[HN Gopher] Stock Market Returns Are Anything but Average
___________________________________________________________________
Stock Market Returns Are Anything but Average
Author : RickJWagner
Score : 206 points
Date : 2021-04-30 11:48 UTC (11 hours ago)
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(TXT) w3m dump (awealthofcommonsense.com)
| hpkuarg wrote:
| I mean, just look at last year, when the S&P 500 index plunged
| over 30%, then proceeded to nearly double from then until now, in
| the midst of a global pandemic that froze big chunks of the world
| economy. Stock market returns make no sense.
| nemothekid wrote:
| I can never coalesce the whole pandemic and stock returns thing
| with the actual "fundamentals" of these companies. Yes - there
| was a pandemic, but the 5 largest companies in the index,
| Apple, Amazon, Microsoft, Facebook and Google, which make up
| nearly 20% of the index all had _insane_ revenue growth. Amazon
| nearly doubled it 's profits, Google growing as much as 30%.
|
| When every other investment vehicle, except maybe housing is
| cratering you have a one-two where stocks looks great to invest
| in, and are much better than everything else. If it were to
| ever pop it would be because _other_ investment products
| started to get much healthier - which to me isn 't a bad thing.
| ycombinete wrote:
| I've made 15% on an 80/20 VWRA/IGLA split since September 2020.
| It scares me. It feels like too much. Like it's going to pop.
| thrower123 wrote:
| It's been a long, long run. If you ignore the drop from last
| March that was recouped within months, it's been a strong
| ramp ever since the second half of the Obama presidency.
| Vanguard tells me I've done better than 16% over that period,
| just invested in the boring VTSAX index fund.
| xur17 wrote:
| I might agree that general stock market prices are quite
| high, but arguing that "they went up 15% in 6 months" doesn't
| seem particularly strong. That has occurred historically, and
| doesn't automatically mean it's overpriced.
| ycombinete wrote:
| I'm quite new to it, so that's reassuring to hear.
| September was when I made my first purchase.
| JohnPrine wrote:
| just forget about it and never take the money out
| pydry wrote:
| The jump was probably caused by the 2.3 trillion in MBSes and
| treasuries bought by the fed.
| tarruda wrote:
| Instead of seeing as high returns, you can also look at it as
| money losing value due to excessive printing of last year.
| sojournerc wrote:
| Exactly. Same with housing. They are not more valuable, the
| dollar is less valuable relative to them and likely will only
| get worse as equities and real estate are the good hedges
| against inflation, causing a positive feedback loop.
|
| Higher interest rates would create an incentive for
| traditional savings, but would destroy companies (and gov)
| holding big debts.
| TheHypnotist wrote:
| I'm not sure where you are but housing over the last year
| is a real supply/demand market condition. They aren't
| arbitrarily being overbid 10%+ because the dollar is worth
| less suddenly.
| sojournerc wrote:
| Sure, but supply is limited in part because of the
| wealthy folks buying properties they will not use as a
| residence to hedge against inflation.
|
| That real-estate is the least risky manner to protect
| wealth is a result of low interests rates and
| inflationary monetary policy. Printing as many dollars in
| the last year as there were in existence before, has
| perturbed a "normal" real-estate market. More dollars
| flying around means overbidding 10% is possible,
| especially since the additional interest is relatively
| negligible (wealthy folks will still take a loan in such
| conditions since rates are at rock-bottom).
| jonfw wrote:
| Supply is mostly limited because demand is up among
| millennials and material shortages have increased costs
| and delayed construction.
| sojournerc wrote:
| I'll agree there is natural price pressure upward, but
| the recent acceleration is concerning, both in equities
| and real estate values.
|
| Millennials were buying houses before all this too (I am
| and have) without this level of inflated prices
| (depending on where you are and how "free" the market
| is).
| staticman2 wrote:
| Except measuring the value of money as something other than
| the ability to provide consumption (the ability to buy things
| you consume, rather than investments) doesn't make sense,
| regardless of how fashionable it is on this site to throw
| around the term "asset inflation".
| muskox2 wrote:
| What is your explanation for the explosion in asset prices
| over the last year, if not inflation? Do you think the
| assets have become fundamentally more valuable?
| malandrew wrote:
| One explanation is to look at the wood market. COVID
| restrictions have severely constrained supply and the
| wood suppliers are unable to keep up with demand.
| CarelessExpert wrote:
| > What is your explanation for the explosion in asset
| prices over the last year, if not inflation?
|
| Well, a few ideas immediately spring to mind:
|
| a) Historically low interest rates are causing people to
| chase gains elsewhere. Again, people end up looking to
| the markets. This has been an ongoing trend exacerbated
| by...
|
| b) For folks not on the margins, discretionary spending
| was severely curtailed last year. They had to do
| something with that extra cash. Many people, during a
| time of tumult, chose to save. This is only exacerbated a
| trend that started way back in 2008 due to similar post-
| disaster psychological scarring. Where did people put the
| money? Into the markets.
|
| c) Wealth concentration means a huge amount of the cash
| floating around has landed in the coffers of the largest
| institutions and individuals. Those institutions aren't
| using that cash to buy chips at the 7/11. They're either
| i) saving it, which means putting it into the market, or
| ii) using it to buy up assets (e.g. acquisitions) which
| itself bids up prices.
|
| In short: What's going on the market probably has
| absolutely nothing to do with what's going on on
| mainstreet.
|
| Of course, that's been true for the last 10 years as
| folks on the fringes continued to predict hyperinflation
| post-2008. But, the great thing about disaster
| predictions is you can always just move the goalposts
| out...
| mellavora wrote:
| There is a big difference between
|
| "things are getting more expensive"
|
| and
|
| "things (that I already own) are getting more expensive"
|
| Apologies for the snark; I've been around the "what is
| inflation really measuring" debate one time too many.
| berkes wrote:
| Tell-tales are all over the place. From explosion in
| asset prices _world wide_ and _cross-industry_ to micro-
| signals, such as goods coming in smaller packaging (for
| the same price) or slightly increasing grocery prices[0].
|
| In my bubble, its mostly tinfoil-hat-wearing crypto-
| enthusiasts pointing at examples of how toiletpaper comes
| in smaller packages-for-the-same-price, so my view is
| skewed.
|
| But its safe to consider all these as datapoints that
| indicate possible worldwide inflation is building up.
|
| [0]:
| https://politicalcalculations.blogspot.com/2020/01/the-
| price...
| Nasrudith wrote:
| Slow inflation is the norm. Because if you have whole
| generations working and aren't experiencing growth things
| are deeply wrong. Not just "corporate lobbyists or those
| connected to officals have disproportionate influence"
| wrong but "masses of people working cannot improve their
| skills, processes, or products at all".
|
| That is a very hard state to get even as a paranoid
| police state or literal aristocracy which views a
| minority of small farmer able to sustain their own plot
| as an existential threat. It is deeply unnatural in the
| "low probability" sense like your cat walking back and
| forth across a keyboard or swatting at it and writing
| passages of famous authors low.
| staticman2 wrote:
| My guess is:
|
| 1) Bonds and bank accounts are paying less than
| inflation, so to not lose money you need to invest in
| stock. That doesn't mean inflation is high rather bank
| accounts stink.
|
| 2) People figured out based on recent fed action that the
| U.S. has a policy of privatizing the gains and
| socializing the losses. Therefore stocks appear to not be
| risky, so people bought them up. The only reason you'd
| put money in a bank account rather than stock is stock
| can go down, but if you think the government will
| intervene to prevent stock going down, you might hold a
| greater amount of assets in stock, bidding up the price.
| nocommentguy wrote:
| Actually, measuring the value of money as something other
| than the measuring stick to compare capital assets doesn't
| make sense, regardless of how fashionable it is to defend
| money printing by verysmart internet economists.
|
| See what I did there? It's not an argument.
| staticman2 wrote:
| Okay, let's phrase this another way.
|
| If your ability to consume food, water, shelter, and
| entertainment has not been impaired but you are
| complaining about "asset inflation" because you learned
| economics from message boards perhaps you are being
| haunted by nonexistent boogeymen and need to chill out?
| nocommentguy wrote:
| If you're not being hurt by the fire alarm, maybe you
| should stop spreading conspiracy theories about there
| being a fire?
| staticman2 wrote:
| I wouldn't call some random person howling at the moon a
| fire alarm.
|
| Never mind that online people have been predicting super
| inflation since at least 2009. I remember a Youtuber in
| 2009 that knew economics more than President Obama's
| advisors because Duck Tales did an episode on inflation.
|
| But I guess by defining inflation as "stocks going up"
| the Duck Tales expert could have made it categorically
| impossible to be proven wrong since stocks tend to go up,
| further removing Duck Tales guy from the mainstream.
| nocommentguy wrote:
| Ok you've convinced me, I'm going to consume products
| instead of holding capital assets /s
|
| Take a look at ag futures my dude.
| roenxi wrote:
| There has been a big leap in technology over my lifetime.
| "Not impaired" isn't the target, if all the wealth gains
| weren't being directed to asset owners by asset price
| inflation then the people who were working to create them
| would be getting a bigger share.
|
| I've done the obvious thing and bought assets, but it
| keeps getting harder and at some point maybe all the
| people who are working hard might notice that they are
| doing all the work and people with assets are getting all
| the benefits. The government should be more neutral on
| whether asset owners or workers get the benefits of work
| - the market is naturally slanted enough without it being
| further tipped towards asset owners.
|
| You might be happy in stasis. But this is an age of
| wonders and the people who do the work to bring it about
| should be compensated roughly in line with their
| contribution. As would be happening if the government
| didn't keep leaning in with monetary policy to prop up
| asset prices relative to wages.
|
| As a bonus, if the government did leave the market alone,
| people would probably work harder and there'd be more
| stuff to go around, even ignoring the fact that more of
| it would be distributed to the sort of people who work
| hard.
| staticman2 wrote:
| 65.8 percent of americans own a home according to an
| internet search. (An asset). If you want to discuss
| wealth inequality, I don't think a term like "asset
| inflation" is necessarily the right way to go about it.
| Can't we just use terms like home affordability?
|
| I just think reinventing the term inflation encourages
| sloppy fringe conspiracy thinking.
|
| It's my understanding if the government didn't intervene
| in markets we'd get events like the great depression
| returning periodically, which probably are in nobody's
| interest.
|
| We should really be discussing the right government
| policies or the wrong one, but I doubt the answer to the
| problems of our time is zero policy.
| lotsofpulp wrote:
| When you need to pony up an extra $100k for a down
| payment and your monthly payment goes up $300 for the
| next 30 years because real estate prices rise, is that
| not impairing your ability to consume other things?
| staticman2 wrote:
| It stinks that housing prices have gone up, but
| fortunately you can rent instead, which is accounted for
| in CPI measures of inflation.
|
| I would think we could discuss the affordabity or
| unaffordability of homeownership without making up terms
| like "asset inflation" and falling into alternative fact
| rabbit holes about the collapse of U.S. currency.
| lotsofpulp wrote:
| Renting is not owning, and I question the utility of
| CPI's method of measuring it that way.
|
| My contention is increased real estate prices are
| affecting people's lives in various ways, such as
| delaying families, not having families, moving people
| away from their networks, and at least allowing for a
| smaller portion of spending on other things in life due
| to a larger portion going into real estate.
|
| Personally, I would label this asset inflation, but I
| don't know about the whole currency collapse thing.
| imtringued wrote:
| It's a problem in a lot of developed countries.
|
| I don't know how to describe it, it's almost as if they
| have stopped "developing".
| staticman2 wrote:
| I don't disagree with your main points but we have terms
| like Housing Affordability Index we can use to discuss
| this. We don't need to use imprecise terms like "asset
| inflation" which can mean different things to different
| people.
| imtringued wrote:
| Consider that the Fed increases the money supply through
| debt. This means that for the money supply to increase, there
| needs to be an increasing amount of debt because eventually
| people pay back their debts and most of the money the Fed
| introduced into the economy disappears.
| achenatx wrote:
| they totally make sense. The money supply increased from 12T to
| 20 trillion under trump. The money supply under biden is about
| to increase another 5T.
|
| We are seeing the effects of the increase in money supply as
| inflation in the price of equities.
| hourislate wrote:
| A Pandemic and multiple conflict zones were no more than a pot
| hole. The markets have pushed higher with no end in sight. The
| Fed and Treasury are making sure that if there is no one to buy
| stocks they will. There is no end to the support the Federal
| Reserve will shoulder for the markets.
|
| With Governments around the world determined to never let the
| Economy fall or stay down even if it means directly sending
| money to the population and spending trillions at a moments
| notice to support Wall St there is no chance that over the long
| term the market will ever fall and stay down again.
|
| Not even a WW or a natural disaster of the like we have never
| seen would keep the markets down. We would be naked, homeless
| and hungry and the market will continue to march higher.
| History is a perfect example of that.
| nfRfqX5n wrote:
| i've been thinking the same thing for a couple years now.
| lots of people keep harping on doomsday scenarios, but it
| seems too many people have too much invested in the market
| for it to fail
| ed25519FUUU wrote:
| That type of intervention prolongs the inevitable, but
| certainly won't stop a collapse.
| Someone1234 wrote:
| It starts to when you ask yourself: Where else are people meant
| to store money? Since interest rates and bond rates were at
| historical lows. So you have people who are looking at 10% YOY
| returns on one hand and 0.2%/2% on the other and making the
| rational decision.
|
| Does this make stocks overinflated? Yes. Is it going to
| suddenly pop? Unlikely, since the conditions that caused it
| won't suddenly change (e.g. certain bonds have ticked up 1%~
| but taken months).
| JohnJamesRambo wrote:
| > Is it going to suddenly pop? Unlikely,
|
| I disagree.
|
| https://www.currentmarketvaluation.com/models/buffett-
| indica...
|
| Unless you mean will it pop tomorrow, then yes that is
| unlikely. But the chances it pops "soon" seem quite likely.
| And it will be very ugly. I don't know if we have ever seen a
| spring coiled this tight from money printing.
|
| https://fred.stlouisfed.org/series/M1SL
| lg wrote:
| but what is a 'pop'? maybe ordinary swings in both
| directions due to various minor panics and manias and
| profit-takings that average out to a decade of nominal
| gains but depressed real returns?
| nscalf wrote:
| 'Pop' can also take the form of increasing inflation,
| making people take bigger risks for returns, leading to a
| bigger pop that is not coming soon. People saying this
| market can't sustain need to think about the inverse:
| what needs to happen for this market cycle to last 5-10+
| years?
|
| "The market can stay irrational longer than you can stay
| solvent."
| kqr wrote:
| You don't have to choose one thing. A portfolio of two assets
| that are sufficiently uncorrelated can provide substantial
| returns over either one alone. They don't even have to be
| cointegrated. One of them could even have net negative
| returns, and it still works.
|
| A split between equity and bonds still seems prudent, I
| think.
| [deleted]
| berkes wrote:
| > Is it going to suddenly pop? Unlikely..
|
| This is not financial advise, but an investor myself, I'm on
| the other end of the spectrum. "Is it going to suddenly pop?
| Certainly! We just don't know when, how much and for how
| long. It could be june 2021, it could be 10 years after the
| Great Sino-Russian war of 2038".
| partiallypro wrote:
| The saying is that "As Long as the Music Is Playing, You've
| Got to Get Up and Dance." You can't -not- invest because it
| doesn't make sense and the valuations are insane because
| you could miss the dance or the encore.
| foobarian wrote:
| Something a lot worse will happen in 2038. I'll be keeping
| my system programming skills up to date for sure.
| aynyc wrote:
| _the markets can remain irrational longer than you can
| remain solvent._
| Nasrudith wrote:
| That isn't sudden in the usual meaning. What is meant by
| the question "Are you going to suddenly die?"? If a safe
| falls on you death will be sudden but there isn't any
| reason to believe you will be around falling safes
| historically. You may have some hidden defect. Sure you
| will die eventually even if you were unaging, but what is
| usually meant is "Do you have any known fragility like say
| a weak heart, high risk of stroke, or a habit of using
| something volatile in dosage like speedballs or
| carfentanil? "
| bryanlarsen wrote:
| We get articles on HN about once a week arguing that massive
| inflation is coming soon. I think all of these articles are
| misguided. With such low interest rates, the Fed can and will
| raise those rates to prevent inflation.
|
| That interest rate rise will likely pop the bubble.
| aklemm wrote:
| Prices are on the rise throughout the economy, so I'm
| starting to think the inflation has arrived.
| heliodor wrote:
| Covid has disrupted many things in the economy. That
| alone means some prices will go up. But it might be
| temporary.
