/sci/ - Science & Math

[Anonymous No.4730113]

Anyone dabble in the stock market in their spare time?

Is it a good way to make cash on the side? Just wondering. I have no experience with economics. Math background is up to differential equations, with no statistics yet. Where can I start out learning about the stock market and the math behind it?

or should I just not get into it. sorry I seriously have zero background in it and thought someone here could point me in the right direction of what I needed to teach myself (or not even try)

[Anonymous No.4730128]

No. No. No. No. No. No.

Did I mention no? No. No. No. No. No.

Start a business or get a money market account to dump your extra bread into. Forget stock investing.

[Anonymous No.4730528]

[Caution: Not for idiots]

Hello,

I will try to answer your question because there really is a legit scientific answer, and hopefully you will try to understand the answer because it's actually a difficult concept to grasp for most people, even those who partcipate in the market.

Math (beyond arithmetric) is not going to help you win on the stock market. There are caveats and exceptions, but I can't be bothered to explain them right now. You'll see why in a moment.

--

The central principal of the stock market comes from a 1900 economic whitepaper called The Theory of Speculation by Louis Bachlier.

It goes something like this:

If there was a stock: Coca Cola for example, and you were aware that because of greater advertising/production that the company was capable of making more profits, then owning stock of that company would make sense because the company is able to pay its shareholders more dividends.

So; it's obvious right, just find profitable companies and invest in them? No. It's not that simple.

Because if you buy the stock, you are involved in an ongoing auction. The price of the stock rises as a result of your buy (or visa veras for a sell).

Think of it like this: your knowledge that the company has the potential for higher profits has been *incorporated* into the stock price.

Thus, the stock price is literally a number made out of information about the company.

As a result, all old information that is relevant is factored into the stock price. Read that statement a few times before proceeding.

[Anonymous No.4730529]

>>4730528
This means that the *only* thing that changes stock prices is new information.

New information is news. News is random otherwise it wouldn't be news and as such it would already be in the price. The stock market, from indivdual stocks to the entire world economy, therefore, follows a pattern that is usually perfectly random.

This means betting on the movements of stocks is excatly predicting the weather or water moleclues flutatuations like in browian motion, only much worse.

[Anonymous No.4730531]

>>4730528
>>4730529
Oh look, it's Captain Obvious.

[Anonymous No.4730533]

Unless you have some privileged information, it's been proven the stock market is pretty much gambling.

[Anonymous No.4730558]

>>4730529

Now you can begin to ask some questions about stock markets which are actually intelligent. Here are two good ones.

e.g.

Q1. Is it then a waste of time to invest in the stock market because it usually follows a random direction?

Q2. You said, *usually* random, are they exceptions?

--

A.1: No and yes. It depends on what you are doing. If you are speculating, e.g. investing on the movements of stocks, then you are completely wasting your time. Any 'big winners' are either lucky, or the marketplace was infomationally corrupted or restrained somehow i.e. manipulated by some powerful entity like a government or cartel. e.g. China holds its citizens savings accounts captive. Speculation on market or stock movements is at best a zero sum game, and after the broker's commisions, advisory fees and taxes, it is a negative sum game.

If however, you are *investing* in stocks, then you buy stocks, hold those stocks and reinvest those dividends.

This makes sense, because the world stock markets on average (See Triumph of the Optimists) have a positive real return over time.

In the United States the average is 10% nominal, 6.5% real return per year (average over a century).

[Anonymous No.4730563]

>>4730558

The interesting thing that is the majority of that 6.5% real return is dividend yield rather than capital gains. 5% is dividend yield on average, 1.5 - 2% is capital gain (this reflects average real GDP growth over time).

This all implies you should buy stocks, hold stocks and reinvest the dividends to acquire more stocks. You should also do this for as long as you possibly can e.g. decades rather than years because of stock market flutuations.

Secondly, within markets you ought to invest in many companies, from tens to thousands depending on your investment philosophy.

Thirdly, you ought to diversify your investments in stock across the entire world. Imagine the German stock market in WWII. There is no gurantee of anything, you should globally diversify.

If you've any questions about the above, ask away.

I view the stock market scientifically, I'm a pragamatist, I use the scientific method in my approach to the market. There is excellent evidence for the ideas I've presented above and if you want I can find you sources.

[Anonymous No.4730565]

Don't bother with single stock investing. If there is a set strategy you wish to pursue - such as pairs trading or index-arb (for example) - then have a go, but simple outright trading of stock probably won't get you anywhere.

[Anonymous No.4730613]

>>4730558

Q2.

Ok, this is tricky to answer. Most people make very bad mistakes here. The scientific analysis of markets is correct, but human nature is such that everybody wishes to make above average stock market returns.

So, is the stock market truly random?

Are there patterns in the stock market?

Paradoxically, the stock market doesn't have to be completely random and there *can* be patterns in the markets.

However *this does not mean you can capitalize on them*.

Remember, in the real world we have taxes, brokers etc. It is never possible for a market to be 100% efficient, 100% random. It is just that it is random to *you*.

Even insider traders, on average don't make excess gains over the market averages that can't be explained by a probabilty normal distribution.

So don't buy into any 'schemes' that claim super-double-plus-good information.

[Anonymous No.4730616]

index fund

[Anonymous No.4730620]

>Stock market isn't worth it
>Qualitative Analysis people get huge bonuses going to infinity
Yep, those guys at investment firms are really getting ripped off paying those huge salaries + bonuses.

[Anonymous No.4730626]

>>4730531

It is not obvious at all.

The concepts of the Theory of Speculation and Efficient Market Hypothesis are very new, 50- 100 years old

If it were extremely obvious how this operated, then it would have been discovered a long time ago in markets.

Everything is obvious once you already know the answer.

I think some concepts are very difficult for the human mind to grasp. Markets themselves, probability theory in math and efficient market hypothesis in economics and evolution in biology. Those are non-trival concepts to grasp.

90% of people have little 'mythos' stories about those above ideas. e.g. a common one is evolution is "The survivial of the fittest". Instantly everybody thinks they have it in their heads.

But actually it takes years of studying those subjects to truly grasp what evolution or markets actually mean. i.e. to understand the implications of a concept is to really grasp the concept. The extrapolations.

[Anonymous No.4730638]

>>4730616

Yes, that's often a very good idea for the average person.

But there are caveats there too.

You must get a low TER (expense ratio) index fund, that uses physical replication rather than sythetic replication. It should also have decent capital base (funds or their share equivalent like ETFs can die if they don't get enough attention).

Also, you must ensure you are using the correct benchmark.

Most people invest in the S&P500 with index funds, but it would be wiser (assuming you have average risk capability and pyschology) to invest in a global index like MSCII World which is like the S&P500, but it's a global large cap developed index instead.

Of course, your mileage may vary depending on where you live. e.g. where I live the TER for index funds is too high and I must acquire ETFs to achieve the same end instead.

Anyway, I'm getting OT, this stuff is more about portfolio building than stock markets themselves.

