I was sipping a venti mocha when I read this and I laughed so hard there's mocha all over my keyboard. There are people here, actual paid economists, who are doubling up in laughter at your assertion.
The Second Law of Economists: They're both wrong.
I guess the hardest part about it is not letting an economist read about this direction, and claim it as his own...
Hmm, an Imaginary Economist.. Sounds somehow apt?
I still think you are transposing economists and analysts.
Again, there is a difference between stock analysts and economists. Economists are looking at numbers, trends and history more like a computer scientist. Economists are even often specialized into various regions of the country.
A stock analyst is going off of timing and trends more than data. If you've ever traded stocks heavily, you learn quickly that traders throw away yesterday...'that money's gone'. Having worked to make companies profitable, it's unsettling to realize that the stock market is full of people who know how stocks work but have no idea how business works.
I think I've posted this before but in one past company we moved millions of dollars of product around before we did our annual inventory just so our numbers would match what Wall Street expected. We actually needed much more on hand than the stock market wanted just to do business, but they wouldn't have any idea about that.
http://www.nytimes.com/2007/03/04/business/yourmoney/04view....
1. Economists were not aware that there would be a major terrorist attack six months later
2. Economists did predict the recession that occurred in March 2001 due to the Bush administration's desire to weaken the dollar. When polled, a few economists were polled if there would be a double dip recession and 95% said no- a fact that changed six months later.
> A stock analyst is going off of timing and trends more than data.
Not necessarily. You can broadly divide analysis into two camps - "technical analysis" [1] which is what you're describing, and "fundamental analysis" [2] which is looking more at intrinsic value, numbers, assets, things like that.
Warren Buffett, for instance, does plenty of stock analysis and he's not a technical trader at all. He repeatedly says he doesn't try to time the market. [3]
The first book I read on trading - Technical Analysis of the Financial Markets [4] - was from a technical analysis perspective, and I lost money trying to implement it.
Then I read about value investing and started trying to apply those principles - only buying fundamentally sound stocks trading at a favorable price earnings ratio, either in fundamentally defensible businesses or with lots of solid assets on their books, and buying with a big margin of safety.
I haven't had a losing trade since then, though in fairness my sample size is small and I don't sell unless the price of a stock I bought gets over what I consider reasonable. I'm currently holding Microsoft and HP which are down, but both I think are way undervalued (Microsoft is extremely stable, has some upside in the way of a strong research division, and could potentially translate a hit like the Kinect into alternate input devices. HP is being treated as toxic despite owning some nice high margin businesses that most people don't think about when they think of HP, as well as a huge patent portfolio and some good assets... yeah, their management sucks lately, but who cares if a company is trading below its liquidation value? anyways, do your own research, check the financials, etc, etc)
Anyways. Not all traders are technical traders. Fundamental analysis is also analysis, and probably easier to implement to be consistently successful. The top book on that is "The Intelligent Investor" [5] by Ben Graham, which Warren Buffets calls the best book on finance ever written (I agree).
[1] http://en.wikipedia.org/wiki/Technical_analysis
[2] http://en.wikipedia.org/wiki/Fundamental_analysis
[3] “If you’re an investor, you’re looking on what the asset is going to do, if you’re a speculator, you’re commonly focusing on what the price of the object is going to do, and that’s not our game.” (1997 Berkshire Hathaway Annual Meeting)
[4] Generally considered one of the best intro books to technical analysis. http://www.amazon.com/gp/product/0735200661/ref=as_li_ss_tl?...
[5] http://www.amazon.com/gp/product/0060555661/ref=as_li_ss_tl?...
Your response is one of the reasons I have to force myself to stay away from Hacker News; I have too much to do but there are some great conversations on here.
This might shock you, but 2-3 years this was the only kind of conversation we ever had on HN with any regularity. It was pretty cool back then.
Anyways, I appreciate the kind words and the discussion as well - drop a line if I can ever lend a hand with anything.
After the 87 crash, the 2001 crash and the 2008 crash, I'm a firm believer that we will experience crashes every 7-10 years, because the financial markets are fundamentally unstable, and keeping your money in the stock market for long term will only lose you money.
I believe the only way to be in the stock market is to realize that it is a game, that the dominant players all believe it is a game, and you have to know how to play by their rules. In this case, it means that you have to follow the technicals in order to understand the ebbs and flows of the market, and know how to trade, not invest. I believe that given the nature of the markets these days, it's more of a market of probabilities, and short-term momentum rather than fundamentals.
I still think there is room for "investing", but it is high risk to hold things in the market these days.
Sell if their stock price gets overinflated, otherwise just hold and collect dividends.
Don't buy stocks that are trading at stupid prices. Don't even buy stocks that are trading at reasonable prices. Only buy stocks that are trading at a steep discount to their reasonably projected future cashflow + asset value + large margin of safety.
...win?
I mean, you kind of can't lose if you do that. Sure, sell if your stocks get overheated. Or just collect dividends forever if it's a great company that's consistently underpriced. Avoid stocks that are priced high relative to earnings/assets, and even avoid reasonably priced stocks. Kind of a no lose proposition that way, no?
1) Dividend might get cut. All the banks had their dividends drastically cut, and their stock prices kept dropping. I'm talking pre-crisis, EVERYONE was saying that the financials were screaming buys. When a stock's dividend yield is too rich relative to its stock price, and it can't get its stock price to appreciate, many companies will tend to just cut the dividend outright.
