Is MPT and buy and hold DEAD?
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[quote=MinimumVariance]To state MPT is dead is the equivalent of saying “In Obamamerica the Laws of Supply and Demand have been repealed”.
What is MPT as encapsuated by the CAPM? Simply the recognition that the price of a security will be determined at the point where S=D, and the owners will be compensated for the risk of that particular security. (And portfolio risk can be diversified away if the total world market portfolio is held. The later is impossible to find, of course, and finding the combination of asset weights that min variance reqwuires a little calculas and a big computer). Buy and hold is an investment strategy and has nothing to do with MPT. The fact is that heretofore, every market timing / pick winners based on some crazy theory has failed to beat a B&H afrter fees and transaction costs. This is an empirical proposition only. If any broker type on this board claims to have extraordinary foresight and some secret 'model' he would NOT be a stock broker but managing a hedge fund.[/quote] If I send you a list of my prospects, will you call them and run this by them? It would help my business tremendously. I love competing against "buy and hope". I especially love the "If you miss the ten best days in the market...." pitch (EDJ is everywhere here).It sure sounds like what he’s saying is that we cant look at the big picture and make tactical decisions. Minimum Variance … how about some clarification - in English, so dummies like me can understand.
We've seen a couple jumps in the market over the past few months, but here we sit at 7000. How do you know when the bull is really a bull and not just another short-lived bear market rally? I think you're playing with fire.Here’s my question - whats your process for getting back to being invested so you dont miss the up?
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I acknowledge that I’m going to miss the first 15% of the next bull market. That’s okay with me. I tell my clients that is already baked in to our portfolios, but that it’s better to miss the first 15% or so of the next bull market rally–which might last another 20 years–rather than miss the next 10-50% heading down.
It was funny, but after I left SB in December my clients were getting calls, telling them they’re crazy to be in cash and short ETF’s heading into the new year. Haven’t they ever heard of the January effect? Or the Santa Claus rally? Or the idea that the market rallies on tax issues, when companies match their 401k’s? And we had our worst January ever. And we’ve just finished one of our worst Feb’s ever.
You can be a hero by not trying to be a hero, IMHO.
We've seen a couple jumps in the market over the past few months, but here we sit at 7000. How do you know when the bull is really a bull and not just another short-lived bear market rally? I think you're playing with fire.[/quote] I have a magic 8 ball. It says "Not quite yet".[quote=Bodysurf]Here’s my question - whats your process for getting back to being invested so you dont miss the up?
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I acknowledge that I’m going to miss the first 15% of the next bull market. That’s okay with me. I tell my clients that is already baked in to our portfolios, but that it’s better to miss the first 15% or so of the next bull market rally–which might last another 20 years–rather than miss the next 10-50% heading down.
It was funny, but after I left SB in December my clients were getting calls, telling them they’re crazy to be in cash and short ETF’s heading into the new year. Haven’t they ever heard of the January effect? Or the Santa Claus rally? Or the idea that the market rallies on tax issues, when companies match their 401k’s? And we had our worst January ever. And we’ve just finished one of our worst Feb’s ever.
You can be a hero by not trying to be a hero, IMHO.
We’re all “playing with fire” when we invest our clients’ money based on future events and expectations. But my risk is much, much lower than that of almost any other advisor around.
How will I know it’s not just a bear rally, rather than the real thing? Because it’s not 2012 yet. These kind of markets right here will persist for the next few years. We can either adapt, or die from a thousand cuts.
I appreciate the insight. I just put 2012 on my calendar. Which month?We’re all “playing with fire” when we invest our clients’ money based on future events and expectations. But my risk is much, much lower than that of almost any other advisor around.
How will I know it’s not just a bear rally, rather than the real thing? Because it’s not 2012 yet. These kind of markets right here will persist for the next few years. We can either adapt, or die from a thousand cuts.
So let me see if I read this correctly. You are making a call based on future events or expectations.We’re all “playing with fire” when we invest our clients’ money based on future events and expectations. But my risk is much, much lower than that of almost any other advisor around.
