Tuesday, November 6, 2012
Saturday, January 7, 2012
Efficient Market Hypothesis - A Tough Opponent
I stumbled across this article on Yahoo the other day (yes, I take all my financial cues from Yahoo :) and although it’s message is basic (KISS, stupid) it got me thinking about where I would be if I would have read this at the beginning of my investing career and taken it’s advice blindly to heart.
As detailed in these pages, I have invested in everything from Index Funds to gold to Treasury-shorting ETFs to private investments, with an element of market timing along the way. I have come up with what can only be described as genius! moves and some others that I am truly trying to block out.
So I put together a fairly basic analysis of what I actually did versus the Yahoo! advice and went back to 2003, which was admittedly not the start of my investing career but was close enough.
I assumed that I would have invest the same money at the same time (end of each quarter) but would pick only VFINX (Vanguard 500 Index) or VBMFX (Vanguard Bond Index) depending on which gets the ratio closer to the optimum, simple ratio. I assumed I would have chosen the typical “subtract your age from 100” routine. We’ll call it 65/35 stocks to bonds. Drumroll please …
Christ.
The difference between the lines is 3.8% which is the same as .4% per year. A very small win which is a rounding error as far as I'm concerned. What is more interesting is looking at what happens when the market is up versus down. In 2008, the blue line is crushing (!!) the pink line. “Risk on!” Then the market teaches me and everyone else about humility. My portfolio gives up all it’s gains plus a bunch more as equities implode. I even timed the turn almost exactly right putting all my chips in the middle in March of 2009 but the damage was more than done. The message here is that we’re not all searching for return; we’re searching for risk-adjusted return. There is a difference.
This whole exercise reminds me of what my buddy told me about sports betting once. (To be clear, I do not bet on sports!) He told me that the reason sports betting is so tempting is that the worst sports better is right 45% of the time. And that’s just about everyone. You’re picking one team or the other and the “market” is pretty darn efficient. The bookie takes his cut (which is why you’re not a coin flip) and it leaves everyone thinking that the wins were genius and there were strange reasons for the losses. And with just a couple more wins, you’d be really good at this!
Hmm. Sounds familiar.
As detailed in these pages, I have invested in everything from Index Funds to gold to Treasury-shorting ETFs to private investments, with an element of market timing along the way. I have come up with what can only be described as genius! moves and some others that I am truly trying to block out.
So I put together a fairly basic analysis of what I actually did versus the Yahoo! advice and went back to 2003, which was admittedly not the start of my investing career but was close enough.
I assumed that I would have invest the same money at the same time (end of each quarter) but would pick only VFINX (Vanguard 500 Index) or VBMFX (Vanguard Bond Index) depending on which gets the ratio closer to the optimum, simple ratio. I assumed I would have chosen the typical “subtract your age from 100” routine. We’ll call it 65/35 stocks to bonds. Drumroll please …
Christ.The difference between the lines is 3.8% which is the same as .4% per year. A very small win which is a rounding error as far as I'm concerned. What is more interesting is looking at what happens when the market is up versus down. In 2008, the blue line is crushing (!!) the pink line. “Risk on!” Then the market teaches me and everyone else about humility. My portfolio gives up all it’s gains plus a bunch more as equities implode. I even timed the turn almost exactly right putting all my chips in the middle in March of 2009 but the damage was more than done. The message here is that we’re not all searching for return; we’re searching for risk-adjusted return. There is a difference.
This whole exercise reminds me of what my buddy told me about sports betting once. (To be clear, I do not bet on sports!) He told me that the reason sports betting is so tempting is that the worst sports better is right 45% of the time. And that’s just about everyone. You’re picking one team or the other and the “market” is pretty darn efficient. The bookie takes his cut (which is why you’re not a coin flip) and it leaves everyone thinking that the wins were genius and there were strange reasons for the losses. And with just a couple more wins, you’d be really good at this!
Hmm. Sounds familiar.
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