Heh, you don't know the business.

People use everything from BusinessWeek covers to blatantly irrational calculus like Merton-Scholes-Black to blind guessing to justify their investments. Fact is, since Super Bowls have been played US markets have been in a generalized secular bull market. If you graphed the value of the Dow over the past 87 years you'd go absolutely nuts at the total lack of context that most stock analysis represents.

In no other industry in the world will you find as much snake oil, blind faith, irrational argumentation, or flawed logic as financials.*

*except politics

Hey, quit knocking "snake oil, blind faith, irrational argumentation, [and] flawed logic". That's what causes markets to clear, letting index investors like myself free ride on everybody else's short-term trading.

Charles:

From 1966 to 1984, the Dow went almost exactly sideways in terms of overall gain. Hardly a long-raging bull market. More recently, from 1999 to present, that market has again treaded water and gone sideways (and it had also done so from 1936 to 1949). There have really been two 17-year long bull markets since the great depression - 1949 to 1966 and 1982 to 1999. The rest has been sideways.

http://finance.yahoo.com/q/bc?s=%5EDJI&t=my&l=on&z=l&q=l&c=

1982 to 1999 correlates to a long period of NFC dominance. Maybe the NFC winning means the Market will go up.

It's the January effect, no it's the weekend effect, no we have efficient markets, no we are all behaviorists, no this and no that.

Folks either need to understand there is risk involved in investing or just take the money, put it in a tin can, and bury it in the backyard.

"In no other industry in the world will you find as much snake oil, blind faith, irrational argumentation, or flawed logic as financials.*

*except politics"

And technical football analysis. Don't forget about that one. All that voodoo and stuff.

2:

Ask people from 1965-1984 if index investing was a gold mine. It's been a successful practice in recent years, but index investing is in some ways a highly irrational bubble that has stayed a few sigmas to the right for some time. Also, short-term trading can be effective if it is done properly, which is not how most short-term traders do it.

3:

Yes, there was that secular bear market around the time of the Nifty Fifty etc. I mostly wanted index investors like #2 to press "linear" on that graph and see how comfortable they are with the "safety" of index trading ;).

4:

It's funny you criticize people for not understanding risk when you describe 4 risk analysis models with terrible flaws. LTCM has something to say about efficient markets, and market behavioralism is crap unless it's in terms of game theory mentioned while establishing an assumptions critique of applied EMH.

All correlations go to 1 when times are bad :).

6 - Most proponents of index investing realize that you have to look at >19 year times frames. 30 is the number that is often bandied about.

7.

30 years is a nice, round figure that encompasses a large portion of the saveable income period for most people who retire at 65. Having a 30-year strategy is certainly interesting, but one can hardly assume we have the data to assume that it is a reliable retirement strategy to choose an index now and follow it for 30 years. That's one of those assumptions built on the exuberance of the last 22 years and the relative stability of the US government.

"In the long run, we are all dead."

Charles:

I was mocking all of them. As in there are numerous so-called explanations for what happens in the financial markets.

Me, I invest and hope for the best. Sometimes I think all the info available is more of a hindrance then a help. After reading everything I could easily justify taking my money and sticking it in a shoebox. Or that tin can.

But I roll the dice. No risk, no reward!

I've always argued with friends and coworkers that investing in the stockmarket short-term is no different than playing poker.

General Electric just wins.

Change that formula to "Old NFL teams and the Broncos", and you've got yourself a 33/40 clip.

10:
I can't figure out if you're saying this is a good thing or a bad thing.

If somebody could guarantee me the same return on stock investments as I get from poker, I'd let them manage my money in a heartbeat. (Of course, I have basically no money to manage, so I play at low stakes, which is I'm sure why I'm able to make money.)

Another thing here, the Dow Jones is the most inaccurate index out there. It is the cost of about a hundred different stocks added together, then divided by a floating point number that I believe is a fudge factor to deal with stock splitting and stock buy-outs in companies in the index. It in no way takes volume into account, so a dip in the price of the stock of the corporation with the least total stock value in the index has just as much effect on the index as a dip in the stock of the corporation with the most total stock value.

14:

It is a price-weighted index. You sort of understand what that means.

The S&P 500 is usually considered a superior index. But honestly, there are dozens of ways to index the market and lots of different interpretations of the data.

I thought the Dow was only 30 companies.

"People use everything from BusinessWeek covers to blatantly irrational calculus like Merton-Scholes-Black to blind guessing to justify their investments."
Ok, I am not trying to be snarky but didn't they win a nobel prize for this?
Isn't that formula used to price options?
I did read the book "When genius failed"
I thought it was really good.
What I took from it was that
1. The guys at LTCM had this unshakeable belief in their models,
2. Probably didn't think about fat tails enough
3. Made some really risky investments near the end.

Basically I thought the book indicted them for hubris more than anything.

2: Why is index investing irrational? It seems that, provided that the economy as a whole grows, it ought to provide a reasonable return.

I love the idea that the economy will keep growing indefinitely. Its like the 1800s never left us.

Boy are the social sciences still primitive.

19: What exactly are you proposing as an alternative? The economy will grow smaller with each passing year until it vanishes in a cloud of zeros?

Yay! Off-topic ramblings!

#6 (and followups) - Given that I started investing at 25, I'm pretty comfortable with my 45+ year investment horizon.

#10 - Poker actually involves a considerable amount of skill. Short-term trading is more like blackjack - there's still some skill involved, but unless you're counting cards, the house is still going to win.

#20 - actually, given the demographic decline in most of the developed world, a long-term decline in economic output isn't quite as insane an idea as it used to be. Productivity, on the other hand, is an entirely different story...