How will I know it’s not just a bear rally, rather than the real thing? Because it’s not 2012 yet. These kind of markets right here will persist for the next few years. We can either adapt, or die from a thousand cuts.
Cool. The present is about as effective for predicting the future as the past is.
After all this time Ice you still do not get me. I believe risk should be embraced when it is rewarded. I believe risk should be avoided when the market penalizes it. I have no idea what the markets will look like in 3 years. What I do know is that right now, the market has a serious aversion to risk and that is how my clients are positioned. Simple supply and demand. I can fit this manner of doing business in nicely with the theory of effecient markets.
[quote=daytradah]
Stoxandblondes....
You must be true blonde.....Do you have to get bent over on the casting couch yet again, before you see the reality of your 'staring role". My god, get the hell out of the advisory biz if you are having trouble locating broad market indexes that are down 50%
The DOW JONES is at 7000....How the hell do you measure that decline from the top...That looks like 50% to me and everyone else who failed 3rd grade math. And it is 100% when you look up from the bottom and want to make it back to the top. You are a doooofuss.[/quote] hmm..just logged back on to see this horsehit...you really smoked me with that snappy fcking comeback. Hey c***sucker-go f*** yourself. What the f*** do you know about the "advisory" biz--daytradah? Youre the sh*thead talking 2 pages back about your damn acts down 50% last YEAR...stick to a specific time frame would ya? Nothing is down 50% last year except maybe some lame ass trading POS you put everyone in. Fking wannabe. You are a prick.Nah, not really.
Just hate a mfker talkin sh*t on a damn website for no good reason other than to compensate for pure mediocrity in real life.I’m a newbie, so I won’t pretend to know what the hell I’m talking about, but a lot of you seem to have some pretty decent insight. What do you guys make of Buffett’s normal mantra of “Be greedy when others are fearful…” during a time like this?
Also, what about all the propaganda that I'm being bombarded with by various wholesalers, funds, my firm, and other sources regarding the benefits of a buy and hold strategy? In particular, I read today that there have been only 3 times since 1926, where the S&P 500 average 10-year annual return was negative, including the 10-year period ending in 2008. I found it pretty compelling, but I'd like to run that through all of your B.S. meters. Then there's the "If you missed the X best trading days you'd be screwed..." line. What do you guys think of that one? I'm fully aware that everything I read is not necessarily objective but meant to pursuade me.Always think about the other side. I was told by my RL that I think too much. So you may want to reconsider asking too many questions and just sell everyone you meet something. But for the two things you asked, Buffet is correct to an extent. You can't just mindlessly buy when others are fearful of course. But fundamentally things are undervalued when others are fearful, that's how they became undervalued. On the next part, I really like this one. Our visiting vet harped on it and it is true. But the opposite is also true, for example, what if you missed the x worst days trading? Everything you read is meant to persuade you. Salesman selling to salesman selling to customers until you go indy.
[quote=JAXSON]
Salesman selling to salesman selling to customers ....
