Economics for Idiots

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Martin_B
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Re: Economics for Idiots

Post by Martin_B » Thu Feb 11, 2021 2:15 am

Herainestold wrote:
Thu Feb 11, 2021 1:02 am
dyqik wrote:
Thu Feb 11, 2021 12:25 am
monkey wrote:
Wed Feb 10, 2021 2:29 pm
Stock market bubbles is similar. Doesn't apply to all stocks, but some are more correlated to inflation than others. But to be honest, it seems nearly anything risks causing a bubble on the stock market.
The short and medium term trading stock market is pretty much composed of people trying to spot the next bubble and get in early, or spot the current bubble and short it. The main cause of stock market bubbles is the stock market.

That's separate to the long term stock market, which is people trying to spot the stocks that will pay out over the long term.
It used to be you could put money in the bank and make more on interest than you would in the market. Not true any longer, so you can spend it, have it stagnate in the bank, or lose it in the stock market.
It's pretty rare that banks pay more interest than average stock market gains, though. Banks play the stock market, too, just with bigger portfolios, so on average the bank's returns would be similar to the stock market average; but they then have to factor in overheads and dividend payouts before working out the interest rate. I'm sure you can find examples where bank interest rates beat the market, but probably not consistently.
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Re: Economics for Idiots

Post by Herainestold » Thu Feb 11, 2021 3:00 pm

Martin_B wrote:
Thu Feb 11, 2021 2:15 am
Herainestold wrote:
Thu Feb 11, 2021 1:02 am
dyqik wrote:
Thu Feb 11, 2021 12:25 am


The short and medium term trading stock market is pretty much composed of people trying to spot the next bubble and get in early, or spot the current bubble and short it. The main cause of stock market bubbles is the stock market.

That's separate to the long term stock market, which is people trying to spot the stocks that will pay out over the long term.
It used to be you could put money in the bank and make more on interest than you would in the market. Not true any longer, so you can spend it, have it stagnate in the bank, or lose it in the stock market.
It's pretty rare that banks pay more interest than average stock market gains, though. Banks play the stock market, too, just with bigger portfolios, so on average the bank's returns would be similar to the stock market average; but they then have to factor in overheads and dividend payouts before working out the interest rate. I'm sure you can find examples where bank interest rates beat the market, but probably not consistently.
Well not now. In the past when interest rates were higher.
Ordinary folk don't make money on the stock market, its hedge funds and oligarchs.
Might as well just spend your money.

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Re: Economics for Idiots

Post by JQH » Thu Feb 11, 2021 3:14 pm

Herainestold wrote:
Thu Feb 11, 2021 3:00 pm
Martin_B wrote:
Thu Feb 11, 2021 2:15 am
Herainestold wrote:
Thu Feb 11, 2021 1:02 am


It used to be you could put money in the bank and make more on interest than you would in the market. Not true any longer, so you can spend it, have it stagnate in the bank, or lose it in the stock market.
It's pretty rare that banks pay more interest than average stock market gains, though. Banks play the stock market, too, just with bigger portfolios, so on average the bank's returns would be similar to the stock market average; but they then have to factor in overheads and dividend payouts before working out the interest rate. I'm sure you can find examples where bank interest rates beat the market, but probably not consistently.
Well not now. In the past when interest rates were higher.
Ordinary folk don't make money on the stock market, its hedge funds and oligarchs.
Might as well just spend your money.
Large pension funds make money to, for the same reason - they can spread the money around a large number of investments. Hence the relatively generous local government pension - paid for by a fund which has been in existence since Victorian times so has grown quite a bit. Classic example of how collectivism works better than individualism.
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Re: Economics for Idiots

Post by jdc » Thu Feb 11, 2021 5:51 pm

This https://www.schroders.com/en/uk/private ... -v-shares/ says this about shares v ISAs:
Analysis of average Isa savings rates data held by the Bank of England and FTSE All-Share total return data shows that the stockmarket has performed far better than cash since the birth of Isas in April 1999.

The stockmarket beat cash by 38% even though the launch of Isas coincided with a high level for equities – the dotcom boom which has followed by bust. The 18-year span for the data also included the financial crisis of 2008 and 2009, one of the worst market crashes in history.
and this about shares v cash:
An annual study of returns by Barclays* showed UK shares had returned an average 5.1% a year since 1899, with the figure reduced to take into account the effects of inflation. For cash, the study showed a return of 0.8%, also with inflation factored in.
This confirms everything I've ever read about long-term comparisons - stocks and shares beat cash. I had figures somewhere for the probabilities of shares outperforming cash over periods of something like 5, 10, 15 years but I can't remember where. All I remember is that the longer the period, the more certain it is that shares will win.

