Risk = ??

Asset allocation, risk, diversification and rebalancing. Pros/cons of hiring a financial advisor. Seeking advice on your portfolio?

If Risk = Standard Deviation, then

Poll ended at 05 Sep 2005 11:48

Risk is a probability of a loss
2
11%
Risk is a measure of uncertainty
12
63%
None of the above
5
26%
 
Total votes: 19

User avatar
ghariton
Diamond Ring
Diamond Ring
Posts: 11725
Joined: 18 Feb 2005 18:59
Location: Ottawa

Re: Risk = ??

Post by ghariton » 30 May 2011 00:44

NormR wrote:Now, move the time in question to an earlier era or go to a third world country
Ah, but they didn't (or don't) have the benefit of expert statistical advice, the way we do. :wink:

As the first part of my response said, these people are buying hope, not making a rational investment. Judging their decisions by standards of our rationality is inappropriate. We have to assess according to a rationality that is appropriate to their circumstances.

There's a book by Banerjee and duflo that's all the rage right now in the bien-pensant blogs, on Poor Economics ("poor" modifying the people it analyzes, not the quality of its reasoning). One of the point they make is that a poor family will go with inadequate food for a long time so as to afford a television. For them, often underemployed and with lots of time on their hands, entertainment takes priority. There's nothing irrational about it.
The rational person argument seems like the height of irrationality given the widespread evidence of human nature. But it seems to be a quaint bit of irrationality that more than a few academics seem to enjoy. :wink:
Well, if we're all irrational in different ways, there's nothing we can do except act randomly. Certainly any kind of financial analysis is doomed to failure. It's all predicated on detecting patterns, and if we all -- or even just "most of us" -- act irrationally, there are no patterns to detect.

The stock market as a random walk. Now there's a novel idea...

George
The plural of anecdote is NOT data.

User avatar
NormR
Gold Ring
Gold Ring
Posts: 3984
Joined: 18 Feb 2005 11:19
Contact:

Re: Risk = ??

Post by NormR » 30 May 2011 01:27

ghariton wrote:
NormR wrote:Now, move the time in question to an earlier era or go to a third world country
Ah, but they didn't (or don't) have the benefit of expert statistical advice, the way we do. :wink:

As the first part of my response said, these people are buying hope, not making a rational investment. Judging their decisions by standards of our rationality is inappropriate. We have to assess according to a rationality that is appropriate to their circumstances.

There's a book by Banerjee and duflo that's all the rage right now in the bien-pensant blogs, on Poor Economics ("poor" modifying the people it analyzes, not the quality of its reasoning). One of the point they make is that a poor family will go with inadequate food for a long time so as to afford a television. For them, often underemployed and with lots of time on their hands, entertainment takes priority. There's nothing irrational about it.
I enjoy the efforts to define all human behaviour as rational. It's almost like we don't need the word irrational. But no big loss. It's such a prejudicial word after all. Not at all PC.
ghariton wrote:
The rational person argument seems like the height of irrationality given the widespread evidence of human nature. But it seems to be a quaint bit of irrationality that more than a few academics seem to enjoy. :wink:
Well, if we're all irrational in different ways, there's nothing we can do except act randomly. Certainly any kind of financial analysis is doomed to failure. It's all predicated on detecting patterns, and if we all -- or even just "most of us" -- act irrationally, there are no patterns to detect. The stock market as a random walk. Now there's a novel idea...
Ah, but why do people trade stocks?

User avatar
Rickson9
Silver Ring
Silver Ring
Posts: 669
Joined: 05 Apr 2011 00:00
Contact:

Myths About Rationality

Post by Rickson9 » 30 May 2011 05:29

"Cognitive scientists recognize two types of rationality: instrumental and epistemic. The simplest definition of instrumental rationality, the one that emphasizes most that it is grounded in the practical world, is: Behaving in the world so that you get exactly what you most want, given the resources (physical and mental) available to you. The other aspect of rationality studied by cognitive scientists is termed epistemic rationality. This aspect of rationality concerns how well beliefs map onto the actual structure of the world. The two types of rationality are related. In order to take actions that fulfill our goals, we need to base those actions on beliefs that are properly calibrated to the world."

[snip]

"The second mistaken view that one often hears is that emotion is antithetical to rationality. The absence of emotion is seen as purifying thinking into purely rational form. This idea is not consistent with the definition of rationality in modern cognitive science. Instrumental rationality is behavior consistent with maximizing goal satisfaction, not a particular psychological process. It is perfectly possible for the emotions to facilitate instrumental rationality as well as to impede it."

http://psychcentral.com/blog/archives/2 ... tionality/
"We don't see things as they are, we see them as we are." - Anais Nin

User avatar
ghariton
Diamond Ring
Diamond Ring
Posts: 11725
Joined: 18 Feb 2005 18:59
Location: Ottawa

Re: Risk = ??

