INVESTING amusement average humans myths & traps finally notes & references
playing with fire
It wasn’t quite “Burning Man,” but boy, did we blow some things up! Unfortunately, I also knew several other members who were killed, lost fingers or of course their hearing. (I am in the latter category.) In 2002, after 14 years of being a “pyrotechnic artist” and attending the annual PGI conventions, I quit while I was ahead.
“managed” ETFs
There are thousands of sector and specialty ETFs that use an index – where the “index” was made up by the firm only for the purpose of selling the product. They are still “managed” funds. Their odds are still poor.
efficient market hypothesis
The EMH was invented by Eugene Fama. He never imagined that his “efficient” market would be 100% efficient all the time. That would be impossible, as it takes time for stock prices to respond to new information. The efficient hypothesis, however, doesn’t give a strict definition of how much time prices need to revert to fair value. Moreover, under an efficient market, random events are entirely acceptable, but will always be ironed out as prices revert to the norm.
Example of the Efficient Market Hypothesis: “A financial economist, and passionate defender of the EMH, was walking down the street with a friend. The friend stops and says, “Look, there is a $20 bill on the ground.”
The economist turns and says, “Boy, this must be our lucky day! Better pick that up quick because the market is so efficient it won’t be there for long. Finding a $20 bill lying around happens so infrequently that it would be foolish to spend our time searching for more of them. Certainly, after assigning a value to the time spent in the effort, an ‘investment’ in trying to find money lying on the street just waiting to be picked up would be a poor one. I am certainly not aware of anyone who has achieved their wealth by ‘mining’ beaches with metal detectors.”
When he had finished, they both looked down and the $20 bill was gone!
Commodities
“It’s impossible to know what the intrinsic value of commodities should be unless you have a crystal ball that peers into global demand for oil, lumber, and agricultural products. No such orb exists, so that reduces commodities to speculative instruments, not investments.” – Charlie Munger/Morningstar
10 Things to do instead of watching market gyrations or following “news:”
Make a pot of Texas chili
Take a ride on your bicycle
Go to a flea market
Take the family out to eat
Detail your car
Go to a fitness center
Teach your grandchildren how to make paper airplanes
Whittle
Write a book
Fly a kite