| bryanlarsen wrote:
| And the Fed is starting to walk back their prediction
| that an interest rate rise before 2023 is unlikely.
| Zr40 wrote:
| > Where else are people meant to store money?
|
| Money isn't stored in other assets. It's transferred from the
| buyer of an asset to the seller. It doesn't cease to exist
| simply because you traded it for stocks (or gold or anything
| else). Now the seller has to deal with the consequences of
| holding the money you previously held. A rational trader
| factors in the costs of money when they price assets,
| therefore one doesn't avoid those costs by trading money for
| other assets.
| nostrademons wrote:
| Right, and so the seller then has to put that money back in
| the market in some other asset at marginally higher prices,
| lest they lose money to inflation holding it in cash (or
| fixed-denomination assets).
|
| This is the natural consequence of negative real interest
| rates. With positive rates the infinite series representing
| the "discounted value of all future cash flows" converges
| to a single dollar value. With negative rates the series
| diverges: the "discounted value" of future cash flows is
| greater than their nominal value, simply because you're
| losing money with competing investments. The rational value
| of any investment that generates positive and predictable
| cash flows becomes infinite.
|
| Right now the only thing holding a lid on equity valuations
| is the expectation that the Fed will eventually raise
| rates, and so cash flows from time periods > 2023 need to
| be discounted at positive rates. If that doesn't happen, or
| if they don't raise rates by more than the inflation rate
| at the time, things will go boom.
| thehappypm wrote:
| This is always what I think of when I think of
| cryptocurrencies.
|
| You're not parking your money somewhere, you're giving it
| to someone else. Every time you buy BTC someone else is
| getting paid. Money goes in circles.
| mywittyname wrote:
| Two economists are sitting at a bar, one pulls out a
| checkbook and writes a check for $100,000,000 then hands
| it to the other economist. The second economist looks at
| the check, smiles, then hands it back.
|
| The first economist calls the bartender over and orders a
| bottle of champagne. The bartender asks what the
| celebration is about, and the economist responds, "we
| just grew GDP by $200 million dollars."
| skybrian wrote:
| Sure, fraudulent transactions exist. The difficulty is
| figuring out how much it matters.
| mrits wrote:
| 10% return investing into a company doesn't even sound as
| crazy as 10% return on a savings account.
| tom-c wrote:
| Not only this, but with the near zero interest rates and
| perceived impending hyperinflation, people are taking out
| massive margin loans to bet on assets. Archegos isn't the
| only one, they just happened to get caught with a dumb
| position. When the interest rates kick up, we'll likely see a
| dual effect here(stocks react, high rates mean it's harder to
| service debt for speculators and actual companies) and a
| 2008-like scenario except our bad bet is on stocks instead of
| mortgages
| Tangokat wrote:
| Stock market returns make sense only when you realize the
| currency is actually just losing value. All currency is being
| devalued so you don't see it in currency pairs but scarce
| assets go up quickly.
| hamilyon2 wrote:
| I think that given how vast is USD influence, currencies all
| over the world will lose their value with dollar. But not
| every currency, economies that rely on mining natural
| resources more should have their currencies better against
| USD.
|
| This is not the case, as far as I can see.
| ivankolev wrote:
| Actually CAD is trending up against USD
| Nasrudith wrote:
| Why would mining help? Resource extraction is the low end
| of earning potential. You mostly need the terrain and a
| willingness to pollute to break into it. It isn't that
| scarce. Industry makes much more than resource extraction
| and advanced services make more than industry.
| rcMgD2BwE72F wrote:
| Stocks market returns only represent the return of the
| companies that are listed on stock exchange. If the economy
| stagnates overall but the small (unlisted) companies suffer
| while the big (listed) ones boom, then the stock market returns
| increase in a stagnating economy but it makes sense.
|
| The problem here would be the belief that stock market is a
| mirror of the main economy. Personally, I believe the stock
| market represents very well the interest of the richest
| capitalists.
| nocommentguy wrote:
| More like the value of the dollar has roughly halved due to
| record money-printing and this is reflected in capital assets
| firsts.
|
| https://fred.stlouisfed.org/graph/fredgraph.png?width=880&he...
|
| MMT apologists are the modern day petit bourgeois. Trust the
| experts!
| Aunche wrote:
| Much of the increase was just banks relabeling their M2 money
| as M1. This happened when banks stopped penalizing people
| from withdrawing from their savings account more 6 times a
| month.
| imtringued wrote:
| Yeah, it's annoying, it ruins the usefulness of the charts
| but it has no short term or long term significance.
| clomond wrote:
| The value of the dollar has not halved....
|
| Against a basket of currencies, the US dollar index is
| approximately 10% lower than it was from the start of the
| pandemic. Pointing to the fed money supply chart as evidence
| is woefully misleading.
|
| Dollar index historical: https://tradingeconomics.com/united-
| states/currency
| berkes wrote:
| > Against a basket of currencies,
|
| Counterpoint would be that against "a basket of assets" it
| is decreasing in value rapidly.
|
| The EUR is probably tanking just as fast. What you are
| doing is like saying "shipping prices for steel have not
| increased, because the price to get a kilogram of steel
| across the ocean is hardly more than the price to get a
| kilogram of coal across the ocean".
| LatteLazy wrote:
| The stock market is about future expectations. As soon as you
| know that, the last year makes perfect sense. Oh no, a plague =
| crash. Oh wait, it will be shitty for 6 to 24 months but
| actually not that bad and people are still buying stuff just as
| much as before = Boom.
| weeboid wrote:
| When S&P plunges more than 10%, buybuybuy. 30%? Shit go full
| margin and back up the truck. I'm sitting on 2x since Dec.
|
| Protips. Saas is the thesis. Long term solar is a 100x-1000x
| easy-ish bet. Capture is "good enough", we are going to solve
| storage. Transmission will significantly collapse into storage.
| Game will change. The entire energy game.
| imtringued wrote:
| 100x? I think that is at the edge of what the EV market can
| accomplish.
| pc86 wrote:
| > _Long term solar is a 100x-1000x easy-ish bet._
|
| This is WSB-level nonsense.
| jonfw wrote:
| Reminiscent of the dot com boom. People said "this internet
| thing really looks like it's on the up and up" and they
| were right. What they didn't understand is that investing
| in 'pets.com' didn't mean they were investing in the
| internet.
|
| Yes the solar industry could probably go up 100x. No, the
| companies we're investing in today won't track that.
| ellisv wrote:
| In many situations, few or none of the observations will have the
| average value.
|
| It's been discussed here before -- search for the "When U.S. air
| force discovered the flaw of averages" story
| mumblemumble wrote:
| For that 2nd graph, he chose buckets that are uniquely poorly
| suited to evaluating his statement about whether returns tend
| toward 10%.
|
| It looks to me like, if he had instead made them (5%)-5%, 5%-15%,
| 15%-25%, etc., then the mode would indeed have been the 5-15%
| bracket.
| TrueDuality wrote:
| That range is covered in the article:
|
| > Just 18% of returns have been between 5% to 15% in any given
| year.
| ricardobeat wrote:
| The mode is already in the 10-20% bucket in the graph, changing
| the buckets would not affect the argument that follows, which
| does mention the 8-12% and 10-15% ranges:
|
| > If we look at the calendar year returns plus or minus 2% from
| the 10% average (so 8% to 12%) this has happened in just 5
| calendar years
|
| > Just 18% of returns have been between 5% to 15% in any given
| year.
|
| The main point being that the odds of you seeing any returns
| near the 10% number are quite low (18/100). It's just a lot
| more spiky than most people realize and not a safe way to get
| 10% returns unless you're looking at 30+ year periods.
| mumblemumble wrote:
| Yes, that's all true, but none of it changes the point that
| it's a poorly constructed visualization that is ill-suited to
| how the author is trying to frame their story. Edward Tufte
| would weep.
| ricardobeat wrote:
| The first graph establishes that there is no clear trend or
| clustering in the data points. The second one lets you
| visualize just how many years are around the 10% average or
| not, and then the argument is expanded from there.
|
| They seem to serve their purpose pretty well. There's
| probably a nicer way to display that, and maybe combine
| them as one of Tufte's principles would suggest, but I
| don't see anything that would make him weep here :) What do
| you have in mind?
| ellisv wrote:
| Agreed. I've seen that figure before (or some variation) and it
| is a bad way to try to argue his statement.
| kingsuper20 wrote:
| The stock market is an odd duck.
|
| What to make of it now? There's both colors of swans at work in
| terms of the plague, excessive money printing, per Peter Turchin
| (cliodynamics) a peaking cycle in civic unrest, a potential loss
| of reserve currency status, big changes in tech that still
| haven't been digested, low cost of transactions. Lotsa
| opportunities for froth.
|
| I'm still uncomfortable with it as a store of value. Not many
| people even owned stocks in the past, which makes historical
| comparisons a little problematic. It took things like the
| government heavily encouraging parking money there (401k, IRA,
| tax law changes, corporate tax law) and greater ease of
| transaction to put us where we are. You could argue that the
| entire market is a mania.
|
| edit: Just to indulge my logorrhea for a minute, I wonder to what
| extent we are seeing an organic change in stock markets, a form
| of evolution really, that takes advantage of human nature. In the
| last 40 years or so, it was bound to gather up all the
| accoutrements of video poker. Marketing and blinkenlights, random
| payoffs, a house percentage getting scraped off, the fiction of
| player skill. The payoff is greater than 100% due to it riding
| the back of GDP growth (and the growth of large companies at the
| expense of the small) but the science of the casino is built
| deeply in the human psyche. The stock market has to act the way
| it does simply to remain attractive to all the primates.
| weeboid wrote:
| The store of value is the infrastructure, edifices, and
| monuments of intellectual capital. Geez man, how much more
| parroting can you do? Would your comment history reveal talk of
| "NFTs wtf amirite!!!"
| lotsofpulp wrote:
| > You could argue that the entire market is a mania.
|
| Objectively, the big publicly listed companies are growing and
| have stellar financials. I can think of no better place for
| someone to invest, other than maybe diversifying into real
| estate with high demand, if they already have a significant
| amount invested in public equity markets.
|
| Public equity market prices are also backed by the federal
| government, at least on a 5+ year (maybe even 3+ year)
| timeframe per events over the last few decades.
| tarsinge wrote:
| But what are you investing in? The probability to sell (dump)
| <something> to someone in the future for a better price?
|
| > Objectively, the big publicly listed companies are growing
| and have stellar financials.
|
| If you don't invest for dividends then it doesn't give
| intrinsic value to the stock you own, it's just a proxy to
| the odds of your bet to dump it for a profit in the future.
| kingsuper20 wrote:
| It's worth considering that what you are buying is a dividend
| stream and/or the possibility of a company being bought,
| which simply gives you more stock. When you essentially lend
| money to GOOGL or AMZN, what are you actually getting back
| besides a story?
|
| Don't get me wrong, in the timespan of an individual's life
| it may well make sense to heavily buy into this system. I'm
| just making the point that it's current form is rather new
| and appears loosely connected to the real world and is
| subject to change.
|
| To me, the current stock market seems like a fiat currency
| without the threat of physical force. Maybe the temptation
| will be to increasingly merge government with large companies
| in order to keep the plates spinning.
| JohnPrine wrote:
| Just because a company isn't distributing dividends doesn't
| mean you're only buying a story. AMZN still has lots of
| room to grow. If I'm an investor in AMZN I would much
| rather them reinvest profits into a data center that will
| produce even more future profits than distribute the money
| to me. Once these growth companies top out in terms of
| their market share they'll pivot to distributing dividends,
| same as large established companies like Coca Cola
| kingsuper20 wrote:
| Personally, I'm not smart enough to pick individual
| stocks.
|
| At some point (perhaps now) Amazon growth is predicated
| on cannibalizing other companies. After all, the broad
| market can't exceed the GDP generally for the long term.
|
| My primary point here is not to argue about investment
| concepts, merely to state a concern about the
| artificiality of it all. Financialization is real and
| rather spooky.
| nostrademons wrote:
| Amazon growth has been predicated on cannibalizing other
| companies since 1995. Bezos was very specific about that
| in the business plan he presented to investors: he wanted
| to own _all_ of retail, and has largely succeeded in
| that.
|
| From a valuation perspective, what's so wrong about that?
| You _want_ to be on the side taking over the world.
| Otherwise you 're on the side that's getting taken over,
| and the value of your equity logically trends toward
| zero.
| lotsofpulp wrote:
| > he wanted to own all of retail, and has largely
| succeeded in that.
|
| They have a decent position in online retail, but they
| are very far from owning all of retail.
| skystarman wrote:
| The thing is there's a FRACTION of a percentage of people
| who are "good at picking stocks".
|
| Most PROFESSIONAL stock pickers don't beat the market.
| And those that do, a tiny fraction can do it consistently
| over a 5-10 year time frame.
|
| This is backed up by decades of data. But we still have
| millions of people who apparently think they are smarter
| than the thousands of professional stock-pickers who have
| MAs, PhDs and years of experience and do it full-time and
| still don't beat the market.
|
| And sure, many average joes were wildly successful with
| GME or whatever the latest meme stock is. Just as many
| people made a ton of money in the last tech bubble. Check
| back in 5-10 years...
| confidantlake wrote:
| Exactly. Just like if you get 1000 people in a room, odds
| are one of them will get a coin toss right 10 times in a
| row. Doesn't mean that guy is good at predicting coin
| tosses.
| [deleted]
| imtringued wrote:
| I agree with this, picking individual stocks is
| effectively a full time job. Most people looking for a
| moonshot only want to invest based on a "theme". E.g. you
| bet on the entire EV market.
| kaydub wrote:
| It has nothing to do with me thinking I'm smarter than
| all those guys. The market is irrational.
|
| I'm counting on being luckier than those guys more than
| anything.
| ahi wrote:
| CocaCola currently has a P/E of 32
| robjan wrote:
| You own the stock in perpetuity, not just for a year. As
| long as you don't expect the company to go bust any time
| soon that's not a bad PE ratio.
| ISL wrote:
| As recently as 2011, KO had a P/E of 9.
|
| https://www.macrotrends.net/stocks/charts/KO/cocacola/pe-
| rat...
|
| There are two ways that a P/E can return to a quasi-
| normal value. Either the price can go down or the
| earnings can increase.
|
| The mean and median values, since 1880, are about 15.
|
| "This time, it's different"
| https://www.multpl.com/s-p-500-pe-ratio
| v_london wrote:
| Stock prices are absolutely inflated, and as a small-
| scale investor I'm scared.
|
| However, I'm not pulling out because realistically,
| there's no other asset that's safer in the long run.
| Interest rates are close to zero so returns in bonds are
| low, inflation will eat away money held in cash deposits
| and don't even get me started on cryptocurrency, rare
| sneakers or other "alternative investments". I started
| investing in stocks in 2017, even then people were
| warning that we were in a bubble that was bound to burst
| at some point. Not investing would have missed me several
| years of above-average returns.
|
| But today, there seems to be a bubble on everything after
| all the money printing. So I'll keep investing in good,
| underhyped and stable companies and try to weather
| whatever storm, good or bad, will come in the next years.
| imtringued wrote:
| >So I'll keep investing in good, underhyped and stable
| companies and try to weather whatever storm, good or bad,
| will come in the next years.
|
| This is the obvious strategy, reduce your risk tolerance
| and go with proven companies. Put your money (fresh from
| your bank account, not from your portfolio) into
| moonshots when you can afford to lose them, after that
| put the moonshot money back into your boring but
| relatively safe investments. There are low volatility or
| stable dividends ETFs that specialize in this.
| [deleted]
| nostrademons wrote:
| So if earnings increase 3x the P/E goes back down to ~10.
|
| KO has excellent margins - last time I looked they were
| around 60%. That means prices * sales only has to
| increase by 5x to bump earnings up 3x. Food prices have
| been inflating at 10-15% recently; 15% inflation over 11
| years will get you there, and that doesn't include any
| growth in sales at all. These aren't unreasonable
| assumptions, given the macro environment: another 1970s
| inflationary episode would do it. (Indeed, Warren Buffett
| made a lot of his money investing in Coca-Cola and See's
| Candies during the 1970s.)
| kgwgk wrote:
| > margins - last time I looked they were around 60%. That
| means prices * sales only has to increase by 5x to bump
| earnings up 3x.
|
| I am not sure about the logic (are you assuming marging
| expansion?) but probably you are trying to say something
| else than revenue has to increse "only" five-fold for
| earnings to triple.
|
| > Food prices have been inflating at 10-15% recently;
|
| Sure.
| ISL wrote:
| I'm not sure I follow all the arithmetic here (I'm pretty
| sure that, at fixed margin, revenue would only need to
| increase by 3x to increase earnings by 3x), but I did
| follow up to see what Berkshire had paid for Coca-Cola.
