dragging down all the others.

Interesting days ahead.

Borrowing may not necessarily be more expensive - the Fed may have to ease rates to attempt stimulating the economy - but you can guarantee that credit will be harder to obtain.

To give you an idea of the scope of what's going on, these are the latest headlines on Bloomberg (http://www.bloomberg.com/index_americas.html):


U.S. Stocks Drop, Erasing S&P Index's Gain This Year on Debt-Market Rout

That's a highly euphemistic way of putting the scenario that S&P is at a low for the year.

Countrywide Shares Fall as Merrill Analysts Say Lender May Face Bankruptcy

Bankruptcy? Won't be the last.

Three-Month Treasury Yield Drops Most Since 1989 as Investors Avoid Risk

Remember the recession and bond crash of the late '80s? I certainly do! That flight to safety shows that the sub-prime crash is already a bigger financial crisis than both 9/11 and the Asian market "flu" of the 1990s.

U.S. Home Sales Drop to Four-Year Low, Prices Fall in Third of U.S. Cities

Tropical Storm Erin Forms Over Gulf of Mexico, Bears Down on South Texas

The housing market is self-explanatory, while a tropical storm - if it causes widespread damage - will put further squeezes on the money supply.

Watch this space!

[Rika]

Thank you for your response. I have to admit I am not really up on finance, but as I am currently applying for a federal (unsubsudized) loan, I was curious if it to was affected as well (And, uh.. we just got a loan to buy a house, because the loan was before the crash and the company agreed to honor their agreements) But!

I suppose now is a good time to look up how it works beyond what I know (And I was barely old enough to know the Asian market "Flu", but hey, the internet is a wonderful thing.)

[The Atheist]

Just count yourself lucky to be in USA, where the ride so far has only been bumpy, the NZ dollar's in free-fall and the sharemarket is off another couple of % today. The current track looks like it fell off the north face of Mt Everest!

[boloboffin]

Boy, did I pick the wrong year to open a 403(b). :yikes:

[The Atheist]

Boy, did I pick the wrong year to open a 403(b). :yikes:

It ain't over yet, either!

Asia; open 2% down, Dow futs showing -125 on opening tomorrow, The Mighty Kiwi, worst one-day loss in 21 years, worst two-day tumble in Asia for over a year, MCSI world down 11% off its highs.

A gem:

We're in the eye of the cyclone,'' said Salah Seddik, who helps oversee about $5 billion at Richelieu Finance in Paris.

[SezMe]

Well Salah Seddik is wrong. We're at the outer edge of the cyclone and there's truckloads of increasingly bumpy weather before the illusiory calm of the eye before heading back into the full blow again. Stuffing the mattress is looking like a smart investment strategy.

[boloboffin]

It ain't over yet, either!

Asia; open 2% down, Dow futs showing -125 on opening tomorrow, The Mighty Kiwi, worst one-day loss in 21 years, worst two-day tumble in Asia for over a year, MCSI world down 11% off its highs.

Did anyone here read Jurassic Park? It's times like these that remind me of the Malcolm Effect.

(Actually, if the notion of investment success is to buy low and sell high, this is the perfect time to open a 403(b), right? Right?

Hooboy.)

[The Atheist]

Buying at the bottom is indeed the answer. It's picking the bottom that's the hard part!

;)

[roger]

No one can predict the bottom (I assert). I can't think of anyone who makes serious money in the market (by serious I don't mean a few hundred million) that even makes the attempt. Most buy before the bottom is reached, and sell before the top is found. All that is required is to find value. Suppose I offered to sell you a dollar for 50cents. You'd buy every one you could, wouldn't you. Now suppose I offer to sell my dollars for 35 cents to the next person. While it sure would have been great to get that offer, you still made out like a bandit. Since you can't read my mind, you would have been crazy to try to predict what my next offer would have been, and refused the 50 cent offer. After all, my next offer might have been 5cents, 80cents, or 5 dollars. You have no way of knowing, but you recognize a bargain, and scoop it up.

Now, if somebody can counter my assertion that we can't time bottoms, I'd sure like to hear the emperical evidence. I haven't run across it yet.

Personally, I love the market like ths. Almost everything I've bought recently is in the red. So I just keep buying more. I'd be an idiot to complain about a sale. I don't get scared when the safeway puts milk on sale. So long as I don't need this money for the duration of a market cycle (which could be as long as 10 years or so, maybe longer if things go truly bad), I don't care. I can't predict the future, so I'm not going to act like I can.

