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Ok I have noticed that people around here seem to be of two camps and I thought we could have an interesting discussion about common assumptions that investors seem to have and the merits of them and also the danger of them.

I seem to see the stock market in a very different way then most people. And some of these things I hear over and over again.

1. Financial statements

I hear over and over again about the value of financial statements and if people were honest about the numbers I would feel a little bit more relaxed about trusting financial statements. In my experience people massage the numbers to get the results they want. For example I massage my income lower to not pay taxes. IF I wanted to defraud investors and make my company look better I might overstate my revenue etc. I am not an accountant but... I do know some. This is even assuming that they are just interpreting the truth they may just as well completely invent stuff. I do know how to read financial statements but I do not trust them.

2. Buy and Hold is the only way to make money

The people who make the most money are the banks and market makers. Neither of these groups of people buy and hold anything. High frequency trading and all kinds of other things I can hardly imagine makes them tons of dough.

3. Don't time the market

Why not try? It doesn't take a rocket scientist to figure out that some stocks trade in cyclical way.

There are probably some more I can't even think of.

DISCUSS :D
 

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1. Financial statements

I hear over and over again about the value of financial statements and if people were honest about the numbers I would feel a little bit more relaxed about trusting financial statements. In my experience people massage the numbers to get the results they want. For example I massage my income lower to not pay taxes. IF I wanted to defraud investors and make my company look better I might overstate my revenue etc. I am not an accountant but... I do know some. This is even assuming that they are just interpreting the truth they may just as well completely invent stuff. I do know how to read financial statements but I do not trust them.
Outright fraud is few and far between in publicly traded companies. But companies do play perfectly legal games with accounting to make their numbers look better. In my opinion, crimes of omission are much more common. But I do agree that investors need to do their homework and put trust in management that deserves to be trusted. If you can't do that, do not invest in the stock, period.

2. Buy and Hold is the only way to make money

The people who make the most money are the banks and market makers. Neither of these groups of people buy and hold anything. High frequency trading and all kinds of other things I can hardly imagine makes them tons of dough.
Trading doesn't always work, even for huge institutions. All it takes is one cowboy trader and poor risk oversight and all the equity in a trading firm could go poof, just like that.

In any case, the point is a moot one for retail investors. Retail investors don't have the time or resources to be successful traders. And retail investors typically lag even the benchmarks. So, it only makes sense that the first step is to close that gap between returns that investors typically get and the returns that can be easily had by just keeping pace with the benchmarks.

Nevertheless, buy-and-hold should not mean you never rebalance or that you stick to a poorly thought out plan.

3. Don't time the market

Why not try? It doesn't take a rocket scientist to figure out that some stocks trade in cyclical way.
Of course, timing can result in great profits. It's just that successful timing is close to impossible in real life, especially after paying trading costs and taxes.
 

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1. Financial Statements

How else do you know what you are paying for something? If the amount of money you make on an investment is determined by what you paid for it, then the only way you will know if you are paying a fair price for something is to study the statements so that you can determine if you are being adequately compensated for taking on the risk of being an owner versus a lender.

If you believe that financial statements are irrelevant because they aren't necessarily truthful and thus have no value, then you are left operating under the greater fool theory; someone will pay more for the asset than you did regardless of the underlying value.

2. Buy and Hold is the Only Way to Make Money

It's not the only way to make money. It never was. What it is is the most reliable way for the average investor to make money. The more decisions that enter into the process, the greater the chance for making mistakes and the greater the opportunity for frictional costs to mount. Gross returns don't count for anything beyond bragging rites. Ultimately the only return that matters is what's left in your account after all fees and taxes have been paid.

3. Don't Time the Market

The problem with timing the market is that it's not just one call that you have to make correctly, but it is also the call to get back in, otherwise you are just spinning your wheels. What it comes down to is having to make a continuous stream of correct calls as to when to exit and when to enter, all the while piling up frictional costs. If your timing is poor, your returns will suffer, quite often being much worse than what the market itself generates over time. This is clearly illustrated by fund flows with mutual funds. The investing public is notoriously horrible at timing their purchases. This is borne out by the very low rates of return that mutual fund investors get when measuring fund flow weighted rates of return versus time weighted rates of return.

You could be exceptional and be a great market timer, but that would be akin to being able to correctly predict the flip of a coin continuously. The probability of such is pretty remote. In a world where costs count, is it really worth the effort to attempt to pursue something that adds costs yet has a low probability of success?
 

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Financial Statements are very important back to the last CEO change then get progressively less important. I'm also very interested if the VP are sticking with the CEO.

Out right fraud were you around when Laidlaw went to a penny stock. And the best part nobody went to jail.
 

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I think if you want to buy the overall market for example then you might consider making changes as you look into the future. This would mean that if you feel the market is expensive and you are paying to much now and down the road a few years then maybe you should lighten up your equities to a more comfortable level. In Feb- March of last year if you thought it was getting on the cheap side then maybe you be at 70-30 equities to cash and short term bonds or whatever. Now after the huge run up you might be more comfortable with a mix like say 40-60 or lower.

If your looking at adding your own stocks then if you look into the future it looks like people will be buying more of the things they need as opposed to what they want because of a poor job market and so on. So you might look at utilities, JNJ or the health care area because of the aging baby boomers and also their need to add dividends and income into their portfolios. So you look at the financial statements of those companies that will be needed in the future. After this you look at a price you will want to pay for that future and this is where you can buy and hold.
 