Post by ghariton » 30 May 2011 11:53

NormR wrote:Ah, but why do people trade stocks?
1) Different information sets

2) Overconfidence in their ability to detect patterns where there is only noise

3) Boredom and an appetite for speculation to relieve the boredom

George
The plural of anecdote is NOT data.

User avatar
newguy
Gold Ring
Gold Ring
Posts: 8073
Joined: 10 May 2009 18:24
Location: Montreal

Re: Risk = ??

Post by newguy » 30 May 2011 11:57

ghariton wrote:
NormR wrote:Ah, but why do people trade stocks?
1) Different information sets

2) Overconfidence in their ability to detect patterns where there is only noise

3) Boredom and an appetite for speculation to relieve the boredom

George
4) To make money

newguy

User avatar
Rickson9
Silver Ring
Silver Ring
Posts: 669
Joined: 05 Apr 2011 00:00
Contact:

Re: Risk = ??

Post by Rickson9 » 30 May 2011 15:24

newguy wrote: 4) To make money

newguy
Winner.
"We don't see things as they are, we see them as we are." - Anais Nin

User avatar
ghariton
Diamond Ring
Diamond Ring
Posts: 11725
Joined: 18 Feb 2005 18:59
Location: Ottawa

Re: Risk = ??

Post by ghariton » 30 May 2011 15:57

newguy wrote:4) To make money
:lol:

Let me know how you make out against a diversified buy-and-hold portfolio over a reasonable time period, say ten years or so.

George
The plural of anecdote is NOT data.

User avatar
newguy
Gold Ring
Gold Ring
Posts: 8073
Joined: 10 May 2009 18:24
Location: Montreal

Re: Risk = ??

Post by newguy » 30 May 2011 16:37

ghariton wrote:
newguy wrote:4) To make money
:lol:

Let me know how you make out against a diversified buy-and-hold portfolio over a reasonable time period, say ten years or so.

George
I've made money every year since '95 except '08. It doesn't really make sense to compare % returns because it's $'s that matter and there is some question in what amount to use for the denominator. eg. Say I have $100k in my trading account and I buy 1 CL futures contract (worth $100k) with a $10k margin. The account is also 100% invested in bonds plus about 2% short equity. I have 2 other accounts with more money. If I make $1k what's my % profit?

I think you could prove to yourself that trading is profitable either empirically or logically. Every company now offers realistic paper trading accounts so you can use one to figure out a way to trade but it may take a year of study. You could also just ask why do companies offer this? It's because they know that people will realize how easy it is to trade profitably, until they use real money of course.

newguy

User avatar
Rickson9
Silver Ring
Silver Ring
Posts: 669
Joined: 05 Apr 2011 00:00
Contact:

Re: Risk = ??

Post by Rickson9 » 30 May 2011 16:56

ghariton wrote:
newguy wrote:4) To make money
:lol:

Let me know how you make out against a diversified buy-and-hold portfolio over a reasonable time period, say ten years or so.

George
You can see my results over 12 years at http://www.ticonline.com

It destroys a diversified buy-and-hold portfolio because it is a concentrated buy-and-hold portfolio.

Best regards.
"We don't see things as they are, we see them as we are." - Anais Nin

User avatar
newguy
Gold Ring
Gold Ring
Posts: 8073
Joined: 10 May 2009 18:24
Location: Montreal

Re: Risk = ??

Post by newguy » 30 May 2011 17:56

Rickson9 wrote:
ghariton wrote:
newguy wrote:4) To make money
:lol:

Let me know how you make out against a diversified buy-and-hold portfolio over a reasonable time period, say ten years or so.

George
You can see my results over 12 years at http://www.ticonline.com

It destroys a diversified buy-and-hold portfolio because it is a concentrated buy-and-hold portfolio.

Best regards.
italics mine

You can see why I said % returns are meaningless. IIRC you have US rental properties, why don't you include the value of those in your results? If all your money was invested in the market do you really think you would make the same decisions? Your making my point that trading is easy as long as it's (almost) meaningless.

newguy

User avatar
deaddog
Gold Ring
Gold Ring
Posts: 2521
Joined: 19 Jan 2008 19:59
Location: Central BC/Arizona

Re: Risk = ??

Post by deaddog » 30 May 2011 18:03

ghariton wrote:
newguy wrote:4) To make money
:lol:

Let me know how you make out against a diversified buy-and-hold portfolio over a reasonable time period, say ten years or so.

George
Should be pretty easy to beat a 10 yr return.