[The Atheist]

No one can predict the bottom (I assert).

I agree.

What I'm saying is that you need to time the entry. if the market's going down, that's all well and good, but you don't want to buy when it's only 25% of the way down.

At the moment, there could be a lot further to go, or all the bargains may be gone. The sharemarket's been way overheated on fundamentals for years anyway.

Pretty happy with yesterday, though. I sold short across the board and they all came down! ;)

No selling today - if there's gonna be a dead cat about, today's the day. Buy small early & get ready for another big sell on Monday. The rally on Wall St at the end of the day had a smack of a desperate attempt by the banks to shore the market up. This is a very dangerous game they're playing - if the market beats them, it will only add to the spiral.

Another interesting couple of days in prospect.

[roger]

Okay.

How do you know the market is 25% down, as opposed to 80% down?

[The Atheist]

Okay.

How do you know the market is 25% down, as opposed to 80% down?

Well, obviously, you don't!

That's where the reading of fundamentals comes in - a company with heavy market investment is obviously going to see its own assets eroded, while a sound manufacturer will retain similar profitability and therefore become more attractive when the price drops.

For instance - anyone even remotely connected to the housing market at the moment is going to get hammered, while debt collectors are a great buy!

[bpesta22]

Look at LEND

[The Atheist]

I am. They seem to be bucking the trend, or maybe we've turned the corner.

[roger]

Well, obviously, you don't!Right. So what does "What I'm saying is that you need to time the entry. if the market's going down, that's all well and good, but you don't want to buy when it's only 25% of the way down." How can anyone follow that advice?

My contention - you can't. So, like you said, look at the fundamentals. Buy a dollar for 50cents.

[The Atheist]

And there it went; again, in a move unprecedented since 9/11, the Fed has cut mid-way through its schedule.

Seems to be working. Dow back up over 13k, Europe up.

If this stops the rot, we'll look back at just another blip. If, on the other hand, the markets turn to slush next week, then we are in for some extended pain - a prospect I'd see as unlikely now, given the selling pressure which has come on the US$.

Latest market update shows the Dow supported at 13k, with a dip back under the line to 12,997 on what looks to be some solid profit-taking by those who had the cojones to buy earlier in the week. Five minutes later, buyers coming back at 13k.

[The Atheist]

Right. So what does "What I'm saying is that you need to time the entry. if the market's going down, that's all well and good, but you don't want to buy when it's only 25% of the way down." How can anyone follow that advice?

Ok. The current market is a great example.

You would have seen value somewhere yesterday and bought, because you saw the value. I would have looked at the market and been prepared to risk a bargain in case the market dropped another 2% today. Today, with apparent support at crucial levels, I'd be looking for those bargains you got yesterday and I'd be paying maybe a 1% premium to where you were.

This time, you win. If the market dropped for another month, I win. I guess I'm probably arguing for a conservative apperoach, even with what seems to be a bargain.

My contention - you can't. So, like you said, look at the fundamentals. Buy a dollar for 50cents.

Dealing with physical shares, that's right, but I've always got margins to look at and nothing grieves me more than getting closed by 3 points before a 50 point movement. I think I was probably talking my book!

[ThunderChunky]

I read somewhere that you need to be right 3/4 of the time to beat someone that just invests in regular intervals (dollar cost averaging).

Assuming that is correct, for you to "win" long term you would have to be right not just about the bottom here, but about 3/4 of all the bottoms.

[The Atheist]

I read somewhere that you need to be right 3/4 of the time to beat someone that just invests in regular intervals (dollar cost averaging).

Not quite sure how that works, I'm afraid. You need to find the article so we can see what it actually means, because the comment doesn't tell us anything on its own.

An example would be a small investor who may lose 80% of the time, but hits gold every so often with a big enough scoop to get well in front. Anytime someone makes a hard and fast rule about investment strategies, they're open to being horribly wrong.

[Wolfman]

Anytime someone makes a hard and fast rule about investment strategies, they're open to being horribly wrong.
You're wrong.

Horribly so.

:D

[ThunderChunky]

Not quite sure how that works, I'm afraid. You need to find the article so we can see what it actually means, because the comment doesn't tell us anything on its own.

An example would be a small investor who may lose 80% of the time, but hits gold every so often with a big enough scoop to get well in front. Anytime someone makes a hard and fast rule about investment strategies, they're open to being horribly wrong.