2) Just because a stock is low doesn't mean it won't go lower, especially if the prospects for growth keep dropping. Look at CSCO. People bought in at 21 thinking it was a good value investment. Now they are trapped longs, waiting to get out at break even. The same goes for MSFT and HP at this point. These are called value traps, because your money gets trapped while you wait for a pop.
The worst case scenario, which happened in 2008 to many, many stocks and which I believe will continue happening, is that you buy a "value" stock, the we get a recession or another crash, the stock price halves, and then the dividend gets cut or eliminated altogether. Then you're left holding a crappy stock for months or years.
The point is that your strategy is not fool-proof. I believe there are probably plenty of companies where it might work, but there are also plenty of companies in-this-day-and-age where you could get massively whacked following this strategy. And history in the last 3-5 years shows that it doesn't work that well.
I did it with WaMu and lost a boatload. Watching cashflows, etc, etc is fine during a healthy environment, but right now, we have no clues as to the underpinnings of many, many companies, because you really need to understand how to interpret financial statements better than a casual observer. Look at Groupon... would you have been able to tell that their cashflows were positive only because they collected their moneys quickly, but paid their merchants slowly? That takes significant amount of experience to understand this. Probably for most of us here that isn't in the industry, it would have looked great.
> EVERYONE was saying that the financials were screaming buys.
Investing on fundamentals means giving not a damn what everyone is saying or thinking. It's just about the numbers. Actually, if EVERYONE is really thinking something is a great buy, it's probably not.
> Look at CSCO. People bought in at 21 thinking it was a good value investment.
Nothing at 21 is ever a value investment. That's still looking for growth. Just because a whole industry is insane doesn't mean a less insane number is good. As a very rough and flexible guideline, I won't spend too much time looking at something with price/earnings above 12. There's just too many solid companies priced below that with solid businesses and assets.
> The worst case scenario, which happened in 2008 to many, many stocks and which I believe will continue happening, is that you buy a "value" stock, the we get a recession or another crash, the stock price halves, and then the dividend gets cut or eliminated altogether. Then you're left holding a crappy stock for months or years.
That's a good point, yeah. I'm comfortable holding forever with my buys, and when "forever" comes around these things correct, but you've got potential opportunity cost in there.
Good comment here, good discussion, cheers.
It's great in theory, but in practice it's not realistic to believe you can reliability know what a company's "reasonably projected future cashflow" really is. Even if they're in the most reliable business in the world, if someone comes up with a lower-cost alternative next year, all those future cash flows go poof.
Conversely, it's damn hard to tell when some stocks are overpriced. I remember folks saying in 2007/2009 that Apple was wildly overpriced at about $90. I heard the same things about Amazon over the past few years.
Isn't the top book on value investing "Security Analysis", and "The Intelligent Investor" is just the popular science alternative?
Of course there will be people who say there is a crash. That's what makes a market. But economists don't predict market crashes, they predict recessions. And very few economists predicted a recession, which is what I said.
Hell, the financial crisis had a early warning alarm. Bear Sterns imploded in the Spring... was the subsequent collapse of Lehman and the crisis really a big surprise?
Any economist who didn't call the bubble, and painful end of it, wasn't trying.
It will get worse. Our economy is debt all the way down.
My memory of the blogosphere is that people knew housing was overvalued and a lot of people were taking equity out of their homes by remortgaging them at high valuations. But I do not remember discussion of how much fraud there was in originating and repackaging housing loans, and no-one was talking about how these were getting securitized and distributed.
This recession is severe, but it has nothing on the recessions of the past. Let's not throw out this knowledge; it was won by the accumulated experience of economic hardship unimaginable to modern Americans.
I have a hard time believing there are any "actual paid economists... doubling up in laughter" in your vicinity. Something about the attitude of your post.
So you are asserting that economics as a field causes stability in the economy?
Here's why: underlying predictability probably increases volatily. People love to lever up when they're certain; "Private Equity" as an asset class refers to both VC deals and leveraged buyouts because in both cases, they fine-tune their leverage to get the same (high) volatility. Increased certainty makes bankers more willing to lend, and speculative buyers are always willing to borrow.
In my experience, speculative borrowers and the marginal banker overestimate decreases in volatility. Thus, a more superficially predictable economy will lever up fast enough to more than counteract that (sort of like the theory that airbags increase traffic fatalities because drivers overestimate how safe they are and thus take extra risks).
For economic volatility to actually dampen, you'd need economists to come up with better predictions that sound really stupid, so bankers and speculators would disregard them.
Economists spoke of a Great Moderation that had occurred thanks to their ideological theorizing, but that is just an unfunny punchline to a joke now.
If you think this recession is bad, look at recessions before modern economic theory came about. That's what I'm trying to get at.
It makes absolutely no sense to throw out sound, proven macroeconomic theory because of a regulatory experiment gone wrong. I'd say it was that macroeconomic knowledge that prevented that mess from being a total disaster. And now people want to throw that economic knowledge out in favor of ridiculous shit like the gold standard, or MORE deregulation, or on the left twisted ineffective versions of laborism, or whatever. Bleh.
umm..Nope. I can give you a subtle, nuanced argument about why that's plain false. However, I will defer to Dr. Derman here - http://blogs.reuters.com/emanuelderman/2011/09/23/the-perils...
This is magical and, frankly, dangerous thinking.
In fact, this is eerily similar to the hubristic naivete peddled by pundits just before the subprime mortgage crash.
Also, this Freakonomics podcast talks about the folly of prediction in general - http://freakonomicsradio.com/hour-long-special-the-folly-of-...
[1] http://www.boston.com/bostonglobe/ideas/articles/2011/01/09/...