Wall Street (WS’) Fallacies (BS)
there is no bigger lie than “this time it’s different ..!”
be careful, or i should say, be very careful, when you hear those words as “it’s not ..!’ .. for dot com boom, it was not, when people said that “eCommerce is the biggest market ever” which was true, but the part that didn’t make sense “therefore, no valuation is enough for an eCommerce company & we will be so bug that we never plan to be profitable” … & look where pets.com and webvan are ..? although, we do buy both pet food and groceries on Internet today .. & yes, Amazon.com did survive, but not due to the fact that it is/was an eCommerce company but because it was a retail distribution company, which keeps on re-inventing itself every couple of years or so .. & it hasn’t stopped yet …
for the real-estate boom when people used to say “housing prices in California never go down ..” but the fact is that excessive growth beyond current demand and artificial credit always turns into disasters .
during the dot com boom, venture capitalists built the artificial credit by re-using the valuations of those “no potential, forever in loss” kind of companies and in real-estate boom the credit was created using the artificial equity in those overpriced valued properties.
so, what’s brewing in now-a-days – it’s the $20 trillion debt the country is in … and people say that we have been living on deficits for 30 years, & look where the stock market has been in last 30 years, which is true, but what people don’t realize is that when this boom started in President Reagan’s era, the stock market was almost flat during 1970s, interest rates were in double digits and kept on going down; therefore, living on deficits, borrowing more and re-financing seem like smart ideas … but we have already reached & passed the bottom (zero interest rates), well, some say Europeans and Japanese are smarter as they can be credited for inventing negative interest rates .. where thing will be, only time will tell.
but, next time, when you hear someone saying “this time it’s different!,” Think again..!
do you ever wonder why folks on WallStreet preach you contrarian strategy ..?
it goes something like this, “buy when others are selling and sell when others are buying” … whenever i hear or read this line, i can’t stop laughing, as
1) for a transaction to occur you need a buyer as well as a seller …
2) how do you figure out who these “others” are and whether they are buying or selling ..?
because the implementation of the strategy would requires answering the above two questions …
another interesting saying on WS is “buy low, sell high” .. how’s that strategy working for you ?
it’s a cliche on WS to say, “buy low & sell high” .. & i say, “really,” what if we have a low price today & tomorrow it becomes lower, do you hold, buy more, or sell now due to the fact that the downtrend has just started … & if you buy more as price goes lower, then what do you do when it goes down further & you run out of invest-able cash .. so you can see that there is an inherent flaw in this approach
although it may not be easy or possible to determine the lowest point, but for sake of this discussion, shouldn’t you buy when the price has past the lowest point and started rising … in that case, the strategy, in my opinion, would be to “buy high[er] & sell low[er]” – i.e. buy when price start rising from the lowest and sell when prices start dropping from the top .. exactly opposite to what WS preaches ..!
& if you didn’t get this let me give two more, “buy high & sell higher” which is same as “everyone is a bull in a bull market” i.e. you can buy at any price and make money as long as you know its a bull market, and the reverse is also true as “sell low & buy lower” which is only applicable for short sellers.
higher risks lead to higher rewards ..
Graham & Buffett used a term as “margin of safety” to define risks …
let me use an example to explain margin of safety, if you are walking on a sea shore, enjoying the wind while looking at the view from a cliff (my favorite activity & favorite locations are Half moon beach & Sunset beach on Hwy 1 in CA) … does it really matter whether you are walking one feet or ten feet away from the cliff ? … may be it does to some people … but to me, those ten feet provides a huge margin of safety without compromising the view … of course, the wind you enjoy is pretty much the same … in my opinion, walking within one feet of the cliff will be stupidity, although some will call it risk taking … as staying just a few extra feet away provides a huge margin of safety while enjoying same returns (the view and the wind in this case ..!)
i completely disagree with Wallstreet’s notion of higher risks means higher reward .. if this was true, Buffett would not be the richest investor in the world …! A company is only as strong as its executive leadership. This is a good place to show off who’s occupying the corner offices. Write a nice bio about each executive that includes what they do, how long they’ve been at it, and what got them to where they are.