|
| This thoughtful Quora post claims that Buffett made his
| first purchase of KO at a P/E of 29.
|
| https://www.quora.com/What-was-the-P-E-Buffett-paid-for-
| Coca...
| runako wrote:
| > When you essentially lend money to GOOGL or AMZN, what
| are you actually getting back besides a story
|
| Buying a stock is not lending money to a company. It's
| purchasing an ownership claim on future earnings realized
| by the company.
|
| For AMZN, the expectation of its investors is that it
| should not realize substantial (relative to revenue)
| earnings now so that it can grow further and thereby
| increase the long-tail earnings to which shareholders are
| entitled.
|
| GOOG, on the other hand, is returning money to shareholders
| now. In fact, they just authorized a program to return
| another $50B to shareholders. Our tax regime skews payout
| preferences, so that instead of paying dividends, some
| companies opt for share buybacks. But the net result is
| that cash is transferred from the company to its
| shareholders. You can see GOOGL's buybacks over time here,
| looks like they returned ~$31 billion to shareholders in
| 2020: https://ycharts.com/companies/GOOG/stock_buyback .
| seanmcdirmid wrote:
| Where does Amazon get all of the stock for employee
| compensation? Do they just have a large pool of
| outstanding stock in reserve?
| drewmate wrote:
| I'm not sure about Amazon in particular, but generally
| companies (especially tech companies) hold some
| percentage of stock in reserve for employee compensation.
| However, the company can also buy back stock on the open
| market either to take it out of circulation (and thus
| increase the value of outstanding shares) or use it for
| employee compensation. Finally, if the board (as a proxy
| for individual owners) permits it, a company can issue
| new shares for any purpose including selling to raise
| cash for operations, or giving to employees as
| compensation. This isn't free money, however. New shares
| tend to dilute the value of existing shares. So owners
| often prefer to raise money other ways, like debt that
| doesn't convert to an ownership claim in the way stock
| does.
| BurningFrog wrote:
| I don't know Amazon's specifics, but I believe that's how
| it's typically done.
|
| It doesn't have to be that large a pool as percentage of
| the company.
| kgwgk wrote:
| Essentially they create them as they go.
|
| Total shares outstanding plus outstanding stock awards:
| Dec 2011 : 468 million Dec 2012 : 470 million
| Dec 2013 : 476 million Dec 2014 : 483 million
| Dec 2015 : 490 million Dec 2016 : 497 million
| Dec 2017 : 504 million Dec 2018 : 507 million
| Dec 2019 : 512 million Dec 2020 : 518 million
|
| Existing shareholders lose 1% per year.
| kingsuper20 wrote:
| > It's purchasing an ownership claim on future earnings
| realized by the company.
|
| Which, as I said, can be realized via dividends or the
| sale of the company.
|
| I looked up their dividend returns. It ain't much.
|
| Keep in mind that tax law highly incentivizes the
| avoidance of dividends.
|
| We'll see (or maybe not). This business of involving the
| general public in stock ownership is a new thing, it
| really is new ground to cover.
| runako wrote:
| > can be realized via dividends or the sale of the
| company.
|
| Keep reading my comment. Share buybacks are another way
| of returning cash to shareholders.
|
| > involving the general public in stock ownership is a
| new thing, it really is new ground to cover.
|
| There have been discount brokerages for 50 years now. I
| guess that's "new" as compared to how long there has been
| money, but I don't know that it's "new" in the sense that
| we can't determine whether buybacks do have the effect of
| returning cash to shareholders (they do). Share buybacks
| have been allowed since 1934.
| WalterBright wrote:
| > Keep in mind that tax law highly incentivizes the
| avoidance of dividends.
|
| Combining Biden's capital gains tax, Federal estate tax,
| Biden's stepped up basis for estates, Washington state's
| estate tax, and Washington state's new capital gains tax,
| the top estate tax rate is now 70%.
|
| This ensures that tax planning will dominate investment
| strategies, which usually results in suboptimal investing
| and subsequently a lower performing economy.
| skybrian wrote:
| Whatever changes you think investors might react to need
| to be discounted by the likelihood of them being in a
| bill passed by Congress.
|
| It's not something I know a lot about, but it seems
| likely that Congress will make substantial changes to
| Biden's proposals?
| bluGill wrote:
| Changes depend on time. Biden is past the early magic 100
| days and now members of the house (and 1/3rd the senate)
| are realizing that they need to prepare for their re-
| election campaign in less than a year. The longer things
| go on the more concerned they will be.
|
| The democrats have the government today. The most
| democrat heavy handed set of bills will ensure that
| republicans take a veto-proof majority of both houses.
| Different levels of watered down will have different
| effects. There is a reasonable chance that no matter what
| they do they will lose the house next election (even
| passing bills that the republicans would like to author
| but wouldn't dare!), but the exact set of laws they pass
| will have a big effect on both who shows up, and how
| voters change their votes.
| aoeusnth1 wrote:
| Or can be realized in a share buyback program, which are
| massive. Dividends and buybacks are just slightly
| differently structured ways to return profit to
| investors.
| PragmaticPulp wrote:
| I think a lot of newcomers to stock investing in the past
| year have been given the wrong ideas about the stock market.
|
| When all of the headlines are about GameStop and Nokia and
| AMC and some kid who made it lost a lot of money on
| RobinHood, the stock market can feel like a place for
| gambling. Now that cryptocurrency prices are listed right
| next to stock prices, many people don't even understand that
| stocks are ownership shares in real businesses instead of
| just another ticker symbol to gamble on.
|
| Several times a week there are conversations on HN where
| commenters can't understand how crypto currencies are
| different than stocks or how stocks are any different than
| gambling or why stocks can have any value without paying
| dividends.
|
| I suspect many of those newcomers will be shaken out of the
| market during the next protracted drawdown. It's unfortunate,
| because they stand to lose a lot over the course of a
| lifetime of investing.
| dcow wrote:
| The problem is options/derivatives trading. That _is_
| straight up gambling. There's a meta market where you bet
| on the behavior of the market...
| kqr wrote:
| While that is a large part of it, it also seems like an
| unfair simplification, for two reasons:
|
| 1. You can construct portfolios of derivatives that are
| almost equivalent to holding the underlying except at a
| smaller initial cost. This gives you nothing but
| flexibility in ownership.
|
| 2. Remember that fire insurance is also straight up
| gambling that your house will burn down. Gambling counter
| to your interests is what we call insurance, and the
| proper mix of underlying and derivative is a hedged,
| lower risk portfolio than just the underlying.
| Der_Einzige wrote:
| When gambling, the house "always wins" over time. With
| options trading, that's not always the case. Anyone with
| a gambling addiction would be far better off doing
| options trading - their chances are much better.
| hattmall wrote:
| It is ALL gambling, options are just another instrument,
| they can make your gamble more risky or less risky
| depending on how you use them.
|
| Except in very rare cases stocks are entirely based on
| what investors think someone else is willing to pay in
| the future.
| whatshisface wrote:
| > _why stocks can have any value without paying dividends._
|
| Well, if a company was never going to issue dividends at
| any time in the future, or do dividend-alternatives like
| buybacks or a liquidation at the end of its life (not a
| normal option), or anything else, its shares would be
| worthless. I could actually imagine a tech company going
| out of business before its first dividend.
| bluGill wrote:
| Many have gone bankrupt without any form of dividend.
| Many others have gone on for years reinvesting in the
| business before doing a dividend. (I'm counting as buy-
| back as a dividend - with modern tax code it is currently
| a better way to do them)
| imtringued wrote:
| Yes, but everyone is aware of this. Nobody talks about
| cryptocurrencies "going out of business", even though
| this is a thing that happens all the time.
| ryandrake wrote:
| > Now that cryptocurrency prices are listed right next to
| stock prices, many people don't even understand that stocks
| are ownership shares in real businesses instead of just
| another ticker symbol to gamble on.
|
| This distinction is practically useless, unless you own
| enough shares to have even tiny sway at shareholder
| meetings. Owning 1/1000000000th of a company doesn't mean
| any extra value or power to you. The big difference between
| crypto coins and stock is that (some) stocks pay dividends.
| The ones that don't pay dividends are just speculative
| ticker symbols that go up and down in value--no difference
| from crypto names that go up and down.
| thisisnico wrote:
| Edit: (Some) Stocks that don't pay dividends still pay
| you. Most stocks now don't pay dividends. Either they
| reinvest in the business (growing the stock's value) or
| buyback shares with extra cash, (alternative method to
| dividends as they're returning value to you the
| shareholder.)
| DennisP wrote:
| Ethereum will effectively do share buybacks starting in
| July. They're switching to a system that burns the
| majority of transaction fees. If share buybacks are
| equivalent to dividends, then arguably this is equivalent
| to paying dividends to ETH holders, funded by the fee
| revenue paid by users.
| imtringued wrote:
| Yes, this is fine because the person paying for it is
| aware where the money ends up and the people who receive
| it know exactly who is giving it to them.
|
| With pump and dumps it is often not known who the
| beneficiaries are.
| ISL wrote:
| I'd preface that first sentence with " _Some_ ".
|
| Some stocks that don't pay dividends (or buybacks, or
| reinvest) straight-up consume investor's capital.
| hobs wrote:
| There's a large difference, one of those is based on a
| pyramid scheme with no inherent value, and one is based
| on a company delivering value to customers.
|
| With the state of the stock market companies can and do
| go under, but generally those doing something for people
| dont magically disappear overnight (like any crypto
| certainly can.)
|
| That's it; that's the difference.
| ryandrake wrote:
| I think the stock market has to a large extent (but not
| entirely) divorced itself from having much to do with the
| underlying value of companies or companies' business
| fundamentals. I can't otherwise explain astronomical P/E
| ratios and meme stocks.
| kqr wrote:
| Sure, but this is already priced in. Most equity doesn't
| go completely down the toilet overnight, but it also
| doesn't give you spectacular overnight returns.
|
| So it's still a game, only for lower stakes in both
| directions.
| bko wrote:
| > There's a large difference, one of those is based on a
| pyramid scheme with no inherent value, and one is based
| on a company delivering value to customers.
|
| Crypto is mostly a store of wealth, similar to a
| currency. It's inherit value is that it is fungible,
| transferrable and scarce. Unlike other currencies, the
| supply is not at the whims of fed officials and
| politicians. The difference is that you can't pay taxes
| directly in crypto. I like it as a hedge.
|
| Do you believe all currencies are pyramid schemes with no
| inherent value as they're based on nothing?
| jonfw wrote:
| Currency is transactional, not a store of wealth. I'd say
| it's a bad idea to store your wealth in currency,
| absolutely, and I'd cite it's lack of inherent value as
| the reason why.
| GZJOHN wrote:
| It's surprising to me how ignorant people commenting here
| know about cryptocurrencies. I would have thought this
| group would be immune to being so confidently incorrect
| but once in a while a topic comes up that I know a bit
| more about than average and I suddenly realize the Hacker
| News commenters are no different than any average bunch
| on a Facebook group but perhaps because they are experts
| in their narrow field they feel it makes them an expert
| in any field perhaps. All the better for those of us in
| the know though I guess: Keep calm and HODL on!
| imtringued wrote:
| >Crypto is mostly a store of wealth, similar to a
| currency.
|
| Currencies are not meant to store wealth. They are the
| exact opposite, a medium of exchange. From a
| macroeconomic perspective wealth can only exist in the
| real world. E.g. you own a house, a car or a factory.
| When you deposit money into a bank account, you are
| effectively delegating wealth and letting other people
| use your money to obtain wealth in your place. These
| people net a return because of their wealth and let you
| have a share of their returns.
|
| When you hoard currencies like Scrooge McDuck then you
| are neither spending your money, nor delegating wealth
| management to other people. The money has been taken out
| of circulation.
|
| Then there is the other side of money/currency, money is
| a claim to another person's labor, meaning if you fail to
| act on that claim the portion of labor that this claim
| represents has perished because of unemployment. The
| solution to this problem is inflation. If labor perishes,
| make the claim to that labor perish as well. If you do
| not want to lose purchasing power you will have to invest
| your money. Banks let you deposit and make your money
| available to those who are interested in investing on
| your behalf. You can also put your money into financial
| assets that directly represent physical wealth such as
| ownership of a company. If banks and financial assets
| fail, you can still invest your money yourself.
|
| >Unlike other currencies, the supply is not at the whims
| of fed officials and politicians.
|
| Considering the vast majority of cryptocurrencies meet
| their demise at the hands of their creators I'm not
| exactly sure where the difference is. A lot of
| cryptocurrency people talk about how the background of
| the team behind the cryptocurrency is very important.
| kqr wrote:
| Currencies are not based on nothing. They're based on
| taxation. As long as a huge group of people need a
| currency to stay out of jail, that currency has value.
| (And pretty much all currencies in history have had their
| value imbued in them by threat of violence.)
| [deleted]
| thehappypm wrote:
| Cryptocurrencies are basically stocks in nothing.
| titzer wrote:
| Until you can use them for payments writ large, they
| aren't even currencies, just speculation bubbles.
| reilly3000 wrote:
| Cryptocurrencies are currencies whose value lies in their
| technology and adoption. Neither the tech nor its users
| are 'nothing', they are in fact quite tangible.
| pradn wrote:
| Proof-of-work crypto prices are based on 1) mind-share 2)
| sentiment/momentum 3) institutional backing (hedge funds
| and companies legitimizing them) 4) price of electricity
| 5) cost per hash 6) hardware supply 7)
| legality/illegality/regulation. Proof-of-stake currencies
| only lack #5, cost per hash. What I'm trying to say is
| that there's components to the price that can drive
| purchase/sell decisions.
| hmsimha wrote:
| Cryptocurrency staking is effectively the same as
| dividends for investors, though staking rewards are often
| more predictable.
| MR4D wrote:
| I agree completely.
|
| Downturns are events where many participants learn how the
| market really works.
|
| It's an ugly reality check, but thankfully we have them
| frequently. Otherwise you get really overbought and then
| events like the tulip mania/bubble happen.
|
| Also, this isn't limited to stocks - back when whale oil
| was a thing, there were all sorts of booms and busts,
| depending mostly if a ship came in with or without a whale.
|
| Instead of Wall Street analysts, there were people with
| telescopes to view the incoming ships as far from port as
| possible to gain an information advantage.
|
| All of my research in this suggests this behavior is
| hardwired into human DNA and won't ever change.
| Red_Leaves_Flyy wrote:
| > the next protracted drawdown
|
| We should have seen this drawdown last year.
| thoughtstheseus wrote:
| The longer the bubble builds the bigger the bust. We've
| chosen growth over stability, fundamentals, and
| robustness. Once the U.S. struggles to stimulate its
| economy through deficit spending it'll hit a wall. It'll
| be fine for people but there will be a massive
| dislocation in the economy.
| Red_Leaves_Flyy wrote:
| I understand this. I'd much rather deal with the bad
| decisions of yesterday today than tomorrow. I guess for
| people that won't be alive in twenty years this is
| immaterial..
| willcipriano wrote:
| Check out the ages of elected officials, most are in the
| "won't be alive in twenty years" camp so the lack of
| foresight is unsurprising.
| Red_Leaves_Flyy wrote:
| That is part of my reasoning behind my statement. The
| other part is the desires and concerns of the largest
| demographics electing these same people.
| imtringued wrote:
| This is an argument in favor of pushing up inflation as
| soon as possible. Ideally inflation should be 2% and
| interest rates should be between 3-4% and it should stay
| that way forever.
|
| If there is a discrepancy from that ideal then it means
| that something is going wrong, and the longer that
| discrepancy lasts, the more things are going wrong. Those
| wrong things will be discovered as soon as interest rates
| are back to their normal level.
| kqr wrote:
| As long as people are still unemployed there should be no
| reason for the US with its sovereign currency to struggle
| stimulating the economy.
|
| Even if you guys would overshoot full employment your
| current president doesn't seem too frightened by the idea
| of taxing coins out of existence again.
| dnautics wrote:
| > It's unfortunate, because they stand to lose a lot over
| the course of a lifetime of investing.
|
| On the other hand, it's worth gambling in stocks because if
| you don't your going to lose your shirt in the upcoming
| inflation, so you might as well roll the dice and shot your
| shit at not winding up poor.
|
| Especially since there are tax increases targeted at the
| rich coming down the pike that are going to absolutely
| destroy you if you are middle class or poor, when a
| mcdouble costs $20 instead of $2 and the minimum wage is
| $100/hr instead of $15
| highfrequency wrote:
| There's a big difference between saying that a company is
| growing and has stellar financials, and saying that it is a
| great stock to invest in. Surely the _current price_ is
| relevant.
