Is passive investing going to destroy the stock market? There has been much chatter on the internet lately about the perils of passive investing and its ability to ultimately take down the stock market. Michael Burry, of the big short fame, recently stated he believed passive investing was a bubble, and ultimately would cause the…
Category: Philosophy
A Grand Unified Theory of Market Behavior
In 2013 the Nobel Prize committee gave the economics prize to two academics with fundamentally opposite beliefs.1 On one side they gave Eugene Fama the award for his work developing and expanding the efficient market theory. And on the other side, Robert Shiller won the award for effectively disproving the efficient market theory. If you…
On a Long Enough Timeline, the Survival Rate for Every Investment Drops to Zero.
All investments die. Given enough time, it’s clearly true. Eighty seven percent of Fortune 500 companies from 1955 are no longer around. Buying a portfolio of the 500 largest companies in 1955 and holding them until now would have been a poor idea. Kind of makes you wonder why “buy and hold” is such a…
How to Balance a Portfolio
Few people balance a portfolio properly. Most have no idea even where to start. In this post, I’m going to show you the proper method to balance a portfolio for the long term. To do this we will analyze the simplest portfolio possible: a risky asset (i.e, stocks) and a risk free asset (i.e cash…
When You Eat Matters More Than What You Eat.
Nassim Taleb has an interesting story from Antifragile that correlates uniquely to investing strategies. The passage is as follows: “And one blatant denial of convexity bias is the theory about the benefits of the so-called Cretan (or Mediterranean) diet that triggered a change in the eating habits of the U.S enlightened class, away from steak…
Why Market Index Investing Works
Why does market index investing work so well? Most say it’s because you can’t beat the market over the long run, so why try. That nonsense. Index investing works by automatically “rebalancing” multiple assets, and by rebalancing more frequently, you can easily beat the market. Let’s investigate further. The Components I’m going to use the…
The Most Misunderstood Force in the Universe
I once believed Einstein called compound interest the most misunderstood concept in the world. He didn’t. Google claims he actually said, “compound interest is the most powerful force in the universe”.1 Well, I’m going to build on Einstein’s supposed quote and state that: “Random compound interest is the most misunderstood force in the universe.” The…
A Random Market?
I received a copy of Burton Malkiel’s famous book “A Random Walk Down Wall Street” 15 years ago. The book lays out the case for why stock market investment returns are random and passive investing is preferred over trying to beat the market. It strongly supports the efficient market hypothesis. At least this is why…
Investing Games
Ed Thorpe invented the strategy to beat blackjack, a method known today as “card counting”. I first learned of Ed in college when my friends and I spent one summer at the local casinos trying to copy his card counting techniques (I wasn’t very successful). A few months ago, while researching the viability of my…