[Anonymous No.4730641]

>>4730620

Many of them are rentiers. 90% don't furfill a useful market function. I say that as a capitalist red in tooth and claw, so I'm hardly kidding.

If you are an investor, the broker, the entire finance system is really your enemy. Your goal should be to steer clear of their schemes and simply acquire ownership of capital. Simple. But pyschologially difficult to do for most people (people want to believe in special stories that set them apart from everybody else i.e. money for nothing).

[Anonymous No.4730642]

>>4730620
When you have a warchest that big, you can afford to take losses. A normal person like OP might as well go to Vegas.

[Anonymous No.4730654]

Protip: if you don't have enough spare capital to set aside that you won't be spending in the next 7-10 years, than you shouldn't be in the marke for 7 to 10 seconds.

There is no such thing as 'investing' in the stock market for a year or two. That is speculation, you might as well visit vegas.

The paradox is that investing for long periods is a smart idea. The richest investor alive says his favorite holding period is forever.

Here's an interesting 'bet' that Buffet made:

http://longbets.org/362/

Food for thought in there on both sides of the EMH divide I think.

[Anonymous No.4730659]

>>4730642

I don't agree. There's a lot to be said for saving small amounts of money e.g. $100 per month and investing in the stock market over time i.e. dollar averaging.

That's how many of us got started after all, I started off with just 5000 euros for example when I was 17.

Anybody can invest in index funds and make decent returns over time. It just takes a fuck ton of patience, time that frankly most don't have in practice.

[Anonymous No.4730677]

>>4730563 diversify


Warren buffett disagrees

[Anonymous No.4730768]

>>4730677

Well to be technical he does diversify between 10 to 15 holdings or so.

But yes, that's not quite the same as holding hundreds or thousands of companies.

I think value investing and index investing are both valid approachs to the stock market, but even fewer people are capable of value investing than index investing (and few people index their investments).

[Anonymous No.4730781]

>>4730768
The usual recommendation would be to hold a index fund. Its like instant diversification without all the legwork.

I think part of it for buffett though is that he has so much capital he has to buy new stuff to keep investing.

[Anonymous No.4730846]

>>4730781

Yup, he's suffering from a case of too much money.

Bizarrely, this is an actual problem for large fund mangers like pension funds. They literally have very few places to put their money, because there's only so many placeds that can accept it.

Truth: Far from the widespread belief that you need to be a wall-streeter to make money, it is actually more likely for you to get above average returns if you are a small investor. This is because you have infinitely more places to put your money. A large pension fund has so many constraints that it must make sub-optimal choices about investments.

Of course there are huge advantages to having lots of capital in the first place .e.g low transaction fees, the ability to do sophisicated research. But in practice you'll find those people who make uber big % return are small investors.

P.S. None of this means that you can make above average market returns. It does mean that you can choose which market you are in to take more risk than the average person however. e.g. frontier market

[Anonymous No.4730866]

>>4730846
Buffett also said that he would guarantee 50% returns on a portfolio smaller than a million dollars.

Another time he said doubling your money every 18 months was possible for small investors.

Personally I never did better than 30% when I was investing, but I hadn't studied as much back then. I just wish I had stuck with stocks instead of pulling out to fund a business.

[Anonymous No.4730871]

OP here, sorry for being gone. I honestly left the thread when the first guy said no and came back to see it on the front page.

I got lost in the lingo. Like I said, I have 0 knowledge on anything. I'm a ChemE undergrad and never learned how any of what you guys mentioned works.

>>4730563
this is where i got lost lulz. sorry. I really do appreciate you taking the time to try an help a fellow anon out, people like you make this board a lot better.

So far what I understand is that it's pretty random and impossible to predict through mathematics. Also long term investments are the way to go? I already kind of figures that in the first place if that's true.

Can you provide starting points on this stuff? I guess I can find a book for dummies and go from there. You mentioned 'The Theory of Speculation by Louis Bachlier' and I'll give that a read. Any other really good books?

[Anonymous No.4730934]

>>4730871
Economics is one of the most complex fields of studies. Everything is based upon simplified models. And as a economist is the first to admit, a model is only a model, it is impossible to account for every variable.

[Anonymous No.4730940]

>>4730934
What would you recommend someone who is interested to do?

[Anonymous No.4730952]

>>4730871

I doubt The Theory of Speculation will be easy to read for you since it's in early 20th century French ;-)

But seriously, finance and economics are not complex. They really are not. There are a million and one caveats and a ton of lingo, but anybody can pick them up and use them to do useful stuff.

I fucking hate those "get rich quick in 7 easy steps" books. I see them everywhere. Rich Dad Poor Dad is a great example of a terrible get rich quick book lots of people read and take seriously.

Finance is a subset of economics, it is a science like any other. Maybe not a hard science, but science nonetheless. That's how investing should be treated imho.

Having said all that, here are my recommendations of good books on investing.

--
Human Pyschology:

Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay.

--

Portfolio building & Investment Theory put into practice:

The Four Pillars of Investment by William Bernstein

That should give you a solid intellectual basis for your decision making without going hardcore Econ.

--

Index investing

Any of Jack Bogle's books (he invented index funds). What I like about his books is that he impresses some simple lessons about investing that investors have a habit of forgetting.

(because we tend to rationalize decisions we know are stupid because of short term greed sometimes)

[Anonymous No.4730964]

It is an amusing hobby, but it is not a good way to make money. Look at all the day trading firms out there with their multi-million dollar computer systems and PhD physicists doing modelling. Where do they make their billions of dollars? From people who play the market casually.

Treat it like any other hobby. Have fun with it, but only invest as much as you're willing to lose. Also, there are many web sites that are kind of fantasy trading, and will track portfolios and whatever for you at no cost. Much better.

[Anonymous No.4730968]

>>4730952

--

Value investing

--

Value investing is exact opposite of EMH in some sense.

The Intelligent Investor by Ben Graham

Then why do I include it? Because I believe in a indexing/value sythesis, I think they both make perfect sense, that they are part of the same coin as it were. Once you've read widely enough you'll understand. Market efficiency is a Great Debate in the Finance community, but value investors and index investors, although they have opposite approaches, actually think in very similar ways about the stock market. I think there's a lesson there.

Also, in science, we are supposed to look for evidence against our own ideas. That is why although I am an indexer, I've read all Ben Graham's work (including Security Analysis). I have learnt valuable things from both EMH proponents and value investors.

--

Lastly; if the books above (recommend you start with The Four Pillars) is too much, then either you need to start slower with a For Dummies book on investing, which aren't all that bad, or not do it at all (you should be prepared for a lot of reading, that's all I'm saying).

I also recommend the Bogleheads.org forum for any questions you might have. It's index-centric, but those guys know more about investment than 99% of all the other supposedly good sources of information online. i.e. they have been there, done that.

I appreciate it might seem dauting, but it is actually quite liberating for you to understand finance. Most people operate their finance on a whim and a prayer. It is worth doing. And you are helping people by investing.

[Anonymous No.4730969]

I am surprised by how well I understood all of this. I am a neuroscience major, and to me this just looks like your typical dynamic system that I study all the time in biology.

