I can try. Firstly, worth mentioning the quote is a bit facetious, witty, jocose...Jolly old Warren Buffett can often be a bit playful and sort of sarcastic when talking about investing in public but it seems few people pick up on it.
Also maybe worth mentioning the quote is based on a well known "2 Rules" phrase format. For example:
“There are 2 rules of life. Rule number 1 is ‘Never quit.’ And rule number 2 is ‘Don’t forget rule number 1.’” - Duke Ellington
and
"There are 2 rules for success. Rule 1: Never tell everything you know. Rule 2:.. ;)"
OK with that said, I wouldn't overthink the quote. Obviously you can't really guarantee you will "never lose money" and so it's not really a rule and even Buffett loses money sometimes.
If I had to guess what he means: I would say use the quote as fun/serious reminder to think about risk ahead of reward and remember concepts like margin of safety that help protect you from loses even if a stock doesn't go up like you expect and hope.
Actually it's not facetious at all. The point comes from his mentor Benjamin Graham, which relates to the difficulty in recouping investment capital following a loss (ie: making your money back after you break the rule).
eg: You have $100k in your investment account. You have a bad year and lose 50% of your money, leaving you with $50k. You now need to have a 100% return in the next year to just make your money back, even though you only had a 50% loss. Seth Klarman, another highly successful value investor like Buffett is also a proponent of this way of thinking.
I'm being totally serious here as I'd love to learn where my writing and communication is being unclear:
May I ask, did you read my full comment?
And do you know the definition of facetious?
I'm not trying to be rude, I just don't understand why you wrote what you wrote.
For example: when you mention "his mentor Ben Graham" did you think I had not heard of Ben Graham or that I didn't know he was Buffett's mentor so you added that too?
Granted it's possible I hadn't. Or maybe you wrote it as a courtesy in case other readers hadn't heard of him? I ask because you saw in my first comment I am quoting Buffett. Then in my reply to waqf I write about Buffett again, his mannerisms and his track record...So maybe I know at least a little bit about the guy. Maybe?
But then at the end of my comment I not only write the concept of "margin of safety", I put it in italics to emphasize it. How did you see that and still wrote what you wrote?
How can someone know the concept of Margin Of Safety and not know Graham? Margin of Safety comes from Ben Graham. "Margin of Safety" is the Title of Chapter 20 of his book The Intelligent Investor; where Graham explains what it is in detail. Plus he just talked about MoS all the time and called it the "central concept of investment". MoS is Ben Graham.
Also heads up. Margin of Safety is also the title of Seth Klarman's whole book. Have you heard about Seth Klarman or his book Margin of Safety? After reading your comment in full I am guessing you may have. If you haven't, it's worth looking up and has an interesting story attached (at one point the book was being stolen from libraries and going for thousands of dollars on eBay. Madness!). Also if you are into investing of any kind, not just value investing, I recommend reading the book. Very good.
Anyway sorry if this is weird or rude or has gotten too long. I'd really love to understand where I am not writing clear enough. Thanks.
Also as for "facetious". Seriously look up the word. If this is a real rule how do you follow "never lose money"? I'll wait.
In the meantime a rule is a prescribed guide for conduct or action. Someone can lose money from forces out of their control. It's like telling someone "Rule 1 of driving: Never get into a car accident". That's not a rule. You can't follow that rule. Someone could hit you even when you are driving perfectly. Rule broken. A real rule would say something like "always drive the speed limit" or "Never text and drive". Those are rules you can follow or break. I'll let you figure out the real rule here for Buffett (hint look in to Chapter 20 of Graham).
Lastly, your example about how if you lose 50% you now need to earn 100% on that to get back to where you where you started is something I see brought up often. It is sad and it is fucking stupid how it gets talked about. This is not some investment concept from one of the greatest investment thinkers in history nor his mentee. Ha, if only. What you are describing is just a basic math concept. Most people learn this in elementary school I believe. Kinda shocking sometimes how proud and confident people who are new to investing become of themselves when they realize they understand how percentages work and percentages work normal and as expected when talking about the monetary value of something changing too...
Does "X times 0.95 times 1.05" = X"? Of course not.
Replace X with your $100k portfolio, 0.95 is -5%, then 1.05 is +5%, does mathematics still work? Still not equal? Obviously.
I know people are trying to help others when talking about all this stuff. I am trying too. And Caveat emptor and all that. Don't believe everything you read on the internet. But it's a bit frustrating at times to watch and sucks when people lose their hard earned money when they try investing based on bad or misleading information they received; especially when good information that is written well is out there and free to read online or at a library. On the other hand I'm sure there are more than a few folks who are very happy when idiots try investing without doing their research first so they can take the other sides of their trades...Margin of Safety is so important and this is a real investment concept and it actually needs to be learned, but be warned it will take more than a minute to understand it. Passive ETF much less work.
