
Stocks for the Long Run - prakash
http://blogs.law.harvard.edu/philg/2008/09/16/stocks-for-the-long-run/
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byrneseyeview
[http://finance.google.com/finance?chdnp=1&chdd=1&chd...](http://finance.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=Logarithmic&chdeh=0&chdet=1221681600000&chddm=3927595&q=INDEXSP:.INX&ntsp=0)

Yes, I can see how you would think that. There's even a small chance that
1999-2014 or 2000-2015 will be the first fifteen-year stretch in which stocks
were not profitable to own (these data only go back to the 20's -- see
Ibbotson's research for more).

From the comments:

"Today I lost the faith and ended all my investments in stocks. Maybe it comes
back, but all experts seem to agree that it is extremely unsure what the
future will bring. Too much uncertainty for me. Today 6% interest on a 5 year
deposit seems like a very good deal."

This is not exactly rational behavior. Stocks are ownership in a business.
Consider the parable of Mr. Market: you and Mr. Market have founded a startup,
despite Mr. Market's diagnosed case of manic depression. Every day, Mr. Market
will offer to buy your share in the business, or sell his, at a particular
price. Today, Mr. Market cut his asking price by another 3% -- when he's
offering his share of the business for less, why does that make _you_ want to
sell?

~~~
coliveira
". Today, Mr. Market cut his asking price by another 3% -- when he's offering
his share of the business for less, why does that make you want to sell?"

You only want to sell if your business is buying and selling stocks, and not
owning a business.

Most people get confused by the difference between owning part of a business
(and making money on the long run), and making money by buying and selling
stocks. These are two distinct ways of making money, although they use the
same instrument. It is in a sense similar to investing in real estate and
flipping houses.

On the other hand, the Wall Street model favors the short-term traders. For
example, in the case of bankruptcy the stock owner loses everything, while the
short seller makes big bucks...

~~~
byrneseyeview
_Most people get confused by the difference between owning part of a business
(and making money on the long run), and making money by buying and selling
stocks._

A stock is a way to divide up a business. The distinction is that you _can_
rapidly trade stocks, not that you should.

 _On the other hand, the Wall Street model favors the short-term traders. For
example, in the case of bankruptcy the stock owner loses everything, while the
short seller makes big bucks..._

This doesn't make sense. If you short a private business, the same thing will
happen (it is extremely rare to actually do this, but UBS did 'short' LTCM
through a swap deal).

------
DanHulton
There's a beauty comment there (top of the list when I checked) about how the
author is measuring from the peak of the dot-com bubble to our current, pretty
awful trough (though I guess likely to proceed still lower).

"Looking back 6 years (to mid-September 2002), counting the recent turmoils,
the S&P500 has had average non-inflation-adjusted growth of 4.9% per year.
Looking back 12 years (to 1996) the growth is 4.6%."

Lies, damned lies, and statistics.

~~~
steveplace
Probably closer to damned lies. Dividends aren't taken into account, and
inflation is reported much lower than what it really is.

------
steveplace
Buy and Hold is not a form of risk management.

~~~
byrneseyeview
"Sell it when it's on sale" isn't a way to produce capital gains.

~~~
steveplace
"Sell when your overexposed to a particular asset class" is a much nicer
approach.

That's a fancy way of saying take profits.

~~~
byrneseyeview
Sell when my overexposed to an asset class _what_? I don't understand how
that's relevant, anyway: if the price of one asset class goes _down_ , you are
less exposed than before -- and if you are still overexposed, why didn't you
sell earlier?

~~~
steveplace
Here's two questions that many people don't ask themselves when they invest.

1) Buy and hold until when?

2) What if you're wrong?

As for becoming overexposed... if you've got Stock/Index A that is allocated
for 10% of your portfolio and the market price doubles, you're allocation is
now 20% (all things being equal). So you need to adjust your position sizing,
unless you want to have 20% of your assets under that particular security.
That's part of portfolio rebalancing and money management. If the price of a
security goes down and you want to have the same exposure in it, then you
would buy more to maintain it.

I also don't think people really take asset classes into account, mainly
because there's not a lot of money in their portfolio to be _truly_
diversified.

~~~
byrneseyeview
1) Until I can find a better business at a better price, adjusted for tax
consequences?

2) It's impossible to usefully answer this question without recursing into
nihilism. Consider: I think there's an 80% chance that BioCo's new drug will
be a hit, and the stock will go from $5 to $10. Does "What if you're wrong?"
mean I dial up the uncertainty everywhere (70% chance of going from $5 to
somewhere between $8 and $12?). Okay, fine. Now I think there's a 70% chance
that the new drug will be a hit, and the stock will trade between $8 and $12.
But what if I'm wrong? Well, it must be time to dial up the uncertainty _even
more_ \-- 50/50 chance of trading between $5 and $15, perhaps.

It doesn't add any useful information to just keep second-guessing oneself, or
to have a rule that amounts to "Be less certain than you usually are, except
about the statement "Be less certain than you usually are, except about the
statement "Be less certain...""" It's good to collect enough information to
consider different scenarios, but it does no good to blindly assume that
you're wrong about a given stock.

 _As for becoming overexposed... if you've got Stock/Index A that is allocated
for 10% of your portfolio and the market price doubles, you're allocation is
now 20% (all things being equal). So you need to adjust your position sizing,
unless you want to have 20% of your assets under that particular security.
That's part of portfolio rebalancing and money management. If the price of a
security goes down and you want to have the same exposure in it, then you
would buy more to maintain it._

That's true. In a scenario like the one we have now, that would imply buying.
Also, holding (until a better deal comes along).

 _I also don't think people really take asset classes into account, mainly
because there's not a lot of money in their portfolio to be truly
diversified._

I'm not sure what this means. Asset-class allocators don't seem to get better
results than people who buy good businesses at good prices. At least, I see
fewer people who _allocate_ their way onto the _Forbes 400_.