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Scandals and frauds do happen. The need for independent auditors and public filing of results should help prevent that, but it's far from perfect. I myself have been burned a few times in the past: surebeam, atlas cold storage, few others that blew up but weren't exactly due to fraud. Everything looked good until the restatements came out showing it was all a fantasy.

But that's what diversification is for: to protect yourself against your own ignorance and unforseen events. Unfortunately I lost everything I had in surebeam. Atlas turned from one of the real winners in my portfolio to a ~50% loss. Despite those two big hits, I didn't do that much worse than the market as a whole through the first half of the decade.

An index fund or ETF will naturally have a better amount of diversification to protect you from that sort of thing. Large companies have many investors (and analysts) poring over the financial reports, so you get a bit of crowd-sourced auditing (though that hasn't always helped spot problems right away).

What I find ironic though is that this concern is coming from someone who works in the real estate industry, which is something that terrifies me for lurking scoundrels and skeletons in the closest. You don't have auditors and a securities commission and an electronic exchange monitoring bid and ask prices. It's just you, the sellers, the agents, and whatever inspectors you care to bring along with you. How many allegations of phantom bids have there been, or of people selling buildings that had expensive problems they may (or may not have) known about? How do you ever trust what a seller says, or know they haven't been deferring a major repair? You even have to take out insurance against the case that someone is selling you a property they don't even own! (...Which, my research tells me, is not a valid way to short the real estate market)

Maybe the crooks are out there in every market, but we just have our own comfort zones where we accept the benefits as outweighing the risks, or trust our own abilities to spot them before they take us in.
 

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Discussion Starter #9
What I find ironic though is that this concern is coming from someone who works in the real estate industry, which is something that terrifies me for lurking scoundrels and skeletons in the closest. You don't have auditors and a securities commission and an electronic exchange monitoring bid and ask prices. It's just you, the sellers, the agents, and whatever inspectors you care to bring along with you. How many allegations of phantom bids have there been, or of people selling buildings that had expensive problems they may (or may not have) known about? How do you ever trust what a seller says, or know they haven't been deferring a major repair? You even have to take out insurance against the case that someone is selling you a property they don't even own! (...Which, my research tells me, is not a valid way to short the real estate market)

Maybe the crooks are out there in every market, but we just have our own comfort zones where we accept the benefits as outweighing the risks, or trust our own abilities to spot them before they take us in.


I don't ever trust. I also have faith in my abilities to be able to repair what comes up. I expect there to be crappy renovations.

When I was originally choosing my career I worked for 6 months on an internship with a real estate agent. What I learned there observing her and others has forever colored my view. So far I have yet to change my mind in any meaningful way. I have heard too much about the crap that goes on with that industry to trust them for anything.

To be honest I don't trust anyone who's motivation to sell me something is over $10,000. Of course they want me to buy desperately they have bills and kids and wives. How many people do you know that you would trust with your $10,000?
 

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1. Agree with scomac
2. Once again, I agree with scomac
3. As a 6th B.C.E Lao Tzu put it.
Those who have knowledge don't predict, those who predict don't have knowledge
 

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1. Financial Statements

How else do you know what you are paying for something? If the amount of money you make on an investment is determined by what you paid for it, then the only way you will know if you are paying a fair price for something is to study the statements so that you can determine if you are being adequately compensated for taking on the risk of being an owner versus a lender.

If you believe that financial statements are irrelevant because they aren't necessarily truthful and thus have no value, then you are left operating under the greater fool theory; someone will pay more for the asset than you did regardless of the underlying value.

2. Buy and Hold is the Only Way to Make Money

It's not the only way to make money. It never was. What it is is the most reliable way for the average investor to make money. The more decisions that enter into the process, the greater the chance for making mistakes and the greater the opportunity for frictional costs to mount. Gross returns don't count for anything beyond bragging rites. Ultimately the only return that matters is what's left in your account after all fees and taxes have been paid.

3. Don't Time the Market

The problem with timing the market is that it's not just one call that you have to make correctly, but it is also the call to get back in, otherwise you are just spinning your wheels. What it comes down to is having to make a continuous stream of correct calls as to when to exit and when to enter, all the while piling up frictional costs. If your timing is poor, your returns will suffer, quite often being much worse than what the market itself generates over time. This is clearly illustrated by fund flows with mutual funds. The investing public is notoriously horrible at timing their purchases. This is borne out by the very low rates of return that mutual fund investors get when measuring fund flow weighted rates of return versus time weighted rates of return.

You could be exceptional and be a great market timer, but that would be akin to being able to correctly predict the flip of a coin continuously. The probability of such is pretty remote. In a world where costs count, is it really worth the effort to attempt to pursue something that adds costs yet has a low probability of success?

Nicely put and I agree with all of it, especially point number 2.
 

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Berubeland - when you state "Buy and Hold" are you assuming a one-time purchase and no reinvestment forever? Ugh..

I believe that choosing where you want to invest in and then dollar cost average is the way to go. Of course I still slip into a pseudo-#3 in that my timing is really only " do I buy today, tomorrow, or next week".
 
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