Long-term indexing is basically a bet that in the long run, technological progress will increase our standard of living. If that bet is wrong, then my investment portfolio is about the last thing I'd be worried about.

No I would propose that we need to try to use capitalism more effectively. It is powerful tool. But we act like a child with his fathrs gun.

To stop maximizing things like the maximum use and distribution of resources, and instead focus on maximizing human flourishing. Sounds complicated, but there are a lot of really simple uncomplicated improvements that could be made right now.

Right now everything is built upon consumption. While some basic level of material things are good, more and more gives vastly diminishing returns.

If everyone in the us scaled their lifestyle back by 1/2 and worked 1/2 as much everyone would be a lot happier. But right now there are too many institutional and social barriers.

Am I being a paternalist and saying people are wrong about their preferences, yes. But I also think there are systematic institutions in society which prey on our psychology and distort our "natural preferences". Think advertising.

I personally think the US would be 100X better if we just eliminated all advertising. Yes peoples decisions might be slightly less well informed (or less misinformed if you are a cynic). But the benefits in reducing unneeded and useless consumption would be great.

I think what we're missing here is that this is completely retarded.

Re 21

If I'd met folks like this 10 years ago, I'd be a lot less red-state than I am now. Why is it that when I look to the usual channels for economic discussions, all I get is "corporations suck, maaannn"....

If you'll just look at my stock chart of JDS Uniphase performance from 1999-2000 and compare it to Chicago's defensive DVOA from week 1 to week 10, you'll see a high correlation.

And where my options made me money in 1999 were Good Rex's 100+ QB rating days. (Hereinafter: Bull market STOMPS) Where the stock started stumbling, like week 10, was when I started saying "this is now a bargain and doubled down." (Hereinafter: Slight Market Correction)

Then we get the postseason portion where my portfolio has some decent indexes and some worthless options and some formerly high-flying stocks worth nothing on one hand... and Bad Rex fumbling twice as Robert Mathis strips him and then throws two picks to Antoine Bethea on the other hand. (Hereinafter "I shoulda listened more to my finance profs" and "Bet the farm on Indy.")

The charts don't lie.

And to think, I wasted my time studying real estate and poker in b-school when I could have been watching football instead.

Where, under capitalism, is the incentive for the individual to work less hours? By working less the individual will earn less and therefore be unable to consume as much as before which is against the basic principals for consumer capitalism.

As for economic growth there is no reason for it to stop provided that population and capital growth continue and that new technology is developed. All of which is currently happening. What happens when the population reaches its limit level? It is likely that none of us will be here to see that so nobody will really know.

More economic development would be nice though since growth can be accounted for entirely by one section of the poppulation becoming far richer than the rest. Inorder to secure long term growth investment in human capital and services is required, which in theory will help with the redistribution of income in the economy.

The stock market/Super Bowl theory may be silly, but it's prompted a decent discussion, hasn't it? :)

#27 - you're right - what's up with that? More ROBO-PUNTER and Catholic Match Girl discussions!

Or maybe we can start an irrational Keynes-Friedman debate.

Or maybe I should get back to work.

I think I saw in US Weekly that ROBO-PUNTER is dating Catholic Match Girl. They were spotted together making out in the stands at the NFC Championship Game while wearing Groucho disguises. Not that I have ever opened US Weekly...

17:

Black-Scholes is based on an incredibly irrational set of basic assumptions about the marketplace.

The assumption at LTCM was that providing liquidity in certain areas would make markets MORE efficient. In some respects, this is true, because the disappearing profit margins in bond spreads is why they moved to stupider equity arbitrage decisions in the first place.

BUT, the problem is the assumption about increasingly efficient markets became very briefly and powerfully untrue with the "flight to liquidity" in 1998 as nations in the East started defaulting - hard. The risk premium for potential insolvency had been too low and when the spreads rapidly dilated to account for the difference LTCM endured breathtaking losses.

The biggest problem with Black-Scholes is that capital is too concentrated in too few hands to compensate for occassional irrationality in a manner that indicates that models built open account for extremes properly.

#22

"No I would propose that we need to try to use capitalism more effectively."

Translation: I want other people to make economic decisions according to my value system, rather than theirs.

:)

22:

The most powerful kind of advertising is word of mouth. That's why advertisers are spending more and more on viral stuff. Keep in mind one of the most powerful compulsions to buy is the the feeling that we need to keep up with our peers.

#29 - Praise the lord - anything to keep CMG away from Reche Caldwell. Think of the damage their children could do with their soul-sucking eyes.

#32 - Anybody else here find themselves owning 17 Chevy Silverados for some inexplicable reason?

35:

(LUCY enters holding a massive keyring with what appear to be dozens of keys emblazoned with the GM logo. DESI peers out from under a pile of red envelopes containing past-due notices.)

DESI: LUCY! You have some 'splainin to do!

LUCY: But Desi! I was just keeping up with the neighbors! We can't let them have more Chevy Silveradoes than we do!

DESI: But we have 6 mortgages! Some knuckle-dragger just reclaimed the band's drumset! Do you want me playing on pots and pans?

(Knocking on the door. LUCY opens it)

JOHN COUGAR MELLENCAMP: (crowd whistles) Hey neighbor! Spare a cup of sugar?

(All begin singing)

ALL: THIS IS OUURRRRRR COUNTRYYYYYY...

Re 33

It feels good to be noticed. Thanks.

I'm sure I saw ROBO Longsnapper with Catholic Match Girl's far less attractive cousin, such is the way of the unnoticed special teamer.

The point of index investing is not that you are guaranteed to make money over the long run. It's that index investing is a lower cost alternative to active money managers, who rarely beat the index, when taking into account fees and transaction costs.