You have all just convinced me to start investing in the stock market.

>>4730659
How many companies did you invest in? What were your returns like per year?

[Anonymous No.4730971]

>>4730952
thank you so much! if i knew you irl, i'd buy you a beer
>>4730964
lol kinda reminded me of when i played runescape and used to manipulate the GE and play it like stock. Totally two different things but I thought it was a funny thought

[Anonymous No.4730974]

>>4730940
my steps to investing
1. pay off any credit card debt. 10% is a good investment return for the average person. But it is stupid if you are paying 30% on a credit card.
2. Save up 3 months income. Worst thing that can happen to small time investors is a real life problem needing cash. You could whip out all your gains by having to sell at the wrong time.
3. If you are investing less than 1000 dollars, don't day trade. With brokerage fees, you could be losing 2-4% of your holdings everytime you sell stock and buy a new one. Either just buy a long hold, or consider investing in a drip. Drips will allow you to invest into one stock, and the fund will allow additional contributions over time, you will also have dividends automatically reinvested, all without any trade fees.

4. Stick with what you know. Like someone said, stock is all about information, if you don't understand chicken farms, chicken farms are probably a bad choice to invest in. The same reason is used against diversification. The more you buy, the more you need to learn, and few people are that knowledgeable.

5. Buy stock you are willing to hold for years. And if the price slips, keep holding them. There was a reason you decided to invest. All markets go up and down, getting scared is bad. Although if the ceo is convicted of puppy rape or something, then please sell.

[Anonymous No.4730987]

>>4730529
Wrong. So, so wrong. If the market was purely random, no one would be able to systematically make money off of it.

[Anonymous No.4730996]

>>4730987
In complex systems things are considered random when too many variables exist to make accurate predication given a long enough period of time.

[Anonymous No.4731001]

What's a good paper trader?

[Anonymous No.4731017]

>>4730113
>Is it a good way to make cash on the side?

No.

Invest your savings prudently. Take a LOT of time to study what that means.

[Anonymous No.4731018]

>>4730528
>2012
>EMH

Nobody believes that shit any more.

[Anonymous No.4731020]

>>4730996

Precisely.

As John Maynard Keynes (economist and investor both) once said, the market can remain irrational for longer than you can remain solvent.

The lesson people should take from markets most of all is humility.

Markets are incredibly complex pieces of machinary, they are in fact the most complex thing that man has ever built. Nothing even comes close to that level of complexity.

Is it possible to make above average returns? Yes. But it is by taking more risks.

Is it possible to make risk-adjusted returns higher than the average person. Yes. But this is either by gaming the system e.g. theft or by simple chance.

That market follow a random walk does not mean that tremeously succesful investors cannot exist like Buffet.

It DOES mean that everybody cannot be Warren Buffet. It doesn't stop people trying though. If you aren't willing to put in your entire life's energies into finding asymmetric information, then you aren't going *consisently* get anywhere.

Remember that Market Efficiency is a Paradox.

It is precisely because of people like Warren Buffet exist that markets are efficient...

If you compete, you compete with the collective intelligence of millions of asute investors. The odds of you being correct and the market being wrong, are, absymal. And even if you are truly correct, it doesn't imply you'll make money from it.

Frankly, there are easier ways to make money on the stock market than by getting above average risk adjusted percent.

e.g. saving more money.
e.g. taking more risk

And so on. But that's hard and most people want it to be easy.

[Anonymous No.4731021]

Fact: price changes taken as a time series are not serially correlated. Prices are a random walk with a slight upward bias.

Translation: You can't time the market or pick winners. The only reason investing makes money is because on average prices tend to rise over time. So the optimal investment strategy is to buy a broad cross section of stocks and hold them for a long time.

[Anonymous No.4731025]

Read this http://www.amazon.com/The-Ivy-Portfolio-Endowments-Markets/dp/0470284897

[Anonymous No.4731032]

>>4731020
> Remember that Market Efficiency is a Paradox.

> It is precisely because of people like Warren Buffet exist that markets are efficient...

Not only that, but trying to make money on market inefficiencies is an explicit bet that the market will become more efficient in the future.

And the "markets are not in fact efficient" argument against index strategies doesn't work. The less efficient a market is the harder it is to time or arbitrage, and the more gains you sacrifice to transaction costs.

[Anonymous No.4731039]

>>4730974
>If you are investing less than 1000 dollars, don't day trade.

If you're using a US-based broker you need $25k to trade with anyway because of PDT rules.

[Anonymous No.4731042]

>>4731001
If you have 10k get an account at IB, you can then open a paper trading account for free that's very good. It simulates fills quite realistically.

[Anonymous No.4731044]

>>4731020
>Yes. But it is by taking more risks.

Nope. Low-risk stocks have superior returns, in pretty much every single stock market in the world. It's a bit counter-intuitive but it's mostly a result of retard retail investors and bad incentives for portfolio managers.

Have a look at http://web.ics.purdue.edu/~zhang654/jf2006.pdf and http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2055431

[Anonymous No.4731045]

>>4731042
I don't have 10k unfortunately. Any other ones? Preferably free or easy to pirate.

[Anonymous No.4731049]

>>4731021
OP here again. So what I'm getting from this thread are two things:

1) It's something you need to be committed to and would be hard to do on the side
2) Long term investments are the key.

So insanely stupid question to the economists in this thread who are extremely helpful, what's the difference in terms of the return you get from buying government bonds and doing what most are saying by holding stock for long periods of time? Haven't done either, I apologize if it sounds stupid to you guys. I appreciate the help

[Anonymous No.4731055]

>>4731021
That's nowhere near being a fact. Explain this graph in terms of random walk theory if you can...

Not to mention, of course, very well-established momentum and mean reversion patterns (daily and 1 month MR, 12-1 month momentum).

[Anonymous No.4731054]

>>4731018

Relatively few people who talk about EMH actually understand what it is saying because they have pyschological or financial incentives to misunderstand its implications.

The credit crunch is not evidence that the EMH is wrong. Sudden price swings downwards OR upwards are not indicative of anything except that the market obtained new contradictory information suddenly.

By this, I do not mean that the housing asset bubble was thought to be sustainable (average house prices capital gains over 1900 - 2000, 1 century, is 26 real percentage points... i.e. crap).

I mean that a whole bunch of people were using the Greater Fool Theory of investing. They thought some other idiot was going to take the bait.

This is perfectly rational. Market efficiency does not imply there won't be irrational behaviour among investors. In fact, the entire market of investors could be irrational and the market would still be rational. If that doesn't make any sense, it is because you're not really getting at what EMH is about.

Markets are proxys for our beliefs about the world, true or false, they are not oracles.

[Anonymous No.4731058]

>>4731045
Well even if you had a platform you need data, which you won't get for free. That is for intraday purposes.

If you're looking to do longer-term investing, yahoo finance has free data and you can just use excel for modeling.

[Anonymous No.4731062]

>>4731020
Better returns does not mean more risk.

