Timing the market

Audaxer

Deleted_User said:

Prism said:

Diplodicus said:

MK62 said:

.....but then, collectively, they haven't diversified anything.....collectively they still hold the same investments, so how could they get a better collective return?

They cannot, by any sample. Even if every investment were diversified through every investor, it would not improve the collective return. No free lunch.

You seem focused on return. Overall return is not the most important factor for many people. Diversification reduces the risk by bringing the return closer to the average.

Its more than that.  Diversification reduces risk AND improves compounded returns. Smoothing returns makes you wealthier.  Here is an example. 

https://www.cfasociety.org/calgary/Documents/Professionals_3.%20The%20Benefits%20of%20Diversification.pdf

I think the following sentence in the summary at the start of the above linked document is a very important one:
"But the benefits of diversification on risk and returns can be achieved only if diversification is used in combination with a rebalancing process."
I think that is an important point about including a rebalancing process to ensure you get the benefits of diversification?

jamesd

Deleted_User said:

"When I ask investors why they believe large growth has outperformed, the answer typically revolves around the notion that “this time it’s different” because technology is moving faster

I think its more to do with the moat that S&P500 companies have.  Red tape has been proliferating.  Governments make it difficult for new entrants to jump in and outcompete.  The regulations require huge pockets, not to mention connections. 

 And technology.  Massive corporations are hard to compete with as up front technology investment is so high.  And the largest US companies are sitting on so much cash they can and buy any new entrant before they become a threat. 

Moats are real but there was this fine and long-established business called Encyclopedia Britannica with an excellent moat in the form of costs of compiling the articles and distribution of physical works. I helped to destroy that moat and most of that business via Wikipedia. In its early days one individual funded a few servers and the early few donation drives raised less than $100k a year. That was enough to establish its likely success and growth was limited by budget because it got slower as the machines ran out of capacity. Donations of a hundred k plus from the likes of Google charity and rising user numbers making donations sealed EBs fate by making and keeping the place fast and securing employees instead of volunteers for core roles.

The approaches used have changed a bit these days and now Amazon or other web platforms are used for compute and sometimes storage. This reduces the upfront hardware costs and lets them scale with usage. Provided there's a revenue stream that can allow very rapid growth because Amazon Web Services has plenty of capacity. Quite a few consumer-facing government systems use ASW to scale load with demand, since spinning up another instance (computer) at AWS can be fast enough to match demand.

Expensive technological infrastructure can still be needed but it isn't always that way, particularly for purely electronic deliverables.

[Deleted User]

In the 90s new leading search engines popped up every year.  Then Google took over and we’ve had no change for over 20 years.  I am not saying it won’t die eventually.  And of course there are lots of small entrants.  Its just the leading companies are more dominant, have less competition and last longer than in the past. Which makes it safer to invest in them. Or at least thats what Mr Market seems to think.  There is less capitalist competition.  

Thrugelmir

Deleted_User said:

In the 90s new leading search engines popped up every year.  Then Google took over and we’ve had no change for over 20 years.  I am not saying it won’t die eventually.  And of course there are lots of small entrants.  Its just the leading companies are more dominant, have less competition and last longer than in the past. Which makes it safer to invest in them. Or at least thats what Mr Market seems.  There is less capitalist competition.  

If you are investing in companies directly then you need to be following the news. Otherwise wise to stick to passive trackers. Avoids making potentially costly errors of judgement. 

The US government has filed charges against Google, accusing the company of violating competition law to preserve its monopoly over internet searches and online advertising.

The lawsuit marks the biggest challenge brought by US regulators against a major tech company in years.

It follows more than a year of investigation and comes as the biggest tech firms face intense scrutiny of their practices at home and abroad.

Google called the case "deeply flawed".

The company has maintained that its sector remains intensely competitive and that its practices put customers first.

"People use Google because they choose to - not because they're forced to or because they can't find alternatives," it said.

Monopoly concerns

The charges, filed in federal court, were brought by the US Department of Justice and 11 other states. The lawsuit focuses on the billions of dollars Google pays each year to ensure its search engine is installed as the default option on browsers and devices such as mobile phones.

Officials said those deals have helped secure Google's place as the "gatekeeper" to the internet, allowing it to own or control the distribution channels for about 80% of search queries in the US.

https://www.bbc.co.uk/news/business-54619148

EU competition chief Margrethe Vestager won her first big Google case in front of the EU's lower court on Wednesday, in a ruling that is set to embolden regulators to launch more cases against the U.S. search giant.

In a major blow to Google, judges of the EU General Court in Luxembourg ruled that Vestager was right to fine the U.S. search giant €2.4 billion in 2017 for favoring its own shopping comparison service over rivals.

"Google favors its own comparison shopping service over competing services, rather than a better result over another result," the court said in a statement. The judges found that Google's practices had anti-competitive effects, and rejected the company's claim that it actually competed with merchant platforms such as Amazon and eBay.

Google's main argument, that changes to its algorithms were designed to improve the quality of its search service, was also rejected by the court. The judges held that "Google has not demonstrated efficiency gains linked to that practice that would counteract its negative effects on competition."

The outcome strengthens the hand of competition authorities across Europe to take a tougher approach not only toward Google's other specialized search services, including flights or restaurants, but also on similar ventures by other tech giants, such as Facebook's Marketplace or Apple Music.

