Hot Women- Hot Stocks Within the last week, Charles alerted me to this article, When Hot Women Pick Hot Stocks. While the article mentions former celebrities turned businessmen/stock jocks, the emphasis is on the former Playboy Playmates who, on average, are returning three times as much as money as an indentical amount invested into the S&P 500.
The fuel behind Mr. Gross' fire is the effecient market hypothesis, a theory that states that all available information is instantly reflected in the price of a stock (its fair value), and is the financial equivalent of group intelligence. An elementary analogy is this- If I was to place a random number of jellybeans into a jar and had people guess, the average of all the guesses would eventually approach the correct number (assuming educated guessers) as the number of guessers increased. Basically, each guess on the high or low side would be tempered by an equally inaccurate guess on the opposite side, while guesses close to the number would start to weight the average. While the purpose of this post is not to debunk the EMH (alright, I'll do it twice- Warren Buffett, and the Tech Bubble Collapse), understanding it is crucial to understand the relation between his two points. Basically, in an efficient market, professionals have no edge since all stocks trade at their fair value, and future movement is unpredicatable. I don't want to get too sidetracked, so I'll cut the EMH off there (unless the masses clamor for another post on it) and move on to the Bunny Money.
The fundamental error that Mr. Gross makes is setting up an unreasonable test, most likely because he doesn't understand diversification (read my previous post for a more complete look at where I'm going). By comparing five celebrity picks to the market as a whole, he substantially tilts the odds in favor of the celebrity. Example- Let's say the market moves perfectly sideways for a year, which means basically one stock advances in value equal to the decrease in value of another. By taking the market as a whole (which is what the S&P 500 and mutual funds do), a portfolio is bound to include as many gainers as losers, guaranteeing a return of 0%. Want to do better? Choose less stocks! In an ideal (1 gain =1 loss) static market, choosing 100 stocks instead of 500 gives you 2.58* 10^122 times the chance at coming out ahead. Choose just ten stocks? Almost a ten percent chance of beating the averages! Just one? 50 freaking percent! Can professional knowledge beat a game that rigged? Could you win at blackjack if you had to hit everytime you had less than 20? I doubt it.
Perhaps a better question is to ask- Can Johnny Capitalist beat the average market return/money manager/Playboy bunny? The answer is yes. Here is how to beat all three-
The average long-term market return of 12%- First, understand the concept of value investing. Start with a decent accounting background, then read books by Benjamin Graham, Warren Buffett, Peter Lynch, etc and throw my post on diversification in there somewhere (redundant, but crucial!)... this is my strategy. Does it work? Since October, I've turned $5000 into $6600, for a return of 32%...
The Money Manager- Same as number one. The difference between Johnny Capitalist and Billy Money Manager is this- as the amount of money in the portfolio grows, the harder it is to maintain high returns. Example- I can place all my money on an undervalued equity without changing the asking price... can Warren Buffett do that with the $200 billion Berkshire Hathaway controls? Not so much...
The Playboy Bunny- On the buttocks... with an open hand.
Officially safe-for-work!
The author, Daniel Gross, uses anecdotal evidence such as "Amy McCarthy "was up more than 20%" through Thursday, Jan. 19, "beating every single one of the more than 6,000 mutual funds tracked by Morningstar," to venture that A) Professional Money Managers have no effective edge and B) the market is becoming more efficient. These points are inter-related, so I'll hit them both at once, before explaining the 'Boobs over Brains" phenomenon.The fuel behind Mr. Gross' fire is the effecient market hypothesis, a theory that states that all available information is instantly reflected in the price of a stock (its fair value), and is the financial equivalent of group intelligence. An elementary analogy is this- If I was to place a random number of jellybeans into a jar and had people guess, the average of all the guesses would eventually approach the correct number (assuming educated guessers) as the number of guessers increased. Basically, each guess on the high or low side would be tempered by an equally inaccurate guess on the opposite side, while guesses close to the number would start to weight the average. While the purpose of this post is not to debunk the EMH (alright, I'll do it twice- Warren Buffett, and the Tech Bubble Collapse), understanding it is crucial to understand the relation between his two points. Basically, in an efficient market, professionals have no edge since all stocks trade at their fair value, and future movement is unpredicatable. I don't want to get too sidetracked, so I'll cut the EMH off there (unless the masses clamor for another post on it) and move on to the Bunny Money.
