Comments on The Psy-Fi Blog: Buy and Hold, the Least Worst Option?

Hi Gestalt Thanks for drawing this to my attentio...

2010-02-08T21:44:50.722Z

Hi Gestalt

Thanks for drawing this to my attention. All papers require some concentrated attention to try and extract the essence of them, and I'll try and do this at some point, but a quick skim suggests that what Faber has here is a empirically backed approach without a theory behind it.

Now such an approach requires that we try and understand why it's successful - there are too many examples of science ignoring the actual evidence to blythely dismiss any evidence based results. However, there's also the reality that many anomalies disappear as soon as investors recognise they exist.

To be blunt, as a matter of dogma I doubt there are any magic bullets for investors. However, I do agree that small investors can navigate their ways between the gaps if they're nimble enough. That I'm not that skillful is no reason to disparage those that do: I'll take a look at this in more detail as soon as I get some time.

I am new to this forum, but I am optimistic and en...

2010-02-08T17:15:22.655Z

I am new to this forum, but I am optimistic and enthusiastic about your subject mater, as I am a vocal proponent of behavioral economics.

I would suggest you take a look at some of Mebane Faber's work on market timing. His paper entitled "A Quantitative Approach to Tactical Asset Allocation" offers a rigorous and compelling argument for a simple multi-asset timing strategy. Of course, I agree that alpha deteriorates over time, but the nature of timing strategies are such that big money generally can not take advantage of it. This gives the small investor an advantage that he or she should attempt to capitalize on.

I would appreciate your feedback on this paper in the context of your argument.

Fabulous article, snappily summarized by Parker Jo...

2010-02-06T11:11:01.566Z

Fabulous article, snappily summarized by Parker John.

You need to work out the utility cost/benefit of the fact that I *like* trading away some of my gains in the active part of my portfolio, because of the thrills!

Perhaps that's the missing chunk of the equation. Give me a credit on your Phd. ;)

Rob Bennett - That doesn't make sense. The f...

2010-02-06T09:07:36.968Z

Rob Bennett -

That doesn't make sense.

The fact that investors are irrational is exactly the reason we can get a good return on equities above non-risky assets, and that so much of the world's wealth stays in non-risky assets.

If all participants were purely rational, the equity risk premium must logically disappear as any gain above non-risky assets would be bid down by the arbitrage your hypothesis depends on.

And that is what roughly what happens, right? As the equity risk premium appears to disappear in a bull market (stocks can only go up!), more investors get pulled in, and bubbles appear. As the market tries to correct those new investors pull out (buy high! sell low!) and the correction is oversold.

Lemondy

An asset allocation strategy would reduce the vola...

2010-02-04T11:01:47.857Z

An asset allocation strategy would reduce the volatility of a portfolio. Rebalancing to cash when equities had outperformed and back in when they had fallen.
It wouldn't eliminate the problem but would mitigate the damage of big crashes.
You just have to have faith to buy a falling market, and then wait.

On market timing: I think its quite possible to t...

2010-02-04T10:30:54.636Z

On market timing:

I think its quite possible to tell when the market is cheap or expensive, compared to its historical valuations.
However, it seems to me that the usefulness of this is limited by 2 factors:

1) Historical averages may not hold in the future. There is no iron law that sets the equity premium to be as high as it was in the 1900's, for instance.

2) Even if historical averages hold true, then there may be an opportunity cost in waiting for reversion to the mean, which could take decades.

Thank you Timarr for explaining CAP/E. I had a dou...

2010-02-04T05:39:33.996Z

Thank you Timarr for explaining CAP/E. I had a doubt about it. It's clear now.

I agree with Rob. I too think that promoting this ...

2010-02-04T05:35:16.987Z

I agree with Rob. I too think that promoting this strategy widely would swipe the edge possessed by long-timers but it is nothing that cannot be mended. It is not a bug that could destroy the entire system...

As James, I also never heard of CAP/E. Can you ple...

2010-02-04T05:29:13.053Z

As James, I also never heard of CAP/E. Can you please tell us what it is?

Very well-balanced article...Great job!It is not t...

2010-02-04T05:26:22.034Z

Very well-balanced article...Great job!It is not that easy to write on this topic unbiasedly and you did full justice to it. Hope to read more...keep writing on such issues.

Personally I’m sceptical that such methods coul...

2010-02-03T15:43:33.235Z
Personally I’m sceptical that such methods could survive a concerted attempt by the investment industry to take advantage of them, suspecting that they might disappear like other anomalies once they became popular.

I agree that the edge that long-term timers now possess would disappear if this strategy were widely promoted. However, I see this as a feature, not a bug.

If large number of investors were selling when prices got too high and buying when prices got too low, we would achieve price stability. Stock prices would always go up by about 6.5 percent real per year (the gain that is justified by the economic realities). We would not have insane bull markets nor the insane bear markets that inevitably follow from them.

Could anything be better? We would continue to enjoy that juicy 6.5 real long-term average return without having to experience the biggest risk of stock investing -- seeing your portfolio wiped out in a crash. We also would avoid the economic crises that are caused by the wealth devastation we see in bear markets.

You did a great job with this one, Tim. It is extremely hard to write in a balanced way on this topic.

Rob

James - CAP/E is the Cyclically Adjusted Price Ear...

2010-02-03T13:29:01.873Z
James - CAP/E is the Cyclically Adjusted Price Earnings ratio - essentially a P/E adjusted for variations over a period of years - 5 or 10 is the common period. The idea is that it smoothes out peaks and troughs of over and under valuation. Probably Robert Shiller is the leading current proponent although it was (I believe) originally proposed by Ben Graham.

Parker - agreed, it's logically impossible for a majority of people to successfully time a market with guaranteed counterparties. However, as about 75% of men think they're above average drivers we shouldn't expect that to stop people trying. Perhaps the more interesting question is whether anyone can consistently time the market.

It seems to me that its impossible for the masses ...

2010-02-03T12:52:18.995Z
It seems to me that its impossible for the masses to beat the market (through timing, etc.) for the same reason that its impossible for the NFL to win more than half its games.

For every team with a winning record, there will by definition be a team with a losing record.

Suppose that all investors engaged in market timing. For every investor who timed successfully, another would time unsuccessfully. Add in transaction costs, and this would be a negative-sum game for investors.

I never heard of CAP/E Could you please explain w...

2010-02-03T10:47:43.838Z
I never heard of CAP/E Could you please explain what it is?