2004 for example was a great year for apple. The were selling a gazillion ipods. Hottest commodity, Apple was a very low risk buy. And people doubled there money in 60 days. Doubled again in 6 months.

Low risk high return, a beauty of a stock.

[Anonymous No.4731068]

>>4731049
Depends on the timeframe. Over the last 25 years or so real excess US equity returns have been about 0. Whether this situation will continue or not remains to be seen. Other countries have been doing even worse (look at this graph and recoil in horror: http://finance.yahoo.com/q/bc?s=%5EN225+Basic+Chart&t=my))

A geographically well-diversified portfolio might have gotten 2-5% annually above treasuries depending on the allocation. Diversifying over several asset classes with a basic GTAA model (would include commodities, equities, bonds, hedge funds, REITs, etc.) could maybe do 5-10%.

[Anonymous No.4731075]

>>4731044

See, here is the paradoxical element again, I actually agree with you, but new investors need to understand market efficiency as a general principal before investigating these kinds of caveats.

I know that value stocks have higher returns than growth stocks in general across the world.

However, taking advantage of that information is not easy. You need decades to take advantage of this effect and frankly it is the sequence of returns that matters most to investors rather just than the absolute average return over time.

There are other problems too. For example, it is actually not very easy to obtain value stocks in the places you would want them. There are often geo-political risks, currency issues and so on. Many examples given of value stock returns are on paper only, and don't take into account some of the trades would have been practically impossible in reality. e.g. low liquidity issues, higher transaction fees in many cases and so on.

I don't dispute your central point, but it is anything but trival work for the average investor. It reminds me of those african frontier market funds, where you're trying to get exposure to the economy of a certain country, but it turns out that you can't buy exposure to the black market so easily and it represents most of that economy...

[Anonymous No.4731085]

>>4731049
if you get 7% you double your money every 10 years. if you get 10% you double your money every 7 years.

many bonds only pay 3-4% interest. But the real money is in buying bonds below face value, to give a better yield. and confusion. I don't like bond math

[Anonymous No.4731087]

>>4731075
>However, taking advantage of that information is not easy.

Sure it is. There are ETFs that do all the heavy lifting for you, for tiny fees. You just search for "value etf" in google finance and then enter the ticker in your broker's trading interface.

There is absolutely no reason for a retail investor to do research and/or invest in individual stocks today.

[Anonymous No.4731102]

>>4731085
> I don't like bond math

But its present value, it's easy.

[Anonymous No.4731104]

http://ir.thecoca-colacompany.com/phoenix.zhtml?c=94566&p=irol-stockcalculator

if you invested 1k in cocacola 22years ago, you would have almost 7k today. That is an averaged return of about 11 percent. Not including reinvested dividends.

[Anonymous No.4731106]

>>4731049

When you acquire a bond this is the situation:

You are loaning a government (or company) money. They will pay it back at some fixed duration. Hence 10 year bonds, 5 year bonds and so on.

-> you take the risk the government will be unable to pay you back your money. e.g. war

-> you take the risk that inflation will destroy the value of the money the government pays you back later.

In return for loaning the government money, they give you income from the bond. This is the coupon rate. If all goes well, you should recieve on average about 4% - 6% return on average over time, which will be better than a savings account (0% real return), but worse than stocks. Again, this is usually, not always.

--

With a stock, you purchase ownership in a company. You may sell this ownership at any point (unlike a bond). Since you own a piece of the corporation, it owes you the profits the company makes, this is the dividend. They are usually paid quarterly or semi-annually. Not all companies offer dividends. At least half do not. Those are growth companies, companies investors expect to appreciate with capital gains (price increase).

In fact, unless you buy a IPO or new share offering, the company never recieves your money directly. Originally the company sold shares and that is when they recieved money, usually from investment bankers, who then sold those onto investors, some of whom sold them again onto yourself.

--

Lastly, your money truly comes from the division of labour.

[Anonymous No.4731127]

I would like to add my voice in favor of investing in the stock market and against EMH. I'd also like to stress that this is important. Most people will not be able to retire unless they save a significant amount of money AND grow it in the stock market.

In the long run, the market returns something like 6% annually. If I remember correctly, There has never been a single 15 year period where the stock market has lost money adjusted for inflation. Therefore, buying a low cost index fund that tracks the movement of the entire market, and holding it and paying into it for your entire working life, is almost guaranteed to make you a profit.

On the subject of EMH. This can almost be discredited with a thought experiment. In times of high volatility, stocks can occasionally increase or decrease in value 50% in one day. It is certainly not true that the efficient "value" of those companies has changed that much in one day. It should go without saying that people make decisions based on emotion or faulty logic sometimes, and occasionally it takes some time to correct this.

[Anonymous No.4731137]

>>4731055

I'm not sure we are on the same page.

I am well aware of the power of mean reversion.

We're comparing apples and oranges.

If I say that Stock X which is $20 today, will be >$20 tomorrow, then I might as well have flipped a coin (with a minute average positive bias).

The price of Stock X flutuates randomly.

If however, we are talking about the entire economy, we notice that there is a 10% average return over very long lengths of time.

Is this a predication that invalidates random walk theory? No.

It is information, but it is not something that you can usefully use.

Much of information like momentum/value etc, is of this nature. The big picture can be known but not that useful.

e.g. we know that all countries should return 10% nominal return over very long lengths of time. However we also know bubonic plague, world wars, genocide and other shitstorms also occur. I mean, in 1900 the average investor was European and viewed America as a emerging market. But european markets were ripped apart by the two world wars. How many people in Europe were realistically able to take advanage of knowing stock markets yield positive real returns over long periods? You and I are probably in our twenties, what is the likeihood of another series of huge calamities in western civilisation? Pretty good I should say.

Risk is real and we do not know the future. We can't be assured expectations about momentum or value will continue infinitely. Why not? I don't know why not. That's kinda the point. I'm not being fatalistic here, I am after all an investor, but I think we know a whole lot less about the future RE: the asset prices come the next 50 years.

[Anonymous No.4731142]

>>4731137
A time series cannot simultaneously be a martingale and mean reverting you retard.

Also you didn't address the graph at all, which shows that successful market timing is trivial.

[Anonymous No.4731146]

>>4731142
OP here, don't call him a retard. We're civilized in here

[Anonymous No.4731158]

>>4731127

Nope. Doesn't work for me. Why does volatility imply that EMH is invalid?

Stocks represent more than just the stake in the currently real world existing business. They also represent expectations about future prospects that will affect the real world existing business.

Volatility occurs where there's low amounts of good information or contradictory information in the market.

Nobody in the academic community that I am aware of, has ever specified that it takes X days or seconds for markets to move Y amount, and then if it's greater than this that the market is inefficient.

That would be completely arbitary.

Lastly, even if markets were completely inefficient full stop, this does not help your case as an investor.

EMH is not actually equivalent to Random Walk Theory. One is a thought experiment, the other is a emperical observation of real prices.

Stocks would follow a random walk whether or not markets were efficient. Because if prices are not determined by value at all, then they are controlled purely by the whim of the crowd, and that is completely unpredictable. So unless you have a Machivellian plan to take control of all the world's media outlets...

