Monday, March 23, 2015

Who to Believe? Math or Hearsay from Someone's Dad?

March 23, 2015
5 Things My Dad Taught Me About Investing

Despite its treacherous pitfalls, the market is one of the few time-tested routes to financial security.

Time-tested means proven reliable or tried and true. I'm therefore going to assume that he did not grow up in Japan after their housing bust in the early 1990s or in one of the many other countries on this planet where the stock market did not necessarily lead to financial security.

You want to know what else was once tried and true? The earth is flat. It was true for even longer, until it wasn't true. To this day, some still refuse to accept it though. That's how powerful time-tested rear view mirror looking beliefs can be.

And in the other corner we have math, straight from the American Association of Individual Investors.

For Long-Term Investors, the Focus Should Be on Risk

For the mathematically inclined, proof positive of how stocks are risky even in the long run is that if you try to insure a portfolio against a shortfall, you will find that the premium rises as the time horizon lengthens, exactly as would the price for a put option on the termination value of the portfolio.

It's almost like the longer the time horizon, the greater the risk something can go horribly wrong. Yeah, it's almost exactly like that.

How long has the United States been time-tested? Just over 200 years. Didn't stop 19 suicidal individuals from flying our own planes into our own skyscrapers though. What did that cost us, per crazed fanatic, over the long-term, if one factors in the cost of wars? @#$% happens.

Here's a fun thought experiment. Want real safety in the stock market? Invest all of your money in stocks then call Lloyds of London. Ask for a price quote on an insurance policy to protect against any and all possible losses on those stocks until the day of your passing, in real inflation adjusted terms. The insurance quote may give you a ballpark estimate on how much risk you are taking.

Well, maybe not entirely. You still have to hope Lloyds of London will remain solvent if your insurance policy actually does pay off. I mean, something must have gone horribly wrong in the global economy for that to happen. Right? Further, what if Lloyds of London was investing your premiums in the U.S. stock market? You know, because it only goes up over the long-term? Wouldn't that be ironically tragic for you?

This is not investment advice.


dearieme said...

I vist a financial forum where I am horrified by the frequency of people saying that they expect the stockmarket to give them a steady return of, say, 7% p.a. It's the "steady" that I can't bear.

Stagflationary Mark said...


7% long-term snd steady is 29 times your money in 50 years. What could possibly go wrong?

In 1000 years, it's 2.4 x 10^29 times your money. Steady. Not a problem if we can just keep growing exponentially for all eternity.

This math also works for locusts. Can't understand why every square millimeter of the planet doesn't have thousands of them. Perhaps it shall remain a sarcastic mystery.

michael said...


It is rather interesting that people have forgotten the tech bubble in 2000 and the housing bubble in 2007. I am sure this one will end about the same.

Stagflationary Mark said...


The first few years at my last employer went well. Would have seemed to most to be a solid long-term investment.

It did not take much time for things to really take a turn fior the worse though. Nearly every division began to implode simultaneously. There's a fine line between staying ahead of the competition or falling behind it. It wasn't just accounting fraud that eventually closed the doors.

I think one of the key problems in our division was that every team was left to its own devices. Virtually no code was shared. There was no tools department. There was no efficiency of scale. In fact, efficiency would be the last word I'd use to describe it.

Oh, the stories I could tell about wasted money. I think the biggest waste was not having an approved game design finished before all the artists and programmers began to work on it. I think back to all the thousands of hours of wasted man-hours on my last project. It was the game designer's first project and after 18 months, we still didn't have a game design.

I worked at 4 different companies in my life. None of them stood the test of time. The first was a food restaurant chain that fell behind the competition. The end was near when they changed the recipe of their shake mix from ice cream to ice milk, presumably to save money. Yuck.

Perhaps that's what makes me appreciate return of capital. It's not a given that it will be returned.

Michael said...

Although I work in the medical device industry I am seeing a similar trend. Although in the case of my firm it took more than 20 years to destroy. I gave up trying to resist the negative trend a few years ago. Small world isn't it.

Stagflationary Mark said...


20 years to destroy? Small world indeed!

The gaming company I worked at was founded in 1980. The founders bailed in 1997. I bailed in 1999.

Mr Slippery said...

The first two companies I worked for were large corporations and they are still around today. The next two companies I worked for were my own and they lasted 5 years each before I dissolved them. Now I work for the government and we can't go out of business. The worst we could do is end up in Chapter 9. Embrace and extend.

Stagflationary Mark said...

Mr Slippery,

Out of curiosity, how efficiently run were the two large companies you worked at?

I ask because the government is huge and not particularly efficient, to say the least.

The smaller company I worked at was reasonably efficient until we grew.

Mr Slippery said...

Both large corporations were efficient at paying people little and charging customers a lot. Really, they were run fairly well considering their size, at least while I was there. At the start of my career, I accepted the low pay, but later on, I did much better on my own, at least for awhile.

Stagflationary Mark said...

Mr Slippery,

I guess large corporations managed to become large because they are run fairly efficiently. Survivor bias? Inefficient medium companies probably tend to die off before becoming large?

And the top executives at large companies are certainly paid well enough. Not hard to attract and keep employees at that level I'm guessing.

I know that Jack Welch was a fan of culling the bottom 10% of employees annually.

I think our company would gave benefited from doing that at least once, but firings were rather rare. A great amount if incompetence needed to appear before something like that would happen.

As harsh as this sounds, a programmer on my team was let go. My manager was on the fence but I was not. We were all better off after he left.

Stagflationary Mark said...

Still experiencing iphone fat finger syndrome in the comments. I need to slow my typing down some and work more on precision.