Isn't it safe to assume that I'd (assuming I put even 1/8th of my freed up market research time into playing more poker) do significantly better just buying nothing but berkshire hathway, than trying to read books and analyze businesses and outperform berkshire?

+1

No, buying BRK at random prices isn't going to ensure market beating returns.

First, it isn't an open ended mutual fund, you don't buy it at it's current portfolio value. It's more akin to a closed end fund, where the market determines what it trades for.

It has an intrinsic value, and paying at or above it will lead to subpar returns. In the past it's traded as high as 2x book value, and anyone who bought at those levels was very disappointed. Anyone who ever got it close to book value should have been very satisfied.

And the Berkshire today isn't the Berkshire of yesteryear. The portfolio size is so large now it cripples effective returns, Buffett has been warning for some time to not expect him to beat the S&P by much in the future. Secondly, Buffett is that much closer to his exit. It's unclear whether the new investment manager(s) will be nearly as talented, and whether the board will do intelligent things to make it easier to beat the market (i.e. pay dividends and shrink portfolio size).

If you don't know enough about valuations to buy BRK at attractive prices, the best thing to do is to buy total stock market indexes split between the U.S and rest of world (to hedge the dollar).

I do it Java, but then again my return expectations aren't as high as yours.

Again, I pointed you to the academic paper you already should have read that's a great start.

5% is just a guess, in both cases. The point of the example is the vast majority of participants are losing money. Again that paper seemed to make some points about that....

If you find a way to define trading EV in a manner similar to Poker EV, so that you can be confident you made a good or bad decision, you'll be ahead of me, and apparently everyone I've ever asked that question of.

Can you expand briefly on why this is? Is it just simply the fact that there are much more places to invest, for instance, $5,000,000, that will return, for instance, 1.5x whatever the market in general will than it is trying to find $5,000,000,000 worth of positions that profitable?

If the current price of some stock that me and Berkshire Hathaway want to buy is X, and I want to buy 100 shares and they want to buy 100,000,000 shares, am I basically always going to be able to get 100 shares of it at X whereas their effective price will be higher than X by the time they've purchased all the shares?

Parabolic mathematics of compounding returns and minimum investment sizes to make a difference.

those are two factors. more importantly,

smaller stocks are less efficiently priced, hence offer the potential for higher returns.

Buffett wants to stay focused on few positions, say 10-20. So he needs to average $2-4B per position. it's hard to find stocks where you can put that much to work in a reasonable time without moving the price tremendously.


he also doesn't like disclosing and filing 13Ds telling the world, because freeriders will jump in before he's done buying, driving up average cost.

i feel stupid cause i googled it and i just dont understand wtf the difference between an index fund and an ETF is, and what the pros/cons of each would be. anyone care to enlighten me?

Yea I knew they were two different things, I thought of the second one shortly after I started the post with the idea in mind that I was just going to citing the first factor as my guess.

Thanks, sounds like I was pretty correct in my guesses.

Now to continue to try to figure out what to invest in instead of just blindly throwing of Berkshire.

DesertCat is *vastly* oversimplifying the case of backtesting and imo misrepresented it b/c it can be a very useful tool ****IF USED CORRECTLY***

that is an example of BAD backtesting (finding patterns that worked and presume that they'll work going forward). in other words, it's datasnooping and is a known bias.

"proper" backtests would be, for example, thinking about fundamental relationships regarding the economics of interest rates, economics, and market outcomes and then creating a logical rule based on those relationships and their hypothesized market outcomes. then, testing that rule to see if it worked.

then, thinking about similar rules that may also have an ability to explain the variance in market returns and constructing a signal based off of those rules to test to see if it works.

the key is starting with logic and ending with the backtest. backtesting to FIND returns is exactly as DC has let on; however, thinking through fundamental relationships (i.e. ones that are likely to last over time or at least remain important/significant) and creating trading rules based off of those and then testing them for efficacy is a method of generating successful systems.

i know i keep coming back to this but just see bridgewater associates or ray dalio. that is literally all they do (and they do it basically exactly as i described above).

In some ways they are similar.

An index fund is a mutual fund that attempts to track an index. You don't ever actually invest in indices (S&P 500 is an index) but you invest in a mutual fund that either fully replicates or partially replicates (to effectively mimic, like the Vanguard 500 is an index fund for the S&P 500) the actual indexes holding.

An ETF is an Exchange Traded (mutual) Fund. There are different kinds of ETFs, but for simplicity sake we will say that an ETF is nothing more then a mutual fund that can be bought and sold at any time during the day where-as a mutual fund can only be purchased at the end of day NAV (Net Asset Value).

An ETF can be an index fund (Vanguard 500 for example) or an actively managed fund (American Funds Growth Fund of America for example) that a manager(s) picks and chooses the stocks that make up the fund.

The point I think being made is there is almost no data. Or the amount of market data compared to trading probability space is akin to a few hundred hands of poker data compared to the poker probability space.

Nearly all the data we have is from a very specific subset of the probability space and even that is only covered sparcely. Its also nothing like a random sample.

Its the ideas that matter, they darn well better not fail backtesting but they survive it rather than being validated by it.

http://www.youtube.com/watch?v=iVkmr8wk9N8

Stui Griffin knows best

I posted already in the "I have XX, where do I put it?" thread, but want to make sure and gather as much info as possible.

Country you live in : USA
Income : $~1k a month
Risk Tolerance : High
Timeframe for investment: 2-3 years, then decide where to go after college degree
Debt: None
Any other information you might have that would help us:

I have about $500 I want to invest right now, maybe some penny stocks to begin. I would consider bigger stocks, like GM (wuld need money online quick and get it for less than $35/share) but would have to be dead sold at first. I have a "mentor" at work that is fairly successful, that I am beginning to meet with/pick his brain. I am fairly ignorant of trading in general, and realize the effort it will take to be even moderately successful.