[Anonymous No.4731165]

>>4731127

Oh, and apart from that

>>4731158


we agree. :D

[Anonymous No.4731171]

>>4731158
>the whim of the crowd, and that is completely unpredictable.

Behavioral finance has documented many highly predictable reactions, biases, etc. Humans are stupid, and we are stupid in predictable ways.

Hell, we don't even need to go that far. Just the PEAD completely tears down the idea of EMH. Markets don't incorporate new information instantly, and the effect is exploitable.

Believing in EMH in 2012 is the financial economics version of young earth creationism.

[Anonymous No.4731170]

>>4731146
that's retarded and you're a retard

[Anonymous No.4731189]

>>4731142

Er... Yes it can.

A coin flip mean reverts to 50:50 probabilty for heads or tails, this does not imply that the coin remembers to 'mean revert' to 50:50. The structure of the problem is such that it cannot do anything else.

We really are not on the same page at all.

There are different kinds of randomness.

There is pure randomness, a purely theoretical construct for which there is no evidence.

Then there is actual randomness, which has different levels of 'organization'.

That is: randomness has bounds. The stock market is not perfectly random. Nor is it perfectly efficient. In fact, if it were perfectly efficient, it would not be perfectly efficient. That is why I mention paradox.

You cannot reliably market time.

Just because you see a pattern, doesn't mean you can consistently bet on it forever. There is no gurantee whatsoever that value stocks will outperform growth stocks for example. It's an educated guess that will take decades to enact to see if you are correct.

I believe that you'll find that value stocks ultimately have higher returns because there really is higher risk in some form even if it is difficult to measure today. Similar ideas about asset classes, momentum, these are not new ideas at all.

You are welcome to disagree, but I shall not be handing you my capital.

[Anonymous No.4731193]

>>4731189
That's not what mean reversion is, that's just the law of large numbers.

Compare:
http://en.wikipedia.org/wiki/Ornstein%E2%80%93Uhlenbeck_process
http://en.wikipedia.org/wiki/Wiener_process

[Anonymous No.4731196]

>>4731171

Since you are becoming antagonistic I see no further reason to discuss this with you.

[Anonymous No.4731198]

>>4731196
Yes, keep repeating your mantra and ignoring the mountains of evidence against it. You're not wrong, I'm being "antagonistic".

[Anonymous No.4731208]

So pretty much what I am getting from this thread. I invest 50k in roughly 20 companies. If the companies remain afloat, in 10-30 years, I will have doubled almost all my investment. In these 10-30 years, I should also lay aside funds to buy more shares and stock, in various companies/the same companies. Ideally, keep the number of holds manageable so you can keep better track of your investment.

The goal would be to continue to invest more stock in one company, or more companies gradually, and then when I am 50/60/70/80 I can slowly start selling/buying and cashing out.

Did I understand correctly?

[Anonymous No.4731212]

>>4731208
Yeah, except for the invest in companies part. Never do that, invest in ETFs instead. Easy diversification, that is either impossible or very difficult/expensive to do for retail investors, for low costs.

Also as you near retirement age you'll want to gradually start moving your portfolio to bonds. One of the biggest problems with stocks are drawdowns. Bad timing on the retirement can leave your portfolio at 30% of its value from the previous top. Diversification and increased bond weighting will counter that.

[Anonymous No.4731220]

>>4731198

So, if I am understanding this correctly, PEAD allows an investor to always pick short-term winners and scoop up profit over a 30 day period after a good earnings report? That is of great interest to me, is there literature on this subject?

[Anonymous No.4731226]

>>4731220
I second this

[Anonymous No.4731231]

>>4731220
Hundreds of papers. http://scholar.google.com/scholar?hl=en&q=post-earnings+announcement+drift&btnG=&as_sdt=
1%2C5&as_sdtp=

Or just look up the ones referenced on WP.

Though the PEAD is probably not something for the retail investor to exploit. Maybe used in conjunction with a market timing or rotational or pairs trading strategy (with tons of leverage) it'd be a workable idea.

Thing is, individual investors are highly limited in the strategies they can actually implement. Which is why they pay 2/20 to hedge fund managers, most of whom aren't all that sophisticated.

[Anonymous No.4731236]

not gonna bother reading the whole thread, but i make $100 a day and that's enough for me. I'm a daytrader

[Anonymous No.4731246]

>>4731236
Give us some details. What do you trade? Futures or forex I imagine...one specific instrument or several? What's your approach? How much capital do you use to make the $100 per day?

[Anonymous No.4731251]

>>4731198

You should listen to this guy

>>4731032

All I'm hearing from you is a bunch of sound bites. You have not answered any of my questions.

Also, you should know that RTM and LLN are synonyms in the finance community.

The majority of investors do not believe in EMH or Random Walk Theory. The majority of investors work in the markets actively. They rationalize that EMH is bunk because it casts a shadow on their ideas.

The majority of experts in finance agree with the general outline of the Efficient Market Hypothesis, but frequently disagree with the details. This is not too different from the general acceptance of Evolution Theory in Biology, but biologists still dispute over whether it occurs mostly by gradualism or by punctuated equilibrium. Very few dismiss the concept entirely.

The truth is that there is no conflict between academia and investors, but there is a very great conflict between the finance industry and academia. If EMH holds to any extent whatsoever, it means that a large portion of the finance community is essentially involved in a highly complicated scam on their clients.

I have nothing to gain if EMH is correct in any way.

[Anonymous No.4731259]

>>4731251
Even though the EMH is completely untrue, the majority of the (investment) finance community is essentially involved in a rather straightforward scam on their clients.

The vast majority of money managers are completely useless and charge EXORBITANT fees that are tantamount to theft. All these index-replication funds with 1 and 2% annual fees are a complete scam when the job can be, and is, done with 0.05% fees. Same holds for 99% of CTAs and a very large proportion of hedge funds.

[Anonymous No.4731266]

>>4731231
>>4731220
From what I read, I am deducing that an earning surprise correlates to either a positive or negative figure relative to a positive or negative earning announcement?

[Anonymous No.4731274]

>>4731212

I second this.

The average investor is likely to do best by using index funds and ETFs.

Note: these are just methods of achieving ownership. There are plenty of other important decisions to make, most notably:

= Your emerging living expense fund in case you lose your job (losing your job and stock prices going down tend to be correlated...)

I recommend 12 - 18 months living expenses. But I am paranoid.. ;-)
Most people are good with 6 months probably.

= Where you allocate your capital. This is possibly the most important decision you will ever make.

If you are new, you should start off with something basic e.g. MSCII World or S&P500 or similar. These are large cap developed blend corporations (and you'll learn what that means if you read those books).

Investing is a little like making sauce. You can always add more milk/water (buy other funds/etfs) if you decide to adapt your portfolio allocation in the future. There's no reason for big swooping changes every five minutes. If a decision couldn't be made over a five year period, then it's not worth thinking about. i.e. ignore short term fluctuation by only looking at your results annually if possible.

= How long you hold your capital. This is where most people screw up.

