Panic on Silver or Gold in 2013? Collapse of the U.S. Dollar?

I gave up on being a fortune teller when it comes to PM's but this we know for sure. Israel doesn't like Iran one bit and they have been flexing their muscles quite a bit lately. Within the next couple of years Israel may start wompin' on Iran then what? I don't think I need to draw anyone a verbal map here. If Israel jumps on Iran then the US is in it up to our necks and you better believe the price of gold will once again rise. Unfortunately that's the way the cookie crumbles and they'll be plenty of crumbs for all of us collectors.

 

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I don't understand - why does year 2 only start with 500,000 instead of the original 1,000,000 consisting of 500,000 winners and 500,000 losers? Sounds to me like your are saying after the 1st race half the crowd goes home.

 

It is just to make it easy to understand ... one either loses everything and gone, or makes money and stays in the game.

after 1st year, 500K are gone, that's why 2nd year starts with this number

 

You've pointed out a problem with the coin flip analogy that is so widely used by the academics to demonstrate that people can't beat the market. Even the best of investors stay in the game after the inevitable bad year. Nobody would say that the best brain surgeons are merely lucky or the product of coin flips by many brain surgeons. But when the conversation moves to investing, people are somehow comfortable with the idea that the top investors cannot possibly possess any real and repeatable skills and that it is somehow only luck. Perhaps is it ego or pride that won't allow them to admit that some people can do what they can't. I don't know.

 

Right - that puts investors who beat the market for a long time at the height of the intellectual pyramid of mankind because they have learned the knowledge and mastered the skills no one else can.

If to compare number of people who studied brain surgery to the number of people who studied investing and find out the rate of success of an outcome I strongly believe that brain surgeons have much higher rate of success.
Because while one is the science and skills the later is just a mix of skills, gut feeling (which might attributed to luck as well) and luck.

Explanation that people were taught wrong that's why they cannot make money doesn't make sense as those billionaires studied the "science" and mastered the skills on the same ground on the planet Earth. Funny while to become successfull brain surgeon there is a clear path while to becoming successful investor -there is just ideas and thoughts what to do.

P.S. BTW one of my majors is in business and until I quit trading the market I had my return no less then 18% for the years 2004-2010, until I decided to cash out, and buy some land in several parts of the world, partner with one company in 3rd world, and start investing in physical bullion as well as going into numismatics. And I consider myself lucky to have 18% ROI (even though I spent some time researching the companies, TA and other things like timing - which is not science but common sense: buy what you know)

 

Using the coin flip analogy after 10 years of the 1,000,000 less than 1,000 would be left playing the game and after 20 years only 1 person out of the million would be playing.

 

Most billionaires and millionaires make their money from operating businesses or as executives of companies. So while they may also be stock market investors, they can't automatically be considered experts. There is a clear path to becomming a successful investor. I've mentioned some of the people to study in previous posts. Common sense, gut feeling and good luck are what many people rely on. That's why they never get to the expert level. You are probably correct that your success in investing is luck. Just because you don't possess investment skills comparable to a surgeon's skills doesn't mean that they don't exist. Investing skills are probably comparable to, say, becomming a master bridge player. There is an element of chance, but in the end the experts rise to the top.

 

here we go ... comparing investor to a master of bridge player ...
when there is an element of chance - there comes the element of luck. I didn't say that successful investors do not have skills, I wrote that if it is a science then it should be replicated. If it is not replicated - then it's not a science but something else including luck.
So, if my success in investing is luck, when, for example Buffet, turned his success from luck to skill? When did it happen during his career?

 

I agree random chance has a huge part. Think of the natural gas story I related earlier. People who did the work on this industry rightly concluded there would be massive shortages, so invested in existing supply. To them, it was horrible luck that fracturing was invented and massively increased supply. No matter how intelligent you are, you cannot avoid this kind of bad luck.

However, smart investors position themselves to maximize profits from good luck, and minimize losses from bad luck. They concentrate on things either not in the news, or having bad news about it. They diversify risks. They think about future scenarios and how their overall portfolio would fare in such scenarios. The real danger is getting greedy. You study a stock, 100% believe you are right, and make you investment. A good investor, even if they are positive they are right, will only commit a portion of their portfolio to a "sure bet". "Sure bets" do not exist in life. This is the major reason, even if a person REALLY thinks PM will skyrocket, that I recommend only putting 10-15% in them.

I think coin flip analogies are ok to help people visualize the basic issue, but are not real world paradigms.