It was a comparison of dollar cost averaging vs market timing. I can't find the article where I heard about that 3/4 rule but this seems like a decent report: www[dot]uwlax.edu/BA/fin/Research/Dollar%20Cost%20Edited.pdf

[The Atheist]

It was a comparison of dollar cost averaging vs market timing. I can't find the article where I heard about that 3/4 rule but this seems like a decent report: www[dot]uwlax.edu/BA/fin/Research/Dollar%20Cost%20Edited.pdf

Cheers, you're right, it is an interesting read.

It actually pinpoints that a single market entry at the start will out-perform DCA most of the time, even to the extent of borrowing to invest initially.

[Pinguey]

I'm surprised to find this thread on a sceptical forum - I always thought of economics as having slightly less scientific credibility than astrology (being from the UK I am also sceptical about spelling 'sceptical' with a 'k').

[The Atheist]

I'm surprised to find this thread on a sceptical forum - I always thought of economics as having slightly less scientific credibility than astrology

Eh? Given that global financial markets and economics affect every person on the planet, while astrology affects none, I'm not sure how you arrive at that conclusion.

(being from the UK I am also sceptical about spelling 'sceptical' with a 'k').

Now, that's far more like it!

[Pinguey]

Eh? Given that global financial markets and economics affect every person on the planet, while astrology affects none, I'm not sure how you arrive at that conclusion.



Now, that's far more like it!
The fact that astrology is bunk doesn't mean that the sun and moon have no effect on our lives, just that it does a poor job of explaining how and why this should be and invents forces and principles for which there is no scientific basis to do so. My scepticism arises not from any doubt about the importance of the world economy but from the persistent failure of economics to explain and predict its behaviour. I think it's important to remember that money was invented by people for their convenience - it has no meaning outside this context and so studying it as if it were a force of nature will always produce spurious results.

[The Atheist]

I think it's important to remember that money was invented by people for their convenience - it has no meaning outside this context and so studying it as if it were a force of nature will always produce spurious results.

Does anyone do that?

[The Central Scrutinizer]

Hello, fellow businessmen & women.

If you're in business, I imagine you'll be watching at least one of the world's financial markets and I thought I'd have a try at having a markets thread. This kind of thing works really well in sports.

You'll imagine wrong.

I'm in business (and an investor) and I have no interest in any financial market. I see no reason why I would.

[The Central Scrutinizer]

No one can predict the bottom (I assert). I can't think of anyone who makes serious money in the market (by serious I don't mean a few hundred million) that even makes the attempt. Most buy before the bottom is reached, and sell before the top is found. All that is required is to find value. Suppose I offered to sell you a dollar for 50cents. You'd buy every one you could, wouldn't you. Now suppose I offer to sell my dollars for 35 cents to the next person. While it sure would have been great to get that offer, you still made out like a bandit. Since you can't read my mind, you would have been crazy to try to predict what my next offer would have been, and refused the 50 cent offer. After all, my next offer might have been 5cents, 80cents, or 5 dollars. You have no way of knowing, but you recognize a bargain, and scoop it up.

Now, if somebody can counter my assertion that we can't time bottoms, I'd sure like to hear the emperical evidence. I haven't run across it yet.

Personally, I love the market like ths. Almost everything I've bought recently is in the red. So I just keep buying more. I'd be an idiot to complain about a sale. I don't get scared when the safeway puts milk on sale. So long as I don't need this money for the duration of a market cycle (which could be as long as 10 years or so, maybe longer if things go truly bad), I don't care. I can't predict the future, so I'm not going to act like I can.

As usual, give that man a cigar.

[The Central Scrutinizer]

For instance - anyone even remotely connected to the housing market at the moment is going to get hammered...

Wrong. http://www.marketwatch.com/quotes/brk.b

[The Central Scrutinizer]

Ok. The current market is a great example.

You would have seen value somewhere yesterday and bought, because you saw the value. I would have looked at the market and been prepared to risk a bargain in case the market dropped another 2% today. Today, with apparent support at crucial levels, I'd be looking for those bargains you got yesterday and I'd be paying maybe a 1% premium to where you were.

Huh??? This only applies if you buy the entire "market". Who does that?

[The Atheist]

You'll imagine wrong.

I'm in business (and an investor) and I have no interest in any financial market. I see no reason why I would.

Funny you'd be in a thread about them then.