This link https://www.unbiased.co.uk/news/investm ... t-money-on references a claim by Paul Lewis that cash can beat shares over a 5-year period if you invest in the best available 1-year deposit account and move it each year. But...
The main drawback is having to remember to move your money every year – and it’s also questionable as to whether you would always be able to secure the best deal (for instances, some savings accounts require you also to move your current account to that provider, or impose other criteria such as minimum regular deposits).
So has this study proved that cash can outperform equities? Not quite. Over the longer term equities still came out top – delivering an average 6 per cent after 21 years as compared to 5 per cent for the actively managed cash.

What it does demonstrate is that cash is more dependable if you are investing for shorter periods, perhaps less than 10 years and very probably less than five. However, the stock market may still outperform cash over any given period – but the shorter the period, the lower the probability that it will do so.
Ordinary folk do make money on the stock market, as long as they leave it there for long enough.

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Re: Economics for Idiots

Post by JQH » Thu Feb 11, 2021 6:05 pm

jdc wrote:
Thu Feb 11, 2021 5:51 pm

Ordinary folk do make money on the stock market, as long as they leave it there for long enough.
Which is harder for ordinary folk than the rich. If the boiler packs up or the roof starts leaking, ordinary folk have to raid their savings whereas an oligarch can pay for it out of petty cash.
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Re: Economics for Idiots

Post by jdc » Thu Feb 11, 2021 6:27 pm

JQH wrote:
Thu Feb 11, 2021 6:05 pm
jdc wrote:
Thu Feb 11, 2021 5:51 pm

Ordinary folk do make money on the stock market, as long as they leave it there for long enough.
Which is harder for ordinary folk than the rich. If the boiler packs up or the roof starts leaking, ordinary folk have to raid their savings whereas an oligarch can pay for it out of petty cash.
Of course, the kind of cash investments that give reasonable returns have the same problem - if you put your boiler repair fund in a 1-yr account you'll either not be able to access it or you'll have an early withdrawal penalty.

The only way to get a decent return on either cash or shares is to have more money than you need for a replacement boiler or a roof repair.

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Re: Economics for Idiots

Post by Gfamily » Thu Feb 11, 2021 7:05 pm

Herainestold wrote:
Thu Feb 11, 2021 3:00 pm
Well not now. In the past when interest rates were higher.
Ordinary folk don't make money on the stock market, its hedge funds and oligarchs.
Might as well just spend your money.
Quick and dirty comparison of Bank Base rate and Inflation for UK

If ICBA I'd add the FTSE100 (inflation adjusted)
relative rates.png
relative rates.png (45.92 KiB) Viewed 383 times
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Re: Economics for Idiots

Post by Millennie Al » Fri Feb 12, 2021 3:39 am

jdc wrote:
Thu Feb 11, 2021 5:51 pm
This link https://www.unbiased.co.uk/news/investm ... t-money-on references a claim by Paul Lewis that cash can beat shares over a 5-year period if you invest in the best available 1-year deposit account and move it each year.
The way that article is written it makes it seem that you can do something which is mathematicaly impossible - have a way of investing that beats shares in the short term and loses in the long term. What it really means is that there are many five-year periods in which you can get cash to beat shares, but mixed in with that there are periods when shares beat cash and do so to such an extent that on average shares end up ahead.
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Re: Economics for Idiots

Post by Bewildered » Sat Feb 13, 2021 3:55 am

Since it’s almost a continuation on this exchange let me ask my own idiotic question about economic.

I realise that if you take a random sample of stock prices at any given time and then roll forward in time, on average these stocks will increase at a rate thats higher than bank savings. However I don’t understand how the average increase in value of shares being higher than saving rates proves that a random unskilled investor should get a better rate on average :oops:.

