Investment Jargon - Fundamentals, calculated risk, etc.

Asset allocation, risk, diversification and rebalancing. Pros/cons of hiring a financial advisor.

Investment Jargon - Fundamentals, calculated risk, etc.

Postby Wallace » 23 Oct 2008 18:30

Every time I switch on BNN, or watch someone from the financial industry talk about something or other, I hear the following statement: "The fundamentals are good"

During the crisis I've heard this over and over again. In relation to house prices, the US debt, the price of stocks, commodities, precious metals, and foreign exchange. But what, if anything, does it mean? A search of Google for "finance AND fundamental" spits out this, among other pages. Essentially it is a long list of accounting concepts.

But the counting and recording of money is only a small aspect of economic theory. It represents only the activity on the upper deck of a ship ploughing through deep and treacherous unknown waters.

I've said before that economics is not a "natural" science. It was invented by us, is still being invented (for example ABCP), and does not exist outside our own experience. If we disappeared from the planet, physics and chemistry would continue, but economics would be gone. It is a social science based on human behaviour that succeeds or fails according the faith that we attach to it. Essentially it is a system that persuades other people to do things for us, and persuades us to do things for them.

So when I hear the pundits say "the fundamentals for cheese are good", what do they mean? Does it just mean that the pundits are bullish on the price of cheese?

Are there true "fundamentals" in economic theory? Or are we all part of an elaborate illusion, trapped within an eternally oscillating Ponzi scheme that expands when we buy into it and collapses when we don't?
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Re: The Fundamentals

Postby mudLark » 23 Oct 2008 19:11

Wallace wrote:Are there true "fundamentals" in economic theory?

When all else fails go to the source...
Adam Smith wrote:The annual labour of every nation is the fund which originally supplies it with all the necessaries and conveniencies of life which it annually consumes, and which consist always either in the immediate produce of that labour, or in what is purchased with that produce from other nations.

According, therefore, as this produce, or what is purchased with it, bears a greater or smaller proportion to the number of those who are to consume it, the nation will be better or worse supplied with all the necessaries and conveniencies for which it has occasion.

I don't believe anyone who tells me it gets much simpler, or [s]more[/s] less complicated, than that.

ISTM the science most closely analogous to economics is climatology. It's ironic that neither of these fields can yet provide a one-handed answer to anything, yet seem to occupy most of our attention.
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Postby Wallace » 23 Oct 2008 20:10

Hi Mudlark

Thanks for quoting one of my own heroes, Adam Smith, who was born 222 years before me, about 1 mile from my own birthplace in Kirkcaldy, Scotland.

The quotation, as I understand it, defines the GNP of a nation and how it benefits the people within.

It doesn't, however, go into the specifics of why people in the nation cooperate with each other to produce the GDP. Therein lies the theory of money.

Why people cooperate with each other to do mutually-advantageous things may not be different from why animals do the same. For example, look at this website that shows cooperative behaviour among ants. Play with it for a while and then imagine that it is a human society where each person is exchanging a $20 bill with his neighbour. Look familiar?

On climate change, I agree that nobody really understands it. But it is still a natural science. If we were all wiped off the face of the Earth tomorrow, climate change would still occur, whether we were there to see it or not.

In the end, our lives are all about relationships. Money is only money.

(ok, I'll keep taking the tablets :lol: )
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Postby Bylo Selhi » 23 Oct 2008 20:28

Wallace wrote:(ok, I'll keep taking the tablets :lol: )

Yabbut there's a good chance they're just placebos ;)
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Postby twa2w » 24 Oct 2008 10:40

I don't agree that economics is invented by man any more or less than Physics is.

Very roughly speaking, Physics is the study of how the world interacts physically. Economics is the study of how the resources are allocated against various demands and how this affects a population.

You can study economics in the natural world. There are studies on the economics of populations of wild animals Populations and health of populations of wild animals flucuate according to supplies of food, weather etc just like they they do in humans. We have built in some artifical systems like money but the basics are the same.

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Re: The Fundamentals

Postby mudLark » 24 Oct 2008 15:16

Hi Wallace,

Wallace wrote:...my own birthplace in Kirkcaldy...
Once upon a time; I played Ducks and Drakes; on Wemyss Bay; from the docks of Methil town.

I distinctly remember the cold and rainy day I first saw Adam's statue in the Kirkcaldy town centre, being too young to know otherwise, I wondered who he was; another irony.