I think SPY returned about 2.6% over the last 10 years. Not to mention the ride!!Woo Hoo!!! :D :D

Term Deposits would have done better
Most of our so-called reasoning consists of finding arguments for going on believing as we already do.( J.H. Robinson)

User avatar
newguy
Gold Ring
Gold Ring
Posts: 8073
Joined: 10 May 2009 18:24
Location: Montreal

Re: Risk = ??

Post by newguy » 30 May 2011 18:38

ghariton wrote:if my house makes up a small proportion of my portfolio, and that portfolio is well-diversified, then the consequences of my house burning down are not very great for my portfolio as a whole.
That's the key I realized, but you have to count everything. The best way to make money trading is to diversify away the risk. When I was young I had all my future earnings ahead of me. I also had the option of returning to school at normal age :wink: . There is also diversification in having a second income from a spouse, having a pension plan, a rich uncle, etc. . It also helps to have enough of these things so that any one part isn't that important.

newguy

User avatar
ghariton
Diamond Ring
Diamond Ring
Posts: 11725
Joined: 18 Feb 2005 18:59
Location: Ottawa

Re: Risk = ??

Post by ghariton » 30 May 2011 21:30

newguy wrote:There is also diversification in having a second income from a spouse
A bunch of my colleagues took early retirement. When I asked about the financial consequences, a catchphrase was "4W". When I asked what that meant, I was told: "Why worry, wife works!"

George
The plural of anecdote is NOT data.

User avatar
Rickson9
Silver Ring
Silver Ring
Posts: 669
Joined: 05 Apr 2011 00:00
Contact:

Re: Risk = ??

Post by Rickson9 » 31 May 2011 07:47

Speaking for myself I don't believe in diversification and invest with that in mind. I only understand a specific type of stock and RE investing and that is how all capital has been allocated - stock and RE; 50/50

For me, an investment in Berkshire Hathaway in the 70s beats pension + spouse + rich uncle, etc. But again, that 's only for me. Each individual needs to determine what works best for them. Live and let live as they say.

Best regards.
"We don't see things as they are, we see them as we are." - Anais Nin

BRIAN5000
Gold Ring
Gold Ring
Posts: 5758
Joined: 08 Jun 2007 23:27

Re: Risk = ??

Post by BRIAN5000 » 31 May 2011 11:39

For me, an investment in Berkshire Hathaway in the 70s beats pension
Be nice to able to go back in time and invest in BRK, slim chance of that. Going forward?

For me it's .....RE + Div Stocks + Cash + DB + 4W
“Sometimes you are going to sell early and wish you would’ve held on, other times you will hold on a
little bit longer and wish you would’ve sold early - this is just part of the game.” - Frank Zorilla via Abnormal Returns

DanH
Gold Ring
Gold Ring
Posts: 1784
Joined: 21 Feb 2005 14:25
Contact:

Re: Risk = ??

Post by DanH » 31 May 2011 12:55

Rickson9 wrote:Speaking for myself I don't believe in diversification and invest with that in mind. I only understand a specific type of stock and RE investing and that is how all capital has been allocated - stock and RE; 50/50
You may not view it as such but many would consider investing in real estate a form of diversifying the business and market risk present in your stock portfolio. To borrow a phrase from Scotiabank, you're more diversified than you think. ;)
Rickson9 wrote:For me, an investment in Berkshire Hathaway in the 70s beats pension + spouse + rich uncle, etc.
Did you invest in BRK in the 1970s? I thought you were a bit young to have done that.

User avatar
Bylo Selhi
Diamond Ring
Diamond Ring
Posts: 24697
Joined: 16 Feb 2005 10:36
Location: Waterloo, ON
Contact:

Re: Risk = ??

Post by Bylo Selhi » 31 May 2011 13:17

DanH wrote:Did you invest in BRK in the 1970s?
Having missed the opportunity to invest in BRK in the 1970s, I'd like to know what to invest in today so that 30 or 40 years from now I can askboast, "Did you invest in XXXX in the 2010s?"
Sedulously eschew obfuscatory hyperverbosity and prolixity.

User avatar
NormR
Gold Ring
Gold Ring
Posts: 3984
Joined: 18 Feb 2005 11:19
Contact:

Re: Risk = ??

Post by NormR » 31 May 2011 13:37

Bylo Selhi wrote:
DanH wrote:Did you invest in BRK in the 1970s?
Having missed the opportunity to invest in BRK in the 1970s, I'd like to know what to invest in today so that 30 or 40 years from now I can askboast, "Did you invest in XXXX in the 2010s?"
Plastics :wink:

Taggart
Gold Ring
Gold Ring
Posts: 6142
Joined: 05 Dec 2005 07:34

Re: Risk = ??