|
| Everyone can agree that Amazon is worth A Lot Of Money. The
| question is: is it worth $2T? or $3T? or $1T?
| [deleted]
| tarsinge wrote:
| This is my sentiment too. People seems to give the market far
| more importance than what it is in reality: an exchange for
| second-hand stocks, with money just circling that can never
| touch the company and the economy. And they also forget that if
| they don't invest for dividends they are just betting that
| they'll be able to dump the bag for a higher price in the
| future.
| gnopgnip wrote:
| Owning a stock is more than just dividends. You own part of
| the company, if it is liquidated you are paid based on the
| assets of the company.
| nend wrote:
| >You could argue that the entire market is a mania.
|
| You could also argue that the entire market is simply a
| reflection of society and humanity in general. As an American,
| I don't really see the market we've built as any more maniacal
| than the society we've built. They seem to go hand in hand to
| me.
|
| What defines how logical/maniacal our society is if not our
| social institutions?
| kingsuper20 wrote:
| At the very least it reflects the movement in the US economy
| from manufacturing to financial services (FIRE) to
| surveillance-based advertising.
|
| Perhaps the thing to do is to cut to the chase and declare
| leaves as money (h/t to Douglas Adams).
| duxup wrote:
| I remember the banking crisis and the money printing after
| that, it was absolutely assumed inflation would follow, how
| much was debatable, but there wasn't much debate about the
| impending inflation.
|
| Didn't happen... for <insert reasons that are now thought to be
| obvious but nobody knew before hand>.
|
| Who knows what to make of the rules these days.
| throwawaywindev wrote:
| Only because housing cost usually isn't included in the
| definition of inflation for some crazy reason. Housing costs
| are out of control.
| mywittyname wrote:
| Housing costs is included, I'm not sure where you got the
| impression it wasn't. And considering you thought its
| exclusion was "crazy," why didn't hearing that fact prompt
| you to investigate?
|
| https://www.bls.gov/cpi/questions-and-
| answers.htm#Question_1...
|
| https://www.bls.gov/opub/hom/cpi/calculation.htm#estimation
| -...
| BurningFrog wrote:
| Some say that inflation _did_ happen, but it ended up in real
| estate prices, which aren 't counted in the formal inflation
| definition.
|
| I'm not smart enough to tell how true that is.
| imtringued wrote:
| Evil landlord owns an apartment, he jacks up prices to the
| maximum possible that people can afford. Fed happens and
| the value of the apartment goes up. The landlord jacks up
| prices to maintain a stable price to rent ratio. Yet nobody
| can afford to rent the apartment.
|
| It's not really inflation, it's something different. The
| cost of financing has gone down. If financing dries up,
| real estate prices will go up again.
| intergalplan wrote:
| Yeah, I don't know how someone can look at housing prices
| say, 1990-2020 and say there _wasn 't_ inflation after the
| housing crisis. House prices dropped, but not as much as
| they "should" have to eradicate the evident bubble of
| '00-'08, despite the very public beating housing & banking
| took. And 2-3 years on they were shooting up again!
| tonyedgecombe wrote:
| Is it really inflation if the cost of a house doubles but
| the cost of servicing a mortgage halves because interest
| rates are so low?
| intergalplan wrote:
| This reads to me like "is it really inflation if money
| just got cheaper?" Which... I think the answer is "yes,
| that's exactly what it is"?
| [deleted]
| kqr wrote:
| No, that's just a single overlevered market with, well,
| the banks laughing all the way to the bank? Because
| apparently they can get away with it.
|
| Individual markets have crazy price increases all the
| time. It's happened to gold, oil, wheat, and virtually
| every tradeable thing ever, including housing. That it
| happens in one place is no reason to cry inflation.
| RobertoG wrote:
| >"Didn't happen... for <insert reasons that are now thought
| to be obvious but nobody knew before hand>."
|
| That's not exactly true, MMT was right about that beforehand,
| this is from 2009:
|
| "There are also those that claim that quantitative easing
| will expose the economy to uncontrollable inflation. This is
| just harking back to the old and flawed Monetarist doctrine
| based on the so-called Quantity Theory of Money. "
|
| From: http://bilbo.economicoutlook.net/blog/?p=661
| duxup wrote:
| I feel like saying it won't be 'uncontrollable' isn't the
| same as calling that there won't be inflation and getting
| the reason right.
| RobertoG wrote:
| I think you feel that way because you can't appreciate
| the argument from only a small quote. They get it right.
|
| The reason QE was (is) not inflationary is because that
| money it's not being spent in the economy, it's only
| adding bank reserves. Bank reserves make the interest
| rate go lower, but, it will not go lower than zero, after
| that you can create all the reserves you want.
|
| Lower interest rates make credit more cheaper, but
| cheaper credit doesn't influence the economy if nobody is
| borrowing.
|
| Also, bank lending is not constrained by reserves.
| Lowering the interest rate will make borrowing more
| attractive for borrowers, but that doesn't make easier
| for banks to lend, because they are not constrained by
| reserves. They are constrained by the number of borrowers
| to whom makes business sense to lend.
|
| So, the quantity theory of money is wrong and the
| fractional reserves model is a fallacy. That should be
| obvious by now. The Modern Monetary Theory guys were
| saying that, way before 2008.
| [deleted]
| AnimalMuppet wrote:
| In the meltdown of 2008, about $4 trillion disappeared. The
| Feds pumped $4 trillion into the economy. Net result: close
| to zero. That was good, because the result of $4 trillion
| disappearing was going to be quite a deflationary crash.
|
| The trick was going to be removing that $4 trillion that they
| injected at the right rate. And what actually happened is
| that they didn't remove it. Is it showing up now, years
| later, in asset inflation, because they failed to remove it
| all this time? I could see that.
| undefined1 wrote:
| we have high inflation, CPI is just not a good measurement.
|
| https://twitter.com/LynAldenContact/status/13875210431207587.
| ..
|
| https://tradingeconomics.com/commodities
| jayd16 wrote:
| The market can be pretty irrational but the 401k system means
| it can't fail. That system ensures it'll always have new dumb
| money poured into it. We'll bail it out one way or another
| because the middle class is tied to it.
|
| What an odd system, indeed.
| tootahe45 wrote:
| Just be glad the US has a relatively strong saving scheme
| like the 401k, without it everybody puts their money into
| real-estate. It has been happening in my country and has been
| going on for decades, causing house costs vs income to be way
| out of whack compared to US.
| paulpauper wrote:
| Recurring ,reliable revenues especially in large cap tech and
| payment processing (such as Visa, PayPal, MasterCard) is the
| main driver of the stock market and is why the market has done
| so well even though the economy feels weak otherwise and there
| is unrest. If companies can keep generating profit margins of
| 10-30%/a year, that is $ that must go to shareholders in the
| form of buybacks, dividends, or share price appreciation. This
| is what a lot of people get wrong about the stock market. Big
| companies, in tech, especial, are more profitable and dominant
| than ever. Never before have such companies generated so much
| cash.
| YZF wrote:
| Rather than looking at returns in isolation it might be more
| interesting to look at returns vs. P/E or vs. some other
| parameters like interest rates. e.g.:
| https://www.alger.com/AlgerDocuments/AOM_singleGreatestPredi...
|
| This is only a 20 year period which is pretty short, but hey,
| doesn't look as random any more.
| mortehu wrote:
| Each data point covers 10 years, and there's only 20 years of
| data. There should be only two points on the graph. The other
| points are just blends of the two independent time periods.
|
| The implied decision is whether to invest over the next ten
| years, and the chart implies that you can make this decision
| every month.
| YZF wrote:
| The question is whether the current P/E impacts (long term)
| future returns. I think it does. Robert Shiller thinks it
| does (or at least the cyclically adjusted P/E).
|
| Having a data point per month is not unreasonable. Prices and
| earnings move. The 20 year period for a 10 year return
| horizon is clearly too short. I'd like to see the same data
| over longer periods.
| mortehu wrote:
| Prices move, but the move from month 0 to month 12 is
| highly dependent on the move from month 1 to month 13. It's
| statistical nonsense to treat them as independent variables
| in a regression model. You could use any biased random walk
| as your price series with this approach and get a
| correlation p value of 0.00001.
| YZF wrote:
| If month 1 was the crash then 0 to 12 and 1 to 13 look
| very different. No?
|
| Aren't you basically saying your precise entry point to a
| 10 year period doesn't matter, e.g. if you enter at year
| zero or year 2, or January vs May in year zero? But
| clearly it matters a lot because the market can make huge
| moves in short periods.
|
| In other words, you're saying to look at 10 year returns
| we should just take each decade on its own with no
| overlap? Clearly if I pick 1970-1980, 1980-1990,
| 1990-2000, or pick 1975-1985, 1985-1995, 1995-2005 I'm
| gonna end up with very very different results? And sure,
| at some point the overlap becomes too fine. But saying
| that 2 decades is just 2 data points doesn't sound right
| either?
|
| I definitely would like to see an analysis over a much
| longer horizon, that'd be a more significant result.
|
| EDIT: Totally agree the points are not independent. But
| it feels like there's still residual value (which I can't
| quite put in mathematical terms) from this "moving
| window".
| jplr8922 wrote:
| The author is doing a lot of work to explain that the statistical
| average takes a long time to converge to the expected return
| because the distribution is volatile (high stdv, skewness,
| kurtosis, etc).
|
| Do note however that his analysis only concerns itself with the
| US. Including other countries would show that US is one of the
| few countries where stock markets were never interupted for a
| long period of time because of its political stability. If you
| dont beliveve it will keep going this way in the future, invest
| in other countries.
| thehappypm wrote:
| Stocks are backstopped by the fact that companies are highly
| highly incentivized to keep the prices high. If suddenly the
| bubble pops and stocks fall 90%, every CEO suddenly has a very
| real fiduciary incentive to get the stock back up. Cut cost to
| yield dividends, buybacks, whatever it takes.
| arisAlexis wrote:
| Taleb in his Black Swan book makes exactly the counter-point for
| this type of article that uses statistics and curves to predict
| and explain something that doesn't fit laws of averages and bell
| curves. Interesting read. The statistics of the article are just
| observational without any kind of predictive power or meaning.
| theknocker wrote:
| Cool to see everyone gearing up for "it's totally not overtly
| hostile to the citizenry if elitists crash a domestic economy to
| help global markets behave more efficiently twenty years from
| now."
| ahelwer wrote:
| There are all sorts of interesting facts you can pull out of
| this, like how if you missed the top 10 best days in the market
| from 1999-2019, your return was cut in half. If you missed the
| top 20 best days, you actually lost money:
| https://www.fool.com/investing/2019/04/11/what-happens-when-...
|
| Basically never mistake annualized return over a long period of
| time for your expected return in a given year (or day, etc).
| There will be some really really good years, and a few really
| really bad years. If something grows consistently with low
| variance over a long period of time, that's a red flag! It's
| likely to be a "picking up pennies in front of a steamroller"
| type trade.
| [deleted]
| paulpauper wrote:
| >f something grows consistently with low variance over a long
| period of time
|
| but that is what compounded interest is, no?
|
| But I agree that this why market timing does not work, at least
| not for the vast majority of ppl and funds. If you miss those
| good days, you are screwed.
| kqr wrote:
| Yes, and you can expect relatively steady compounding returns
| at the risk-free rate (the clue is in the name.)
|
| When you see return rates higher than the risk-free rates
| that still seem like they exhibit low variance, then one of
| two things are true:
|
| 1. Either you have found something that produces way too much
| reward for its level of risk. This is for anything publicly
| traded somewhat unlikely.
|
| 2. Or you have found something that's prone to rare, but
| incredibly big swings. The fatter the tails, the more likely
| it is you'll get a long, good run followed by something that
| completely wipes you out.
| Der_Einzige wrote:
| Ah yes, real estate, the classic example of something "growing
| consistently with low variance over a long period of time", is
| akin to "picking up pennies in front of a steamroller".
|
| Nah, actually, I think that growing consistently with low
| variance over a long period of time means that the asset is
| objectively a good buy...
| charwalker wrote:
| Pat of most modern economic theory around the stock market is
| slow and steady, sustainable growth. It's a fairly 'liberal'
| policy choice as you can't, say, tweet something to spike or
| drop a stock price and benefit (or have those in the know
| benefit). For example, several economists say that stagnation
| in the market is not necessarily a bad thing and shooting for
| the moon in stock pricing by chasing continual growth can lead
| to companies overreaching or expanding then crashing hard,
| hurting consumers and their employees worse than the gains
| created short term.
|
| https://www.wbur.org/onpoint/2020/02/12/economists-slow-econ...
|
| This is in addition to noting the stock market is not a
| representation of the economy or its health. slow, continual,
| predictable growth is critical for planning economic and fiscal
| policy along with preparing for rough times, like when a
| pandemic shuts down global production.
|
| I often refer back to the stock market or simply inflation rate
| before the US went off the gold standard and instituted massive
| reform and regulation of markets. Some years the US would
| bounce back and forth between extreme negative then positive
| inflation rates, ex:
|
| https://tradingeconomics.com/united-states/inflation-cpi
|
| Set the chart range to MAX for effect, or see a table of data
| here:
|
| https://inflationdata.com/Inflation/Inflation_Rate/Historica...
|
| In 1920 inflation was close to 22% in the spring but a year
| later was about -15%. No way that was helpful for preparing for
| an economic downturn like we see in the general accepted 10
| year business cycle today. Image starting a company and all
| your initial costs are 20% higher than you planned, then once
| you get production up and running your goods are worth 15%
| less! Market stability breeds stability but not high return
| brokerage accounts.
| vmception wrote:
| very true but we have no other advice that works for the
| upwards mobility of a large population
| tut-urut-utut wrote:
| And if you avoided the worst 10 days, your earnings double. If
| you avoided 20 worst days, your earning doubled again.
|
| What is the point of such trivia? That most of the profit or
| loss happens during the days of high volatility?
| TuringNYC wrote:
| >> And if you avoided the worst 10 days, your earnings
| double. If you avoided 20 worst days, your earning doubled
| again. >> What is the point of such trivia?
|
| The point is -- it is hard to avoid/miss the 10 worst days
| since you dont know which ones they will be. It is easy to
| capture the 10 best days because the easiest thing to do is
| be invested all the time.
| j7ake wrote:
| Isn't it easy to miss the bad days because after it
| happens, you can buy stocks?
| qotgalaxy wrote:
| Maybe the next ten days after that are the ten worst
| days.
| grumpwagon wrote:
| The point of the trivia is arguing against trying to time the
| market. Lots of people predict crashes are coming, so shift
| money from equities to cash or bonds. Unless you can time it
| perfectly (you can't), it is better to hold because you don't
| know when the best or worst days are.
| mertd wrote:
| But the analysis assumes you timed the market "perfectly"
| and sat out only on the 10 best days.
| tut-urut-utut wrote:
| I agree that timing the market usually doesn't work. But it
| doesn't work in both ways. You are equally likely to miss
| or hit both good and bad days, with the same or similar
| impact on total return.
| gimmeThaBeet wrote:
| The author's colleague had a blog post on the topic,
| reasoning that missing either the best or worst was not a
| particularly interesting "what-if" since the best and
| worst days are both associated with the same bouts of
| higher volatility. He used the 200 day moving average to
| try and model the effect of 'missing' both. It honestly
| didn't turn out so bad, but one takeaway is that
| backtesting (aside from not being a necessarily great
| projection) does not model personalities.
|
| https://theirrelevantinvestor.com/2019/02/08/miss-the-
| worst-...
| ceejayoz wrote:
| The good and bad days are not equally likely to be
| equally good/bad, though. Long-term, the market tends to
| rise; the good days will outnumber the bad in either
| quantity or quality.
| charwalker wrote:
| If one is equally likely to miss both good and bad days,
| but overall the market is up 10%+ in a year (repeated
| over decades), then money left in the market will double
| every 7 years or so (Rule of 72 [1]). In that way it is
| almost always preferable to invest and hold in index
| funds.
|
| The S&P 500 has returned about 13.6% return per year from
| 2010-2020 [2], or doubling your money about every 5.5
| years. If that rate continues or increases then of course
| it makes no sense to try and time the good or bad days.
|
| Of course, some will argue that a pure index fund market
| won't be priced correctly as it is active/day traders who
| continually buy and sell to set a proper market rate. If
| everyone buys and holds like Bitcoin then there is no
| true reflection of the companies value in the stock.
| Those that would go under otherwise may be buoyed or
| bought out just for their stock value. There are many
| opinion articles out there on the topic, but so far it
| hasn't been observed at scale (I think).
