Share good ideas and conversation.   Login, Join Us, or Take a Tour!
comment by blackbootz
blackbootz  ·  329 days ago  ·  link  ·    ·  parent  ·  post: What is a post you have made that didn't get the discussion you were hoping for?

I read that curve-fitting parable and thought I commented. I was just visiting some family out of state. Most of them portly hicks, but we love (and tolerate) them. My uncle, upon learning that I'm majoring in economics, asked me for stock picks. And I was like, are you fucking kidding me?

Makes me believe that the efficient market hypothesis is rather weak.




flagamuffin  ·  327 days ago  ·  link  ·  

a book about the efficient market hypothesis you may enjoy:

https://equilibriabook.com (free)

a book about the failure of financial models you may enjoy: https://www.amazon.com/Misbehavior-Markets-Fractal-Financial-Turbulence/dp/0465043577 (not free)

kleinbl00  ·  329 days ago  ·  link  ·  

    Makes me believe that the efficient market hypothesis is rather weak.

LOL if it doesn't work you just need a broader timescale.

    The efficient market hypothesis (EMH) is an investment theory that states it is impossible generally tricky to "beat the market" in the long run because stock market efficiency causes existing share prices to always eventually incorporate and reflect all relevant information.

Ask an arbitrageur how they feel about the efficient market hypothesis.

blackbootz  ·  329 days ago  ·  link  ·  

Actually, I confused the firm foundation investing philosophy with the EMH. It's the firm foundation philosophy that comes apart for me when I see there's nothing in the way of my uncle picking more or less random stocks.

kleinbl00  ·  329 days ago  ·  link  ·  

Firm foundation theory isn't really a theory. There's actual math.

Let's say you've got $40. We're going to buy a 6-year CD at 2.25%. After 6 years you've got $40.91.

Let's say instead that you've got a $40 share of GM. It varies, obviously, but for the sake of easy math let's go with that number. GM has paid a 38 cent dividend the past four quarters; at the end of six years (assuming GM stock hasn't gone up) you've got $49.12. The "intrinsic value" of GM stock over 6 years in this case would be $48.21.

Obviously you can get a lot more mathful but basically, the "fundamental value" of an equity is what it earns you above and beyond a "risk-free" investment. Thing is, "firm foundation theory" tends to reward stocks that, you know, actually fucking pay you so it's seriously out of favor in this land of 350:1 P/E ratios and negative goddamn dividends. The "fundamental value" of Tesla stock is well below what it costs you.

But I fuckin' own some.

blackbootz  ·  328 days ago  ·  link  ·  

I don’t quite know how to phrase this, but if GM stock pays such a “risk-less” premium, what’s the mechanism by which the GM stock starts to become less valuable? If this information is publicly available, why isn’t everyone buying such dividend paying stocks? Is it that the influx would drive the price up and then the dividend would represent a smaller fraction of the capital used to invest, eventually yielding a return less than the prevailing interest rate?

kleinbl00  ·  328 days ago  ·  link  ·  

So go here. Look at the chart for "max."

https://finance.yahoo.com/quote/GM/

Since 2010, GM has bounced around $40. It's gone as low as $20 (which is whacky) and as high as $44 but it's at like $40. It's been about $40 for longer than that, too - something not shown here is in the recession when GM took money from the government, they had to kill their old stock and issue new stock so the historic record is shorter than it should be.

Now go here and do the same.

https://finance.yahoo.com/quote/TSLA?p=TSLA

Over the same period of time, Tesla has gone from $20 to $360. So while you've been pulling in 30 cents a share every three months, your buddy who bought Tesla stock, negative dividends and all, has increased his holdings by a factor of 18.

So what's the intrinsic value of Tesla? GM has been making cars for a hundred years. They have a good idea how to go about it. Nobody thinks they become 18 times as valuable over the past six years because of their increasing expertise. Rather, they think that they can sell it for more than they bought it.

Value investing is well out of favor at the moment. Prices are set by what you can sell it for and what you can buy it for. If fewer people want to buy it, you have to sell it for less.