Post by Taggart » 31 May 2011 14:01

Bylo Selhi wrote:
DanH wrote:Did you invest in BRK in the 1970s?
Having missed the opportunity to invest in BRK in the 1970s, I'd like to know what to invest in today so that 30 or 40 years from now I can askboast, "Did you invest in XXXX in the 2010s?"
Japan. Definitely, Japan. Forty years from now you can tell me if I was right or wrong. By that time I'll be a forever young 101. :beer:

User avatar
Rickson9
Silver Ring
Silver Ring
Posts: 669
Joined: 05 Apr 2011 00:00
Contact:

Re: Risk = ??

Post by Rickson9 » 31 May 2011 16:42

DanH wrote:You may not view it as such but many would consider investing in real estate a form of diversifying the business and market risk present in your stock portfolio. To borrow a phrase from Scotiabank, you're more diversified than you think. ;)
Good point. The only distinction that I can offer is that for me, diversification (into depressed markets/assets) has been done as a consequence of my investing, not as a goal.

What I mean is that my portfolio becomes somewhat diversified (nobody has ever accused my portfolio as being diversified anyway) as different markets experience downturns as opposed to an investor who actively diversifies for the perceived benefit of less risk, volatility, peace of mind, etc.

Hopefully that makes some sense.
Rickson9 wrote:Did you invest in BRK in the 1970s? I thought you were a bit young to have done that.
No. Unfortunately I did not. By the time I had any money, Berkshire Hathaway was too big to do anything significant.

Going forward, for better or worse, my fortunes will rise and fall with my investments in Toronto real estate and Fossil (FOSL) in late 90s, The Buckle (BKE) in 2005, Columbia Sportswear (COLM) and American Eagle (AEO) in 2009 and U.S. real estate in 2011.

Investments in Oakley (OO) and King World Productions (KWP) were prematurely bought out. :cry:
Bylo Selhi wrote:Having missed the opportunity to invest in BRK in the 1970s, I'd like to know what to invest in today so that 30 or 40 years from now I can askboast, "Did you invest in XXXX in the 2010s?"
Boast definitely! :wink:

In any case, I continue to document my investing experiences at http://www.ticonline.com in the hopes of keeping me somewhat honest. Maybe.

With regards to what to invest in today, I haven't purchased a stock in 2 years. Speaking for myself, everything has become expensive. I continue to shop for U.S. real estate because, for me, it appears inexpensive.

I apologize for my contribution in taking this topic off course!

Best regards.
Last edited by Rickson9 on 31 May 2011 17:14, edited 5 times in total.
"We don't see things as they are, we see them as we are." - Anais Nin

User avatar
NormR
Gold Ring
Gold Ring
Posts: 3984
Joined: 18 Feb 2005 11:19
Contact:

Re: Risk = ??

Post by NormR » 31 May 2011 16:55

Btw, how did the risk thread turn into a return thread? :wink:

User avatar
newguy
Gold Ring
Gold Ring
Posts: 8073
Joined: 10 May 2009 18:24
Location: Montreal

Re: Risk = ??

Post by newguy » 31 May 2011 17:12

NormR wrote:Btw, how did the risk thread turn into a return thread? :wink:
NormR wrote:Ah, but why do people trade stocks?
newguy

DanH
Gold Ring
Gold Ring
Posts: 1784
Joined: 21 Feb 2005 14:25
Contact:

Re: Risk = ??

Post by DanH » 31 May 2011 17:50

NormR wrote:Btw, how did the risk thread turn into a return thread? :wink:
Sign of a bull market? ;)

User avatar
deaddog
Gold Ring
Gold Ring
Posts: 2521
Joined: 19 Jan 2008 19:59
Location: Central BC/Arizona

Re: Risk = ??

Post by deaddog » 31 May 2011 19:03

NormR wrote:Btw, how did the risk thread turn into a return thread? :wink:
It’s a way of measuring risk. :)

Whenever someone claims superior returns; someone else chimes in “Yabut you took too much risk” :wink:
Most of our so-called reasoning consists of finding arguments for going on believing as we already do.( J.H. Robinson)

User avatar
NormR
Gold Ring
Gold Ring
Posts: 3984
Joined: 18 Feb 2005 11:19
Contact:

Re: Risk = ??

Post by NormR » 31 May 2011 19:37

deaddog wrote:
NormR wrote:Btw, how did the risk thread turn into a return thread? :wink:
It’s a way of measuring risk. :)

Whenever someone claims superior returns; someone else chimes in “Yabut you took too much risk” :wink:
But if I take too much risk, can I get superior returns? Time to get a few lotto tickets. :wink:

Post Reply