|
| [1] https://en.wikipedia.org/wiki/Rule_of_72
|
| [2] https://www.businessinsider.com/personal-
| finance/average-sto...
| z2 wrote:
| This is a guess based on anecdotes on recent volatile
| periods, the general scenario could be this:
|
| 1. Market falls sharply.
|
| 2. General public panic and sell, while market timers
| double down.
|
| 3. Market falls further, market timers panic and sell.
|
| 4. Markets rebound sharply, with the above-mentioned
| people missing those good days.
|
| The key assumption is that at least some really good days
| usually follow really bad days.
| baby wrote:
| I can attest. Beginning of covid: stocks are crashing,
| going down 10% every day, I read the paper from that uni in
| London that says we are going to be alternating light and
| heavy lockdowns for the next 12-18months. More than a year
| of lockdown? How can the economy survive this? I'm like:
| sell, sell, sell. Right when I sold the market went up like
| crazy and has more than recovered now.
| nightski wrote:
| Right and you probably do not follow the market very
| closely. Which is fine, that is most people. If you start
| watching it closely though (and I mean over several
| months to years) there are many patterns that emerge. I
| knew a lot of people that bought the dip last year. They
| weren't worried about how long it would take the economy
| to recover, or if it would go down further because they
| knew things were VERY cheap and it would eventually come
| up unless there was a global economic collapse at which
| point it wouldn't matter anyways.
|
| Most I knew dollar cost averaged down. It paid off very
| well.
| cableshaft wrote:
| Usually I'd say your correct. Like if I hadn't been laid
| off and decided to go back to school I would have had no
| problem buying the dip during the recession in 2008.
|
| But last year could have gone very differently. The US
| (and the world in general) was tested in all sorts of
| ways last year in ways the people and the government are
| really not used to, and things probably should have gone
| a lot worse than it ended up going, but somehow the
| country made it through intact, although unfortunately
| with a lot of dead people and failed businesses.
|
| It went well (for the stock market, at least) this time.
| Next time, maybe not, especially with climate change
| continuously getting worse with almost nothing being done
| about it.
|
| For myself, I didn't bother selling any of my 401k (and
| kept putting money into it), so I didn't lose anything,
| but I did start putting spare money into other assets.
| kesselvon wrote:
| That assumes you have the time to make up for bad market
| years like that. If you're retired and you see the market
| tank like that, its hard to fight the urge to not panic
| sell
| splithalf wrote:
| It's such a fundamental contradiction you see it
| everywhere. The quote "buy low, sell high" says we should
| time the market. Even the classic "percentage of bonds to
| stocks should be your age" requires us to time the market.
| And if you just buy stock when you happen to have spare
| cash, that too is "timing the market."
| sokoloff wrote:
| I would argue that the percentage of bonds should be your
| age is not timing the market in any meaningful sense of
| that phrase. (I also think that's too conservative an
| asset-allocation, but in any case "make a periodic
| rebalancing trade according to this preset formula" is
| the opposite of "time the market".)
| altvali wrote:
| The part about timing it perfectly is not true. You can
| time it, for example predict that the market will crash,
| shift your money to bonds now, the market goes up for
| another year and then dips below the level you exited at.
| At that point, you can shift back and you'd have made less
| money than someone who timed it perfectly but more money
| than someone who stayed.
| baby wrote:
| I understood it as: HODL
| PeterWhittaker wrote:
| This "trivia" points out the flaw in the "long term average"
| argument: The stock market is occasionally so volatile that
| 40 days out of 34,675 have an inordinate effect on returns
| over those 34,675 days.
|
| Over 95 years of trading, 0.12% of days account for far, far,
| far, far more than 0.12% of market impacts.
| dasil003 wrote:
| Yeah so what are you going to do about it?
| pc86 wrote:
| What kind of argumentative nonsense comment is this?
| hattmall wrote:
| Hedge with options. You can even out the highs and lows,
| make your returns predictable with in a tight window and
| act accordingly.
| randoramax wrote:
| I think it's a legitimate question: we all have a large
| chunk of savings stuck in this game because of perverse
| incentives set by corrupt/inept US gov. Now what?
| dasil003 wrote:
| The point is that of course there are the outlier days
| that disproportionately affect gains/losses, that doesn't
| invalidate the long-term average argument though unless
| you have some way of identifying those periods in
| advance. If you could do that then you A) would not tell
| anyone until B) the SEC came knocking at your door to
| explain how you turned $1k into $1B over a very short
| time span.
| ericmay wrote:
| > What is the point of such trivia? That most of the profit
| or loss happens during the days of high volatility?
|
| Simply that you shouldn't try and time the market, but
| continue to "buy and hold". The likelihood of picking these
| exact 10 or 20 days is near 0, so it's an irrational thing to
| do.
| akomtu wrote:
| I'd politely disagree. The massive fall and recovery around
| March 2020 was easy to predict, so I did and made a
| handsome amount of money. I mean, if a small asteroid fell
| on an important trade route or if another serious pandemic
| began, would you seriously suggest to just hold the stocks?
| ericmay wrote:
| I did too, but I think that's besides the point.
| nunez wrote:
| the point is to remind folks that if you want to invest in
| the market safely, use index funds...otherwise, enjoy
| gambling
| simonbarker87 wrote:
| Time in the market vs timing the market. The former is easier
| to do but you need to be patient, the second could give more
| gains but the chance of you timing the market right is
| basically zero
| boringg wrote:
| I think the way you should think about the stock market is
| similar to beating the Casino in blackjack & card counting.
| When you know the deck is rich ins face cards make more
| aggressive bets, when its low in face cards be frugal. I.e.
| don't put lots of money into the market when its hot & put more
| money in when its cold. That way you statistically have a
| better chance on getting a good return.
| weeboid wrote:
| Please let us know, on a percentage basis of you earnings,
| how much is allocated to personally managed stock portfolio?
| boringg wrote:
| How is that relevant?
| lotsofpulp wrote:
| > I.e. don't put lots of money into the market when its hot &
| put more money in when its cold. That way you statistically
| have a better chance on getting a good return
|
| Was the market hot in 2017, 2018, 2019?
| boringg wrote:
| With the caveat, historical returns do not predicate future
| returns. If you invested in the S&P 500 from 97-99 and
| didn't sell before the large sell off of 2000 you would
| have to wait until 2010 before you saw positive inflation
| adjusted returns.
| ahelwer wrote:
| You are making the classic mistake of confusing domains
| exhibiting a normal distribution of outcomes (casino games)
| with domains exhibiting an exponential distribution of
| outcomes (the market). This is the sort of thinking that
| traps people into believing "it went up a lot, therefore it
| has to revert to the mean and go down" or vice versa - there
| is no basis for such a belief in exponential domains.
| EVa5I7bHFq9mnYK wrote:
| There is also no basis for such a belief in the casino
| games.
| ahelwer wrote:
| Certainly not in the sense of the gambler's fallacy, but
| you can be sure that someone's fortunes from playing
| casino games will exhibit mean reversion in the sense
| that the next game is always more likely to bring their
| cumulative winnings closer to the house edge rather than
| further from it. Not so with the stock market. The stuff
| about card counting is basically impossible to do these
| days but can alter the house edge, and also doesn't apply
| to the market.
| boringg wrote:
| Actually there is a basis for it in blackjack and how to
| card count. That said I'm not sure what casino's are
| doing these days ever since the card counting was figured
| out.
| selimthegrim wrote:
| They use a decent size shoe of several decks and
| reshuffle more than just in between rounds. Furthermore,
| the dealer only deals from a subset of the shoe IIRC.
| boringg wrote:
| I figured they had a way to break up the benefits of card
| counting - thanks for informing me!
| kqr wrote:
| The market appears to be _subexponential_ , which is a
| worse class of distributions than the exponential. Just as
| a technical note.
| boringg wrote:
| That is a very astute point. I say it more as a broad
| model. And to the point of casino games - I speak to
| blackjack only which has a finite set of cards in a deck.
|
| I would argue, broadly, that there is a finite value in the
| stock market we just don't know what it is (and it changes
| significantly) but I do agree with you that there are some
| very significant differences and is a potential flaw in the
| analogy.
| Raidion wrote:
| Could you define what metrics you would use to see if the
| market is "hot" or "cold"? Could you let us know what each of
| those metrics would change in terms of contributions?
|
| It's easy to say "hot and cold", but those things aren't
| easily definable, but it would be easy enough to backtest any
| theory you have. I'm pretty skeptical it's going to be
| valuable without getting into PhD level math coupled with an
| experts understanding of global politics and trade.
| ed25519FUUU wrote:
| How do you know any of that though? Nobody really does. The
| fancy hedge funds and the skittish retail investor are all
| just guessing. Buy and hold seems to be the only sane
| strategy.
| boringg wrote:
| I don't know, clearly - no one knows. I do know that
| investing in equity during the hot years is not a winning
| strategy at any point in time, unless you sell before it
| goes cool. At least from an index based fund perspective.
| If you stock pick (i.e. Amazon at peak 99 prices you would
| still have performed exceptionally well)
|
| The stock markets are cyclical - it's tough to see how we
| can continue to buy into a market that is considered
| overbought by many financial talking heads. Once returns
| materialize elsewhere + cap gains tax changes materialize I
| expect froth will come out of markets...
| AJ007 wrote:
| It is like driving down the street by looking out the back
| window. You are confident there isn't a dump truck parked
| in the middle of the street, because you didn't see one in
| the last 3 blocks.
| SavantIdiot wrote:
| How do you "miss" 10 days?
|
| Unless you are a day trader (aka gambler), "normal person
| investing" is about trickling cash into an account slowly over
| time into low-cost funds/etfs, covering the grid, and pretty
| much never selling until retirement. Maybe a rebalance here or
| there over the decades, but you're never "out" unless you're
| paranoid and liquidate into a cash position, but refer to point
| A.
|
| This is the strategy myself and many of my college friends took
| when we graduated in the late 80's. And we're all pretty comfy
| right now. We had a few buds that went all day-trader and they
| lost their shirts, with one and only one exception.
| azemetre wrote:
| When the 2008 crashed happened the office I worked in had
| lots of people take their money out of their 401ks, IRAs, or
| brokerages for years. In hindsight it may have been
| irrational but from what I remember, people were scared. Some
| people lost their job for years (remember the various news
| stories about 99-week unemployment people?), you needed
| whatever money you could get. If that meant cashing out
| everything you had, so be it.
|
| There were other people that weren't fazed by it and
| obviously had the chance to not miss the "days."
|
| Guessing this type of anecdote may be more common than people
| think.
| kqr wrote:
| Not only more common -- that is effectively what crashes
| are: demand for liquidity exceeds the supply, and the way
| markets are set up, this condition causes an even greater
| demand for liquidity, in a feedback loop.
|
| Most of the time, you can get liquidity, but only at a
| price that really hurts. Sometimes you can't get it at all.
| azemetre wrote:
| That makes sense, growing up my parents never contributed
| or had a 401k and I myself didn't start taking investing
| or contributing to anything until last year.
| pwarner wrote:
| My old job 401K was shifting into the new job 401K, so for a
| week or so my $ was in a check in the mail between companies,
| and I think I missed like 2% gain. It's semi real $. It's
| annoying.
| SavantIdiot wrote:
| The investment horizon for the average American is 45
| years, 2 weeks doesn't mean diddlysquat.
| johnwheeler wrote:
| I agree with this except I think if you know a stock or two
| is good, diversification is unnecessary. I've only had two
| stocks in my portfolio for the last ten years.
| SCUSKU wrote:
| I am happy for you that your 2 picks have been good. But
| most likely you have been lucky (maybe you picked AMZN,
| TSLA). Modern portfolio theory states that diversification
| gets you closer to better returns on average with lower
| risk. [1]
|
| https://en.wikipedia.org/wiki/Modern_portfolio_theory#Diver
| s...
| johnwheeler wrote:
| I would say people who picked amzn and Tesla are lucky.
| The jury is out on amzn. Bezos did something no public
| company ever did to the extent he did. He put customers
| before profits in an extreme way. Then, he built another
| multi billion dollar unit from scratch with AWS. So far,
| it's worked out but the PE makes it speculative
| nonetheless. But the gap is quickly closing making it an
| investment grade issue. I don't know so I leave it alone
| knowing I'll regret it one day. That's fine. I stay away
| unless I'm 95% sure. I would say s&p 500 represents 100%
| certainty overtime, because if it wasn't, life as we know
| it wouldn't be the same anyway we'd have bigger problems.
| Tesla is just a dumb gamble. There's no justification at
| all for its price and history shows us what can happen
| with auto stocks.
| SavantIdiot wrote:
| Methinks 'johnwheeler' is full of it and probably just
| discovered reddit, WSB, and stonks
| kevincrane wrote:
| Same for the lottery, if you just know which numbers are
| good then you only have to buy one or two tickets ever and
| you're set for life.
| johnwheeler wrote:
| This is a bad analogy. The stock market is not a lottery.
| It's a place to buy and sell shares of a company. Most
| people treat it like a lottery and that can serve you
| rather than hurt you if you know what you're doing.
| blaser-waffle wrote:
| For all the DD you do, there is no predicting the future.
|
| Plus there is a very real incentive for companies to do
| shady things, e.g. Volkswagon or Enron.
|
| Are you sure those companies you're holding aren't lying
| out of their ass? Can you _prove_ that? Like, unless you
| 're in the accounting dept. at those firms -- or someone
| who can otherwise get those numbers -- you can't.
|
| At that point it's gambling. It may be akin to counting
| cards, where you can make probabilistic guesses, but best
| case is still uncertain.
|
| Otherwise you're rocking a very special secret, or are
| manipulating the market. But for the rest of the us stock
| plebs, is effectively gambling.
| johnwheeler wrote:
| Yes.
| ProAm wrote:
| You cannot study about lottery numbers however. Whereas
| studying business isn't impossible.
| z2 wrote:
| Ultimately it's about risk (permanent loss) control, and if
| you've done the research into those couple of companies,
| have high confidence in their continued success, and are
| diligent in continuing to update your views, then it sounds
| like you're managing risk well. There's always the chance
| of unknown, idiosyncratic, and potentially disruptive
| factors though--from a financial planning and risk
| management perspective, even founders are urged to
| diversify away from their own company's equity eventually,
| regardless of how successful they are.
| johnwheeler wrote:
| Yes there's a bigger chance of a black swan event. You
| have to answer for yourself if the extra point or two of
| cagr is worth it.
| nO0b wrote:
| > This is the strategy myself and many of my college friends
| took when we graduated in the late 80's. And we're all pretty
| comfy right now.
|
| I wonder if your Japanese peers in a Nikkei 225 fund over the
| same time period would agree with your strategy. Buy-and-hold
| for them is still down 50% over the last few decades.
| lixtra wrote:
| Not if they were slowly and continuously trickling in as
| the gp suggested. Still Japan is a cautionary counter
| example to the stock market always goes up.
| thethimble wrote:
| Why would expect the Nikkei 225 to provide similar returns
| to the S&P 500? Company quality varies greatly between
| these indexes.
| blaser-waffle wrote:
| Japan has a population of 125 million people and is one
| of the largest economies in the world (3rd / 4th largest
| depending on if you're using GDP or PPP).
|
| Why wouldn't they have similar companies?
|
| Lots of well known global brands in Glorious Nippon, too.
| tasuki wrote:
| > Why would expect the Nikkei 225 to provide similar
| returns to the S&P 500?
|
| Why would you expect them to be different?
|
| > Company quality varies greatly between these indexes.
|
| Can you elaborate on that? Has the "company quality"
| differed between the two indexes 30 years ago and was the
| market mispricing it? Is the market pricing these indexes
| correctly now? Do you think the S&P 500 is going to
| provide better results than Nikkei 225 going forward?
| sichtlinkair wrote:
| > It's likely to be a "picking up pennies in front of a
| steamroller" type trade.
|
| What does that mean?
| kesselvon wrote:
| There are trades where you can make a small profit regularly,
| but on bad days you take huge losses. The huge losses
| outweigh all the potential profits by a large margin. Just
| like picking up pennies is a small gain while risking death
| to do so
| ahelwer wrote:
| Traders who engage in such behavior are also humorously
| said to "eat like chickens, shit like elephants"
| MR4D wrote:
| It means doing something very risky for little overall gain.
| ahelwer wrote:
| Think of a slowly advancing steamroller, with pennies
| scattered before it. You can run around picking up these
| pennies, for small but consistent gain over a long period of
| time. Just don't take your eye off the steamroller!
|
| The canonical example in recent times is the XIV blowup of
| 2018, which inversed VIX (a security tracking market
| volatility). So if you held XIV you basically bet that large
| market moves wouldn't happen - you're shorting volatility.