So put like that it sounds stupid, and I am asking you to explain a tautology, but my confusion is I have also been told many times that wise investors can do better than average. It’s a huge industry and while there may be some exaggerations and b.llsh.t, I am pretty sure high frequency trading is delivering and it’s doing so in a way that’s quite intuitive (they get extra information first and use it to get good value stocks). As I understand the stock market is a game of chance, like poker, except poker is usually a negative sum game, or zero sum game with friends, while the stock market is positive sum game. But I still expect that the skilful players making more money for themselves to impact on the less skilful players, ie I expect the extra information the hf traders get and use to somehow limit the availability of stocks that are about to rise, forcing other unskilled players to buy them at a higher share price ? Doesn’t it work like that? But if that’s the case then how can you can reliably predict an unskilled players expectation value by comparing to the average growth rate of stocks?

To use the poker analogy I could take a snapshot of the money players have in a cardroom or online site and then run it forward and I know the average result will be a loss thats fixed by the level of rake (money the casino takes out of the pot to pay for the dealer etc and make a profit). However some skilled players will make a profit in the long run and unskilled players will get crushed by a lot more than the rake. Even if the poker site ran a crazy promotion where they put money into the pot, e.g. added 1% of the pot each hand, instead of taking it out, many players will still be losing due to the skilful players. So it seems one of my assumptions or the statements is wrong here. Can anyone explain?

One idea I had is that stock market is also different from poker, in that the investments actually do something and cause growth. So then the answer could be that skilful players make extra expectation value by growing the entire market, instead of lowering other players expectation value. However I somehow find it unlikely that there is unlimited potential for skilled investors to grow the market, and wouldn’t we then see an acceleration in the growth rate as people became more educated about how to make investments?

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Re: Economics for Idiots

Post by basementer » Sat Feb 13, 2021 5:06 am

Bewildered wrote:
Sat Feb 13, 2021 3:55 am
So put like that it sounds stupid, and I am asking you to explain a tautology, but my confusion is I have also been told many times that wise investors can do better than average.
Some investors get better returns than others, and the ones who do better than average are probably inclined to imagine that they have been wise rather than lucky.
Money is just a substitute for luck anyway. - Tom Siddell

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Re: Economics for Idiots

Post by bolo » Sat Feb 13, 2021 5:36 am

Yes, what Basementer said.

There are several ways to make money on the stock market:

1. You can be a trader in the business of buying and selling stocks to investors, and you can charge a fee per transaction, or equivalently you can charge the buyers a slightly higher price than you offer the sellers. You make your money off the fees and/or the price differentials and to a first approximation you don't care whether the stocks themselves go up or down, because you're making money on the transactions, not by owning stocks.

2. You can be a high frequency trader, using expensive IT equipment to get information about stock orders a fraction of a second sooner than the average bear, so that when someone announces that they're looking to buy, you can snap up that stock from the cheapest available seller before the prospective buyer can get to them, and then sell it to the prospective buyer for a teensy bit more than you paid for it. Here again, you make your money off a very large number of very small price differentials, and to a first approximation you don't care whether the stocks themselves go up or down.

3. You can buy stocks that are valued at less than their true worth. When other investors eventually recognize their true worth, the price will rise, and you can sell, making a profit. Lots of people think they can identify stocks that are valued at less than they are worth. The vast majority are deluding themselves, unless they have insider information, which is illegal. There is lots of academic research saying that even professional stockpickers, over the long term, do no better than someone who picks entirely at random. And they do worse than random, when you subtract out their trading fees.

4. You can buy stocks, hold on to them, and on average, you will make money, because owning a stock means you own a fraction of a company, and the average company makes money. The average stock rises in value over time (or equivalently, pays out dividends) because the company it represents is in the business of making profits.

Most people who don't work professionally in the finance industry can only successfully do #4, and if you don't waste a bunch of money on fees, by trading excessively or making your investments via a company that charges excessively, then in the long term, on average, you will do just fine that way.

The main point is that if you treat the stockmarket as a betting game, buying and selling and hoping that the stocks you buy go up and the stocks you sell go down, then most of the time, in the long run, you will lose money, just like you will at roulette. Your wins and losses on the actual trades will cancel each other out, and along the way you will pay fees, or spread, just like the house rake at a casino.

If you are investing, rather than speculating, then you want to pay as little rake as possible and count on the fact that, on average, over a long enough timespan, companies in the business of making money mostly succeed in making money. For nearly everyone, this means you should buy an index fund with fees as low as you can find, and hold onto it forever. Well, not forever, but until it's time to sell it and spend the proceeds on whatever you were saving up for.