[Anonymous No.4731284]

Here's a number of tickers that can serve as a starting point for a properly diversified portfolio: SPY DBC DBB EEM SHY SH FXE XRE.TO DBV EFA RWX DBA HYG IEF LQD TLT VBR VNQ AMJ

Look into momentum & value based rotational systems (this article is a good starting point: http://advisorperspectives.com/dshort/guest/BP-120514-Adaptive-Asset-Allocation.php))

Shit takes a bit of work, but long-term even a small difference in returns compounds to have a giant effect on your retirement wealth.

[Anonymous No.4731289]

>>4731266

good luck meandering down the garden path

I should begin a new business selling rabbit feet.

>>4731259

At least we agree on something. Take note oh gentle newblets.

p.s. volatility implies markets are inefficient because...what excatly?

[Anonymous No.4731304]

Index funds and lifecycle funds. Boring, but a good long term investment.

[Anonymous No.4731310]

>>4731266

Assuming that markets will react positively to positive news or visa versa is cute.

Here's a tip for you. Put your money in the bank. Ok?

Now, follow this sensible advice:

1. Pick up wall street journal or the FT on a weekly basis or whatever.

2. Pretend you have 10,000 in the bank.

3. Buy shares. Assume taxes/fees don't exist for simplicity.

4. Guess next week which ones will go up, and which ones will go down.

5. Repeat this for a couple of months.

Then you'll start to understand what I've been saying in half this damn thread.

On the other hand, if you feel uber-confident after 3 or 4 months of that, then do whatever you want.

Trust me, the stock market has the world's most expensive tution fees. Do it on paper first if you're going to do this.

[Anonymous No.4731334]

>>4731310
>Assuming that markets will react positively to positive news or visa versa is cute.
>4. Guess next week which ones will go up, and which ones will go down.

But that wasn't what I was saying.

[Anonymous No.4731336]

>>4731310
OP here. Absolutely agree that it's something you need to be comfortable with and not go in to it blindly. Someone had mentioned paper trading and I'm definitely going to try that, as well as knowing what the heck was going on in the middle part of this thread. Before I do anything, I'm definitely going to have some money in the bank.

[Anonymous No.4731368]

>>4730969

Missed your reply post, sorry.

I invested in about 500 companies through an ETF (it was IEMS which was biased towards small value in emerging markets) and made 75% return followed by lower single/low double digit digit returns the next two years. Then I had awful problems in my life that even my emergency fund couldn't cater for and I had to sell the lot. I made about 30,000 pounds altogether in 3 years.

My case is highly unusual, not replicable. I expected to have a longer time horizon of about 20 years and took risks that would be stupid to take in the short time duration of 3 years.

[Anonymous No.4731378]

To those who believe that maths can't be used to play the stock market... Please explain why hedge funds and banks the world over employ so many mathematicians to model it. Further explain why these people have such massive success.

[Anonymous No.4731406]

>>4731368
Awesome man, but sorry to hear about your crisis. What was your total initial investment?

[Anonymous No.4731413]

>>4731378

It's simple. Hedge funds aren't held to the same reporting standards as some other financial instruments.They don't enjoy huge success at anything in particular apart from relieving clients of their funds. There is no lies per se, except for the entire big picture.

This is how it is done:

1. You set-up several exotic allocation/timing/whatever strategies with twee amounts of capital.

2. Most of these will suck.

3. Some of them, due to probability alone, will do amazingly well.

4. Concoct a coherent story about why this works the way it did. A good example of this is Nick Taleb's old fund. I've seen both public and private records Utterly sucked, but he had a convincing story for expected behaviour and resulting behaviour.

5. Sell the story to investors. This fund has 100% returns for the each of the last five years! This fund outperformed all the competitors! And it's all true. But what you don't know, is that the investment bank that created the hedge fund is the initial investor and the amount of capital invested was literally like $100. Since the prospectus will show only that the amount was < 1 million dollars or so, this is not a lie.

6. Profit!

Hedge funds are the Troll Science of the Finance Industry.

Everything described is totally legal because hedge funds cannot be analysed. All that information is private. Look at hedge fund reporting standards, their accountability is practically nil, despite rationalizations and protestations to the contrary.

[Anonymous No.4731418]

>>4731406
Well, if he made 75% return followed by let's say 10% then 10% as he claims, his initial investment must have been ~400000 pounds. Presumably he means profit though, in which case ~14000 pounds.

[Anonymous No.4731433]

>>4731413
Firstly, that simply does not apply to all hedge funds, if any at all you're full of shit. Secondly, what about the banks?

Finally, take Renaissance Technologies as a case study. They hire only mathematicians, physicists, etc - no finance guys at all. Trade purely mathematically and have the highest returning fund in the world.

[Anonymous No.4731437]

>>4731406

It was about 15,000, so I doubled my money in 3 years (tax free too, so that's 15,000 sterling profit, but that's another story).

Don't be impressed by that, I screwed up my gameplan because the time horizon was completely wrong. My expected average return was ~15% per annum with this asset class (again, the higher return is the result of me taking higher risks, more so than the average person, and I expected to have to do this for 20 years at least). So; this was mostly luck.

In the housing bubble crash and ensuing credit crunch, there was huge flows of capital from western economies to developing ones like SA, China, Brazil and so forth.

Again; none of that was predictable and I did not predict anything like it.

[Anonymous No.4731479]

>>4731433

Erm... That wasn't me making up some hypothetical conjecture or something. If you talk to the right people in London or New York e.g. like me, then you're going to hear the same story.

Hedge funds are glorified by clients. They are like the 'Secret Boys Only Hideout' of your childhood. Everybody wants in, but only by excluding some clients do you ensure the appeal of being on the inside. Exclusivity = cachet.

I'm not excatly a Michael Moore character but it is true that the hedge fund industry is not just riddled with corruption, the entire basis of the hedge fund industry is itself completely corrupt. It's because there is no real reporting standards that are independently verifiable. It's just true.

Note: this is quite distinct from PE, that's a different subject with different caveats. I am talking about the ways in which hedge funds are most commonly utilized. Some of them may be legit, but most of them are certainly not legit. It's not something that you could prove, but everybody knows it.

You know what we call clients for hedge funds?

Whales.

Because they are fat with blubber (loaded), and you can churn their portfolio to infinity and beyond before they begin to turn around. Slowly, slice by slice, our account fills up with fees and expense taking, while theirs depletes. By using high risk investments and the ensuing volatility, this is actually extremely hard to spot.

The only reason why this isn't more well known ex-industry is because people don't like to be wrong, to admit they were wrong to their pals, to be socially embarrassed in their peer group.

Hedge funds are just 1 middleclass step above those shell games you can see every day on city street corners. Sorry.

[Anonymous No.4731618]

>>4731437
What kind of volatility were we looking at?

[Anonymous No.4731791]

>>4731618

"On the subject of EMH. This can almost be discredited with a thought experiment. In times of high volatility, stocks can occasionally increase or decrease in value 50% in one day. It is certainly not true that the efficient "value" of those companies has changed that much in one day. It should go without saying that people make decisions based on emotion or faulty logic sometimes, and occasionally it takes some time to correct this."