| Take a look at the graph to see how that ended up; the
| steamroller caught up to them!
| https://www.rcmalternatives.com/2018/02/why-did-xiv-implode/
| paulpauper wrote:
| it's like shoplifitng. big penalty if caught, small reward if
| you get away with it, which most do until too late.
| asymetical payoff.
| skrtskrt wrote:
| A good example is selling options for premium.
|
| You can sell a put option against a stock.
|
| Say the stock is $100 right now, and you sell a put option
| one month out for a strike price of $90.
|
| The seller of this put option essentially bets that the stock
| will still be above $90 in a month.
|
| The buyer of this put option is betting that the stock will
| be below $90 in a month.
|
| For executing this trade, you, the put seller, receive
| premium, say $1. The buyer pays you $1.
|
| You have a sold a very high likelihood bet and received $1
| for taking on the risk. The buyer has bought a very low
| likelihood bet and spent $1 for the chance to win.
|
| This sounds great! In the long run, stocks tend to go up so
| you should win this bet the vast majority of the time,
| collect your $1, and make the same bet again.
|
| This is the "picking up pennies" stage.
|
| Now what is the steamroller? The steamroller is the low
| likelihood but very high loss scenario that this stock or ETF
| absolutely crashes while you are on the selling side of this
| open put option bet.
|
| If it crashes to $N where $N < $90, the put option buyer has
| the option or right to sell you the stock at $90, even if it
| is worth hardly anything. So you have now paid $90 for a
| stock worth less than $90. It could be $0, the company could
| be bankrupt. Your loss is -($90-N)+$1. (Note that because of
| your $1 premium, your breakeven on this trade is when the
| stock is at $89, not $90.)
|
| If you put up the collateral (the money needed to buy the
| stock at $90) for the bet with your own money, you are out
| that money. If you put up collateral on margin (borrowed
| money) you can be mega screwed.
|
| This is the steamroller. You picked up $1 here and and there
| but then you got hit with a -$20 or -$50 or -$90 steamroller
| when you may have not even had the money to cover it.
|
| Yes the steamroller is very low likelihood, but you have to
| hit pick up a LOT of pennies in a row to still come out on
| top after getting hit by the steamroller.
|
| It is important to note that there is a ton more nuance that
| can go into running this kind of strategy, but in general for
| the average person, buy and hold will always outperform a
| strategy like this for several reasons, not least of them
| being that the income received for premium is taxed at income
| rates, where gains from buy and hold will be taxed at capital
| gains rates.
|
| Very sophisticated investors do run this strategy with many
| ways to handle the tail risk, and their sophisticated
| strategies do not necessarily stop them from getting
| absolutely screwed when things go bad like during the flash
| crash at the beginning of coronavirus. Modeling and
| mitigating tail risk is hard, because terrible events are not
| as common as normal events and when things go terribly, they
| usually go terribly in a way no one has ever seen before.
| jdasdf wrote:
| Just a quick note here, selling puts is actually the worse
| of the examples you could have mentioned, because you can
| simply use it as a way to maintain an open order for the
| stock at a given price while getting paid for it.
|
| Selling calls would be a better example, since in that case
| losses are potentially limitless.
| skrtskrt wrote:
| True, but a casual investor is less likely to sell naked
| calls with infinite loss.
|
| When they sell covered calls and lose the bet, the only
| loss is missing out on the run up of the stock.
|
| I mostly just used the put example because it maps better
| to compare to a buy and hold strategy - good if market is
| up, bad if market is down.
|
| It's also a well-known pennies-in-front-of-steamroller
| strategy that hedge funds have gotten very publicly
| burned on before, so anyone interested could research
| more.
| bryanlarsen wrote:
| If there's a highway made of pennies that is being maintained
| by a steamroller, you can make a very consistent but small
| profit by picking up pennies every day. Except for that one
| day that you get run over by a steamroller.
|
| A better example is imagine that every day you bet on coin
| flips. Every day you go home after you're up $1. You start
| off with a $1 bet, and double the bet every time you lose. So
| for example one day, you might lose $1, then lose $2, then
| win $4 for a total profit of $1.
|
| It's a foolproof strategy! You win $1 every day and you can't
| lose. But of course it assumes that both you and the house
| have an infinite stake. But if not, one day the house flips
| 16 heads in a row and you don't have $65536 to bet a 17th
| time so you go home down $65535. Kind of makes your $1 daily
| wins look pretty stupid now, doesn't it?
|
| There are _tons_ of options plays available on the stock
| market that have a risk profile similar to the coin flip
| example.
| slv77 wrote:
| This is called a martingale bet (https://en.m.wikipedia.org
| /wiki/Martingale_(betting_system)). Doubling down on losses
| would be an example of a martingale bet.
| jiscariot wrote:
| I think this is also a reason why tables generally have
| set limits.
| confidantlake wrote:
| I don't think so. If you as the player make bets a series
| of bets, each with a negative expected value then your
| total expected value will also be negative. It doesn't
| matter if you double after every loss.
|
| The limits are mostly because the casino can't afford to
| take on a 20 billion dollar bet from someone like Bezos.
| Even if it has a positive expected value, they will still
| go broke the 49% of the time they lose it.
| j7ake wrote:
| The martingale strategy works because this theoretical
| gambler has infinitely deep pockets to withstand the
| losses.
|
| Setting bet limits can reduce the effectiveness of the
| martingale strategy.
| confidantlake wrote:
| I don't think it matters, even with infinite pockets.
| Let's say 3 is the max number of losses we will accept.
| 50-50 coin flip, start of betting a dollar. 7 out of 8
| times we win a dollar. 1 out of 8 time we lose a dollar,
| double lose 2 dollars, double, lose 4 dollars quit.
|
| (7/8)(1) + (1/8)(-7) = 0
|
| Generally: n = number of losses before quit.
|
| E(x) = (1-.5^n)(1) + (.5^n)(-2^n+1) =
| (1) - (1/2^n) - (2^n-1)/(2^n) =
| (2^n)/(2^n) - 1/(2^n) - (2^n+1) / (2^n)
| = (2^n -1 - 2^n + 1) / (2^n) = 0
|
| So with a 50-50 our expected value is 0 even with an
| infinite bankroll. Which makes sense, there is no way to
| transform a series of neutral or negative expected value
| bets into a positive expected bet by combining them.
| slv77 wrote:
| With an infinite bankroll there is no reason to stop at
| three losses. In an infinite series of fair coin flips
| there will be deviations in the distribution around the
| mean. A gambler can simply choose to stop at any point of
| excess "wins" as long as he isn't stopped out due to
| exceeding his bankroll.
| kccqzy wrote:
| Your trades have a near-zero (probably positive) mean but
| very negative skewness.
| b0afc375b5 wrote:
| I think it means doing something high risk for low reward.
| kccqzy wrote:
| It means doing something high risk but the risk has low
| probability, and for low reward.
|
| No rational mind would do anything high risk low reward,
| unless the risk has low probability. Then it's just like
| selling insurance.
| JackFr wrote:
| This is hand-wavy feel-good stuff, and it isn't terribly wrong
| but saying true things about long term returns is very difficult.
| Adjustments for inflation, interest rates, dividends, corporate
| tax rates, individual tax rates, index/portfolio construction,
| selection bias, etc. all need to be considered if you want to try
| to draw serious economic conclusions.
| cryptica wrote:
| The stock market has more or less monopolized the global fiat
| monetary system. Politicians can decide what the returns will be
| in any given year because they control the currency.
|
| The returns are only meaningful in the short term while everyone
| is in a trance thinking that fiat currency is worth the same as
| it was before... The longer everyone can stay in this trance, the
| more 'real' the numbers are.
|
| However, it's my opinion that the real value creators of our
| economy (the backbone of all economic value) don't have much
| incentive to believe in the fiat numbers anymore. That's why
| they're moving towards Bitcoin and crypto.
|
| The next decade is going to be interesting; we're going to find
| out if all the hype about 'automation' and 'big data' was genuine
| or if it was just moral cover for the elite to justify their
| monopolization of everything.
|
| If the corporate elite have managed to automate the economy to a
| degree that people and non-corporate entities cannot compete with
| their machines, then fiat will continue to thrive. If it turns
| out that non-corporate entities still have the competitive upper
| hand, then fiat will deteriorate and Bitcoin will take over.
|
| My PoV as a developer who has worked for many big tech companies
| is that the corporate sphere has been deteriorating for years and
| most advancements have been vaporware. I believe that apparent
| growth in profits and market cap are a trick of the money
| printers and the numbers are not grounded in real economic value;
| they are extremely fragile and the only reason that the stock
| market doesn't collapse along with fiat is because of extreme
| herd mentality among investors who have been primed to believe in
| the supremacy of fiat currencies for their entire lives.
| SilurianWenlock wrote:
| I cannot understand the thinking behind your 2nd and 3rd from
| last paragraphs
| boringg wrote:
| I'm going to add that I did a rudimentary an analysis of the S&P
| 500 because everyone seems to be throwing their money into
| passive S&P500 low vehicle investments. I looked at every hold
| period since inception from 1 year holds / returns up to 40 year
| hold and returns.
|
| Timing is crucial for good returns - depending on when you put in
| and take out your money the returns can be negative (even in
| cases where you hold up to 15 years) and in other cases quite
| good (best cases inflation adjusted annualized returns of 12%
| over 40 years).
|
| I did it because I didn't buy the commentary that you should just
| put it in S&P 500 and that it will almost guarantee returns.
| caturopath wrote:
| The S&P had one 22-year drawdown in its history, the Great
| Depression. Second place was 4 years.
|
| If people planned to contribute once in their life, the risk of
| buying the top before a long drawdown would be relevant.
|
| Most people spend decades of their life buying investments.
| Even folks with bad luck seldom buy the absolute top --
| positions acquired a couple months before are out of the
| drawdown that much sooner.
|
| No backtest of typical investment patterns is going to see any
| 15-year net losses in the S&P's history.
| kgwgk wrote:
| > Second place was 4 years.
|
| What about mid-2000 to late-2006?
|
| And that's in nominal terms, because it underperformed cash
| from mid-2000 to mid-2013 (and quite longer against bonds).
| caturopath wrote:
| Ugh, I looked at the wrong column in https://static.seeking
| alpha.com/uploads/2020/5/20/saupload_d... and didn't sanity
| check the results. Sorry for my sloppiness and
| misinformation.
| SamBam wrote:
| > the returns can be negative (even in cases where you hold up
| to 15 years)
|
| Are you certain? Are you taking into account potential
| deflation or other factors during that time?
|
| There are some analyses that say that even if you bought at the
| height in 1929, you would actually still make you money back
| within 10 years. Here is an article from 2009 [1] suggesting
| that the very longest true downturn of the stock market was 8
| years, during the recession of the 1970s.
|
| 1. https://www.nytimes.com/2009/04/26/your-money/stocks-and-
| bon...
| yummypaint wrote:
| This is true, but it's easy to look back at historical data and
| draw conclusions from perfect information. When actually making
| an investment decision facing an unknown future, index funds
| are relatively low risk. This is why people actually buy them.
| Making the pool of companies smaller will only increase the
| volatility.
|
| I would argue that psychologicaly the S&P offers the least
| optimistic promise of return for an investment a person would
| realistically make, since it is supposed to represent the
| market as a whole. People don't like to make an investment if
| they believe its quality is below-average, so expectation of
| average returns is really the minimum.
| jsight wrote:
| > Timing is crucial for good returns - depending on when you
| put in and take out your money the returns can be negative
| (even in cases where you hold up to 15 years) and in other
| cases quite good (best cases inflation adjusted annualized
| returns of 12% over 40 years).
|
| Yes, timing is crucial. In your analysis, how much did timing
| change if you change the "sell date" into a 6 month window?
| CarelessExpert wrote:
| > depending on when you put in and take out your money the
| returns can be negative (even in cases where you hold up to 15
| years)
|
| Sorry, but unless you're talking about truly black swan
| circumstances like the Great Depression or the 2008 crash, I
| don't believe for a second that, over a 15 year timespan,
| holding the S&P will result in negative returns frequently
| enough that a typical investor has to concern themselves with
| market timing.
|
| You need to prove your work for a statement that strong.
| boringg wrote:
| go look at the investments into the market 98 early 2000s in
| the market and how they underperformed for about a decade.
| (look at the NYT visualization you were commenting on).
| Adjust it for inflation.
|
| My point is that investing at the peak of the market will not
| generate returns unless you unload before the market goes
| down. Now who knows if the equity markets are going to get
| clipped (or rather when) ... timing is fickle.
|
| Also, selling on good years makes your performance
| exceptionally good.
|
| I guess TL; DR. Either sell in the good years around nowish
| if you've generated a return as equity markets are frothy or
| be prepared to hold a long time to generate a return
| [statement for S&P index not individual stocks] assuming the
| future follows some of the past patterns (sample size is
| small though to be fair).
| iso1631 wrote:
| Sell in Feb 2009 and you'd have made a loss if you had
| entered at any point since May 1995
|
| Buy at the peak in Aug 2000 and you'd have been in the red
| until Feb 2015
|
| Invest in the Nov 1968 peak at 810 and you'd have seen red
| until Dec 1992
|
| However invest $100 a month in 1985, increase your investment
| by 2% per year, and you'd have made a 388% profit by now,
| having invested $69420 (snigger) and have $338956 back.
|
| That's excluding any dividends.
| troydavis wrote:
| For anyone interested in this topic,
| https://dqydj.com/sp-500-historical-return-calculator/ is a
| good place to start.
|
| As a starting point, accept the defaults and hit "Calculate
| Historical Returns." The minimum return and standard
| deviation are most relevant.
|
| (Note that it defaults to adjusting for inflation, but that's
| really the only metric that makes sense when comparing long
| periods, particularly those including the 1970s and 1980s, so
| that's probably what you want.)
| jerf wrote:
| The New York Times published the same sort of analysis in
| 2011: http://archive.nytimes.com/www.nytimes.com/interactive/
| 2011/...
|
| Be sure to _carefully_ read the description of the graph.
| Every time I link this, someone assumes that the green & red
| indicates are the _yearly_ returns, but the entire point of
| this graph is that it is _cumulative_. If it is red 20-30
| years into the line, that means that money put it at the
| beginning had a negative _cumulative_ return after 20-30
| years, not that the 20th or 30th _year_ was negative. Also
| observe the graph is inflation adjusted.
|
| Yes, it's true. The idea that you can just stick your money
| in the stock market and see 7% returns every year is
| somewhere between "mistaken" and "a lie". It is not a
| coincidence that this idea has arisen during a time of loose
| monetary policy and a stock market that is being inflated by
| it over the course of a couple of decades. In the 1970s and
| 1980s, for instance, this would have been considered risible,
| and indeed, people did not generally value stock equities.
| (See the chart for why they may have felt that way.)
|
| It is not an even remotely accurate model of the stock market
| to think of it as a 7% return that you can casually compound
| over time. Anyone who speaks of that model or uses that model
| doesn't know what they are doing. Your debt certainly
| compounds over time, but your assets can't be modeled as
| doing that.
|
| A couple of further observations:
|
| Part of the reason _why_ the stock market can offer 7-10%
| gains in a year, when the economy does not offer such gains
| in general, is precisely that "room" is made for those gains
| by the years in which it loses big.
|
| This is also part of why we have a pension fund crises,
| because even in the relatively friendly stock market of the
| past couple of decades, even these so-called professionals
| would blindly use a high-single-digit return estimate per
| year, and even in the past few years, that has been an
| inadequate model. The bailout they're going to need if the
| stock market actually crashes (popping the "Everything
| Bubble"?) will be literally unaffordable. (Not paying in
| sufficiently is also a problem, but that is also itself a
| consequence of absurdly optimistic models being generally
| accepted.)
| as_i_fall wrote:
| Really interesting and somewhat surprising chart.
|
| That said I think there's some important drawbacks to point
| out.
|
| First, that 7% figure that's often quoted is usually meant
| to mean nominal return. At least, that's the way it works
| relative to the commonly cited 4% SWR.
|
| Second, buying and selling exactly once will greatly
| increase the variability of returns and also the likelihood
| of negative returns. It's important though to realize that
| this isn't actually how almost anyone invests, so just
| counting periods of negative returns under that assumption
| isn't particularly meaningful.
| CarelessExpert wrote:
| Great visual!
|
| So I'll just note a few things:
|
| 1) You can clearly see the Great Depression and 2008 in
| here, so I'm just going to ignore those.
|
| 2) The other really nasty period for market returns was
| during the 70s oil crisis and subsequent high inflation
| period.