“a mix of bond & stock portfolio is good for most people ..” … really ..!
i never understood this line or even the basis of this line, although it is used by some of the experts in the industry … since my goal is to challenge everything, so let me give it a try …
first of all, for the geeks of finance, an optimum portfolio consists of roughly 80% in stocks & 20% in cash, there is no room for bonds in it .. (see MBA Finance text book Investment page xxx…)
but let me give you a logical argument by breaking up the market cycle into various stages …
1. bust to early rise: during the early phase of the market cycle, stocks jump heavily, corporate bonds may rise as well since both coming from depressed values, but bonds’ gains will be much limited due to rise in interest rates
2. middle of the cycle: in this phase, bonds & stocks go up & down alternately; so, mixing the two simply cancels each other; however, holding a stock only portfolio will enhance your returns as expected stock returns are higher than bonds’; hence adding bonds to a portfolio in this phase doesn’t provide an advantage
3. late cycle/early drop: in this period, bonds go up first signaling a downturn; but stocks stay up for a while before taking a nose dive … yes, bonds protect you in this period as stocks free fall, but as soon as the downturn ends (which is much shorter than the up move), it is better to invest in stocks (on regular basis) rather than bonds or a mix portfolio to capture the upside as the money invested in bonds would only have limited gains .. this assumes you invest in the market on regular basis .. so investing in bonds and holding them throughout the cycle doesn’t help you in anyways, instead it hurts your portfolio returns.
now, let me take the other side, there is nothing wrong in investing in bonds .. there are bonds purists, who invest only in bonds and some of them make more than those who invest in stocks .. it’s a workable strategy or at least it was since 1982, as the bonds rates have been going down continuously so anyone who invested in treasury bonds would not have lost any money (assuming they held them for a while) and giving a better advantage when market took a nose dive … Buffett converted part of his positions into bonds in 1998/1999 when the rates were high and so is the stock market .. but that situation no longer exist in 2018/2019, when the fed rates were zero for a while and feds have starting raising the rates.
conclusion: having bonds or any other instrument in your portfolio is not a bad idea, as long as you know what you are doing ? i.e. when to go in and when to come out ..? … but that is trading and not investing .. for investors, it is best to stick with a diversified stock index like S&P 500, and keep some in cash for emergency situations that you may have to deal in near future.
we are a long-term investor ..! OR i am holding this [stock] for the long-term ..
after the Feb 2018 fiasco (and many others before that), as the market dropped 10% over a few days, a number of so called experts visit the financial media and have guts to say on live TV, “we are a long-term investor ..” & as i listen to them, i say “really ..!” rather, what i think that person should be saying, ” i am an idiot and i didn’t see it coming !” … if you are paying someone to take care of your money, and it is his full-time job, he should see it coming and protect you from this; otherwise, i am not sure why he should be paid.
don’t get me wrong, if you are a long-term investor, you should have remained invested during such drops, however, if you are holding a single stock in loss and praying that it will pick up simply by holding it for long-term, then you may be in an illusion …
“it’s a stock picker’s market”, and not a right time to invest in market (i.e. indexes)”
& i say, “Total BS, ” …
first of all, i have been trading markets daily haven’t taken a break for a day, even when i was sick) for 4.5 years [as of Mar 2018] & investing for almost 20 years, and absolutely don’t remember a time when the market doesn’t provide an opportunity … e.g. if you think the market is high, then feel free to short it or take some cash out, but don’t blame the market, if you don’t have guts to handle the above
second, the advisors/portfolio managers like stocks over markets because they make lot more money selling stocks than indexes
& third, it’s sexy to talk about stocks at cocktail parties, to impress others, how you can dig more information [about one stock] than others and are able to make huge some … then who wants to talk about the boring indexes ..!
market is confused ..!
people who get face time in media, use this term all the time … & i find it funny & strange because in my opinion, market is never confused … market is a collective outcome of thinking of millions of participants & not an opinion of one person … OTOH, there are whole bunch of other folks who are willing to dive for a few cents [of confusion] as they can make millions if this would be correct.
rather the way i read what this person is saying “I don’t agree with market … mainly because i have a portfolio which is in opposition to what is happening”
& i say, who’s fault it is … “don’t blame it on market .. blame it on Rio ..!”
stock prices go up when there are more buyers than sellers ..
nothing can be far from truth as it takes two to complete a transaction .. for each transaction there is a buyer and a seller so when a buy transaction is happening, there is also a sell happening at the same time … so at any moment, let’s say, one million transactions are happening, then there are exactly one million buyers and one million sellers, although one person may be involved in more than one transaction … as a trader, i do hundreds of trades in a day and even for me, there is never more than one trade happening at any given point in time.
so, how do stock prices go up or lower ..? at a given point of time, for each security, there is a bid and an ask price, and certain number of shares are offered at bid price & ask price … let’s say 100 shares of a security are offered to sell @ $10 each (ask) and suddenly you get an urge to buy 1,000 shares of this security right now; you can buy 100 shares @ $10 and for remaining 900, you need to look for others who are selling at higher price, by raising your buy price (bid); and as the transaction occurs, a higher price is marked for the security .. and same goes to sell, if you want to sell and no one likes your price than you need to offer a lower price, and hence the price goes down … e.g. a buy or sell order of 1,000 contracts of S&P futures (e-Minis) at any point in time can change 1 or 2 points in price .. it is all about human behavior – i.e. your urge to buy or sell raises/lowers the price of any security .. & now think of a situation that millions of people suddenly find that urge & so it goes up/down big.