Meanwhile...I've corrected a logic error in my original post. I forgot that sometimes more is less, and vice-versa. :oops:

Wallace wrote:The quotation, as I understand it, defines the GNP of a nation and how it benefits the people within.
I tend not to take the word nation too literally nowadays, as I suspect today's world may be too complex for that idea to readily translate into a beneficial result.

Wallace wrote:It doesn't, however, go into the specifics of why people in the nation cooperate with each other to produce the GDP. Therein lies the theory of money.
I don't agree...

Adam Smith wrote:...those who are to consume it...
ISTM therein lies the [contemporary] theory of money (and economics):

During the Industrial Revolution economics were focused on defining and improving production in order to better equip the nation state for war. The application of Adam's theories as a tool, were successfully used by the British to defeat Napoleon.

Contemporary economics are focused on defining and improving consumption in order to avoid war. The hope of nuclear armed governments is that gradually economic activity will become a substitute for conflict. To be successful the end-state in this transformational idea has to be global, and result in greater equality of consumption, both within and between nation states.

Money is the medium we are gradually learning to use in order to increase cooperation within and between nations. The US has spent trillions over the past two decades convincing the Chinese to cooperate, successfully IMO. In the late 1980s the British government stopped throwing troops at Ulster, and started throwing money instead. Very soon a point arrived, when the people had become used to the pleasure and certainty of consuming, they (both Protestant and Catholic) then realized they had more to lose from a continuation of the troubles than they ever had to gain.

What's at stake within this transformational idea is...well, everything...which, methinks, is the real reason Greenspan was so ashen during his testimony to congress yesterday. He understands better than most that the survival of the many has been threatened by the greed and hubris of the few; during his watch. The real danger inherent in the current economic meltdown is not a recession, global or otherwise, it is the eventual failure of this idea; a failure that may eventually propel us into a war that involves nuclear weapons.

IMO these are the 'true "fundamentals" in [contemporary] economic theory' your original post seeks to explain.

Wallace wrote:Why people cooperate with each other to do mutually-advantageous things may not be different from why animals do the same. For example, look at this website that shows cooperative behaviour among ants. Play with it for a while and then imagine that it is a human society where each person is exchanging a $20 bill with his neighbour. Look familiar?
Interesting, in other words ants dance to a collective ant rhythm...the more ants dancing the more apparent the harmony of the rhythm.

Perhaps the critical question is what motivates an ant to switch from an inactive state to an active state, when all the other ants are in the inactive state? Put another way what is the source music to which the ants appear to dance?

BTW likening the global economy to the behaviour of ants may not be dissimilar to likening the global economy to the global climate. :wink:

Wallace wrote:In the end, our lives are all about relationships. Money is only money.
I sincerely believe our lives are all about what Maslow said they are all about. If they are all about relationships, they are neither about survival or self-actualization. If they are not about survival or self-actualization, they probably about relationships.

ISTM most people nowadays have a far more complex relationship with money then they do with each other.

My turn to take the tablets :lol:
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Re: The Fundamentals

Postby Wallace » 28 Oct 2008 18:33

mudLark wrote:Once upon a time; I played Ducks and Drakes; on Wemyss Bay; from the docks of Methil town.


I'll refrain from quoting from "Auld Lang Syne" ("We twa hae paddled in the burn.....") I'd get too teary-eyed :lol:

mudLark wrote:During the Industrial Revolution economics were focused on defining and improving production in order to better equip the nation state for war. The application of Adam's theories as a tool, were successfully used by the British to defeat Napoleon.

Contemporary economics are focused on defining and improving consumption in order to avoid war. The hope of nuclear armed governments is that gradually economic activity will become a substitute for conflict. To be successful the end-state in this transformational idea has to be global, and result in greater equality of consumption, both within and between nation states.


I've never heard this argument before. It's fascinating and I'll have to think more about it. But if the practical application of economics is connected to armed conflict, I don't have your confidence that the goal has changed from winning war to preventing it. Perhaps we believe it simply because we are on the "winning" side.

I love your comment about Greenspan -

He understands better than most that the survival of the many has been threatened by the greed and hubris of the few


Spot on.

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Re: The Fundamentals

Postby deaddog » 28 Oct 2008 21:44

Wallace wrote:Every time I switch on BNN, or watch someone from the financial industry talk about something or other, I hear the following statement: "The fundamentals are good"


So when I hear the pundits say "the fundamentals for cheese are good", what do they mean? Does it just mean that the pundits are bullish on the price of cheese?