Wrong. http://www.marketwatch.com/quotes/brk.b

Or have opinions on them?

Huh??? This only applies if you buy the entire "market". Who does that?

Everyone in futures, options and other derivatives. Hardly anyone, really, only about 99% of all broking shops, I guess.

[The Central Scrutinizer]

Funny you'd be in a thread about them then.

Just to correct those who follow them.


Or have opinions on them?

Just to correct those who have incorrect opinions.

Everyone in futures, options and other derivatives. Hardly anyone, really, only about 99% of all broking shops, I guess.

So which "markets" do they own?

[Pinguey]

Still think it's just people jerking each other around - don't suppose that socialism is too popular on this forum...

[The Atheist]

Just to correct those who follow them.

That's great. As soon as you see any misconceptions, you can correct them. I find it odd that someone who claims not to follow any markets would have an opinion on them though.

If you don't know anything about the markets, how on earth would you be able to correct anything.

I confess to being a touch confused.

Maybe you could explain what you actually mean.

English/French/Maori, I don't mind.

So which "markets" do they own?

Ah, I see your confusion.

In the sharemarket, traders will say, or type the word "BUY", followed by a certain commodity, share, index or interest rate. When they transact that BUY, they haven't actually bought ALL of it.

If for instance, a share trader says, BUY Microsoft, he isn't bidding for Bill Gates' billions, he is buying a certain number of shares/options/etc.

In the same way, if I BUY an NZX future, I am not offering to BUY the entire NZX at some future date, I am buying a futures contract based upon whether the market as a whole goes up or down.

Cheers.

[The Atheist]

Still think it's just people jerking each other around - don't suppose that socialism is too popular on this forum...

You're right, the whole market is a giant gambling arena, but with a little different odds to casinos or racetracks. Like a good poker player will beat a bad one over a prolonged time, a good trader will beat a bad one.

Socialism can't be too unpopular - there's a sort of pseudo/nouveau-communism business thread over the way which is touching on it.

[The Central Scrutinizer]

If for instance, a share trader says, BUY Microsoft, he isn't bidding for Bill Gates' billions, he is buying a certain number of shares/options/etc.

You seem very confused. If you're interested in buying Microsoft, why are you tracking the entire market? Odd, that.

[roger]

The Atheist, Scrut seems to be playing with you a bit.

We (Scrut and I) come from a Benjamin Graham background. His theories beget people like Fisher, Buffet, Munger, Ruane, et. al. All people (and really, the only people) who have consistantly beat the markets for decades. An extraordinarily difficult and impressive record.

The central thesis is we ignore markets. We buy value - or in the words of Graham, we buy dollars for 50cents. This valuation has nothing to do with the markets. You can find those deals in bull, bear, and sideways markets, though obviously the'll occur more often in a bear, and be more difficult to find in a bull market.

But no one has ever demonstrated the ability to predict the future movement of the market, despite looking at interest rates, housing data, etc., etc., etc. So, we ignore the behavior of the market. Can't predict it, not gonna try. We just look for people offering to sell us a dollar for 50 cents.

So, to take your MSFT example, we try to place a value on MSFT based on future cash flows. That's the only rational reason to buy MSFT. Sure, the price will bob up and down with the market, but we can't predict that bobbing, so we don't try. We try to estimate the future free cash flow of MSFT, and do a dicounted cash flow (DCF) analysis to figure out what the present value of those future cash flows (FCF) are. If the current stock price is significantly below that price, and we are confident in our valuation of the company, we buy it, ignoring the market.

In the short term the market is gambling, as you have pointed out. But in the long term, stocks follow value. I.e. if you look at short term movements of stock prices, we can show they are a random walk. There's a lot of conditions behind that statement which is too much to go into in a single post; I refer you to Malkiel's "A Random Walk Down Wall Street". However, in the long term, stocks always trend towards the value given by a DCF of the FCF. I refer you again to Malkiel for this analysis.

So, investors like Scrut and I, shameless cloners of Graham, Fisher, Buffet, et. al, ignore markets. We look at individual stocks, value them, and buy or sell based on that valuation. We don't look at if the market is up or down, what the "support level" is, or anything like that. If a man offers you to buy a dollar for 50 cents, you take him up on it. If he offers to buy a dollar from you for 2 dollars, you sell. Sooner or later rationality will prevail.

I believe that is what scrut meant when he said he does not follow the market (I base this on several threads where we discussed these topics before).

