All the people saying you can't compare shares because there are some crap ones so if you pick the good ones obviously do not understand the stock market and efficient market theory. Share prices reflect all information available at the time. That means if there is something bad about the company, then the share prices fall - ie. factoring in the bad information. This then becomes a value stock and historically value stocks outperform the market in general. When there is some bad information about a company, it increases the risk, therefore, with the efficient pricing mechanism of the stock market, a greater risk premium is priced into the stock. The companies that, upon all known information, look to be a great stock, will generally under perform because there is more certainty, less risk, therefore less reward. It's the value premium.....selecting 'good' stocks will generally have you under perform the market. Any given day, share prices reflect all known information and the performance of anyone stock going forward will be based on new information that isn't available now.
The people on this forum that think they can pick the stocks that will perform well, even after 1000's of very smart stock analysis and traders use the pricing the mechanism to correctly price all stocks with all information available every day, are kidding themselves. Anyone here that has outperformed have done it by luck, and quit while your ahead. Read 'Fooled by randomness' by Nassim Nicholas Taleb
Aussiehouseprices is correct stating the house price growth includes capital additions which will always artificially boost house price growth. Shares have historically performed better for most periods, so if we are at a point in time where property returns are smashing shares....wouldn't that ring alarm bells for anyone? I'd much prefer to take a contrarian approach and stick clear of property. But that's just me.
The people on this forum that think they can pick the stocks that will perform well, even after 1000's of very smart stock analysis and traders use the pricing the mechanism to correctly price all stocks with all information available every day, are kidding themselves. Anyone here that has outperformed have done it by luck, and quit while your ahead. Read 'Fooled by randomness' by Nassim Nicholas Taleb
I agree with this. When gamblers win they commonly imagine that their success was due to their "system", expertise or cleverness. With shares, the law tries to ensure that any win is luck. In Australia there is a law against trading shares using information not available to others. To the extent that this law is enforced, it ensures that any success above average is luck. Someone on this thread has suggested that professionals operating managed funds achieve better returns. It is my understanding that, on average, managed funds fail even to achieve index performance. Studies repeatedly indicate that monkeys with a dartboard are as good as if not better than average investors. There is clear evidence that something like 90% of individual forex traders are losers. People like Chris Becker (The Prince on Macrobusiness) who, if believed, makes 50%-70% return pa on trading are very very rare. Furthermore, managed funds have fees, perhaps 1% pa. Over the long term this wipes a massive amount from a return compared with that indicated by an index. The majority of Australian share ownership is done through Superfunds - again with fees of perhaps 1% pa. The share returns (and property returns) indicated in the OP are thus, for most investors, overstated.
It is interesting that the insider trading law does not seem to apply to the purchase and sale of property. This implies that a benefit can be obtained from the possession of property related information not widely known to others.
Crikey. The Strindbag back with a vengeance. Of the course, it a timely with a world seemingly return to a unknown. Such a narrative use by a Strindbag is a obvious one to placate its emotions. And no the doubt will be a referred to by its beloved media, its gurus, and its opportunist white shoes.
What mouzealots will not be focusing is relationship between its asset class. If the leftfield nutbar suggest that stock the market volatile cause by same factors as mouse house price, the invective will the start flowing from all lover, particularly in a Australia. Idea that a financial system that created beautiful mouse house price is part of current crisis best cannot enter tunnel into skull of mouzealot.
So a Straindbag behavior is the entirely consistent and expect. What it can do the teach about future of its mouse house price can also be the found in big steaming dump.
Ultimately people should diversify their asset portfolio rather than have everything in housing or shares. Sure, you may not make the maximal potential profit when viewed in hindsight, but you will have reduced your risk of any one asset tanking. Going for max profit in one asset class at,the exclusion of all others seems more like gambling than investing.