Are there true "fundamentals" in economic theory? Or are we all part of an elaborate illusion, trapped within an eternally oscillating Ponzi scheme that expands when we buy into it and collapses when we don't?


This is a quote from Mark Cuban in the Forward to the book "The Number" by Alex Berenson

What about fundamentals? Fundamentals is a word invented by sellers to find buyers.

Price/earnings ratios, price/sales, the present value of future cash flows, pick one. Fundamentals are merely metrics created to help stockbrokers sell stocks, and to give the buyers reassurance when buying stocks. Even the way profits are calculated is manipulated to give confidence to buyers.
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Re: The Fundamentals

Postby mudLark » 29 Oct 2008 12:38

Wallace wrote:Perhaps we believe it simply because we are on the "winning" side.
Are we ... on the winning side?

Assuming by "we" you mean citizens of the west (Europe and the Anglosphere) ... those who constitute the top billion:

ISTM most of "we" are on the losing side of globalization.

In the west real median individual incomes stopped growing about 25 years ago; mainly because they started growing elsewhere.

Somebody needed to make a sacrifice so that the middle billions could feed themselves. Methinks it was the us in "we".

Without this sacrifice, the middle billions would have had little hope for a better future. Local tensions would have inevitably become regional, or even global, and led to a conflict somewhere ... probably one involving nuclear weapons.

The price "we" have been paying for peace in our time has been a gradual erosion of our living standard. This strategy was fine whilst we had surplus standard of living to sacrifice. Unfortunately, IMO the surplus remaining is going to rapidly disappear during the next couple of decades.

IOW as living standards for the not-so-poor rise, those of the not-so-rich inevitably fall, until eventually all the not-so-anythings are forced to adopt egalitarian consumption levels. Money is likely going to be the tool used to impose this global consumer egalitarianism.

Meanwhile the bottom billion will continue to starve ... unless they too can threaten us with extinction.
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Investment Jargon

Postby Studebaker Hawk » 09 Dec 2008 15:27

deaddog and adrian2 flailingly, respectively wrote:"It’s a calculated risk" and "a matter of probabilities and tweaking them in your favour"


Isn't this subjective nonsense that allows you to dress up your hunches to a rationalized level of respectability?

I've always wonder about statements like "the deal has a 90% chance of success". Isn't that another way of saying "I have no fucking idea but I want to bet the ranch."?
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Postby Bylo Selhi » 09 Dec 2008 15:42

Yes and yes.

(I'm afraid to elaborate lest my verbiage be dismissed as "subjective nonsense" or worse.)
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Postby tidal » 09 Dec 2008 15:48

I'm not sure where you are going with this, but fwiw, I think that most investors are working off a broken paradigm, where they think about "risk", and focus on specific risks and trade-off the likelihood of this or that risk against potential return... e.g. credit risk, liquidity risk, market risk, deal risk, stock specific risk, currency risk, etc.

And I think that wasn't such a bad way to go at one time.

But today we are dealing with complex systems and we have no bloody way of predicting what an action/input of, say, liquidity injection, will have on the system as whole. We might be able to make a guess about a single risk - say, inflation risk - but we have no idea about the emergent properties of the system as a whole. Like, why the hell are bad mortgages in Cleveland leading to massive layoffs at Sony, and how the hell do you model that? And what do layoffs at Sony mean for Ontario provincial bonds?

We are dealing not with "risk" anymore, but unbounded uncertainty - in the words of Donald Rumsfeld: "unknown unknowns". That may seem arcane, but it means that investors are going to demand a LOT more risk premium going forward. Probably permanently.

And we are just scratching the surface of how complex our economy and planet are, and how rapidly and abruptly and unexpectedly shocks can be transmitted throughout the entire system.

A financial crisis? That little thangy? This is going to seem like playing in the sandbox compared to some of the unknown unknowns we face w.r.t. energy, water, food, climate, acidification of the oceans... bwtfdik... sweet dreams...
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Postby WishingWealth » 09 Dec 2008 15:50

Good on SH for starting this thread.

One statement that comes back often - and I was always shy to ask - is how do I initiate a position?

I'm a bit of an old timer and I buy stocks, ETFs or stuff, sometimes with the intent to purchase more in time.
OTOH, the more savvy investors start/initiate a position.
How do I too?

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Postby Nemo2 » 09 Dec 2008 15:56

WishingWealth wrote: and I was always shy to ask - is how do I initiate a position?
Have you tried "If you could just move your leg that way"?
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Postby WishingWealth » 09 Dec 2008 16:02

Nemo2: I would have appreciated a How To video.
Never too late to learn something.

