I remember this Mark Cuban quote from another entry, it really made me think (emphasis mine):
> The stock market is probably the worst investment vehicle out there. If you won’t put your money in the bank, NEVER put your money in something where you don’t have an information advantage. Why invest your money in something because a broker told you to? If the broker had a clue, he/she wouldn’t be a broker, they would be on a beach somewhere.
Basically - The big Funds drive volume, and therefore stock price.
They're looking for a return on investment, through either Dividends (small) or Equity Growth (potentially massive). When they buy a Share, they want to know it's going to be worth more to them in the future.
Since no company is going to pay dividends at 30% of the share price, but the market can move that much fast (up 50% in Australia since the March 09 bottom), Funds care about Equity Growth.
And they know that growth is driven by volume. When they buy today, they don't care what the fundamentals, profitability etc tells them - they just want to know will there be more Volume in the future?
Did we mention these are the same companies that drive the actual Volume?
Cuban calls it a Ponzi scheme. It can certainly turn into a circle-jerk, where every Fund drives Volume by buying because they expect every other Fund to drive Prices up by driving Volume by buying.
But they forget that the Fundamentals can destroy a company. And a company that doesn't exist, doesn't trade anymore.
> But they forget that the Fundamentals can destroy a company. And a company that doesn't exist, doesn't trade anymore.
A wise company with poor fundamentals but a good image and an inflated share price could, however, use that overvalued currency to buy other companies (with better fundamentals) in an all-stock deal.
There are some who would say that this is pretty much how the entire internet industry works...
Cuban makes a lot of good points in this series, but fundamentals do exist. Compare his philosophy to Warren Buffet. Sure, Buffett does often get better deals not available to retail investors, such as the recent Goldman deal, but Buffett also buys plenty of common stock as well. (There is plenty of overlap in the philosophies as well...looking over his 2008 letter, seems like he favors dividend paying stocks, but don't hold me to that).
It's kinda ridiculous to try and extract personal investing lessons from Buffett. He cultivates this image of some grandpa who is just good at picking stocks, but it's baloney. He has always operated with an edge. Information advantages or super cheap capital from insurance companies.
Personally, I take the approach advocated by Benjamin Graham. I have separate accounts for investing, and speculation/trading.
I just view them as fundamentally different activities, with different risk profiles, and different sorts of analysis required prior to taking or selling any given position.
I read the 'snowball' book about Buffet, and it seemed to me like the advantage Graham had was that they went over information in a way that would only take a few minutes with a computer, but that wasn't done so systematically at the time, by most people. So, 'fundamentals', yes, but fundamentals driven by data. In this day and age, when everyone can comb out the same stocks in a matter of minutes, does that approach work?
that's kind of cool. Ok, don't shoot me, but that is probably based on the CPI and folks on reddit say government published inflation data understates inflation. Maybe I should just stop reading reddit ...
No, the Redditers are right. Well, more or less right. The CPI is entirely subjective. There is no objective way to measure quantitatively how much quality of a product has improved.
More importantly, from an investment perspective what you care about is monetary dilution, not consumer prices. If the currency dilutes at 10% a year, and productivity grows at 7% a year, then CPI inflation would be a nice and easy 3%. But that dilution rate is really high. If you own a asset that dilutes at 2% (gold, stocks, oil, real estate), you'll earn a return of 8% a year.
I'm just a guy with a deep and abiding fascination with economics and public policy. One so deep I recently picked up a graduate degree on the subject. One so deep that my current startup is based entirely on my desire to help individuals better understand the financial possibilities that lie before them.
But you've read a blog and some things on reddit, so clearly you understand it better than me.
I'm sick of arguing with people like you... people who base their economic beliefs not on solid econometric analysis, but rather on mostly inaccurate blog posts... and yet you still mistake yourself for an expert.
You win. I'm out of here too. I'm deleting my posts that are available for deletion, because the combined arrogance and ignorance of your response here makes clear that I was foolish for thinking that this could be a venue for informed discussion. I won't waste another second of my life "debating" well established knowledge with an idiot like you.
You complain about me being "arrogant" and "ignorant" and then you make entirely false statements about my own background (a subject of which you know absolutely nothing). You then complain about the quality of this forum, and then are the first person in two years of commenting on Hacker News that has ever attacked me ad hominem. I suspect that you are reasonable person that is just especially frustrated by the generally low quality of internet commentary about economics ( I too no longer visit reddit, but that doesn't mean the people there are wrong about everything). But if that kind of language is common with you, I do hope that you leave Hacker News.
I have had also had a long and deep fascination with economics and public policy. I've read dozens of books on finance and economics, from the original classics to more modern research. I've read hundreds of articles, I used to browse through social science libraries and download NBER papers for fun. I've had long and productive discussions with academic economists, people who work in finance and people who have worked in central banking. I don't claim to be omniscient about economics. But I have formed judgments, I state them plainly, and I welcome debate and hearing new arguments. I do not disagree with Keynesians or other mainstream folks because I am ignorant of their arguments. I disagree because I have evaluated them very carefully, read everything I could on the subject, and found their theories unconvincing.
I would be happy to debate or back up either of the two claims I made ( "The CPI is not a good measure of inflation" and "The mainstream economists led the economy off a cliff"). If you want to read comments where I elaborate more, you can read a few I made elsewhere: http://www.newmogul.com/item?id=15334 or http://www.newmogul.com/item?id=12274 I would actually really like to debate them with a worthy opponent. I too find good economic debate very hard to find on the web.