The sites that seem best for small investors:
Scottrade ($7 trades, highly respected)
Sharebuilder/TradeKing (No minimum deposits, friendly to new/small investors, Sharebuilder offers $25 free)

I need site suggestions and book suggestions (I will check out book thread also)

Thanks for your time and help.

Re3el: $7 commissions in and out will eat like 3% of your starting $500, and that's with only one position. Definitely don't spread it across different penny stocks. Places like Vanguard, Fidelity and Schwab will give you commission-free trades on select ETFs, though I'm not sure if there's a required $ minimum. It might be +EV to test your research & active investing in a play money account until you get more capital to work with.

Here's an article about ETFs that's kind of interesting, but might not exactly answer your question.

WSJ article on potential ETF risks?

because houses produce income.

If you believe in land as an investment then buying land with rental income is like buying gold that pays interest.

Thanks for your help. Sharebuilder offers $25 free and has no minimum. Also it's only $4 for etf, stock, mutuals...real-time are 9.95....options are $1.25

Its looks like I will either go Sharebuilder, or find a site to use play money, and keep saving and studying another month or two. I'm definately not trying to make any kneejerk decisions. If I had $2k (ideal) I would go Scottstrade fwiw.

"in the past stock splits have very often been associated with substantial
dividend increases." Fama, 1969.

Why does this happen? I don't understand why a stock split would increase (or decrease) dividends.

Any explanation would be great.

Thanks (and apologies for opening a thread about this before seeing his master thread)

ive never heard of this. my logic would be:

company growth/expected growth---> stock price rises---> stock split.
similarly, company growth/expected growth---> increased probability of dividend initiation or increase.

so, imo, all fama is saying is that there's a correlation (not necessarily causal) between stock splits and dividend initiation/increases when, in reality, both have a similar underlying determinant: company growth/expected growth.

again though, there may be some more fundamental reason for what he's saying as he also uses the word "substantial" so i'd say my answer is probably at best 50% right.

Yea, dividend increases are most closely correlated to increased cash flow, which is also correlated to increased stock prices. Companies split their stocks if the price gets too "high", based on their assumption that retail investors don't like to pay too much per share. So you would think big dividend increases would be correlated to stock splits statistically, but I'd be surprised if the correlation was that strong.

any academic studies you've seen re: increased cash flow and/or cf growth ---> dividend issuance/increase ---> stock price increases ---> profitable trading rule?

as is typical in an academic study they probably would have sorted those cf/cfgrowth stocks into quintiles and short the bottom quintile, long the top, rebalancing every quarter.

there's probably a screen or two that has this in aaii i'd bet also but for the most part their screens kinda suck balls while "having proven to be really good in the past" lol.

i guess i'm just curious to read this since i know i couldn't institute this trading rule w/o access to quality data. aaii cf data B.L.O.W.S. (as does much of its other data though some of it is good)

RANDOM QUESTION:

i'm not sure how to do this without being a dick and/or seeming condescending but i'd really like to expand the group of people i reach out to/talk to about trading by just a few. i don't want to explain stuff to people in this group though and would rather they be much smarter/more knowledgeable than i.

for instance, my former boss is one of these people. whenever i say "we" in a thread regarding trading/execution, i mean my former boss and myself since we set up a proprietary incubator fund that is still operating that we both think of ideas for and bounce stuff off each other.

for one of these ideas, i reached out to a poster i feel like i know enough to know:

a) he wouldn't post the idea,
b) he's smart and could definitely significantly contribute as well as point out what i may be doing wrong/missing,
c) is well trained in financial markets analysis, and
d) trades/thinks about finance lots.

what i'd like is a few more people like him and maybe a small (3-5 person) email group to discuss such ideas and bounce them off each other.

what i dont know how to do is know who to reach out to. again, i really don't want to be a prick here but i also obviously want to limit this group to people who have a lot of training and have a proven ability to contribute significantly to trade idea/macroeconomic discussions/execution logistics etc.

if this helps, what i imagine would be involved is the following:

1. discussing trade ideas we'd come up with (pointing out risks that may have been missed, positing alternative viewpoints, constructively criticizing analysis and of course providing your own ideas where there'd be a very strict understanding/agreement that nothing would leave that email thread until everybody got their desired position executed),
2. shipping spreadsheets back/forth (so an ability to audit/understand a spreadsheet that is well labeled etc. is pretty necessary though i think anybody who qualifies would automatically have this),
3. thinking about/discussing how to execute ideas (hedge ratio generation, logistical implementation, trade sizing),
4. thinking about/discussing how to manage positions once they're on (rebalancing for spread trades, when/how to optimally roll specific futures, increasing time exposure to options, and other management decisions), and
5. adding anything else that may be of value that i've missed here.

so i thought i'd throw this out there. if you think you would like to join or help form such a group, post here or PM me. there are, of course, a few posters who i think would qualify but i didn't feel comfy directly reaching out to them since i don't think i know them well enough. so def feel free to PM me / post here if you think that you'd be interested in this small group.

so i hope this generates 2-3 people who would be interested.

thanks,
Barron

Could someone point me in the direction of some good non-us specific personal finance blogs or books. Not really trading or investing, just some real basic stuff like how to manage a personal budget, put some savings away etc.

n00b personal finance 101.

Thanks a lot.

Maybe more of a 'basic grasp of English language' question, but what does "Efficient markets believers say Price-earnings ratio must be a proxy for some sort of risk" mean??!