Ultimately people should diversify their asset portfolio rather than have everything in housing or shares. Sure, you may not make the maximal potential profit when viewed in hindsight, but you will have reduced your risk of any one asset tanking. Going for max profit in one asset class at,the exclusion of all others seems more like gambling than investing.
Thankyou - a bit of sanity at last.
By the way Stringy, how many houses do you own, and do you own any shares?
Whenever you have an argument with someone, there comes a moment where you must ask yourself, whatever your political persuasion, 'am I the Nazi?'
By the way Stringy, how many houses do you own, and do you own any shares?
I own just the house I live in. I own no shares. I/we own a pile of government bonds. I wrote about this on GHPC and CreditCrunch. I've been lucky with them, especially the index linked CAIN 406 series. Probably getting time to offload them now.
Bonds deserve much more attention but it is still luck. 30 year US bonds purchased in 1980 paid 15% every year until 2010. Some will say now that it was a nobrainer and they would have purchased them then if they had been around then. The problem was that 15% might have been exceeded later. A bit like people who say that Aussie mortgage rate of 17% in 1989 was obviously a high point and it was safe to buy then. That's only with hindsight. It might have carried on going up and up. The market sets the collective expectation. People who think they know better take a risk.
The bulk of my income is not dependant on my own investments. I have a decent pension (been payable since I was 50), indexed linked without limit. Luck again I suppose but I consider it the product of a successful career. The best investment for youngsters is their career.
All the people saying you can't compare shares because there are some crap ones so if you pick the good ones obviously do not understand the stock market and efficient market theory. Share prices reflect all information available at the time. That means if there is something bad about the company, then the share prices fall - ie. factoring in the bad information. This then becomes a value stock and historically value stocks outperform the market in general. When there is some bad information about a company, it increases the risk, therefore, with the efficient pricing mechanism of the stock market, a greater risk premium is priced into the stock. The companies that, upon all known information, look to be a great stock, will generally under perform because there is more certainty, less risk, therefore less reward. It's the value premium.....selecting 'good' stocks will generally have you under perform the market. Any given day, share prices reflect all known information and the performance of anyone stock going forward will be based on new information that isn't available now.
I have a lot of problems with the efficient market hypothesis. It just doesn't work in practice. Actually, you also need to be specific about which particular version of the efficient market hypothesis you are talking about:
1. Weak efficiency: This form of the hypothesis states that past market price data cannot be used to beat the market. Translation: Technical Analysis is a waste of time.
2. Semi-strong efficiency: This form says you can't beat the market by using any publicly available information. Translation: Fundamental analysis is also a waste of time.
3. This form says that even private information can't be used to beat the market. Translation: The enforcement of insider trading laws is a waste of time.
It just isn't this way in practice. There are people out there who have made a good living consistently over decades by trasing the various markets. The trading desks of companies like Goldman Sachs routinely turn hundreds of millions of profit per month and only rarely (low single digits of days per month) make a daily loss. This can only be through exploiting market inefficiency. The fact that most people consistently underperform the index is also to me proof of market inefficiency, but from the other side. (You should not be able to lose to the market consistently, however hard you try.)
I'm not sure why the efficient market hypothesis is untrue in practice, but I have a few theories:
1. There is huge amounts of information out there, but much of it is wrong. Some people can sort the wheat from the chaff. Much of what is right is being misinterpreted. Some people are better at interpretation.
2. The market is driven by information and sentiment. Actors in the market react to events in different ways and at different speeds based on change of sentiment. People who get ahead of the curve on sentiment can get some arbitrage.
3. There are many actors in the market who a disadvantaged from the start. Average punters are slaves to emotion and will hold when they should sell, and sell when they should hold. Fund managers are disadvantaged by liquidity. They need to accumulate large positions which take weeks or months to accumulate and unwind. These accumulations and unwindings leave elephant tracks in the price signal which people with smaller positions can exploit. Fund managers are also disadvantaged in that they are punished severely for being wrong in a way different from other fund managers but not punished for being wrong in the same way as their peers. Upshot: they all hold similar positions and if you know what positions the fund managers are holding, you can exploit this - but they can't, because it would involve taking a contrarian position which they dare not do in most cases.