You're all good - I've never actually seen such a long response to a short thread before! And indeed, I have read Klarman's book a number of times - he talks about avoiding capital loss and the difficulty in recovering from bad choices quite a lot in the book. Best of luck with your investing!
> "There are 2 rules for success. Rule 1: Never tell everything you know. Rule 2:.. ;)"
In regards to this quote, this is why hedge funds are so protective of their "secret sauce". At a fund I worked for, I saw an employee sued in federal court for intellectual property theft 4 hours before he was terminated. Criminal charges followed a few months later. (Don't email source of a quantitative trading system to your personal email, lest you want to be jailed & unemployed and untouchable by the rest of the industry).
Besides the obvious of "Don't lose money because that's bad", he's referring to how losses can quickly wipe returns.
If you're shooting for 10% per year and you lose 5%, you need to then get a gain of more than 5% to get even again, pushing you to take worse risks.
Hence, by simply focusing on a strategy of "Not losing money" you can come out ahead.
This was also the original Hedge strategy where you short some stuff and buy some stuff so you can get some of the gains without participating in all the losses. For instance, if you can capture 70% of market ups while only taking 70% of the downs, you'll beat the market.
Literally, plot daily gains vs daily losses of S&P. If you only take 70% of the losses but get 70% of the gains (so multiply each win/loss % element in the series by 0.7, and apply the new sequence to a portfolio balance), you'll end up doing better than the market.
How about this, below is the link to the data (S&P 500 daily returns), whoever is right will donate money to an education-related charity at 70% of the dollar amount donated by whoever is wrong. So for example if you are correct, I will donate $100 and you donate $70, and vice versa.
Happy to chat about it more if you want. But just intuitively and quickly everyone should be able to see why one can't say an equal 70% up/down capture ratio will just beat the market...
1. let's agree the market can do whatever the hell it wants. Up, down, whatever.
2. Imagine a market is down -5% and then up 10%. According to your story and capture ratios, when this happens your portfolio is down only -3.5% and then up 7%. Right? 70% of the down and 70% of the up?
I think you will find in just this example the market beats your portfolio by more than 1% here. This is just a simple example and I am being generous. When you look at real data you will not only find a similar pattern, but your portfolio gets absolutely crushed by the market.
Maybe an even quicker intuitive answer: If a 70% up/down capture ratio portfolio will beat the market, why isn't this a huge thing and everyone sells/changes their regular full market S&P 500 ETFs to do that?
Your data only goes back 10 years. Mathematically, whether 70% up/down works out to beat the market depends on the period we're talking about.
> I think you will find in just this example the market beats your portfolio by more than 1% here. This is just a simple example and I am being generous. When you look at real data you will not only find a similar pattern, but your portfolio gets absolutely crushed by the market.
Here's a python script that generates random numbers to simulate the stock market. Each time you run it, you'll get a different result: http://pastebin.com/UNtDPjxd This is basically your "simple example" run many times side by side. Sometimes a hedged strategy works better; sometimes not.
The place I got this idea in the first place was a book I read in college about the history of hedging as a strategy. It noted one of the earlier demonstrations of why it's a good strategy was when a fund showed that participating in 70% of the gains/70% of the losses of the S&P beat the S&P. But which years? This matters. Unfortunately, I can't find the book anywhere. IIRC, I think we'd be talking about a stretch covering the 40s, 50s, 60s.
This is similar to how Milken pitched the junk bond -- it was originally based on a paper that showed a balanced portfolio of low rated bonds performs better than a balanced portfolio of high rated bonds (this is explained in Den Of Thieves). This was true back then because low credit ratings were so heavily discounted by market conditions (mainly, nobody wanted to buy them).
> why isn't this a huge thing and everyone sells/changes their regular full market S&P 500 ETFs to do that?
For the same reason that no one is pushing a diversified portfolio of junk bonds anymore; what worked in the past doesn't necessarily work in the future.
Thanks. For a second I thought I was chatting with someone you who knew what they were talking out. I appreciate you confirming you were basing your answer of something you read 10 years ago in a book, a book you can no longer find. The rest of your comment shows you didn't even study the basics of finance and economics either.
Dave, Hacker News has some of the smartest commentary I found on a News site. Questions on here regularly have people answering them where that person has experience, worked in that field professionally and have studied those topics in school and have degrees in them.
