The reason your statement was ignorant and irrational had nothing to do with whatever information you were basing your claims on. Since you've shared what that information is now, I can demonstrate how ignorant and irrational your statements are. All of this information was turned up by a quick search on Wikipedia, it's not exactly hard to find.
Yakk wrote: bigjeff5 wrote:
Yakk wrote:If you think anything else, then you are being successfully used-mutual-fund dealership'd.
This is probably the most ignorant and irrational statement I've read all week.
I'm glad for you. It happens to be reasonably close to true.
Given the weak efficient market hypothesis, unless you are way smarter than everyone else playing the stock market, basically everything you talk about has been already factored into the price of the stock right now.
The EMH in all forms is hotly contested by both researchers (aka scientists, if that helps you) and investors. Emperical studies do not support strong variants of EMH, and support for Weak EMH is, well, weak.
Warren Buffet doesn't believe in the Efficient Market Hypothesis, but I suppose he's not as smart as you are, and so is probably wrong and doesn't really know anything about investing*. Eh?
Stocks are not dice.
The value of a stock, minus their current stock price, is a pretty decent random number generator.
Uhh, citation please? I can't come up with any logic that works for that statement, but I'm open to the possibility that I am simply wrong.
It isn't perfect. But something as simple as "I'll buy the best stocks and pull off 8% year over year investment, why doesn't everyone" is silly.
Why is it silly? The market still averages about 10% returns, even with the recession taken into account. I'm not talking about mutual funds here, I'm talking about the market as a whole. A well diversified portfolio (fund or just hand picked stocks, it doesn't matter) aught to average in the neighborhood of 10%. That's how averages work.
This is not a random roll of 100 dice, where the successful dice are re-rolled until you have five dice that have rolled 4 sixes in a row.
As for mutual fund picks, what I was talking about is pretty heavily cited. People who pick stocks for mutual funds (that sell to consumers at least) are not measurably better at it than the public market price signal as a whole.
You can gamble on stocks, but stocks themselves are not random in any way, shape, or form.
Oh baby. What do you mean by random? You mean "is determined by information far beyond your ability to determine"?
If you use fake definitions of random, you can twist it in whichever way you like. That's why words have meaning. It's true that "truly random" is a physical impossibility. That weakens your argument, not mine. But no, what I mean by random is the more traditional measure of random "all possible results have an equal possibility of occurring".
If stocks were random throws of the dice, as you seem to suggest, nobody would make money on the market. Everybody would eventually lose. The huge number of successful investors who are able to be consistently successful is empirical evidence that this is not the case. If stocks were random, winners in the market would be exactly the same as winners in the lottery. They are not, however, because there is a vast amount of information available upon which to base your decisions on. We have TV shows that give out analysis of these stocks, for Christ's sake!
Because yes, stock prices are random by that measure, just like dice.
As I have just stated, and as any halfway decent investor knows, no they are not. It may be possible to abstract the market as a whole and get random, but each individual stock price is based on a wealth of readily available information. It is not random.
In order to predict if a given stock will go way up, you'd have to know the consumer and producer behavior of the world for the next few years. You'd have to know if joe worker at the company will die of a heart attack before he manages to implement a (disastrous) | (amazing) plan.
This happens to be pretty easy to estimate, given the history of the company and the products they already have on the market.
There are companies behind the stocks which have equity, profits, and people attempting to increase the equity and profits.
And there is physics behind a die roll that deterministically determines which side it lands on.
The physics behind the die roll are several orders of magnitude more difficult to track than the freely available information about a stock's company. This makes the die roll several orders of magnitude more difficult to predict than the stock. This is how people make money in the stock market.
The model for the die is far simpler -- it is far easier to roll a die in such a way that you know what side it will land on, than predict all of the factors that influence stock price in the future.
Citation please. I'd really like to see you model that, roll the dice, and give me the correct answer before the dice are shown. The best I've heard of is predicting quadrants (not numbers) in roulette for a specific roulette table and a specific roulette dealer. It's certainly possible, but I've never heard of it being done in a practical way. I know I've never been capable of predicting a die roll, but I've been quite capable of predicting a rise in stock for certain companies consistently. Can I do it for all of them? No, but I don't need to. I can get rich on just a few.
In light of this, dropping the poorest performing stocks is an excellent way of finding the most consistently well-run and profitable companies.
When you drop the poorest performing stocks, you sell stocks you bought high and are now at a lower price. You then reallocate resources to stocks that used to be cheap, and are now more expensive. Others do the same thing.
I see where you are going with that, but it's very short term thinking. When looking at a stock's long term average, the initial buy price is next to meaningless. It's the average performance that matters, and if you bought a stock that has actually gone down
in the last 10 years then you should probably never buy that stock again, unless there is a very, very good reason for it.
Accidentally buying high and selling low only happens if you aren't evaluating the stocks for a reasonable amount of time.**
The fact that people expect the "expensive" stocks to do better has been factored into their price already by other people. That is why their price is high. So your purchase of it, based off publicly available information, already there. If you expect that their price will go up even more than the market does, then your bet is good.
I don't know why you are making this argument, it only strengthens my case that the stocks are not random, but relatively predictable. I honestly think you are a little confused about how you think stocks work.
It's like choosing the best players for a baseball team - you drop the ones who suck and keep the ones who consistently perform well.
Not particularly. On a baseball team, you are limited to N players. In a stock portfolio, you are limited to N$. And the price of the players is determined by other people also trying to build a team. And teams of 500 players are perfectly legal (all on the field at the same time).
So it isn't at all like a baseball team.
It's called an analogy. I also was not talking about price, I was talking about performance. A little reading comprehension please.
You can reasonably expect those who have performed well in the past to continue performing well, barring some unforeseen tragedy (like a hurricane destroying wheat crops, or something).
And you can reasonably expect that their level of performance has been factored into their salary already. You only win if their performance is better than their salary.
Again, their salary has nothing to do with it. The initial price of a stock has nothing to do with it. It is their performance over the long term that matters. The analogy is apt.
Look, it even says it in the small print in every mutual fund I've seen advertised or I've bought: past performance does not determine future results. They know this, and they want your money, so they don't want you to know it.
That's called the Cover Your Ass (CYA, for short) legal statement. You may not have noticed in this litigious society of ours, but these statements are everywhere. Companies add them even when they are unenforceable (as in the case of waiving a company's responsibility for your safety). It is there to make it clear that they are not guaranteeing your profits in case there is a market crash or some similar event that causes the fund to lose money.
Past performance is still a very good indicator of future results.
*If you don't know who Warren Buffet is, you shouldn't be talking about investing. But just in case, he is currently the 3rd wealthiest man in the world, and has been in the top spot several times over the last few decades. He tends to trade places with Bill Gates and Carlos Slim on that list every few years. None of this makes Warren Buffet right (just more likely to be right), which is the real reason your investing tips are irrational. Science is a continually moving foundation. It rarely (I'm almost confident enough to say never) gives a concrete answer about anything - it simply improves on its previous answer. For something as poorly understood as economics, absolute statements are almost grounds for dismissal, in my opinion. Almost.
**There is some merit to the idea of buying when the entire market
is down, but even this can be completely avoided with careful stock selection in a high market. The point is to buy solid stocks that will give consistent returns. This is the time tested method of getting rich slowly. You can try to maximize your returns by playing the meta-market, but your returns likely won't be as good as simply selecting your stocks with an eye toward the long view.
Edited a couple of times for clarity.