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Re: Economics for Idiots

Post by basementer » Sat Feb 13, 2021 6:06 am

I'm in bolo's 4th category. So far (the kiwifolio has only been running a bit over four years) my annual rate of return is a few percent below the index of the top 20 shares, but as it's well over five percent ahead of either inflation or bank deposit rates, I'm content. In it for the long game.
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Re: Economics for Idiots

Post by KAJ » Sat Feb 13, 2021 4:35 pm

basementer wrote:
Sat Feb 13, 2021 5:06 am
Bewildered wrote:
Sat Feb 13, 2021 3:55 am
So put like that it sounds stupid, and I am asking you to explain a tautology, but my confusion is I have also been told many times that wise investors can do better than average.
Some investors get better returns than others, and the ones who do better than average are probably inclined to imagine that they have been wise rather than lucky.
It's some time since I put substantial effort into evaluating the performance of professional stock market investors (I was a pension fund trustee). I (and my fellow trustees) concluded that past investor performance was no predictor of future performance - at any time someone has to be leader of the pack, but no one was reliably at the front. We ended up choosing tracker funds, where management costs are lower. The Efficient-market hypothesis is relevant.

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Re: Economics for Idiots

Post by Martin Y » Sat Feb 13, 2021 5:01 pm

In related news, my grandma left me some shares that I've just kept, and they send me small dividends from time to time. This isn't the news bit. She died in 1987 which I remember because Black Monday happened while her estate was still going through probate and that evaporated about a third of it, but I digress. So far so category 4.

I just got a letter telling me the company is considering a buyout offer at 880p/share. I checked their share price and saw it was bumbling along at around 600p until 3 days before the letter was sent out when it suddenly jumped to 850p. Just a reminder that by the time we category 4 types learn of an investment opportunity it's already much too late.

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Re: Economics for Idiots

Post by lpm » Sat Feb 13, 2021 6:01 pm

Best investment: your own company's share scheme if they have one. UK gives 20% discount to share price, plus optionality, 3 year term

Second: pension. Immediate tax gain, then very long term returns.

Third: tax efficient share ISA, PEP or equivalent, whatever the govt currently allows.

Fourth: index fund, gives saving on costs

Fifth: fun portfolio - pick companies that interest you. E.g. solar or robotics. Watch them over the years, a bit like following a football team

Sixth: tax efficient bond ISA or equivalent. Low risk, low return

Seventh: bank deposit ISA

Eighth: bank or building society deposits

Other: highly expert in a narrow niche, e.g. buy and sell Swedish antiques. Unlikely to be profitable long term for more general buying and selling, such as antiques as a whole
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Re: Economics for Idiots

Post by bolo » Sat Feb 13, 2021 6:44 pm

lpm wrote:
Sat Feb 13, 2021 6:01 pm
Best investment: your own company's share scheme if they have one. UK gives 20% discount to share price, plus optionality, 3 year term
Well yes, within reason, but not for 100% of your portfolio, because then if your company goes south, you might lose your job and your savings at the same time.

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Re: Economics for Idiots

Post by basementer » Sat Feb 13, 2021 7:11 pm

lpm wrote:
Sat Feb 13, 2021 6:01 pm
Best investment: your own company's share scheme if they have one. UK gives 20% discount to share price, plus optionality, 3 year term

Second: pension. Immediate tax gain, then very long term returns.

Third: tax efficient share ISA, PEP or equivalent, whatever the govt currently allows.

Sixth: tax efficient bond ISA or equivalent. Low risk, low return

Seventh: bank deposit ISA
These may not be applicable in some of the countries where forum members reside.
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Re: Economics for Idiots

Post by lpm » Sat Feb 13, 2021 8:01 pm

bolo wrote:
Sat Feb 13, 2021 6:44 pm
lpm wrote:
Sat Feb 13, 2021 6:01 pm
Best investment: your own company's share scheme if they have one. UK gives 20% discount to share price, plus optionality, 3 year term
Well yes, within reason, but not for 100% of your portfolio, because then if your company goes south, you might lose your job and your savings at the same time.
Optionality. In UK schemes you can't lose your savings, you get your money back.
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Re: Economics for Idiots

Post by bolo » Sat Feb 13, 2021 8:40 pm

lpm wrote:
Sat Feb 13, 2021 8:01 pm
Optionality. In UK schemes you can't lose your savings, you get your money back.
Interesting. Never heard of that.