[/quote] Great way to put it. Great points. Jones tries to spin everything as a positive. So a 10 percent foreclosure rate becomes '90 percent of your neighbors are paying their mortgages on time.' After a while you don't believe anything. .... I don't necessarily think they are con artists, we just don't have many people here who understand markets and investing. Here we are, a year into an historical economic calamity and there has been no effort here to figure out what is going on.[quote=JAXSON]
But the opposite is also true, for example, what if you missed the x worst days trading? [/quote]
It's funny you mention that because the piece that I read addressed that side of the coin also, and I'm with EJ, so you probably got the same info I did. Basically, it calculated that a $1 million investment in the S&P 500 that somehow missed the worst 100 days in the market over the last 30 years would've grown into $1.4 billion. That's akin to saying that the entire investment was completely liquidated just prior to the three worst individual days every year (on average), and then completely reinvested the next day. Now, I don't know much, however I think I've got an above average B.S. meter by and large, but, as long as these statistics are actually true, it makes a pretty compelling argument in favor of buy and hold vs. attempting to time the market. Realistically, nobody knows what the market's going to do tomorrow or next month or next year. That would be like clairvoyance (sp?). This article further espouses how all the "gurus" and "pundits" are, in fact, not billionaires, which indicates that they probably aren't clairvoyant. I dunno....what do you guys think? Oh, as far as constantly taking the "glass half full" attitude on everything. Personally, I feel that that is a good way to look at life in general. Particularly during tough times. I like to think of myself as generally open-minded and at least half educated (although I admit to being opinionated on certain issues), so I always try to see things from every angle, but I also try to choose a positive outlook on things. The alternative kinda sucks! As far as selling to salesmen...you're exactly right, but that's pretty much sales management in a nutshell. Your salesmen have to buy into your products/services/strategies to be effective in transferring that buy-in to prospects. I don't know for sure, but I've got a feeling that indies are completely inundated with sales literature for everything they can sell. That's really no different...selling to the salesman. Every seminar sponsored by a wholesaler is one long sales pitch...selling to the salesman. There's really nothing wrong with it in my view. If the salesmen don't believe in the product, then they won't sell the product (at least not with integrity). JMHO.I don’t use B&H myself, but I don’t think there is any EVIDENCE that some crazy theory about the MACD line crossing the 200 day EWMA line has any validity at all. The CAPM describes what will prevail when markets are in equilibrium. Of course markets are never in full equilibrim as new info in available constantly, relative prices are changing somewhere for something, in the case of securities peoples risk aversion changes. However, eventually all markets will clear (which just means theres a price where some people who want something are satisified with its price as are the owners of that same thing).
B&H has nothing to do w/MPT itself. Some academics who adhere to MPT have gone on to empirically investigate different strategies. Up until the latest conflagration none of those studies have found something better than B&H san taxes / transaction costs as a stratgy. Arguing this matter at this point in time tho is like arguing with a guy selling equity linked annuities ["see how well they worked"! Course the insurnce company that guaranteed the returns is not bankrupt, but thats a different issue...] Please NOTE: B&H does NOT mean 'buy 100 stocks and put em in a safe deposit box. Open box at retirement". It means hold the market portfolio. The composition oif the market portfolio will CHANGE DAILY as its' components values change. Let me describe my B&H approach (which is not literally buy and hold). 1- Determine asset class desired exposures. To more closely approximate the total market portfolio I add a healthy does of 'alternative' assets. 2- Within asset classes determine sectors with a greater probablity to gain (or loss) relative to my BM. EG Fertilizer will beat Financials next qtr. (this takes the form of probablilty functions - I am __% optimistic that X will occur). 3- Decide whether you want to use active mgrs, single invetments, or indices. I use all three as I don't believe it's worth paying for active mgrs in LC stocks when all you get is beta. It may be worth paying for alpha though in markets that are less efficient (Korea, BioTech). Collect ten yers of returns on each of your selections, calcualte a bunch of statistics about each one, and the Cov matrix for all of them. Actually computers do this. 4- Optimize groups of selected assets with a Black-Litterman add-on to a Markozitz MVO (say 30 out of an investible universe of 300?) Depending on the risk preferences of the client will determine what goes into the universe. Think of each square in a hypotheticl 'global style box' as having three choices: agressive, moderate, and conservative (as measured by their respective Sharpe Ratios). 5- Buy the optiomal portfolio weights. [I might do this using 3,5,7,10 yr data.]. I carve out a 5% - 10% piece for tactical positions. I might use an options overlay on the whole thing. 6- Repeat every month by adding one data point (more recent) and subtradcting one (most distant). Re-visit performance estimates of sectors (this is called your 'view' of a particular segment). Compare transaction costs with expected gains, either change or wait till some threshold is reached where Bemefit > Costs. As you add new data, and has different sectors pricing relatives change you can emphasize a monentum or a reversion to the mean strategy strategy. Decide whether you'll allow short positions (I don't, but not doing so can be a significant cost in terms of future portfolio returns). THATS HOW I DO BUY AN HOLD