 

medoraman, no one trying to create a paradigms - too difficult and requires consent of all the parties . You are right that it takes some knowledge about where to invest and how - this is what people can learn from smart investors while going to school, and they actually do it . But luck comes in timing of those investments. And these timing makes it more of a luck. (Though I believe that Buffet's last years have nothing to do with luck - he was just there with money bag and pushed for the deals he wanted)


As of diversification you are right, but as of percentage ... like Munger, Buffet's pal says, 3 stocks are more than enough in order to diversify. PM holds 8% of my portfolio and I tend to increase it steadily but not at once.

Coin flip analogy was used in order to simplify as much as possible. For sure real world is much more complex and there are too many factors that affect each other and may be what I attribute to luck is just effect of something I don't know yet.

 

I would be disappointed if Charlie said that. I like the man a lot, (only met him once in person), but statistically it takes at least 15-18 perfectly chosen stocks to eliminate alpha, and generally about 30 to eliminate alpha and not have to choose loser stocks to do so.

Did you mean 30 versus 3?

Btw Kasia my apologies for this finance geek talk hijacking your thread. My prediction for the dollar is steady as she goes for 2013, weakness if a certain party wins, maybe a little strength if a different party wins. PM will depend on Europe and if they stock stealing money from bond holders. If they get their house in order, I predict PM down.

 

Well, in one of the recent interviews I read that he is for having 3 good companies that diminishes the risk.
For sure it was not 30 stocks. May be editor made a mistake, which I doubt.

As of alpha - you are right.

 

There is a problem with definitions here. Chance is not the same thing as luck. Chance relates to probability. Luck is flipping 10 heads in a row. Is tracking the path of a hurricane pure luck just because there is an element of chance? If so, why not just spin a wheel to determine direction? Great investors replicate their results, sometimes for decades. When you consider that each year may involve numerous buy and sell decisions, it becomes difficult to attribute it all to luck. And Buffett explains why this has nothing to do with the mathematics of coin flipping if you bother to read his explanation. I suspect that Buffett was a highly skilled investor from the time he met Ben Graham to the point when Berkshire Hathaway became so huge that size became a drag on performance. It would take Yogi Berra to discount his performance - "Buffett has made so much money in the market that he isn't a great investor anymore."

 

3 is the correct number. Munger has been saying this for a very long time. He doesn't equate volitility to risk.

 

I would agree 3 will greatly minimize risk, its a steep downward slope that tails off around 8 and you don't gain a ton after that, but mathematically it persists until about 30.

While I have huge problems with the calculation of Alpha and the assumption of volatility = risk, (as did the person who invented the notion, he wanted to use half volatility calcs but did not have the ability to crunch those numbers at the time), I was simply thinking 3 was so close to the classic 30 it may have been a typo. I actually have a series of lecture slides I used to present detailing the failure of beta calcs if someone was really bored.

Actually, if someone wants to get really geeky, it is this very notion of where the risk relating to volatility is perceived on an investor by investor basis that leads to dynamic pricing in the market. Ok, I guess I am straying off the reservation into total financial geekdom land now....

 

medoraman, are you teaching finance or investments?
any link for those slides available?

 

I taught MBA finance and econ. No links but I can see where the slide packet is for the Investment Finance class. I loved destroying everyone's reliance on alpha and beta calculation assumptions by showing them the inventor of the idea hated calculating it that way, he was forced to by lack of computers. Bonds are mathematical with analysis of relative risk to "safe" bonds, equity valuations in the end, even if everyone agrees with the outlook, are a very personal valuation choice due to the nature of the returns, (i.e. everyone has a different level of which a return possibility is "bad" versus "acceptable")

Even knowing that, does it make you a better stock or investment picker? Heck no.

 

I'd listen to that lecture ))

Even though I am out of all of this I still keep interest on risk management and investment as well as history of great depression and great depression as well.

 

Amazingly, I was listening to some investment pundant on TV earlier this week while getting ready for work. He actually said that no person should ever buy individual stocks for investment because it isn't possible for anyone to know as much as the professionals. I taught my kids when they were in high school to never believe anyone who told them investing was too difficult, and set up Scottrade accounts for both of them with the money they earned from their jobs. We had and still have a lot of fun discussing investments and making money.

 

While not saying its 100% accurate, I would agree with that statement in regards to day trading. I know people have made money, but it would most likely be from trend following. Short term you have tons of people and computers crunching numbers. Hard to beat the house on those. Long term is where an individual investor has a chance to shine. Mr. Buffett has said his biggest asset is that he does not live in NYC.

For a pundit to say never buy invidual stocks, well that is just condescending, self serving, and wrong. I wonder if he is a mutual fund manager. Nearly 80% of them mathematically are proven to never have superior returns after you calculate their costs and the tax bill from their churning.