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Re: Economics for Idiots

Post by sTeamTraen » Sun Feb 14, 2021 12:05 am

Something worth considering when deciding where to invest is not just the risk/reward ratio that you are prepared to accept for the invested money, but combining that with the risk/reward ratio of your next 10 or 20 years of income (or whatever horizon you want to consider).

Basically, if you have a government(-type) job from which you are very unlikely to be laid off but which perhaps pays less well as (or has fewer prospects for progression than) a private sector job, you can afford (and should have) a riskier portfolio with a greater weighting in shares, because your basic income is relatively secure, but you are unlikely to get bonuses or share options from your employer.

On the other hand if you work in, say, sales, where your income is based on commission, or in a sector of the economy that has regular highs and lows, you should probably have a higher proportion of your savings in deposits or bonds, to balance out the variability in your income.

(On the same principle, if you have a long commute by car to work, you should buy shares in Shell. That way if the price of oil goes up, some of the increased cost of your commute will be offset by the rise in the value of the shares.)

Ironically, though, the types of people who take jobs in the first category tend to be more risk-averse as investors than those in the second, so the first group doesn't take enough risk and ends up with their savings been needlessly eaten by inflation when they could quite reasonably have had 50-70% in stock etc. Meanwhile the people with riskier incomes are often hit twice by an economic downturn, both in terms of their monthly income and their unnecessarily large exposure to the economic cycle via their investments.
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Re: Economics for Idiots

Post by Millennie Al » Sun Feb 14, 2021 6:42 am

Bewildered wrote:
Sat Feb 13, 2021 3:55 am
Since it’s almost a continuation on this exchange let me ask my own idiotic question about economic.

I realise that if you take a random sample of stock prices at any given time and then roll forward in time, on average these stocks will increase at a rate thats higher than bank savings. However I don’t understand how the average increase in value of shares being higher than saving rates proves that a random unskilled investor should get a better rate on average :oops:.
That's not an idiotic question at all - very astute in fact. The random unskilled investor cannot get a better rate on average - they need to do the right thing, which random unskilled people don't do. There are two ways to beat the average as an almost unskilled investor: one on a personal level and one on a population level (though you can mix them as well).

On a personal level, you essentially buy a broad range important shares and hold them for a long time. Due to trading costs, it's not practical for ordinary people to do this directly, so you use an index fund which effectively pools money from many people to buy the shares.

On a population level, everyone chooses one important share at random and puts all their money into it. Mathematically, this is equivalent to the personal level averaged across the population, though it results in a wide range of results for individiuals with some losing a lot (or, possibly, everything) and others gaining hugely. An amusing mathematical idea - but totally impractical in real life.

The completely unskilled investor will probably try to buy and sell shares in some pattern and do so in a less skilled way than professional investors, thereby losing at least some of their money to the professionals, which is therefore going to be worse than the passive investing described above.

Fortunately, you don't have to figure out which shares are "important" as you can use standard definitions such as the FTSE100. This index started 37 years ago at a nominal value of 1000 and now is at 6,589.79 at its 37-year anniversary it had achived an average growth of 5.17%. While some professionally managed funds have beaten that, many have not, and for the ordinary person it does not help to shift the challenge from picking which shares to buy into picking which manager to choose for you.

Note that buying an index tracker is not quite equivalent to buying the shares in the index that it tracks as companies enter and leave an index. For example, if a company leaves the index, an index fund will sell its shares in that company and buy in whichever replaces it. Similarly, if two companies merge resulting in a new entrant, the fund will rebalance the portfolio to accomodate the new entrant.
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Re: Economics for Idiots

Post by Millennie Al » Sun Feb 14, 2021 6:43 am

Martin Y wrote:
Sat Feb 13, 2021 5:01 pm
In related news, my grandma left me some shares that I've just kept, and they send me small dividends from time to time. This isn't the news bit. She died in 1987 which I remember because Black Monday happened while her estate was still going through probate and that evaporated about a third of it, but I digress. So far so category 4.

