
What If You Only Invested at Market Peaks? - gighi
http://awealthofcommonsense.com/worlds-worst-market-timer
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gjmulhol
Loved this article, mostly because of the fact that it turns much of the
normal perspective on markets on its head. Rather than looking at a best case
or a simulated median case, looking at a worst case is pretty cool.

What would make this more interesting would be to look at a constantly
rebalanced portfolio that is a blend of stocks and bonds. That would have
performed even better.

@notastartup -- "the best investors" is a complicated statement. Usually
investors are graded on an annual basis compared to the market. If you
outperform the market and justify your fee (if your fee is 1%, you had better
outperform by a lot more than that, or else an index fund would have been a
safer way to go), you keep your job, are able to get more capital into your
fund, and generally are more highly regarded as an investor. So while I think
there is a ton of merit to using an approach like this (or using the
rebalancing approach I mention above), this is not what makes successful
professional investors successful. That can be ascribed to luck, a ton of
luck, skill, nefarious dealings, or any other number of other good or not-so-
good reasons.

~~~
gighi
What would make this more interesting for me would be a pretty accurate answer
to the question: "what are the chances that this could happen again if the guy
started in 2014"? :)

~~~
gjmulhol
Provided the overall market and economy continue to grow in spite of short
term volatility, it would happen again. If one honestly believes that the
whole market is going to go down over time, then probably best to look at
bonds or precious metals.

~~~
gighi
Yeah, the condition you mention is the key: what are the odds that the US
economy (or the overall world average, if you're diversified with a global
index) will continue to grow as gloriously as it has done in the past 50
years? (when the guy started investing)

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porlw
Interesting. I wonder how does this compare to:

1) Buying every month

2) Only buying at some set period after each correction (e.g. market drops x%
over 7 days).

Are there any online tools that make it simple to work out these ideas?

~~~
splike
You could simulate this at quantopian.com or use their backtesting library,
Zipline.

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sopooneo
What would the best strategy be to _lose_ money in the stock market? If we
ignore fees, would it be any easier to time market purchases to optimize for
loss than it would be to optimize for gain? And I don't mean picking dates
after the fact.

~~~
fnbr
It wouldn't be any easier, because losing money & gaining money are actually
the same thing- if you can predict which stocks will decrease, then you can
short those equities (essentially buying negative amounts of the stocks), and
then make a profit equal to the amount of the decrease.

~~~
dllthomas
Not so, because you can always transact to lose money. Just cross the market
to buy, cross the market to sell what you just bought, as fast as you can. You
can blow off an arbitrary amount of money in an arbitrarily short amount of
time. It's basically true that you can't _make_ money by picking losing stocks
any easier.

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notastartup
Very interesting. Could it be that the most successful investors have this in
common? They never second guess themselves and they never sell. However, they
are wary and picky of the company they dump their money in. Buying in when the
market underprices a security and holding on to it. Only selling when you see
fundamentals of a security as flawed and the market still thinks its
overvalued.

~~~
gighi
Except that in this case, the guy bought the whole market by indexing, so he
wasn't very wary and picky, although the index itself took care of getting rid
of bad performers (because they went out of business).

~~~
notastartup
that's what makes this even more beautiful. you don't need to drive down to
the balance sheets of each company you want to invest, he bought a
representation of a basket of companies.

What's the likelihood of another market crash like the one in the 80s?

What's the likelihood of 2008 housing market crash?

I reckon that the latter is more predictable and omnious, while a sudden
market crash without any signs like the one in the 1980s is less likely.

The theory that market is already efficient over a long stretch of time must
be true. It reverts to its mean which is a continued bull as long as the
economy can fit it.

However, this must be a tough concept to sell. "Hey I just lost 60% of your
money because I bought in right at the peak recently, but please don't pull
out your money yet, it will recover for sure in 5 years." Again, this example
shows the difference between Bob and the average investor. Bob would've said
okay, while the average investor would've taken his/her money out and getting
ready to sue you for fraud, "but you promised 20% return on my money". "YES,
you will get 20% compound interest on your money if you wait another 10 years,
believe me the stock market always goes up".

But unlike Bob, you can definitely time your market entry.

    
    
        1. Wait for market crash.
     
        2. Buy.
     
        3. Check in a couple of years.
    

And people who buy after a major market meltdown, when everybody shudders at
the word 'stock', the wise ones buy in. When everybody is talking about it,
you run. Contrarian investing.

You can also apply this bullish bias in markets outside of stocks. Forget
daytrading noise, just buy & hold.

    
    
        1. Buy Crude Oil mini futures.
    
        2. Hold on to it.
    
        3. Check back every few months instead of every few 
           minutes provided you still can meet the margin calls.
    

What a great article. This really have resparked my interest in investing and
trading.

~~~
collyw
All very easy, but how do you tell when a market has crashed? If the price is
down 20% on a week before, who says its not due to go down another 30% next
week?

~~~
lutusp
The answer should be obvious. The market isn't predictable at all, for the
reason that there are any number of players, each following a private
strategy. Without cheating, without using insider information, you're better
off investing in an index fund and tracking the slow but reliable increase in
market valuation, instead of trying to track the unpredictable peaks and
valleys along the way.

More here:
[http://arachnoid.com/equities_myths](http://arachnoid.com/equities_myths)

People who use the index fund strategy are statistically ahead of all other
strategies -- I mean statistically. You can obviously find exceptions, black
swans, but as a matter of probability and averages, you're better off in an
index fund than any other market investment strategy.

Guess who swears by this idea, and who is going to make all his relatives
adopt it after he's gone? Warren Buffet.

~~~
notastartup
But Warren Buffet invests in individual companies using valuation technique to
discover under valued companies which the market is ignoring.

One peculiar thing about Warren Buffet is that he has strayed away from
technology companies, he's always invested in very stable ideas like brand and
other economic moats unlike the tech sector which is susceptible to unexpected
disruptions, like two boys working in a garage to build a better search
engine. He even stayed clear of Microsoft and seems like it fit his plan of
holding onto a good stock forever.

For those that do not know how to come up with a intrinsic valuation of a
company, for example, reading through K's and Q's and figuring out if there's
discrepancies in what it actually says and what the market thinks, it's best
to invest an index, a large basket of companies and you bet your ass that for
a country like United States, it's going to go up in valuation, seeing how
well aligned the NSA's global surveillance is poised to benefit American
corporations, I'd definitely back American companies, although the intrusion
into individual freedom and privacy is jarring, I'll play the dirty
capitalist, if it means I can make money work for me.

~~~
lutusp
> But Warren Buffet invests in individual companies using valuation technique
> to discover under valued companies which the market is ignoring.

Yes, this is true, but the possibility exists that Buffet realizes his early
success might have arisen from chance, and that his present success arises
from the announcement effect (everyone wants to invest in the same stocks he
invests in, so he can't go wrong.)

I have no idea whether that's so, I won't pretend to have any inside
knowledge, but it's certainly true that Buffet has set things up so his
inheritors are in index funds and buy & hold, two ideas he has spoken well of
over the years.