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Postby Studebaker Hawk » 09 Dec 2008 16:06

tidal wrote:I'm not sure where you are going with this,


I won't know until I get there. I never do. It's always a surprise. I often get lost along the way.

but fwiw, I think that most investors are working off a broken paradigm,


If it's broken now, wasn't it broken then? The fact that something seems to be working doesn't mean that it's not broken.

But today we are dealing with complex systems


Ever was it so. Ever will the good ole days be a time when things were simpler.
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Postby Nemo2 » 09 Dec 2008 16:44

WishingWealth wrote:Nemo2: I would have appreciated a How To video.
Never too late to learn something.

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Oh, jeez, it's never worked for me....I just wondered if you've tried it. :lol:
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Postby blonde » 09 Dec 2008 16:59

Investment Jargon...pure spit-swap with the aim to confuse the masses.

'ems that don't know 'how' the work gets done in systems will be impressed by the investment jargon...warm and fuzzy feelie type...excellent for the slaughter. OTOH, why shud that be a bad thing?

Study the SYSTEM...study the continguency plans too...learn 'what' questions to ask...

do business schools teach...'if U want to predict the future, U need to create it UR-self'? Hmmmm!!!...wud it be worthwhile to create the jargon for this model too?

Are ya'lls ready for the new and improved jargon?

stay tuned...it's coming...

as an aside...what is the definition for 'diversification'?...ans: dunno.
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Re: Investment Jargon

Postby deaddog » 09 Dec 2008 16:59

Studebaker Hawk wrote:Isn't this subjective nonsense that allows you to dress up your hunches to a rationalized level of respectability?
:oops: :oops: :oops:

I've always wonder about statements like "the deal has a 90% chance of success". Isn't that another way of saying "I have no fucking idea but I want to bet the ranch."?


To me this means that 9 times out of 10 it will go in your favor. But I have no fucking idea which way it will go this time.

I take a calculated risk. I will bet a limited amount of cash that it will go my way. 9 times out of 10 I will win. Hopefully!! :wink:
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Postby deaddog » 09 Dec 2008 17:12

WishingWealth wrote:
One statement that comes back often - and I was always shy to ask - is how do I initiate a position?

I'm a bit of an old timer and I buy stocks, ETFs or stuff, sometimes with the intent to purchase more in time.
OTOH, the more savvy investors start/initiate a position.
How do I too?

WW


Well old timer you are on the right track.

If you don't own any of a stock you wish to have a position in, you buy some.

You have now initiated a position.

At a later date you can add to your position by buying some more. You can then Close your position by selling the whole lot or Scale out by selling a bit at a time. :lol: :lol:

Of course any time you initiate a position"It’s a calculated risk" and "a matter of probabilities and tweaking them in your favour"
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Postby tidal » 09 Dec 2008 17:34

Studebaker Hawk wrote:
tidal wrote:But today we are dealing with complex systems
Ever was it so. Ever will the good ole days be a time when things were simpler.
Yeah, but it WAS simpler then, and it IS a whole hell of a lot more complex and inter-connected today. And from what we are learning about complex systems, and unexpected emergent behaviours at the level of various whole systems, well, let's just say it is not the world Ben Graham or Warren Buffett spent most of their careers in. Insights may be just as valid, just saying... a lot more unknown unknowns, and it is hard to see how this won't actually just compound as time goes on...

I think the thing to do in the face of increasing complexity is to fall back on simplicity, but even that is making an enormous implicit assumption about business as usual being a decent proxy for go forward... I can't seem to reconcile any other strategy to the present (although I do think there is a case for selling volatility...), but I don't know and I know I don't know...

I've been reading Thomas Homer-Dixon's "The Upside of Down"... typically with a stiff drink...
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Postby Nemo2 » 09 Dec 2008 17:34

Exit, pursued by a bear.
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Postby WishingWealth » 09 Dec 2008 19:56

Thanks dd, now I'm off to impress my BIL.

. . .. .. WW
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Postby deaddog » 09 Dec 2008 20:27

WishingWealth wrote:Thanks dd, now I'm off to impress my BIL.

. . .. .. WW
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I know I'll regret this but I got to ask. Whats BIL??? :?
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Postby WishingWealth » 09 Dec 2008 20:31

BIL: Brother In Law.

A few more [s]TLA[/s]acronyms
http://www.financialwisdomforum.org/forum/v ... p?t=104499

WW

TLA: Three Letter Acronym
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