“A great day for antitrust enforcers who want to deal seriously with anti-competitive conduct of digital platforms and have relied on this precedent,” Isabelle de Silva, a judge at France’s highest administrative court and until recently France’s competition chief, said on Twitter.

https://www.politico.eu/article/eu-commission-margrethe-vestager-wins-google-shopping-case/

Diplodicus

Deleted_User said:

Prism said:

Diplodicus said:

MK62 said:

.....but then, collectively, they haven't diversified anything.....collectively they still hold the same investments, so how could they get a better collective return?

They cannot, by any sample. Even if every investment were diversified through every investor, it would not improve the collective return. No free lunch.

You seem focused on return. Overall return is not the most important factor for many people. Diversification reduces the risk by bringing the return closer to the average.

Its more than that.  Diversification reduces risk AND improves compounded returns. Smoothing returns makes you wealthier.  Here is an example. 

https://www.cfasociety.org/calgary/Documents/Professionals_3.%20The%20Benefits%20of%20Diversification.pdf

Thanks for the link, Mordko. Im not convinced. I’ll need to come back on it tomorrow as I am still at work but it looks as if the two assets chosen in the paper would rebalance to the opposite conclusion over the years 2014/2021? 

MarkCarnage

Linton said:

MarkCarnage said:

Always best to check first, Rather than to assume anything. SP500 is currently 29.5. 

For comparison the FTSE All Share is 14.4 and the FTSE250 16.3. 

Which is very possibly reflective of forward earnings growth prospects of their constituents. 

I wonder how many of the enthusiastic investors in Tesla or other high growth tech stocks have ever heard of forward earnings growth never mind taking it into account in their buying decision.

Maybe, but the collective expected earnings growth of the two markets is what I'm talking about. Yes, the FTSE may well be cheap, but the average growth prospects of stocks in the FTSE100 are I would suggest quite a bit lower than the S&P500. 

MarkCarnage

Diversification is a good thing. Discuss.....it already has been at length.

Intuitively, and in practice to a degree it is. However, it is worth considering in a bit more detail its limitations. There has been various work showing that in practice owning a relatively small number of stocks (up to 30 or at most 50) will provide c90% of diversification benefit....however that is only against that particular universe benchmark within equities. 

Geographic and sectoral diversification can be overdone too. You will carry more and more market risk and less stock specific risk. 

In practice, at times of systemic stress, like 2008-9, risk asset correlations all tend towards 1. Where they don't, there is often a liquidity stress too, or both if you're unlucky. Don't think that holding lots of different equity funds, active or passive, real estate or most credit will provide a lot of diversification benefit in that kind of stress. Sovereign debt might, some hedge funds could at a cost, some commodities might, some alternative risk sources like Cat Bonds might. 

Ultimately, almost all of these assets rebounded, some faster and further than others. Therefore, unless you crystallise the price falls by selling and turning them into losses, it's of limited relevance.

The scenarios where true diversification matters are more existential, like complete wipe out, Germany, Russia, Argentina. Didn't matter if you were holding shares, bonds, cash or in some cases real estate. Gone. All of it. If it's your domestic market, there might not be a lot you can do about it except leave the country in time. 

JohnWinder

There has been various work showing that in practice owning a relatively small number of stocks (up to 30 or at most 50) will provide c90% of diversification benefit....however that is only against that particular universe benchmark within equities.

I'd be interested to see that research, firstly to learn how one quantifies the benefit of diversification but also to see how it stacks up against Bernstein's assertion that 50 stocks just doesn't cut it (unquantified). http://www.efficientfrontier.com/ef/900/15st.htm

MarkCarnage

JohnWinder said:

There has been various work showing that in practice owning a relatively small number of stocks (up to 30 or at most 50) will provide c90% of diversification benefit....however that is only against that particular universe benchmark within equities.

I'd be interested to see that research, firstly to learn how one quantifies the benefit of diversification but also to see how it stacks up against Bernstein's assertion that 50 stocks just doesn't cut it (unquantified). http://www.efficientfrontier.com/ef/900/15st.htm

I mentioned diversification 'benefit' only the context of reducing standard deviation of return, which is what many have been debating on here. I agree that holding 20 or 30 stocks increases the risk of missing a significant part of the market return, as the distribution of the contribution to long term return is skewed. It could however give you a return well above the market if the stock selection is good. This is a problem of quantifying risk in terms of standard deviation of return without actually adding in what the return might be. 
I have seen a fund categorised as low risk when it was anything but....its main 'assets' were out the money put options on equity indices, these decayed slowly, so vol was low, hence deemed low risk, but you just lost your money gradually and very slowly as the market went up. 
However, my point was really that stock diversification will ultimately just give you the market return and the market risk. Combining different sources of beta, preferably with low or negative correlation is where diversification can add value in relation to minimising volatility. It does help if the diversifying asset has a positive expected long term return though.

[Deleted User]

JohnWinder said:

There has been various work showing that in practice owning a relatively small number of stocks (up to 30 or at most 50) will provide c90% of diversification benefit....however that is only against that particular universe benchmark within equities.

I'd be interested to see that research, firstly to learn how one quantifies the benefit of diversification but also to see how it stacks up against Bernstein's assertion that 50 stocks just doesn't cut it (unquantified). http://www.efficientfrontier.com/ef/900/15st.htm

It all comes down to stock pickers figuring out the optimum portfolio size and a lot of assumptions.  Managing a 50 stock portfolio is tough. The whole thing is mute now with ETFs giving you the whole world for the price of a few basis points. 

But even if its just 30 stocks, modern stock pickers would try to cover key sectors.