4. Different actors in the market are acting over different timeframes. For example, fundamental analysis works over the long term but fails (often dismally) in the short term. By long term I mean periods starting at 5 years. Warren Buffett could not have been as successful as he is without exploiting market inefficiency big time.
And I haven't even touched on market manipulation as a mechanism. I also haven't gotten into the fact that the bid/ask spread just pushes money into the hands of the market makers day in, day out. The market by its very design transfers wealth from the hands of the common punters and the retail fund managers into the hands of market makers, hedge funds and a small band of very smart traders.
I have a lot of problems with the efficient market hypothesis. It just doesn't work in practice. Actually, you also need to be specific about which particular version of the efficient market hypothesis you are talking about:
1. Weak efficiency: This form of the hypothesis states that past market price data cannot be used to beat the market. Translation: Technical Analysis is a waste of time.
2. Semi-strong efficiency: This form says you can't beat the market by using any publicly available information. Translation: Fundamental analysis is also a waste of time.
3. This form says that even private information can't be used to beat the market. Translation: The enforcement of insider trading laws is a waste of time.
It just isn't this way in practice. There are people out there who have made a good living consistently over decades by trasing the various markets. The trading desks of companies like Goldman Sachs routinely turn hundreds of millions of profit per month and only rarely (low single digits of days per month) make a daily loss. This can only be through exploiting market inefficiency. The fact that most people consistently underperform the index is also to me proof of market inefficiency, but from the other side. (You should not be able to lose to the market consistently, however hard you try.)
I'm not sure why the efficient market hypothesis is untrue in practice, but I have a few theories:
1. There is huge amounts of information out there, but much of it is wrong. Some people can sort the wheat from the chaff. Much of what is right is being misinterpreted. Some people are better at interpretation.
2. The market is driven by information and sentiment. Actors in the market react to events in different ways and at different speeds based on change of sentiment. People who get ahead of the curve on sentiment can get some arbitrage.
3. There are many actors in the market who a disadvantaged from the start. Average punters are slaves to emotion and will hold when they should sell, and sell when they should hold. Fund managers are disadvantaged by liquidity. They need to accumulate large positions which take weeks or months to accumulate and unwind. These accumulations and unwindings leave elephant tracks in the price signal which people with smaller positions can exploit. Fund managers are also disadvantaged in that they are punished severely for being wrong in a way different from other fund managers but not punished for being wrong in the same way as their peers. Upshot: they all hold similar positions and if you know what positions the fund managers are holding, you can exploit this - but they can't, because it would involve taking a contrarian position which they dare not do in most cases.
4. Different actors in the market are acting over different timeframes. For example, fundamental analysis works over the long term but fails (often dismally) in the short term. By long term I mean periods starting at 5 years. Warren Buffett could not have been as successful as he is without exploiting market inefficiency big time.
And I haven't even touched on market manipulation as a mechanism. I also haven't gotten into the fact that the bid/ask spread just pushes money into the hands of the market makers day in, day out. The market by its very design transfers wealth from the hands of the common punters and the retail fund managers into the hands of market makers, hedge funds and a small band of very smart traders.
Agree with most of the stuff you have to say.
It seems we have pretty much all of the 'small band of very smart traders' on this forum.
I think Australia's market is efficient enough that no one can consistently outperform based on skill. I'm sure someone will keep winning based on luck. Just like if I get enough people to toss a coin 1 million times, someone will toss a million heads.
And Goldman Sachs regular profit, well, I don't think that has anything to do with 'picking the good shares'. More like manipulating the markets, insider trading and ripping off clients.
It's like houses. The people making the most money are real estate agents, and property spruikers. That has nothing to do with identifying the best houses to purchase for investment purposes.
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