[The Central Scrutinizer]

The Atheist, Scrut seems to be playing with you a bit.

We (Scrut and I) come from a Benjamin Graham background. His theories beget people like Fisher, Buffet, Munger, Ruane, et. al. All people (and really, the only people) who have consistantly beat the markets for decades. An extraordinarily difficult and impressive record.

The central thesis is we ignore markets. We buy value - or in the words of Graham, we buy dollars for 50cents. This valuation has nothing to do with the markets. You can find those deals in bull, bear, and sideways markets, though obviously the'll occur more often in a bear, and be more difficult to find in a bull market.

But no one has ever demonstrated the ability to predict the future movement of the market, despite looking at interest rates, housing data, etc., etc., etc. So, we ignore the behavior of the market. Can't predict it, not gonna try. We just look for people offering to sell us a dollar for 50 cents.

So, to take your MSFT example, we try to place a value on MSFT based on future cash flows. That's the only rational reason to buy MSFT. Sure, the price will bob up and down with the market, but we can't predict that bobbing, so we don't try. We try to estimate the future free cash flow of MSFT, and do a dicounted cash flow (DCF) analysis to figure out what the present value of those future cash flows (FCF) are. If the current stock price is significantly below that price, and we are confident in our valuation of the company, we buy it, ignoring the market.

In the short term the market is gambling, as you have pointed out. But in the long term, stocks follow value. I.e. if you look at short term movements of stock prices, we can show they are a random walk. There's a lot of conditions behind that statement which is too much to go into in a single post; I refer you to Malkiel's "A Random Walk Down Wall Street". However, in the long term, stocks always trend towards the value given by a DCF of the FCF. I refer you again to Malkiel for this analysis.

So, investors like Scrut and I, shameless cloners of Graham, Fisher, Buffet, et. al, ignore markets. We look at individual stocks, value them, and buy or sell based on that valuation. We don't look at if the market is up or down, what the "support level" is, or anything like that. If a man offers you to buy a dollar for 50 cents, you take him up on it. If he offers to buy a dollar from you for 2 dollars, you sell. Sooner or later rationality will prevail.

I believe that is what scrut meant when he said he does not follow the market (I base this on several threads where we discussed these topics before).

You believe correctly. And sum it up very well, as usual.

I work with a guy similar to The Atheist. Everyday he's coming over to the desk showing me all sorts of graphs and trends and support levels and momentum and blah, blah, blah. I try to educate him, but ultimately, I just have to tell him I'm not interested.

Another word that came to mind reading your post was "beta". And my friend uses that term too when discussing which stocks he is trading. I don't even know what it means, all I remember is what Mr. Buffett said about it one year at the meeting - "If someone uses the term "beta" while discussing a stock, turn and run in the other direction". So I don't know what it means, and I don't even want to waste the time to find out.

Instead of wasting hundreds of hours on "market analysis", I find it much easier to buy a piece of a great company at a bargain price (or dollars for 50 cents, as you put it) and holding them for long periods of time. Then I can spend those hundreds of hours reading books or watching movies.

[drkitten]

Another word that came to mind reading your post was "beta". And my friend uses that term too when discussing which stocks he is trading. I don't even know what it means, all I remember is what Mr. Buffett said about it one year at the meeting - "If someone uses the term "beta" while discussing a stock, turn and run in the other direction". So I don't know what it means, and I don't even want to waste the time to find out.

You -- and Buffett, I'm afraid -- are wrong.

Beta is a measure of how unpredictable a stock's return is. Perhaps Buffett is in a position where preservation of capital is no longer an issue (although I doubt that); I doubt you are. Even if someone is offering to sell you a dollar for fifty cents, there's still the question of how long you'll have to wait before you get your dollar. Unless you're planning to be immortal, you need to think about the downside as well as the upside.

That doesn't make the quants any more correct, of course. But the idea of figuring out the time horizon over which a stock is likely to have a positive return is hardly a waste of time.

[The Central Scrutinizer]

You -- and Buffett, I'm afraid -- are wrong.

Sorry, but Mr. Buffett is right in about 40 billion ways.

Beta is a measure of how unpredictable a stock's return is.

Ummmm....sorry, but every stock's return is equally unpredicatble. So how come they all have different betas?

Perhaps Buffett is in a position where preservation of capital is no longer an issue (although I doubt that); I doubt you are.