--

Whether or not stocks rapidly increase or decrease in price has absolutely nothing to do with EMH.

EMH does state that markets react to information, but there is no criterion for *when* this occurs.

[Anonymous No.4731792]

>>4731618

You have a fault you see, like most people to be fair. You see yourself as being outside the system, external.
This makes you believe that your actions are somehow separate from the market itself. That *you* discovering an inadequate interpretation of information in the market implies that the market is wrong. Hereinlies the paradox, if the market is incorrect, then the market is correct because you'll take action to profit. Now you see it, now you don't.

If EMH is wrong, then so is Value Investing and anything like it. If prices do not react to information at all, then there is no reason whatsoever for value investing to work! I mean, there is no such thing as 'true value' or proper value.

EMH is a truism, a logical tautology.

You *are* part of the market. The very action you are taking is making the Efficient Market Hypothesis work, whether it is strong or weak form efficient is beside the point. It's simply amazing how many otherwise intelligent people cannot grasp this concept.

Now, I cannot prove this. In fact, it has been proven that EMH cannot be proven. That is why it is a hypothesis, it can *never* be a theory because of this. It is a self contained logical construct.

[Anonymous No.4731811]

>>4731618

This should start sounding familiar to mathematicians, the logic of markets and Godel's Incompleteness Theorem are connected in some way. That is another concept which most mathematicians essentially ignore in their day to day activity.

If you are understanding what I am saying, then you'll see that it doesn't really matter if EMH is true in any way, shape or form, because *we know that markets behave as if EMH is true*.

It doesn't matter if you don't believe what I'm saying, because it is the very nature of the idea itself that makes it so hard to believe. If it were easy to grasp the implications of EMH, if it was fully understood, then it would stop working (because we'd all be in passive investment strategies and there would be no price signal setting information any more).

It's a pity we can't make MindFuck captions for EMH, because it's the biggest mindfuck there is.

[Anonymous No.4732300]

Can someone explain to me the difference between market value, book value, and intrinsic value?

Also, are there any standard formulas used to calculate intrinsic value or are these well guarded secrets amongst investment firms?

[Anonymous No.4733552]

bear in mind a lot of finance terms aren't standardized, but:

- market value is the price of the company (no. of shares multiplied by the share price)

- book value is the assets of the company e.g. all its products, production machinery, credit in savings accounts etc, basically all the firm's assets as measured in cash. This number is then subtracted from the firm's debts and other liabilities.

- intrinsic value is a much vaguer concept than the above two and can be measured in many different ways. It is basically what you believe the true worth of the company is to investors. There are equations like the Gordon Equation for example.

Note: the inputs to the Gordon Equation and any other are entirely subjective.with analysts using the same equation and data available coming to entirely different conclusions.

The real use of such things is to determine the *relative difference* under performance or outperformance related to a benchmark. e.g. whether this company, assuming average growth rate, dividends for a similar set of companies, is doing better or worse than the rest.

Choosing the benchmark can be an extremely tricky exercise.

Lastly, there are other methods of intrinsic value too. You could say that "faith" that a company will outperform the others is a naive form of intrinsic value setting (but one which is almost certainly wrong).

I hope that all makes sense.

Also, the previous definitions are used in slightly different two senses, one is a macroscopic view (e.g. I am buying an entire company) but more frequently those numbers are divided by the number of shares.

[Anonymous No.4733574]

>>4732300
>>4733552

I should add, one of the biggest problems with models like the gordon equation is:

- many companies have assets that can't easily be measured e.g. how 'good' the management are, how intelligent their workers are, intellectual property and so on. This is often the most valuable part of a company, but the hardest to measure.

It doesn't often matter what university the board went to for example, what really matters at the end of the day is things like tacit knowledge, which is by definition unmeasurable. Past performance is unhelpful too for other reasons.

- many companies don't issue dividends or don't issue them in a uniform way over time.

As they say in computer science, Garbage In, Garbage Out, these are educated guesses and little more.

We already know they will be wrong, the question is *by how much*.

[Anonymous No.4733582]

>>4733552
Is that the picture for the Green section of The Color Spectrum EP by The Dear Hunter?

[Anonymous No.4733600]

>>4733582

I have no idea

[Anonymous No.4733606]

>>4733600
It is.

[Anonymous No.4733649]

[Anonymous No.4734209]

>>4733574
Thank you for the informative post.

One more question, would the analysts at firms such as Berkshire Hathaway have discovered the most efficient, accurate methods of measuring intrinsic value, and would this accuracy and efficiency be a dominant precursor to their success?

[Anonymous No.4734302]

>>4734209

"One more question, would the analysts at firms such as Berkshire Hathaway have discovered the most efficient, accurate methods of measuring intrinsic value, and would this accuracy and efficiency be a dominant precursor to their success?"

That is indeed an interesting question.

First, some background information. Berkshire Hathaway is not a large corporation, it is in fact absolutely tiny. It is true that it is enormously wealthy and powerful, yes, but there is somewhere between 5 and 15 people that actually work directly for Warren Buffet and Charlie Munger. Many of those workers are accountants, lawyers, secretaries. This implies that it is actually 2 - 5 people at the most who are involved in decision making about intrinsic values.

This is of course in direct contrast to most funds, who have literally tens of working groups, hundreds of experts and oddles of computer programmers, economists and so forth working for them.

Imho, I believe that Buffet has to be simultaneously the most lucky and most astute investor in recent history. Logically this has to be the case because otherwise he would not be the world's richest investor, it must have been both luck and skill to reach that level.

The third observation I would make is that Charlie Munger and Buffet are a pair. This is interesting to me, because I notice in almost every powerful business I see, that there is either an entrepreneurial duo or else a family business. Microsoft, Apple, Google, all founded by duos. I also suspect the same is true of Facebook, but I don't know who Zuckerberg's aide is, because in my view it is more likely that he doesn't really run his corporation than if he has operated purely solo in his decision making. <insert conspiracy theory here>

[Anonymous No.4734304]

>>4734209

(cont)

I do think that if you have two people, who read all the same books on a subject, who continually talk to each other i.e. a unusually close relationship that is not based on romantic affection, then it is possible to create a thing called a coterie. The point of this exercise (which takes many years to work, it's no short term project) is to generate a feedback loop of information between you two. It seems to me that there is a lot of empirical evidence this is an extremely effective strategy at processing information and maintaining the big picture view. You have a positive feedback loop in that you encourage each other, and a negative feedback loop because you will disagree. It's like the difference between mutual fund researchers brute forcing the problem and using Google's page rank algorithm.

I'm afraid it can't be reduced to simple forumale or even very complicated algorithms. The market is a complex adaptive and dynamic system. I know it sounds strange to attribute a type of relationship to obtaining economic information, but that might be why the idea is overlooked.

Google The Delphi Method and Amazon's Mechanical Turk for some interesting ideas very much related to this post. I think it would be interesting to explore market indicators via a HIT network and a Delphi Method panel and the Coterie method I mentioned before. Then I think you'd have some genuine firepower for finding intrinsic value.