|
| It also notably marks areas "slightly above inflation" as
| red, which are _not_ periods where loses would occur
| (though, yes, the gains would be basically flat). This
| strikes me as an odd choice and a misleading one that makes
| the historical analysis look worse than it actually is.
|
| Yet despite that, the majority of that chart shows returns
| moderately above inflation, sitting in at around the 4%
| safe withdrawal rate.
|
| I personally don't view this as justifying the claim that
| individual investors need to worry about market timing. If
| anything it reinforces my view that they shouldn't because
| no one could apriori predict the kinds of events that led
| to the red areas of that chart.
| [deleted]
| jerf wrote:
| I will also agree that if you just erase all the risk
| from the market due to the downturns, that the market
| becomes a great investment.
|
| But what's the relevance of that? When the next bubble
| pops, whether it be in two weeks, two years, or a decade,
| you and your investments are going to experience it. Some
| of those red splotches go on for _twenty years_.
|
| As for why doing "just barely better than inflation" is
| marked as red, the chart accounts for inflation, but it
| _doesn 't_ account for a time value of money. Putting $1
| dollar in the market to get $1.04 back out 30 years later
| is not a positive investement.
|
| "Yet despite that, the majority of that chart shows
| returns moderately above inflation, sitting in at around
| the 4% safe withdrawal rate."
|
| Which is why it is generally not a terrible idea to
| invest in the stock market.
|
| But this is basically a goal-post move relative to the
| "common wisdom", which presents it as a done-deal that
| the stock market is always a good investment that
| produces a ~7% return every year. It won't matter to you
| that it tends to generally produce a relatively decent
| return over 50 years if you are currently, unbeknownst to
| you, at the beginning of one of those big red areas that
| may stretch down for decades.
|
| Look at the stock market as it stands today. I will not
| tell you 100% that we are in such an area; internet
| commentators have predicted one million of the past 3
| recessions. But I _will_ tell you that it 's an awfully
| plausible story.
| woobar wrote:
| > Putting $1 dollar in the market to get $1.04 back out
| 30 years later is not a positive investement.
|
| This is not how annual returns work. If you put a $1 an
| average return was 4%, you will get $3.25. And if you put
| it in a tax deferred account or did not withdraw a lump
| sum after 30 years, the effect of taxes would be less
| dramatic.
|
| What other investment performed better over the long
| time? For instance, housing did not grow much until 30
| years ago.[1]
|
| [1] https://dqydj.com/historical-home-prices/
| [deleted]
| pushrax wrote:
| The problem is that there's not a clearly viable
| alternative. Even if we're in a period where the market
| is going to underperform (likely), will it still
| underperform cash? Bond yields are so low that they're a
| questionable inflation hedge as well.
| jerf wrote:
| This is the thing that people don't want to hear. There
| is no guaranteed, long-term store of value. Period. End
| of story. The closest is precious metals, especially the
| "monetary" precious metals, but even they are valued
| based on their usage (if society collapses, platinum &
| palladium will probably have their values go "poof", for
| instance) and fluctuate over time. They're one of the few
| goods that you can literally physically hold on to for
| decades and they at least won't tank to zero, but they
| still may not be worth "as much" as what you spent to get
| them.
| eezurr wrote:
| > If it is red 20-30 years into the line, that means that
| money put it at the beginning had a negative cumulative
| return
|
| No, this is only true if its dark red.
|
| The way you present the data of the graph does not
| represent how people invest. The average person works for
| ~40 years, so there are 40 individual years you could track
| on this graph. However, that isn't useful because
| compounding interest is a huge factor in returns. Another
| variable is people dont invest the same amount every year
| (typically people make more money as they age, however in
| most cases, compounding returns beat out income gains over
| the long term).
|
| Consider if year one someone places $10,000 into the stock
| market. 40 years later, it grows into $48,000 (real value
| after inflation).
|
| If you extend the diagonal boxes to 25, 30, 40, or 50
| years, which makes more sense given how long people work
| and how long they live after retiring, the cumulative
| growth is _always_ above inflation.
| drdec wrote:
| One big grain of salt to take with that NYT graphic is that
| they took taxes into account. If you are investing in a
| retirement vehicle (401k, IRA or Roth IRA), your tax
| obligations are going to be very different. Not to mention
| that tax laws have changed greatly over time.
|
| Another think to remember is that if you are saving for
| retirement, you are very likely doing dollar cost
| averaging, i.e. making deposits on a regular basis. So you
| aren't buying all your stocks in one year, you are buying
| them across a multitude of years. That greatly mitigates
| the risk of starting at the wrong time.
|
| For example, I started saving for retirement in 1999. It
| was ugly for a while but I was positive for good as of
| 2009, despite all the red in that graph.
| dnadler wrote:
| This is a good visualization, I think. Interesting that
| they include taxes here, though, as that can vary quite a
| bit by individual circumstance, and most long-term retail
| investing is probably done in tax-advantaged accounts like
| 401ks. Also, it's important to note that this appears to be
| in _real_ terms, and so the period in the 70s to 80s is
| somewhat extraordinary. -2% annual return vs ~10% inflation
| isn 't great, but also far better than cash.
|
| All that said, it does show that the longer you hold, the
| more likely you are to achieve an average positive return.
| Note that the only negative return (again in real terms) is
| the darkest red.
|
| Again, just to drive the point home, the neutral color
| 3%-7% return is _after inflation_. If the long-run average
| inflation is 2%, then this is 5%-9% average annual return
| which almost exactly tracks the common assumptions
| surrounding long-term buy & hold.
| ryangittins wrote:
| This is an interesting visualization, but if I'm
| understanding it correctly it does oversimplify in a big
| (and potentially misleading) way:
|
| This is what happens if you do all your investing in one
| big lump sum, e.g. putting one dollar in the market in 1970
| and getting out less than a dollar (after inflation) in
| 1985.
|
| Outside of getting a major windfall (and not dollar-cost
| averaging), this isn't how investing is done. Investments
| are typically made as income allows, over the course of
| decades. Yes, that means some of the dollars you put in are
| going to be massive losers in the long run. Others are
| going to be massive winners. What's important is the
| average over 30-year period of investing followed by a
| period of withdrawals spread out over another couple
| decades.
|
| I'd be very curious to see a similar visualization which
| illustrates the same point for spans of time rather than
| lump-sum-in and lump-sum-out.
| boringg wrote:
| Actually the modeling I did assume that you invest the
| same amount every year - its rudimentary but does account
| for this.
| ryangittins wrote:
| I was talking about the NYT analysis linked in the
| comment I was replying to, but I'd be curious to see your
| numbers as well if this is something you've worked out!
| [deleted]
| boringg wrote:
| Kind of wish they re-ran the code to bring in the
| 2010s-2020s! Really appreciate that visual - my code is
| just from 70s until now .. I should build it as a heat map
| like this one.
| BeetleB wrote:
| I did the same analysis. There's _no_ 20+ year period where it
| lost money.
|
| http://blog.nawaz.org/posts/2015/Dec/pay-down-mortgage-or-in...
| arez wrote:
| the problem is just that you don't know when it's a good or bad
| timing, that's why you shouldn't bother and just put your money
| in. If your money is long enough in the market it doesn't
| matter anymore that much as it averages out. It also sounds
| that you think 15yrs is a long time, but for ETF you should
| consider more like 20yrs and up
| boringg wrote:
| I understand the theory behind it and the uncertainty of
| timing is an impossible problem to solve.
|
| My point is that holding S&P 500 generally gives you a
| positive return but if you buy during good years/months and
| end up having to sell in bad years/months you actually can
| have a negative return up to a about 15 years (if you really
| eff the timing up) or get marginal returns (1-2% per year).
|
| Even over 40 years - you probably wouldn't be supper happy
| with a 100% return - yes things go positive but your returns
| are much lower if you time the market poorly (obvious
| statement).
|
| For example buying in 98/99/00 your returns are much worse
| then buying before or after. Likewise selling in those years
| gave much higher returns.
|
| Stating the obvious - but worth thinking about. Sell when the
| market is rich, buy when its soft (like blackjack).
| snikeris wrote:
| > Timing is crucial for good returns - depending on when you
| put in and take out your money the returns can be negative
| (even in cases where you hold up to 15 years)
|
| This is well captured in this guy's drawdown charts:
|
| https://portfoliocharts.com/portfolio/drawdowns/
| boringg wrote:
| This is slick.
| tyrust wrote:
| I've run similar calculations in an attempt to convince an
| acquaintance not to pull out their money when they "had a bad
| feeling" about something.
|
| To me the takeaway isn't that "timing is critical for good
| returns" but that "you can't time good returns, so don't move
| all your money at once". You'll be investing over the years of
| your career and withdrawing over years of your retirement.
| Historically, it ends up working out.
| boringg wrote:
| Adding some further comments since there were a lot of
| questions: I did a portfolio approach in which you invested the
| same amount each year. I determined the final returns from very
| outcome (i.e purchase and hold and sell every year combination)
| of investment over the last 40 years and did both nominal and
| inflation adjusted dollars.
| cocoa19 wrote:
| General consensus is to invest using dollar cost averaging so
| you don't rely on timing.
|
| Invest the same amount of money each pay cycle. If stock is
| expensive, you'll be able to afford less stock, if stock is
| cheap, you'll afford more stock.
| tyrust wrote:
| It's not exact that straight-forward. From Vanguard:
|
| > Our research indicates that it's prudent to invest a lump
| sum immediately.
|
| Article: https://investor.vanguard.com/investing/online-
| trading/inves...
|
| PDF: https://static.twentyoverten.com/5980d16bbfb1c93238ad9c2
| 4/rJ...
| [deleted]
| jusssi wrote:
| The same principle can be applied for taking your money out.
| Instead of a single big cash-out, take $X per month.
| as_i_fall wrote:
| I don't think anyone is claiming that throwing your money into
| SPY for a year or even 5 will guarantee returns.
| bryanlarsen wrote:
| But the claim is often made that throwing it in for 10 or 20
| years will guarantee returns.
| as_i_fall wrote:
| Well obviously nothing is guaranteed, but something like
| 90% of 20 year windows in the last 100 years would in fact
| result in positive real returns.
|
| http://archive.nytimes.com/www.nytimes.com/interactive/2011
| /...
|
| Note that the light red color is actually still indicating
| a positive real return, this is particularly relevant in
| the 70s and early 80s when a 2% real return would be a much
| higher nominal return.
|
| Agreed that some people expect returns for time horizons as
| short as 10 years though, which is clearly a mistake.
| BeetleB wrote:
| Interesting: I did my own analysis[1] and did not show a
| loss for any 20 year period:
|
| http://blog.nawaz.org/posts/2015/Dec/pay-down-mortgage-
| or-in...
|
| Must be some differences in the data they have vs what I
| could find. I did include inflation and dividends, but
| not taxes - wondering if that brought it to the negative.
| bryanlarsen wrote:
| The last 100 years is only a weak predictor of the
| future.
| as_i_fall wrote:
| If you find a stronger one I'll be all ears
| programmertote wrote:
| Somewhat related question: where/how did you acquire that data?
| I have been meaning to run some simulations on the S&P 500
| historical daily closing data, but I can't seem to find a place
| that provides the data covering for the last 40-50 years.
|
| Thanks in advance for your answer!
| aerosmile wrote:
| A really interesting thing happened in March 2020. The market
| crashed and we all remember how gloomy everything looked.
| Needless to say, some businesses were going to be directly
| affected by Covid (eg: travel, hospitality) and their stocks went
| down as much as 80%. But it also became clear that many stocks
| were just collateral damage (eg: most of the tech stocks), and
| that they were going to recover more quickly than others. I
| bought all the tech stocks I could and things worked out great.
| If anything, I gave myself too much time to execute on this
| strategy - as a way to protect against the market tanking even
| further, I decided to dollar-cost average and make my investments
| over a 6-week period between mid March and end of April. As is
| obvious in hindsight, the mid-March cohort outperformed the late
| April cohort by a wide margin. Writing about this in April 2021
| doesn't seem so surprising, but I can tell you that in April 2020
| I was shocked how fast the market was improving even though the
| global news only kept getting worse and worse. I am close with
| many people who run their own businesses, and many of them had
| their worst weeks in April. I guess the market was recovering
| following the same rationale that I used, so I shouldn't be too
| surprised about its behavior, but it was still interesting
| considering how my risk profile is so different from the majority
| of other people.
|
| Would I recommend timing the market? Most of the time, no. But a
| lot of people talk about the impact of the 10 best or worst days
| in the last 20 years, and I would say those "insane periods" do
| exhibit somewhat recognizable patterns that makes it possible to
| identify them and take advantage of.
| Chirael wrote:
| It is also very easy to talk about all of this in hindsight.
|
| Prior to April 2020 I had 100% of my 401K in cash/equivalents.
|
| In April 2020 I put half of that cash into stocks.
|
| Now, of course, I kick myself and say I should have put
| most/all of it into stocks back then.
|
| But that kind of "of course!" and "that was such a recognizable
| pattern!" talk is a lot easier in hindsight.
|
| It's easy to forget what it was like at the time, and that it
| could have easily gone down even further. At the time, the cat
| was both dead and alive (market recovers vs. market falls
| further).
| qeternity wrote:
| This has nothing to do with your company thesis and everything
| to do with the Fed.
| Traster wrote:
| Isn't this kind of... stupid?
|
| > So around 5% of all years since 1926 have seen average returns.
| In fact, there have been just as many yearly returns above 40% as
| returns in the 8% to 12% range.
|
| Well yeah sure but 3 of the 5 years that saw those >40% returns
| were 3 consecutive years 100 years ago.
|
| I think all we can take from this article is that there are a
| multitude of factors that drive the value of the stock market and
| if you don't think about any of them in any detail then you're
| going to spot lots of statistical patterns that don't mean
| anything.
| [deleted]
| kragen wrote:
| This article suffers from hindsight bias by virtue of focusing on
| the _US_ stock market, for which this has been an exceptionally
| good century. If you were to include the markets of Britain, the
| Netherlands, Japan, Germany, France, Poland, China, Argentina,
| and Switzerland, the picture doesn 't look so rosy. Anything you
| invested in the Gielda Pieniezna w Warszawie in 01926, for
| example, would have evaporated in 01939; despite the "liberation"
| of Poland in 01945, no stock exchange would reopen there for 50
| years.
|
| Poland is an extreme case, but so is the US--I don't think any
| other country's stocks did so well during the 20th century. If
| someone were to write an article about how well Esso/ExxonMobil
| stock has done from 01926 to 02021 (11.9% I think), it would be
| easy to understand that this wasn't a recommendation to hold
| ExxonMobil for the next century, much less some other arbitrary
| stock; obviously the investors 95 years ago in the F.W. Woolworth
| Company and the Kennecott Mines Company didn't do quite as well,
| which is precisely why nobody would write an article today about
| buying and holding Woolworth's stock.
|
| Will the US do so well over the next century? The spectacular
| bungling of the covid pandemic suggests that it may not.
| [deleted]
| OldHand2018 wrote:
| > obviously the investors 95 years ago in the F.W. Woolworth
| Company and the Kennecott Mines Company didn't do quite as
| well, which is precisely why nobody would write an article
| today about buying and holding Woolworth's stock.
|
| I don't know about Kennecott Mines, but Woolworth's never
| missed a quarterly dividend payment from 1926 until 1995, and
| they resumed again in 2003 (they are now named Foot Locker,
| FYI). Nobody who bought Woolworth stock in 1926 lost money if
| they just HODL and passed it on to their kids.
| sec400 wrote:
| OT: why do you prefix the year with a 0?
| ArtTimeInvestor wrote:
| The author falls for the "past equals future" fallacy.
| The only way to truly take the randomness out of the
| stock market is to have a multi-decade time horizon.
|
| He says so after looking at the data of a few decades. That makes
| no sense. It is like looking at 3 people and saying "People come
| in groups no larger than 3".
|
| The whole article is based on that premise. He has something like
| 90 data points and assumes the next 90 data points will be alike.
|
| Is it possible the next 10 years will have a negative return?
| This is a very interesting question. But I doubt we can answer it
| by looking at historical returns. We need to look at the actual
| situation. What would have to happen in the world so we see
| negative returns? War? A natural desaster? Who says war and
| natural desasters cannot throw us back 100 years? 1000? 10000?
| spurgu wrote:
| > The author falls for the "past equals future" fallacy.
|
| Isn't this more about random events? The stock market is not
| random, it merely fluctuates a lot.
| berkes wrote:
| > the data of a few decades.
|
| 1926-2020 is 95 years. Calling that "a few decades" is
| downplaying it. I'd say it is safe to take 95 years and from
| that extrapolate a 30 year future with wide margins. In your
| analogy: looking at 95 people and saying "the average group
| size is between 2 and 5".