"Preservation of capital" = poor returns. I'm out to increase my capital, not preserve it. If I wanted to preserve it, I would stick it in the bank and earn 3%.

But the idea of figuring out the time horizon over which a stock is likely to have a positive return is hardly a waste of time.

Again, unknowable.

"If you don't plan on holding a stock for 10 years, don't spend 10 minutes thinking about buying it" - Warren Buffet

[roger]

Some have argued (http://pages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/marginofsafety.pdf) that Buffett got that one wrong. Beta measures how much a stock price bounces around relative to another asset. Buffett repeatedly puts down beta by bringing up his Washington Post purchase. he bought at a market cap of 80 million, whereas he valued it at 400 million. Time has proven him correct in that valuation. His dismissal of beta runs along the lines of 'would it have been more risky to have bought at 40 million than 80 million.'

Well, as the linked article points out, the Post's beta did not increase when the share prices fell in 73. However, I find it to be a bit of a fine point - short term flucuations can provide us with long term value opportunites, or margin of safeties, to put it another way. But of course you buy because of the margin of safety, not the beta. And I think that was Warren's point, he does not invest by looking at beta; if he see's value, and a reason to believe the truth will out (some catalyst to cause the stock price to eventually match his valuation), then he buys.

I believe Dr. Kitten to know something about Modern Portfolio Theory based on previous conversation. I know little except how to spell it. I believe that Beta plays quite a role in it. I'm not really aware of anyone using it to produce the kinds of returns Buffett and similar investors get. OTOH, I'm aware of groups like LTCM failing spectacularly when the sigmas didn't go their way.

So, I guess I would be presumptious to say that Buffett has it right; however, his investing methods only require a normal IQ, a pencil, and access to company reports. It's the one I'll stick with.

[The Central Scrutinizer]

Some have argued (http://pages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/marginofsafety.pdf) that Buffett got that one wrong. Beta measures how much a stock price bounces around relative to another asset. Buffett repeatedly puts down beta by bringing up his Washington Post purchase. he bought at a market cap of 80 million, whereas he valued it at 400 million. Time has proven him correct in that valuation. His dismissal of beta runs along the lines of 'would it have been more risky to have bought at 40 million than 80 million.'

Well, as the linked article points out, the Post's beta did not increase when the share prices fell in 73. However, I find it to be a bit of a fine point - short term flucuations can provide us with long term value opportunites, or margin of safeties, to put it another way. But of course you buy because of the margin of safety, not the beta. And I think that was Warren's point, he does not invest by looking at beta; if he see's value, and a reason to believe the truth will out (some catalyst to cause the stock price to eventually match his valuation), then he buys.

That part is worth underlining.

I believe Dr. Kitten to know something about Modern Portfolio Theory based on previous conversation. I know little except how to spell it. I believe that Beta plays quite a role in it. I'm not really aware of anyone using it to produce the kinds of returns Buffett and similar investors get. OTOH, I'm aware of groups like LTCM failing spectacularly when the sigmas didn't go their way.

Reminds me of one of my favorite quotes from a recent meeting (within the last year or two):

"Modern Portfolio Theory is asinine." - Charles T. Munger

So, I guess I would be presumptious to say that Buffett has it right; however, his investing methods only require a normal IQ, a pencil, and access to company reports. It's the one I'll stick with.

Me too. As Mr. Buffett always says - "Investing is simple, but not easy."

[drkitten]

Ummmm....sorry, but every stock's return is equally unpredicatble. So how come they all have different betas?

That's simply not true, and one of the main reasons that diversification works as an investment strategy.

"Risk," in this sense, can be defined fairly simply as the variance in the year-to-year return. As you point out, cash and high-quality bonds are more or less risk free; they will return the advertised interest rate with clockwork regularity. Stocks, on the other hand, are riskier -- they might return substantially the than the market as a whole, or they might return substantially less. But even there, some stocks are "riskier" than others; the spread of returns is wider on the riskier ones. A stock which has returned 5% each year for the past twenty years is has less variance than one that has returned either 0% or 10% each year.

That you don't understand the math doesn't make it wrong or useless.

[The Atheist]

The Atheist, Scrut seems to be playing with you a bit.

Did you read my previous post to him?

[The Central Scrutinizer]

That's simply not true, and one of the main reasons that diversification works as an investment strategy.

Or diworsefication, to put it another way.

That you don't understand the math doesn't make it wrong or useless.

It's not that I don't understand the math, it's that I don't want to waste my time learning it.