[Anonymous No.4734322]

A stray thought:

It could be that that the success of duo coteries is down to the fact that they are self-reinforcing since it's a feedback loop. This would probably make people less inclined to self-doubt about value judgements.

So, that a coterie was responsible for people "staying the course" might be something you see in lots of successful businesses, but that doesn't mean necessarily that the duo coterie relationship results in success. i.e. to be the *most* successful you have to be a duo coterie, but we are not counting all those unsuccessful duo coteries who ran with the wrong idea.

Alternatively all of this could be just bunk.

[Anonymous No.4734329]

>>4734304
This makes a lot of sense to me. Thanks for the response and I will definitely check those books out.

[Anonymous No.4734380]

Just to add, PE makes lower than average profits, it's speculated. See the wikipedia (I know, I know, so reliable). Also, ChemE guy, do you have email? I won't bother you too much but I'm studying finance / options pricing right now and I'd love to go over it with you at some point in the summer. You seem pretty down to earth about everythiing.

[Anonymous No.4734389]

>>4734329

Well, they are ideas, not books, I don't think there is any books about them directly related to finance.

If you are looking for a good book related to this subject, then I can definitely recommend The Wisdom of Crowds, it's a great thought provoking book.

[Anonymous No.4734401]

>>4734380

private equity makes about as much as emerging market equities as an asset class. There are surveys by Callan and Morgan Stanley and others.

But the costs of getting into PE can be considerable and it can be difficult to obtain, there are liquidity and information transparency issues, so caveat empetor

still not the nest of vipers that hedge funds are...!

[Anonymous No.4734407]

PE is actually highly cyclical, and in very predictable ways. Funds started during recessions make a lot of money because there's not much cash to go around and thus only the best investments are made. Funds started during good times generally underperform broad market indices.

VC is always shit.

[Anonymous No.4734434]

>>4734407

Venture Capital != Private Equity.

IPO and similar on private markets is always crap, yes. But that's not the same thing as private equity anymore than IPOs represent all stocks. The majority of the firms in Germany for example, are private equity.

[Anonymous No.4734440]

anyway, back later, here is a picture of a pug

[None !!ddNqgd/ihEj No.4734449]

can someone provide me with the tl;dr conclusion of this thread? ty

[Anonymous No.4734451]

How much of the math do you know behind all this?

[Anonymous No.4735267]

>>4734434
Private Equity isn't literally privately held equity, it's a type of fund with a limited timespan (typically ~5 years with one or more options to extend for a few years) and limited investment size, which is structured as a limited partnership and makes highly leveraged buyouts.

[Anonymous No.4735764]

>>4735267

Yes it is. PE is simply any equity that cannot be obtained on a public exchange. The nomenclature of markets can be unintuitive sometimes. In fact, according to wikipedia even that definition is too specific because any long term illiquid asset could be referred to as being private (not a way in which I would use the term because it's less confusing to simply describe an asset as public and illiquid),

PE includes venture capital and the form of private equity you mentioned. It also includes lots of other financial structures that haven't been mentioned, all of which share the common theme of not being quoted on a public exchange i.e. PE is a universal set.

[Anonymous No.4735771]

>>4734449
Financials is like betting for the average person.

Unless you invest in solid base industry and expect no returns at all in twenty years or so.

[Anonymous No.4735802]

>>4734451

Unless you are an econometrician, I have found there is relatively little mathematics used in both economics in general, and this is even more readily apparent in the subset which is finance.

There are equations like the Gordon Equation and mathematical models like CAPM (capital asset pricing model).

However these are a 'plug-in-the-numbers' deal. You couldn't really describe that as using mathematics, 90% of the time you are using simple arithmetic and little else.

Now, that is not to say people like quantitative analysts don't exist. It is just that at my level and the level of 99% of investors, you are doing things far more macroscopic to require sophisticated mathematics, especially considering that markets are complex adaptive systems.

There is a tendency for geeks new to the stock market to invest their time looking at complex mathematics. This is nearly always a complete waste of time. Warren Buffet even says that if you're using math more complex than adding and subtracting then you're doing something wrong. I wouldn't go that far, but you will find that studying asset prices over time e.g. returns of the stock market, commodities etc, in different markets over many decades is a far more valuable skill than advanced stat analysis.

Read this:
http://en.wikipedia.org/wiki/Long-Term_Capital_Management

Why did they fail?

[Anonymous No.4736030]

>>4734449

There really isn't a 12 step program.

Here are some basic directions which are good advice:

1. Build an emergency fund of six to eighteen months living expenses. This is so you have the opportunity to find new work in the event of a market crash since people losing jobs en masse and share prices dropping dramatically are likely to be connected.

2. Create a portfolio using exchange traded funds and index funds. This is a great example of how it is done properly:

https://docs.google.com/viewer?a=v&q=cache:Uw_Nbpl2OsMJ:www.merriman.com/PDFs/UltimateBuyAndHold
.pdf+the+ultimate+buy+and+hold+strategy&hl=en&pid=bl&srcid=ADGEESjUj7-BxzvNZbp1uKAW1eCdH
Z17IkGwGcE8iIvHmXfbQiiCqz_80tkCXI7uogygVqNUCCCJc-3Z-UxBmkRVnn8ORTgw4s3t-T1g_ZIAaoNCXfC31Q_AkNrPXny88
fUSV0iFrNrk&sig=AHIEtbS4yF_2Px7erU_lq68zhFpRKzDBGw

3. Invest your savings and automatically reinvest all dividends for several decades. Never sell. Save as much as possible. Keep your fees as low as possible. Do not use synthetically replicated index funds or ETFs. Rebalance between your asset classes using time or trigger band rebalancing depending on whether you are taking moderate or high risks respectively.

4. You should now be a multi-millionaire if you've put in any effort at all and held your nerve. You're welcome.

Note: This is nowhere near enough information to make this work. Primarily you need to understand this post completely and the background theory that goes with it otherwise you are almost certain to flak out and panic sell at some point in the next couple of decades. e.g. World War III style events.

Note: I am not claiming this process will work for everybody, just the average intelligent investor with no special connections or vast amounts of wealth to manipulate. There are many roads to Rome and this is one of them. Its simplicity is beguiling, it is actually very difficult and few people manage to do it properly. Simple != Easy

[Anonymous No.4736055]

>>4736030
>>4735802
Got anymore of those kinds of pictures?

[Anonymous No.4736204]

>>4736055

[Anonymous No.4737208]

>>4736204
Of course it's not normal. Financial distributions are heavy-tailed.

[EK !EKFnQG0UBo No.4737285]

[Anonymous No.4737388]

>>4737208

Fun fact for those who aren't already aware:

Caucy distributions have no mean or standard deviation..

That normal distributions aren't reflective of markets isn't a new discovery however, I don't think anybody knows what distribution markets have.

P.S. I fucking loathe nick taleb. He is the biggest poser there is in the field of finance, he's a hypocrite on so many levels.