I greatly doubt "dozens of books", but I wouldn't be surprised if you've read a couple books and some articles that generally all agree with your preconceived ideas and your austrian leanings.
That is false. I read books from all sides, and the results of my reading greatly changed my views.
After all, you're clearly a person who think that he can point to the sky and understand economics, which is typical for armchair austrians... whereas actual economists and intelligent people generally prefer econometric data.
I have no problem with data. Because I respect data and math, I care a lot about when it is used properly and when it is not. In particular, regressions are almost always abused in econometrics, because there are far too many variables to control for, all the variables are imprecisely defined, and there is no easy to way to check the author's assumptions for a sensitivity analysis.
The federal reserve failed to be an effective arbiter of systemic risk. (something which was not even remotely in its mission statement.)
- "supervising and regulating banking institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers"
- "maintaining the stability of the financial system and containing systemic risk that may arise in financial markets"
That's just nonsense. Most economists have nothing to do with the economy.
A great number of prominent economists work in official positions ( CEA, FED, the various agencies and bureaus). These economists play very major roles in regulating the economy.
Non-hedonically adjusted metrics have been studied at length and are generally be be more flawed than the hedonically adjusted metrics.
I never said straight up hedonically adjusted numbers are better. You have to use the right number for the job. For the purposes of monetary policy or investing, I would look mainly at national income statistics, asset prices, credit growth, and broad money supply growth. Maybe the Fed wasn't watching these, or maybe were and just ignored them. But all four measures were showing huge warnings as early as 2004, and had they been paid attention to, a lot of bad things could have been avoided.
That said, it's ludicrously arrogant and nonsensical to simply claim it's pure fabrications,
Calling it a "pure fabrication" is inaccurate, and a word I did not use. The CPI is the result of lots of honest hard working people, who long hours trying to boil down the economy into one number using the most accurate methodology they can. But the economists calculating the CPI do exist in a political world, and there is a selection effect for a methodology that has more generous assumptions.
But when you pile a ton of subjective assumptions together and then apply a bunch of math, the result is subjective. There are multiple semi-plausible ways to do hedonics and there is no right answer. How can you objectively measure how much percent better a 2004 Toyota is than a 1998 Toyota? The CPI does indeed have a consistent, thought out methodology. Unfortunately, it's actually in part measuring the Toyota new model roll out strategy. The Toyota model roll out strategy has nothing to do with monetary economics or investment strategy.
To you, economics is a religion, and as such there is no point in arguing with you... you point at the sky, not at the ground.
Well, I have changed my mind on many issues. I am very responsive to good arguments. In fact, I used to have exactly your position on CPI, with exactly the arguments you made. But I studied the issue further and was convinced otherwise.
I truly and honestly hope that at some point in time you'll pull your head out of your ass for long enough to realize the difference in the level of effort required to become a true expert in a field, and the level of effort required to simply become dangerous.
So what would you advocate I do if I wanted to become an expert? What defines an expert?
CPI doesn't categorically understate inflation, sometimes it shoots high, sometimes low. This is understandable, as turning something as complicated as inflation over all the goods and services bough in a country into a single number cannot exactly be simple.
Lately, the index has arguably been understating inflation a little because the cost of living is going down, which pulls the index on the whole down even if the price of most of the essentials on it are going up.
Then again, this can simply be considered wad -- cost of living is a very major household expense, even if most people who already own a house don't see the cost reductions on their balance sheet.
Frankly, reddit is a truly horrible source of information about business and the economy. The loudest commenters on those topics tend to be educated primarily via blogs.
Personally, I'd advocate a subscription to the Financial Times, which is brief and factual in nature, with opinions kept to the opinion page.
Keep in mind that the mainstream, professional economists did in fact lead the economy of the cliff. So mainstream views of economics are not exactly error-free. Blogs, reddit, etc. are full of populist myths. But the blind squirrel occaisionally finds some nuts. Or an elephant. The CPI is the elephant.
The economists at the Fed set the rules of the game (too big to fail, lender of last resort, Greenspan put) that rewarded increasing levels of irresponsibility over the last two decades. Firms have one directive: make money. The Fed has the directive of setting the rules so that financial firms make money from being productive, rather than living off the taxpayer. The Fed failed at this.
I think Harry Browne's "permanent portfolio" deserves a lot more popular attention than it gets.
In Fail-Safe Investing Harry said to allocate your wealth equally between: stocks (broad market index), bonds, gold, and cash (CDs, money market). Rebalance back to equal allocations roughly once a year. Try not only to diversify a fraction of this internationally, but make sure to have some wealth entirely outside your home country out of reach of your government.
This portfolio has the critical property of stability, which is very important yet underrated for most personal investors, who are told to go heavy on equities. It captures inverse correlations so that it tends to grow steadily, rather than shoot up and down along a growth trend as equity markets do. It underperformed equities during the late 90s, but never nosedived in the early 2000s and actually continued to grow.
It has done very well historically. It grows steadily in each of an inflationary, deflationary, or high growth macro environment.
> The stock market is probably the worst investment vehicle out there. If you won’t put your money in the bank, NEVER put your money in something where you don’t have an information advantage. Why invest your money in something because a broker told you to? If the broker had a clue, he/she wouldn’t be a broker, they would be on a beach somewhere.
http://blogmaverick.com/2009/05/13/success-motivation/