A dowser can tell you all sorts of theories on why dowsing works. I know that it doesn't, so why should I waste my time learning those theories?

[drkitten]

It's not that I don't understand the math, it's that I don't want to waste my time learning it.

A dowser can tell you all sorts of theories on why dowsing works. I know that it doesn't, so why should I waste my time learning those theories?

Because diversification, unlike dowsing, works.

[The Central Scrutinizer]

Because diversification, unlike dowsing, works.

Smooth move, trying to move the goalposts. But you really didn't think I wouldn't notice, did you?

For those following along, I compared beta to dowsing. But drkitten responded as if I had compared diversification(diworsefication) to dowsing. Nice try, drkitten. NOT!!!!

Of course diversification works. So do annuities. :rolleyes:

[drkitten]

For those following along, I compared beta to dowsing. But drkitten responded as if I had compared diversification(diworsefication) to dowsing.

Of course diversification works. So do annuities.

Good. I'm glad to see that you're not totally delusional. Now, when you consider that "beta" is simply a measure of "how well will diversification work", you see what beta does for you. A high-beta investment is one where the risk eliminable by diversification is not very large, and is therefore one that is likely to produce large swings in your portfolio value. If you like large swings in your portfolio value, buy a high-beta investment. If you don't like large swings in your portfolio value, buy low-beta ones. If you are indifferent to swings in your portfolio value, you evidently plan to have an infinite lifespan.

[The Atheist]

Anyway, just to get boringly back to the OP, a couple of days have made all the difference - the Dow back over 13200, the Nikkei up a whopping 2% on opening this morning.

And yet those Fed T-Bills took their biggest drop the other day since.....


1987.

Quite bizarre for the sharemarkets to be going up on the back of that - possibly a sign that the Fed may have tipped a little too much in?

[The Central Scrutinizer]

Good. I'm glad to see that you're not totally delusional. Now, when you consider that "beta" is simply a measure of "how well will diversification work", you see what beta does for you. A high-beta investment is one where the risk eliminable by diversification is not very large, and is therefore one that is likely to produce large swings in your portfolio value. If you like large swings in your portfolio value, buy a high-beta investment. If you don't like large swings in your portfolio value, buy low-beta ones. If you are indifferent to swings in your portfolio value, you evidently plan to have an infinite lifespan.

OK, it's time to "bottom line" this discussion. For those keeping score at home:

The guy who says "beta is baloney" has 46 billion, I repeat BILLION, dollars.

The guy who says "beta is a useful investment tool" has way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way less than 46 billion.

You decide who is right.

[roger]

Did you read my previous post to him?Yes, why?

[roger]

Beta is a measure of how unpredictable a stock's return is. Beta is defined as the historical fluxuation of a stock price relative to another stock or index. On most brokerage sites, it is the last 5 year's performance compared to the S&P 500. Alpha measures the return of a stock compared to an index like the S&P 500.

Past performance is no guarantee of future performance. This is not just a legal statement - is is borne out by many studies. Beta measures historical performance. Hence the disagreement between you and scrut.

Put simply, CAPM says something along the lines of: "if the risk-free rate is 3%, the beta (risk measure) of the stock is 2 and the expected market return over the period is 10%, the stock is expected to return 17% (3%+2(10%-3%))." (lifted from here (http://www.investopedia.com/terms/c/capm.asp)).


Whereas Buffett et. al. have the crazy idea that the return of a stock is measured by DCF of FCF minus the purchase price of a stock. I.e the actual performance of the business minus your purchase price.

Emperically, I am not aware of any unleveraged CAPM portfolio coming close to the performance of Buffett, Ruane, Fisher, Templeton, Miller, Graham, Dodd, Munger, Whitman, Greenblatt, et. al. I welcome corrections to my knowledge, naturally. These are people who get returns of 15-20% on billions invested, and 30-50% on millions invested.

Finally, I'll point out Malkiel himself, a proponent of CAPM to say the least, finds value style investing intellectually defensible and appealing; his only complaint is a lack of emperical evidence. I find this somewhat surprising; he dismisses decades long records as insufficient, yet repeatedly uses much smaller sample sizes in support of various points he wishes to make. However, I cannot claim an exhaustive literature survey to back up the previous point - it was just something that stood out as I read him.

[The Atheist]

Yes, why?

Here (http://forums.randi.org/showthread.php?postid=2887920#post2887920)