The fundamental error that Mr. Gross makes is setting up an unreasonable test, most likely because he doesn't understand diversification (read my previous post for a more complete look at where I'm going). By comparing five celebrity picks to the market as a whole, he substantially tilts the odds in favor of the celebrity. Example- Let's say the market moves perfectly sideways for a year, which means basically one stock advances in value equal to the decrease in value of another. By taking the market as a whole (which is what the S&P 500 and mutual funds do), a portfolio is bound to include as many gainers as losers, guaranteeing a return of 0%. Want to do better? Choose less stocks! In an ideal (1 gain =1 loss) static market, choosing 100 stocks instead of 500 gives you 2.58* 10^122 times the chance at coming out ahead. Choose just ten stocks? Almost a ten percent chance of beating the averages! Just one? 50 freaking percent! Can professional knowledge beat a game that rigged? Could you win at blackjack if you had to hit everytime you had less than 20? I doubt it.
Perhaps a better question is to ask- Can Johnny Capitalist beat the average market return/money manager/Playboy bunny? The answer is yes. Here is how to beat all three-
The average long-term market return of 12%- First, understand the concept of value investing. Start with a decent accounting background, then read books by Benjamin Graham, Warren Buffett, Peter Lynch, etc and throw my post on diversification in there somewhere (redundant, but crucial!)... this is my strategy. Does it work? Since October, I've turned $5000 into $6600, for a return of 32%...
The Money Manager- Same as number one. The difference between Johnny Capitalist and Billy Money Manager is this- as the amount of money in the portfolio grows, the harder it is to maintain high returns. Example- I can place all my money on an undervalued equity without changing the asking price... can Warren Buffett do that with the $200 billion Berkshire Hathaway controls? Not so much...
The Playboy Bunny- On the buttocks... with an open hand.
posted by Justin at 9:56 PM 
6 Comments:
nice. I either want to read those books or give you all of my money right now.
Truly you have a dizzing intellect. Bravo fair sir. The thing that you didn't take into account is the possibility of being wrong. For example, yes you do have a better chance of beating the odds when you pick fewer stocks, but you also run the risk of getting your head cleaved-in-twain and ending up like Donny Darko with a plane engine on your head. The other miscalculation is that the stock market (according to new polls) is returning closer to 10% over the long hall. The 12% average applies only to small cap stocks...and as we all know, in order to have long term success with stability, you have to round out all 9 sectors of the Morningstar Rating sheet...you need some small cap value, blend, and growth as well as mid-cap, and large cap value, blend, and growth. Of course you can speculate and use hedge funds but you run an increased risk of getting burned by international risk (ex: exchange rates, ect.). For long term-lower risk, it is best to take the stick-to-it approach. (For a more risky approach, look at funds like Emerald Banking and Finance...ticker hssax). That fund came out of no where and has had great returns over the last couple years. It all depends on your risk tolerance. But, I have no doubt that you will be very wealthy someday. Just remember the campfires at my house...and who helped you out.
By the way, I also found it hard to go any further into your arguement after looking at that picture. It is very distracting. Perhaps you should have saved it for grand finish...
Drawing a bra on that girl is the gayest thing you've ever done. Even gayer than that time you crashed in to Big Boy, because you got distracted by the Big Boy's package.
Gmack-
I'm going to disagree. It is my contention that you can realize above average returns with a sufficient margin of safety by limiting stock ownership to companies that meet a very high standard (ex- great ROE, low debt, cash cow, good management, etc...). For more clarification, check out my post on diversification (there is a link in the original post) or read up on Warren Buffett. In a zero-sum game, I'd rather take my chances putting most of my money in when I'm dealt A-A (Osi at $35, Urbn at $23, etc...) than spread it out equally every time I get A-x.
I'm not discounting the fact that I may make a mistake from time to time, but for someone who keeps a close eye and can jettison underperforming equities before they sink the ship (somewhere around a 6-7% loss) owning more companies instead of less is bad business, especially with the added extra commission cost.
Also, the three year return on an investment in Hssax is 22-23%. I've returned 30% in less than 5 months taking two substantial beats, selling out prematurely in multiple rallies, and having a lack of cash with which to cost-average a few equities that underperformed in the short-term. Once I get a positive cash flow personally and some more experience, I think I can boost that return without much risk.
Charles- not one comment? Even after I wrote the post for you? and fixed the picture so you can view my blog at work?
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