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Comments on: Tarzan update 1 http://hornes.org/2007/09/tarzan-update-1/ Tue, 22 Jul 2014 20:14:12 +0000 hourly 1 https://wordpress.org/?v=4.9.1 By: Rusty Burlingame http://hornes.org/2007/09/tarzan-update-1/#comment-1418 Sat, 29 Sep 2007 20:50:19 +0000 http://www.hornes.org/2007/09/tarzan-update-1/#comment-1418 Hi Jay –
The Vanguard funds have worked out well for me. Besides capturing the market return, they’ve had the other benefits of requiring absolutely none of my time, and I sleep a little better at night.
Regarding efficient markets, I think it depends on what you’re investing in. Are you looking at very small companies with a relatively small number of transactions? I might be convinced. If you’re trading GE and Microsoft, or more generally stocks in the S&P 500, I’m less inclined to agree. With millions of shares traded per day, that’s an efficient market. The people trading GE (as a whole) know a lot more about GE than I do.
If you actually generate the returns you’re expecting trading stocks in the S&P 500, that is an amazing feat.
Two other comments, if you will. I think it’s one thing to be able to say, “We’re in a tech bubble” or “These tulips cost way too much.” But it’s really hard to invest against a bubble. Greenspan was warning of irrational exuberance a couple of years before the bubble popped. Shorting too early would have cost quite a lot, not to mention passing up the rest of the ride up.
Besides that, I can’t think of how you’d try to exploit popularity in the 1-5 day time frame. That’s mindblowing to me, and I’d love to hear more about that. Are you researching these companies, or is your selection based on some kind of technical analysis or trend detection? I’m intensely curious.
Finally, the big question for me. Why aren’t others discovering this, and competing away the returns? Why isn’t some mutual fund company advertising a fund that returned 70% on average over the past 6 years?
Greatly enjoying this,
Rusty

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By: Jay http://hornes.org/2007/09/tarzan-update-1/#comment-1417 Thu, 27 Sep 2007 14:48:10 +0000 http://www.hornes.org/2007/09/tarzan-update-1/#comment-1417 Hey Rusty! I think I may have mentioned this before on the blog, but I think Vanguard funds are a great idea. The rise of ETFs also looks like a good approach, though I haven’t looked into them much.

I have Random Walk but haven’t gotten to it yet (working through the Harry Potter books right now). However, I do not believe efficient market theories give a good account of the short term (I am not opinionated on the long term as I haven’t investigated it). Issues of liquidity as the big guys enter/exit an equity, overall investor psychology, etc. do not make for an efficient market in the 1 to 5 day time frame. Take a look at “Extraordinary Popular Delusions and the Madness of Crowds” (originally published in 1841 but I believe very applicable today) and ask yourself if a Random Walk theory explains these sorts of events. I believe such madness takes place every day in the stock market on individual equities in the very short term.

Am I taking extraordinary risk? No (or, more accurately, I don’t believe so after a couple thousand hours of working on it). If investing in the S&P 500 is an ordinary risk (which in the past 10 years includes a drawdown on the order of 50%), I am taking very ordinary risk. Perhaps it is extraordinary risk, but on the favorable side. I would never trade a system that showed in 50% drawdown in the past 10 years.

I’ve had several questions on my actual approach, so I’ll try to post something on that in the coming days.

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By: Rusty Burlingame http://hornes.org/2007/09/tarzan-update-1/#comment-1416 Thu, 27 Sep 2007 04:15:37 +0000 http://www.hornes.org/2007/09/tarzan-update-1/#comment-1416 After being walloped by the Tech Bubble, I read “A Random Walk Down Wall Street” and we’ve been plowing our savings into Vanguard funds ever since.
I’m feeling a bit of cognitive dissonance. You’re a very wise man, so I’m interested in how you explain this. Are you taking extraordinary risk? Betting that things will return to the mean, like LTCM? Have you ever read Random Walk, and what do you make of that?
Rusty

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