I just got a letter telling me the company is considering a buyout offer at 880p/share. I checked their share price and saw it was bumbling along at around 600p until 3 days before the letter was sent out when it suddenly jumped to 850p. Just a reminder that by the time we category 4 types learn of an investment opportunity it's already much too late.
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Re: Economics for Idiots

Post by Millennie Al » Sun Feb 14, 2021 6:45 am

lpm wrote:
Sat Feb 13, 2021 8:01 pm
bolo wrote:
Sat Feb 13, 2021 6:44 pm
lpm wrote:
Sat Feb 13, 2021 6:01 pm
Best investment: your own company's share scheme if they have one. UK gives 20% discount to share price, plus optionality, 3 year term
Well yes, within reason, but not for 100% of your portfolio, because then if your company goes south, you might lose your job and your savings at the same time.
Optionality. In UK schemes you can't lose your savings, you get your money back.
Are you referring to the save-as-you-earn (SAYE) schemes? Your money will be at risk after the term when you buy the shares, so you should diversify then.
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Re: Economics for Idiots

Post by Bewildered » Sun Feb 14, 2021 7:57 am

bolo wrote:
Sat Feb 13, 2021 5:36 am
Yes, what Basementer said.

There are several ways to make money on the stock market:

1. You can be a trader in the business of buying and selling stocks to investors, and you can charge a fee per transaction, or equivalently you can charge the buyers a slightly higher price than you offer the sellers. You make your money off the fees and/or the price differentials and to a first approximation you don't care whether the stocks themselves go up or down, because you're making money on the transactions, not by owning stocks.

2. You can be a high frequency trader, using expensive IT equipment to get information about stock orders a fraction of a second sooner than the average bear, so that when someone announces that they're looking to buy, you can snap up that stock from the cheapest available seller before the prospective buyer can get to them, and then sell it to the prospective buyer for a teensy bit more than you paid for it. Here again, you make your money off a very large number of very small price differentials, and to a first approximation you don't care whether the stocks themselves go up or down.

3. You can buy stocks that are valued at less than their true worth. When other investors eventually recognize their true worth, the price will rise, and you can sell, making a profit. Lots of people think they can identify stocks that are valued at less than they are worth. The vast majority are deluding themselves, unless they have insider information, which is illegal. There is lots of academic research saying that even professional stockpickers, over the long term, do no better than someone who picks entirely at random. And they do worse than random, when you subtract out their trading fees.

4. You can buy stocks, hold on to them, and on average, you will make money, because owning a stock means you own a fraction of a company, and the average company makes money. The average stock rises in value over time (or equivalently, pays out dividends) because the company it represents is in the business of making profits.

Most people who don't work professionally in the finance industry can only successfully do #4, and if you don't waste a bunch of money on fees, by trading excessively or making your investments via a company that charges excessively, then in the long term, on average, you will do just fine that way.

The main point is that if you treat the stockmarket as a betting game, buying and selling and hoping that the stocks you buy go up and the stocks you sell go down, then most of the time, in the long run, you will lose money, just like you will at roulette. Your wins and losses on the actual trades will cancel each other out, and along the way you will pay fees, or spread, just like the house rake at a casino.

If you are investing, rather than speculating, then you want to pay as little rake as possible and count on the fact that, on average, over a long enough timespan, companies in the business of making money mostly succeed in making money. For nearly everyone, this means you should buy an index fund with fees as low as you can find, and hold onto it forever. Well, not forever, but until it's time to sell it and spend the proceeds on whatever you were saving up for.
Thanks, that is really helpful!

So if it’s an empirical fact that the professional stockpickers don’t outperform the average, that explains the apparent contradiction. Would be great if you or anyone else had a link to a paper or better still a review of the evidence or some such.

I’d still like to understand better how this happens though, as I am confused about a few things still. but I will come back to this later.

Bewildered
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Re: Economics for Idiots

Post by Bewildered » Sun Feb 14, 2021 8:01 am

KAJ wrote:
Sat Feb 13, 2021 4:35 pm
basementer wrote:
Sat Feb 13, 2021 5:06 am
Bewildered wrote:
Sat Feb 13, 2021 3:55 am
So put like that it sounds stupid, and I am asking you to explain a tautology, but my confusion is I have also been told many times that wise investors can do better than average.
Some investors get better returns than others, and the ones who do better than average are probably inclined to imagine that they have been wise rather than lucky.
It's some time since I put substantial effort into evaluating the performance of professional stock market investors (I was a pension fund trustee). I (and my fellow trustees) concluded that past investor performance was no predictor of future performance - at any time someone has to be leader of the pack, but no one was reliably at the front. We ended up choosing tracker funds, where management costs are lower. The Efficient-market hypothesis is relevant.
Ah I missed this post before replying to bolo. That link looks very relevant to what I was confused about!

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