The DIY Economist

What am I?

• A technical trader with a horrible track record
• A student of Modern Portfolio Theory
• A failed "family fund" manager
• A retirement planner
• A psycologist?
• An investor. No, a trader. No, an investor. No...

Update:Here are my views re. the debate between fundamental, technical, and efficient markets analysis summed up concisely so that you can start arguing with me. If you do not understand what I'm talking about, please conduct independent research before taking up a position. :)

This section has been updated since the Crash of 2008 (as I call it).

• The efficient markets hypothesis is an approximation - a perfectly adequate approximation, but an approximation nonetheless. Behavioral analysis is a better approximation but does not make any concrete predictions (in terms of return distribution).
• In general, markets are efficient seeking. In other words, the presence of active investors is what enables the market to be approximately efficient.
• Any form of stock market analysis - technical or fundamental deals with information sets that are by their own nature incomplete, asymmmetric, and dynamic. In the long run, the stock market is a positive sum game. The futures and options markets are approximately zero sum, as they deal with contracts and obligations. Despite this, because of the variability of returns, many fail to achieve the expected positive return in the markets.
• I am skeptical of mean reversion theory. Markets do revert to their means, but if the mean is constantly changing, that causes long-run portfolio values to in fact have large fluctuations which is counter to mean reversion theory. Bayesian statistics of market returns returns show that long-run returns are actually MORE volatile than short-term returns, contrary to mean reversion theory.
• The large majority of long-run return variability is contributed by a) asset allocation and b) inter-security correlation, with security selection exempt the above factors playing only a minor part
• Dividends > Capital gains in the long run.
• Total returns should take the following into account:
  • Dividends, and taxes on them
  • Borrowing costs (for margin trading)
  • Commissions and spreads
  • Applicable taxes
  • Performance fees, expense ratios, management fees, etc fees
• Total returns should not take the following into account:
• Monetary cost of time
• Equipment, software, etc costs
• Opportunity costs of investing/trading (equivalent with time)
• Generally, academics have a smaller information set Θt compared to Wall Street firms. This magnitude may or may not be significant.

DISCLAIMER: I'm not a financial advisor and all that, so don't start showing up in lawyer costumes just because I missed a call. Er...