I realize this is the internet, expectations are low. People troll. Even if you wanted to help, why not wait a minute before answering to see if someone more informed or more experienced, than a book read 10 years ago will have answer. It's more a courtesy to the person asking as they get a better answer, and it stops you from looking like an idiot. Win-win.
Just wanted to add that Dave's notion is not quite as absurd as you make it out to be.
As you might know, daily rebalancing leveraged ETFs (say, 2x or 3x) are basically a bad idea for long-term investments, because they are (simplistically) short vol. So, they might outperform the (non-leveraged) index/ETF if vol is low and total return over the period is high. But typically, with normal or high vol, or over long periods, they underperform non-leveraged.
By analogy, a less-than fully invested ETF/trading strategy that's basically "0.7x" leveraged will beat the (non-leveraged) index/ETF in certain trading regimes (where total return over a period is negative or modestly positive, while vol relatively high).
I interpret it as if you are only correct half of the time, you can make money by letting your winning positions run and cutting your losses. Many winning traders talk about limiting your losses and risk management as being key.
Anyway, it's a bit too harsh to downvote. He's just answering a question, and correctly says if you lose 5%, you need to make back more than 5% to get back to even.
That's really interesting that they publish that information.
The top of the list is http://news.bbc.co.uk/1/hi/magazine/6965657.stm; presumably any of the people mentioned, including in the comments, might be responsible for the right-to-be-forgotten request to Google.
Now if you Google any of those 3 students, https://www.google.co.uk/search?q=site%3Abbc.co.uk+"nikki+ho... then that page, that BBC say is hidden in Google SERPs, appears?? Did someone mess up. Google does say "Some results may have been removed under data protection law in Europe.", however.
Similarly, this page http://news.bbc.co.uk/1/hi/england/wiltshire/4747988.stm is listed on that BBC page, but searching the main name and "BBC" brings up that same page as the first result; again the "Some results may have been removed [...]" text is given.
I'm all for the freedom of speech in the American sense of the phrase (probably in the extreme considering many of the comments here). However, I don't think that means we should always exercise that right; this is where I think norms shine. I'm actually uncomfortable with you collating/ summarizing this data such as you have (though I'd never want to try and legally prevent it; it's your choice).
I think some of us that have had the foresight to prevent such things as in the OP from ever possibly being an issue in our lives might forget the rational decisions made in ignorance or a moment of exuberance (i.e haste).
Still, the internet is global and laws are regional, so ineffective legislation is a waste of time.
[Not going to get into P2P tech that is still un-censorable]
>I'm actually uncomfortable with you collating/ summarizing this data such as you have //
I hesitated, the BBC page will be an ocean of views compared to the puddle of view this thread gets ... I didn't follow the details for other posts, concerning crimes. The cited post looks like it was probably to hide what's essentially normal student behaviours (though one can't be sure). At least there's nothing intrinsic that seems worthy of censoring.
What it does shine a light on for me is how very bland information about us that we share might become a source of regret later in life.
It's called google.com. But seriously, Google has a pretty passive-aggressive approach to complying with laws they don't like, such as publishing all DMCA takedown requests.
There! I've added those to the post at the bottom, with one more quite funny story that I didn't knew about myself. Thank you all for asking questions, there are many questions that I couldn't come up with myself that I'm very happy to get answers from!
This is a good problem. The solution is to raise the bar: in order to be a professor you have to make a tangible advancement in your field, something that advances the state of the art by an order of magnitude.
It's easy to say that, but there's no way that can be reality. The amount of money to advance your field by an order of magnitude can be quite large.
Research is expensive and funding is hard to come by. Therefore, if you want to have a job next year, you end up doing 'safe' experiments that only incrementally advance your field.
In order to get funding for more radical ideas, you need to have a history of good results (and past funding). Which usually means you have to be a professor already.
(Also, many people who aren't professors, such as postdocs, cannot directly get funding from many funding agencies. They usually require you to be a professor already...)
Even the greatest geniuses do not advance their field by an order of magnitude all by themselves within seven years of receiving their PhD and their first permanent position (a tenure-track evaluation timeline). Einstein took ten years after publishing on special relativity and the photoelectric effect to discover and publish general relativity. Hell, in 1905, he only had five papers published and had just finished his PhD thesis.
You just denied tenure to Albert Einstein.
(Luckily, in real life, he was appointed a lecturer in 1908, three years after finishing his degree, and became an assistant professor in 1909 and a full professor in 1911.)
You can get administrative head count back to 1980s levels. You can also ban 7 figure salaries for University administrators. That would pretty much do it. It is a simple problem with a simple solution.
That's a great idea, but at many schools it wouldn't actually raise much money. It's not as though the idiot boosters will be just as happy to see their money going toward lab equipment as toward e.g. barbells.
