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March 04, 2010


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Old Limey-

Yes I would agree. Especially on minimizing losses. (#1 rule)

If you were to give me a bet that had a 70% chance of making money I would take the bet. Doesnt mean I win. Give me a coin that has a 51% head and 48.9 tails (dont forget the odds of it landing on the side!); and again, I'll place bets accordingly.

Volatility, although in my opinion misunderstood and a poor measure of risk, is a key component to any strategy. (Sortino is at least a slight adjustment for one error) Returns of a strategy must always be adjusted for this component. Risk of 'gamblers ruin' or also known as money management must be put into the context of volatility.

I think Bill Ackman recently called the professionally managed, diversify buy and hold strategy 'lazy'. And that 'Diversification covers up ignorance'. So yes, I would tend to agree with your general views.

@Mike Hunt..."You should strive to hit $1 million in net worth by the time you are 34"? How?

I'm being serious, is this only possible if you make over a certain amount? What would your target date be if you made $50,000 a year? $75,000? What did you mean by "luck"?

I'm very serious and would love some pointers. If we could have $2 million by 37 or $3 million by 40, I want to know how. Heck, I'd like to know how to simply shave off a few years from our age 52 goal...

How much do you want to save of your income? What rates of return do you think you will receive?

So... if you save 10k per year, make 7% each year, you will have $1mm in 31 years.

25k per year... 20 years to get 1mm

Fortunately as it happens my trading days are now over. Nowdays most mutual funds have taken steps to combat what they call excessive trading. One technique is to have a redemption fee of between 1% and 2% if you do not hold their fund at least "X" days, where "X" can be as low as 30 days or as high as 90 days.
The other thing they frequently do is to place a permanent ban on you from buying their funds. I made a very short term winning trade on a Vanguard Bond fund many years ago. It was a large trade of around $1M that I only held for about a couple of weeks and they immediately banned me from buying Vanguard funds in the future. The ban also applied to family member accounts for which I have trading authorization. I have also been banned by three other mutual fund companies. It's just like the Casinos, they don't like gamblers that keep winning, especially market timers that use a system. That's also why a fund that makes a big deal out of low fees doesn't impress me at all. I am only impressed by excellent longterm performance.

For a variety of reasons it's not as easy to win as it was in the 90's. The market these days is much more irrational and you are going up against the big firms that have computerized trading platforms, inside information, very smart programmers and traders, and cheap money from the Fed. It is no longer a level playing field. Also in the early 90's the vast majority of small investors didn't have the information and tools available that they do today and news didn't travel at the speed it does today. The advent of the Internet changed everything and those that got in early and had the tools and data that I did had a distinct advantage for quite a few years. I know I could never duplicate the success I had between 1993 and 2007 going forward. It's the same as the real estate market, in my days as a buyer ('63 to '67) land was dirt cheap. A 1 acre building lot (orchard land) in prestigious Saratoga,CA was $20,000, today it is $2,000,000 if you can even find one, that's why I don't live there. Usually these days you would have to buy a 50+ year old old house on a great lot, then tear it down, and build your MacMansion as has happened all over Silicon Valley. At the height of the boom this valley was producing 60 new millionaires/month from the wealth generated by all the IPO's. It's been ages since I read about the launch of a new IPO.

Was your reply to my question to Mike? If so, yes, I can use a calculator. I was wondering how he expected everyone to get there by age 34. Obviously it wasn't simply by saving X amount per year unless he makes a heck of a lot more than most people could expect...and if that's the case, why did he tell everyone to strive for it?

I was trying to point out that his statement acted like it should be possible for everyone, and I want to know how.

"The market these days is much more irrational and you are going up against the big firms that have computerized trading platforms, inside information, very smart programmers and traders, and cheap money from the Fed."

Correct (except the insider info part). I sit on this side of the table and I think it would be very hard for you/private investor to win (beat me). I can move in and out of 1,000 of positions in less than a second. My transaction costs are as low as they can get. My infrastructure is massive.

Have you considered using ETFs for your strategies? Not that you even want to play in the game anymore.

I have read articles that indicate that Goldman Sachs, for example, has visibility into incoming trades on some equities and uses this information to make very tiny profits, maybe only $0.01/share but on millions of shares it can add up, especially when it's done every day on quite a lot of equities. The articles refer to this as insider trading because they are using data that is not available to the public.

I have looked at ETFs but when I compare an ETF traded throughout the day with a mutual fund in the same sector that only trades at the close I have seen much greater volatility with the ETFs, and extra volatility is something I try to avoid. It is a huge problem on very thinly traded ETFs. I once bought an ETF after a seller dumped a large amount of a very thinly traded ETF on the market causing it to drop severely, only to have it soon rebound to where it had been once the big seller was gone. I haven't used an ETF in about 3 years. I now only use two mutual funds, one is a muni bond fund, the other is a short term bond fund, and I use them to hold the monthly interest I receive from CDs and Munis and also to have a very small percentage of any account that is easily liquidated if need be.

Old Limey-

Seeing any customer order, and making a trade in that stock or based on that information, is called front running and it's highly illegal. I have no idea if GS front ran any orders, but I think its highly unlikely. What I imagine you read about were an order type called flash orders. Although these have been essentially ban, they were not illegal and were not front running. In addition, I'm not convinced they offered any real advantage to one market participant over another. I can go into greater details, but I'm not sure it is of value since flash orders are gone.

Pennies in front of bulldozers.

"I once bought an ETF after a seller dumped a large amount of a very thinly traded ETF on the market causing it to drop severely, only to have it soon rebound to where it had been once the big seller was gone."

This occurs in every asset class and can offer great opportunity. (Most financial intellects would argue this doesn't occur.)

I reached 1m in 2007, and 2008 was bad, and back 1m in 2009, I put 5k each month into my investment.

It took me 10 years from 100k to 1m, my question is which kind of expectation to reach 5m and 10m in how long?

any suggestions and experience to share here?

another mike

Here's a concrete example: My financial net worth (not counting equity in a paid-up house) first became $1M in 1998, when I was 56. It became $2M in 2004. It became $2.943M in May of 2008 and then declined steeply with the markets. In March 2010 it first exceeded $3M. As befits my current age, my allocation is conservative: 66% bonds/cash, 34% stocks.

thanks for the sharing, I am 45, I am having more in stocks than bonds/cash, but loos like more uncertainty in the current century than before.

I already hit 1 million.
But then again there's still time for me to drop..
I don't really spend money on anything,my parents were the one's who bought my first house and car.

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