Update of "InvestingTheory"

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Artifact ID: 09e41fc086678c967f8de5b03311a43571b65e6341c850799d7fcbb9e20425d0
Page Name:InvestingTheory
Date: 2021-05-19 21:05:04
Original User: zie
Parent: 0e9b9aab8ea21bad43fbfea5d9f68a92294dd3daf3384d5c917775937fb137b8 (diff)
Next c07ef4411e402972cbb4d862918abfd62c041c1f0245b722b25a698a5f80afe4


*  The future is unknowable
*  Compounding interest is how investing works

Early in your investing life there is no chance of much danger, as the balances are small and relatively benign in how much damage they can do to your life overall. So we might as well take all the risks we can.

As we approach retirement, especially that last decade or so is when all the real gains happen. with 6% growth your money will double in 13 years. So that last doubling will be HUGE for your retirement income as you go to retire. This leads to discussing volatility.


If we are invested 100% in equities, say a nice boring total stock market index(like VT), we will notice that history teaches us we can have a decade of terrible or no growth, but that is usually followed by tremendous growth of double digit % real growth.

Volatility sucks


see Economy

So we need to keep our sustained growth rate nice and awesome forever. How do we do that?

Diversification across all asset classes.

So how about we just buy every asset class at "global market cap rate". i.e. we just buy a piece of everything, so that when X does well, we own some. when Y does well, we own some.

Asset Classes

Global Market Cap In billions

Stocks: 89,475 Gold/Silver 10,935 Cash 6,662 Savings 95,698 Bonds 252,600 Real Estate 280,600 Commodities/Deriviatives 11,600


Active investing.

The professional "active investors" generally lose money after fees are taken into account:

"When performance is measured using before-fee model alphas and compared across the cross-sectional distribution, any active fund performance advantage is substantially less than one would conclude from benchmarking to average index fund performance. Moreover, any advantage of the top active managers over the top index funds is much less than the advantage of the worst index funds over the worst active funds. When performance accounts for residual risk, active funds no longer outperform index funds. " - Passive versus Active Fund Performance: Do Index Funds Have Skill? Alan D.Crane and Kevin Crotty doi:10.1017/S0022109017000904

Day Trading

But the grim truth is that day-trading does not work. As Burton Malkiel (author of A Random Walk Down Wall Street and other books) explains,

To go and day trade and think that you are investing, that’s what I think is absolutely wrong and is likely to be simply disastrous for people. … It’s not that they can’t make money in gambling, … but over the long run, this is a losing proposition.

How can one be so sure that day-trading doesn’t really work? Let us count the ways:

  1. In July 2000, the manager of a day-trading operation acknowledged in a U.S. government hearing that between 80% and 90% of their customers lost their funds and quit within six months.
  2. A large 2004 study of Taiwan day-traders found that more than 80% lost money, and only 0.03% consistently earned significant profits.
  3. A more recent 2017 study by U.C. Berkeley and Peking University researchers found that even the most experienced day-traders lose money, and nearly 75% of day-trading activity is by traders with a history of losses.
  4. A 2019 study of Brazilian day-traders found that 97% of all individual traders who persisted for more than 300 days lost money in their trading. Only 1.1% earned more than the current Brazilian minimum wage, and only 0.5% earned more than the current starting salary of a bank teller.
  5. A 2019 study by Crestmont Research found that from 1950 through 2019, U.S. large-cap stocks go up on a day-to-day basis only slightly more than 50% of the time, whereas, say, holding onto a U.S. stock for a 10-year period produces a profit 94% of the time.
  6. A 2019 study of trading using “contract for differences” confirmed that only about 20% of individual traders actually made money.
  7. A 2019 study of foreign exchange traders found that over 90% of individuals who trade in these securities lose money and quit.
  8. Many day-traders rely on technical analysis methods. But as we have discussed at length in this forum and elsewhere, the blunt, unvarnished truth is that technical analysis does not work, particularly given that trading in modern financial markets is now dominated by hedge funds and other organizations utilizing very sophisticated, highly computerized, big-data-based, machine learning methods, together with sub-millisecond trading operations, all of which are far beyond the realm of technical analysis in general and amateur day-trading in particular.