|
| > ... 90 data points and assumes the next 90 data points will
| be alike.
|
| Are we reading the same article? I don't see it predicting
| anything 90-points forward. Even the predictions for 30 points
| forward are very much on the safe side: merely a caution and
| establishment of a (well-known) generalism. A conclusion in
| that article:
|
| > don't know if the next 30 years will be this kind to
| investors in U.S. stocks. You could make the case investors
| should reduce their expectations going forward.
|
| > But if those lower expectations turn out to be correct this
| makes thinking and acting for the long-term even more important
| than ever.
| jimbokun wrote:
| The author makes clear that the next 30 years may very well not
| follow this trend, given the entire dataset contains only 95
| data points.
| ryanar wrote:
| A war? A natural disaster? That is the point! If this happens,
| it doesn't matter what you invested in, money is worthless. So
| outside of that, it is now safe to say invest and hold is a
| safe strategy for guaranteeing returns over a long time horizon
| (30 years).
| bryanlarsen wrote:
| WW2 didn't make money worthless, COVID-19 didn't make money
| worthless. A limited nuclear war won't make money worthless.
| Climate change won't happen fast enough to make money
| worthless.
| mrlinx wrote:
| I'd say crypto have the bigger chance. Good or bad, leave
| that up to the reader.
| bob1029 wrote:
| This is a very tiresome argument that I have to continuously
| have with friends & family.
|
| These days I just sit on the sidelines and watch people I care
| about throw money into raging infernos because they genuinely
| believe that a historical time series has some notion of
| inertia/momentum/hocus pocus/etc behind it.
|
| After a certain point you have to stop trying to save other
| people from shitty ideas or you will drive yourself mad.
| beckingz wrote:
| Reminds me of the nose and bean principle from consulting:
| https://archive.uie.com/brainsparks/2011/07/08/beans-and-
| nos...
| ahelwer wrote:
| I mean yes, past performance doesn't guarantee future results.
| But it does waggle its eyebrows suggestively at it, when you
| have a phenomenon that's gone unchallenged for probably a
| hundred years now. It isn't guaranteed. But nobody's lost their
| shirt betting it'll continue _yet_.
|
| People always bring up Japan in these discussions, of course.
| The Nikkei 225 peaked on 29 December 1989, still only at half
| that value over 30 years later.
| bryanlarsen wrote:
| Or the German stock market of 1914. An 1914 investor would
| have had to have held for 100 years to get his investment
| back.
|
| The major point is that only looking at 90 years of American
| stock market returns is very serious cherry picking. We can
| get a lot more data by including non-American stock markets.
| The last century was a century of American ascendance. 100
| years from now America still might be at the top, but I
| wouldn't take that bet. Even if it is, we won't get the gains
| we got from rising to the top.
| xwdv wrote:
| No they would not have had to wait 100 years. Makes for a
| spicy headline, but no one just throws a lump sum of money
| into the market once and hopes for the best.
|
| If you continue to invest regularly, your returns
| eventually cover your previous losses and your back to
| making profits sooner than later. Your portfolio balance
| over time is the only thing that matters, not the returns
| of individual investments.
|
| It's why you shouldn't be scared of a big crash. Do you
| plan to continue investing afterward? Yes? Then you'll be
| fine.
| bryanlarsen wrote:
| Lots of people do something very similar. They throw
| money into the stock market regularly for years, and then
| on a single day they retire and start slowly taking it
| out instead.
| ahelwer wrote:
| The ultimate point of these discussions is coming to a
| conclusion about "what should we do?". I can give you quite
| a few reasons why dumping all your money in market index
| funds could end in disaster. I'm not under the illusion
| these gains are guaranteed. But what the hell else am I
| going to do?
| EGreg wrote:
| This is going to be a silly response, but how silly is it
| really? You asked what you would do with your money, to
| grow it...
|
| This is related to the Keynsian Beauty Contest for
| following fads actively instead of passively taking long
| positions for years:
|
| https://en.wikipedia.org/wiki/Keynesian_beauty_contest
|
| How about hiring a person to research and buy the latest
| shitcoins on Uniswap and Pancakeswap? I can name several
| in the last month that have each been up 500% in 24
| hours. For example, see these:
|
| SAFEMOON (weeks ago)
|
| https://coinmarketcap.com/currencies/safemoon/
|
| SPORE finance
|
| https://coinmarketcap.com/currencies/spore-finance/
|
| PROMETEUS token
|
| https://coinmarketcap.com/currencies/prometeus/
|
| By the time you hit these links, you may be astonished to
| see that the assets have risen _in one day_ nearly half
| of the 900% the guy says the stock market would do in 30
| years.
|
| I mean, isn't the goal of growth investing to get the
| biggest returns? This seems to be that, massively
| accelerated.
|
| Then retire LOL.
|
| But seriously... the smallest cap projects in the newest
| industries -- especially now that trading is available to
| anyone with no intemediaries -- presents massive
| opportunities for huge crowds to descend on one thing or
| another, and if you are early to the party you make a
| lot. I find it a very strange aspect of capitalism, that
| seems to reward meme marketing and attracting crowds to
| fads, rather than actual value for society.
| heliodor wrote:
| Great! Now you have your retirement stash. You'll have to
| protect it for decades to come. How? Which brings you to
| the beginning: how do you invest your money?
| EGreg wrote:
| The point is that your retirement stash can at that point
| just be kept in regular assets for decades because you
| have made a ton of gains through a fast sprint. Or you
| can take some of that to hire various money managers to
| repeat this strategy for years whenever the opportunities
| present themselves.
| [deleted]
| DennisP wrote:
| Invest globally instead of throwing it all in the S&P500,
| and add some other asset classes.
| whynotminot wrote:
| Do you think the globe as a whole will outperform the US
| market?
|
| I don't think our _collective_ future as a planet is any
| better than the US outlook, personally. If anything, the
| United States is probably better situated to win future
| dystopian contests than most, too.
| staticman2 wrote:
| If international stocks are undervalued because U.S.
| stock are in a bubble or overvalued international will
| outperform, in theory it has little to do with who is
| "better".
| DennisP wrote:
| Do you just buy stock X because you think it will do
| well, or do you buy a broad ETF because you believe in
| passive investing and diversification?
|
| If the latter, well, the same applies to countries and
| asset classes. You can take your best guess on who the
| winners will be, or you can just buy the market. It
| doesn't mean you think "the globe will outperform the
| US," any more than buying VTSAX means you think VTSAX
| will outperform Apple.
| kapp_in_life wrote:
| And it also bears mentioning that if you're buying a
| market cap weighted fund then you aren't really missing
| out too much on US equity dominance, since for example
| VTWAX holds ~60% US stocks.
| bryanlarsen wrote:
| As long as you realize that you're choosing the least bad
| of a bunch of bad options. Far too many people are
| claiming that stocks are safe.
|
| You're right: stock picking, index funds, bonds, crypto,
| cash, real estate, collectibles -- they're all bad
| options in 2021. Myself I would recommend holding a
| sizable portion in cash. Unlike many, I'm not overly
| worried about cash holdings getting destroyed by
| inflation, but I do believe that coming interest rate
| hikes will make stocks cheaper soon.
| EGreg wrote:
| It's not that stocks are safe
|
| It's that the options could be convex !
|
| In other words putting 10% in the riskiest things with
| highest potential returns (shitcoins on DEXes for
| example) and 90% in the safest things would be strictly
| better than putting ANY money in the middle between the
| extremes.
| rorykoehler wrote:
| Cash is being decimated by asset inflation before our
| very eyes.
| jokethrowaway wrote:
| It depends what assets you want to spend your cash on.
|
| Will home prices go up after this crisis? Will there be
| demand once small companies start firing people and close
| down and we run out of government incentives?
|
| Sure, big companies have more money, but that is likely
| to be hoarded or invested (and I doubt it will be in real
| estate, given it's a hassle to manage) - it won't go back
| in the economy.
| rorykoehler wrote:
| It went into real estate the last time around so why not
| again?
| ChrisLomont wrote:
| >Cash is being decimated by asset inflation before our
| very eyes.
|
| Not really - 10% change in 5 years is expected.
|
| https://fred.stlouisfed.org/series/CPILFESL
| heliodor wrote:
| Put your money in real estate.
|
| Our political system is unable/unwilling to address
| housing needs. Home owners vote for whatever it takes to
| increase prices. Renters and young people looking to buy
| their first homes don't have as much political clout. The
| reality of the situation is sad but the results are
| clear!
| xwdv wrote:
| Real estate is one of the worst asset classes right now.
| If anything is due for a crash it's real estate prices.
| And the amount of protection that tenants have been
| getting during the pandemic doesn't inspire confidence in
| being a landlord. On top of that, people seem to get so
| leveraged in real estate, it's a recipe for bankruptcy. I
| never hear about people investing in stocks going
| bankrupt unless they do something extraordinarily stupid,
| but I hear about real estate investors going bankrupt all
| the time despite simply following best practices.
| mellavora wrote:
| There were some interesting books written about some
| bankruptcies associated with stocks.
|
| Which doesn't subtract from you main point, yes, real
| estate is much riskier than it might look.
|
| For example-- what happens when municipalities realized
| their pension funds are broke, and they decide to raise
| property tax to cover the shortfall?
| berkes wrote:
| This warrants some disclaimers.
|
| We might very well be in a housing-bubble. So put your
| money only in there if you can miss it and if it is safe
| for you. And always consider spreading your money.
|
| E.g. consider paying off mortgage, which could be seen as
| a safe version of "investing in real estate". As well as
| putting aside some cash, and buying in on some ETFs.
| heliodor wrote:
| I should have mentioned that I was thinking of a long
| term scenario. 20-30 years. The covid real estate market
| is... interesting.
| mikem170 wrote:
| Could be demographics driving the housing demand, also.
| The large millennial generation are now in the housing
| market, and the baby boomers haven't sold yet. In 20-30
| years the baby boomers will not be around. That will
| change the demand for housing. Could be quite a
| difference.
| willcipriano wrote:
| > But what the hell else am I going to do?
|
| Personally I'm taking some money that could go into the
| stock market and investing in increasing the energy
| efficiency of my home to reduce my future costs, buying
| items I'll need in bulk (things like 200 pairs of socks
| so I'm set for life) and other things that will improve
| my QOL without ongoing costs.
| ricardobeat wrote:
| How can I start investing in the sock market?
| bryanlarsen wrote:
| I'm going to take your awesome joke seriously. You can
| invest in the "consumer staples" index which is
| relatively counter-cyclical. People buy a similar number
| of socks every year whether they're doing well or badly.
| chromatin wrote:
| This is possibly the best post in this thread
| rorykoehler wrote:
| The world has changed now though. Betting against America
| is essentially betting against human progress.
| panax wrote:
| I feel reasonably confident that we will probably continue
| to see decent gains over the medium term of the next few
| decades, barring major wars. But what is always in the back
| of my mind is just how long can human civilization continue
| this incredible rate of exponential growth. If you assume
| that economic growth requires any amount of increase in
| energy consumption, then there are physical limits to how
| much growth can occur over the long term and we are rapidly
| approaching them[1]. Eventually growth will need to slow
| and it looks like this is already starting to happen [2].
| Japan may be the endgame for most of us. Eventually there
| could be zero growth and then things become zero-sum which
| may encourage conflict.
|
| If we are able to colonize other parts of the solar system
| and export industry off the planet that will allow for
| several more decades and probably centuries (millenia?) of
| growth. Hopefully civilization will survive conflict long
| enough to make this transition.
|
| [1] https://arxiv.org/abs/2005.05244 [2]
| https://www.economist.com/graphic-detail/2021/03/15/young-
| pe...
| EVa5I7bHFq9mnYK wrote:
| The nikkei 225 peaked at 38k in 1989. It is 29k now, 76% of
| the old value.
| moneywoes wrote:
| That's without dividend reinvestment though no?
| [deleted]
| slv77 wrote:
| The stock market is nothing more then a claim on a future
| stream of dividends over a roughly 50 year time horizon. The
| longer the investment horizon the greater the uncertainty and
| the greater the volatility.
|
| To compensate for that investors typically demand higher
| returns. Yields on 30 year bonds are typically higher then 10
| year bonds.
|
| Long term returns on the stock market can be broken down into
| two categories:
|
| - Increase in corporate earnings - Increase in the price that
| investors are willing to pay for those earnings
|
| Increases in long term corporate earnings are constrained by
| long term growth in GDP unless earnings as a percentage of
| GDP increases. GDP is a function of demographics and
| productivity increases.
|
| Assuming that future returns will match historical returns is
| a bet that GDP growth rates will be close to historical
| trends along with earnings as a percentage of GDP will
| continue to increase. Demographics are long term trends that
| can be mostly predicted 20+ years into the future (you can't
| go back in time and make a baby) and are mostly unfavorable
| compared to historical norms (lower percentage population in
| prime working age). There is also a limit on corporate
| earnings as a percentage of GDP unless taxes and wages go to
| zero.
|
| So a bet on future returns matching historical trends is
| essentially a bet on a massive productivity growth across all
| sectors of the economy over the next 50 years. In addition
| the bulk of that productivity growth will need to fall into
| corporate coffers rather then tax revenues or wages. And it
| will need to sustain that over a 50 year time horizon.
| ahelwer wrote:
| Future-discounted series of dividends is _one theory_ of
| stock market valuation. It isn 't the only one. Keynesian
| beauty contest is another.
| mabbo wrote:
| I decided to play with these numbers myself because I had some
| questions. I believe the data is the same as I found here[0]
|
| The average single-year return over that period was about 7.5%,
| not 10%- though in half of years, the market did better than 11%.
| But what happens if we bucketize by a larger period, like 5-year?
| My method was to take $1, multiply by the return for 5 years in a
| row, and then take the 5th root of the result, then convert to a
| percentage return per year by 5-year bucket. Overlapping 5-year
| buckets.
|
| The end result is as you'd expect. There are bad years, and there
| are good years, but the storm is pretty tame when smoothed out.
| In more than 75% of 5-year periods, the average return was
| positive. Only 69% of 1-year periods were positive.
|
| As a fun aside, if you invested in an S&P500 index fund the day
| Clinton was elected and sold it all the day Bush was elected,
| you'd have made close to 25% annual return on average.
|
| [0]https://www.macrotrends.net/2526/sp-500-historical-annual-
| re...
| BeetleB wrote:
| ~7% is after adjusting for inflation. I suspect OP did not
| adjust.
| wbc wrote:
| Did you add in the dividends?
|
| https://www.multpl.com/s-p-500-dividend-yield/table/by-year
| weeboid wrote:
| Isn't it the case that for *any* arbitrary 30 year period of S&P,
| the _worst_ you could do is 2x, and the best 1000x? And the mode
| something like 10x
|
| For 20 years it reduces where I think some periods could actually
| produce flat or slightly negative, but the best and mode are
| still up in that range.
|
| Hey, yeah. Investing is "risky". Keep "working on your career",
| and squirrel away into 401ks then.
| fallingfrog wrote:
| He's not taking inflation into account, which makes the whole
| exercise rather suspect.
| hansor wrote:
| US market should NOT be used as any scientific benchmark for
| anything - as it does not represent "all" typical possible
| scenarios for the stock market.
|
| Look for example(one of many) at Japanese NIKKEI index - it was
| going DOWN for like 20 years! So this theory does not work!
|
| Many people in Europe also quote multiple studies based on US
| market - but they are usually worthless on other markets(both
| bonds and stocks). If you add inflation and CPI - this theory is
| even more worthless.
|
| US market is special - as US is one of very few superpowers on
| Earth.
| verbify wrote:
| The NIKKEI would've given you a positive return if you bought
| and held and reinvested dividends. And picking the worst point
| in one of the worst indices does not mean much - most investors
| are not investing a lump sum (they're usually putting into a
| pension over the course of decades) and they shouldn't be
| investing in just index/asset class (all-world diversification
| and having bonds as part of your portfolio is recommended).
| fnord77 wrote:
| > US market is special - as US is one of very few superpowers
| on Earth.
|
| For now. Look how rapidly the USSR lost its superpower status.
|
| What if the Capitol insurrection were successful?
| boringg wrote:
| Not even a relevant comparison, sorry. Russia was a
| competitor but didn't have the same built in advantages.
|
| US will remain a super power for the remainder of everyones
| lives on hacker news. It will diminish, but it will remain in
| power until we're all in the ground. Mainly stemming from its
| economic roots for the global financial system.
| nunez wrote:
| Based on the bell curve centering around 10%-20% average returns,
| I'd say that returns from the stock market are pretty average.
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