Political ideology and investing
 

A few years ago when I started playing poker and earning money, I decided do some reading and put some thought into the stock market. I already knew the basics of how investing worked, because my Dad would talk to me about it here and there growing up. But my personality is one where when I get into something, I really want to get into it. If I was playing Candy Land, I'd try to find some inefficiency to get some sort of edge. And with money involved, even moreso. So I was really looking to learn a lot of [censored] and get into it.

I (relatively quickly, and sort of disappointedly) came to the conclusion that index funds are the best possible investment to make, and everything else is basically silly. Or at least, index funds are so close to as good as you can do that anything else isn't worth the time or energy, even if maybe you could beat them by a tiny bit. Now, I see nothing wrong with taking a gamble here or there when you just feel like it, or sensing some opportunity and going with it. But as a general strategy, anything other than a diversified set of index funds just seems patently useless to me.

If you're not too familiar with investing, an index fund is basically a mutual fund that mirrors a market "index." So if McDonald's makes up 10% of the Dow Jones, and I invest $1000 in a Dow Jones index fund, I'll basically have $100 invested in McDonald's, as long as the fund "manager" knows how to add and stuff. So they're managed passively and not actively. (And because of that you pay much lower maintenance fees than a mutual fund to boot.) In other words, you're investing in a market and not in a person's ability to beat a market.

It's something like 5-10% (I think it's more like 5) of all mutual fund managers who actually are able to beat the indexes (and at that I wonder how many are anything other than a lucky statistical outlier). Don't quote me on the exact numbers, but the point is that most people (even trained professionals) can not beat the index. And that, as well as just thinking about how the market actually "worked," was really all I needed to know to decide that index funds were the most equitable move. And that any money put into something other than an index was probably a -EV move.

I didn't decide this based on any sort of philosophical trust of the free market. I just decided this because I wanted to make the most money possible, and this seemed like the best way. But it eventually dawned on me that the way people analyze investment strategy is probably similar to the way people form their political conclusions.

I sort of think of the people whose general investment strategy is to pick and choose individual stocks (or who would trust a mutual fund more than an index fund) in the same way I think about politicians (and voters) who think they can fix problems by interfering with the market. People see an idea and think it's a good one, but don't seem to fully realize that their idea is shared by a lot of people and already contributes to the price of the stock. It just seems absurd to me to think you can beat the market with anything short of inside information. But people think that way. And they're probably the same people who assume hands on political solutions work too.

I'm basically a libertarian. I mean, I'm nothing. I really could not care less if other people agree with me politically or whatnot. But I can't help but conclude that the libertarian arguments pretty well explain the way things actually are. That's just the way I think.

I'm sure I'll be accused of making a biased pro-libertarian thread, even though I'm really just discussing the market in a way that seems truthful to me (and then we can go on a hijack and debate the semantical philosophy of property rights or something). But I'm curious, what's your political persuasion and what's your general approach to investing?

Are you a libertarian who agrees with me? A libertarian who disagrees? A socialist who agrees??

To any libertarians/ACers who invest money, if your investments aren't index fund heavy, then I think you just don't know what an index fund is, and you should consider them. If you know what they are and disagree with me though, I'd be curious to hear why.

Re: Political ideology and investing
 

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It just seems absurd to me to think you can beat the market with anything short of inside information. But people think that way. And they're probably the same people who assume hands on political solutions work too.

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Care to explain this leap a little further?


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To any libertarians/ACers who invest money, if your investments aren't index fund heavy, then I think you just don't know what an index fund is, and you should consider them.

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This is an exclusive tip?

Re: Political ideology and investing
 

My friend the actual Austrian economist agrees completely. The number he quoted me was that in any given year perhaps 15% of fund managers beat the market, and they are rarely ever the same funds from year to year.

He invests for the long term in index funds, and that is pretty much it.

Re: Political ideology and investing
 

If investing for a long time horizon, index funds are the way to go. However, it is definitely possibly to "beat the market" through swing trading individual stocks, bonds, derivatives, and other instruments. My suggestion, and what i do, is have between %75-90 of your investment worth in your long term portfolio, which should be a mix of index funds, bond funds, and cash (money markets/CD's) and have the small remainder in a "spec portfolio." This allows you to "secure" the vast majority of your wealth (although obv in the short term index/bond funds can go down) while being able to take on a lot of risk but only on a small portion of your wealth. It's more fun too. [img]/images/graemlins/smile.gif[/img] I don't see what this has to do with politics but, uhhh, yeah...

Re: Political ideology and investing
 

Welcome to the effiecient market theory and its effects. With the exception of the above noted complex strategies, eg. covered calls, other derivatives, hedge funds etc. it is difficult to beat the indices, especially after the transaction costs of an actively traded portfolio.

Large, sophisticated investors, such as pension funds, are beginning to move away from traditional equity investments and replace them with "portable alpha" funds, basically funds of hedge funds. They have been successful at beating the indices during the bull market, but I wonder how well they have fared the last few weeks. Portable alpha managers claim to reduce volatility, but increase the mean return..ie raising but shortening a bar graph of probable returns. In the relatively stable markets up until now, Ive generally seen return improvements of 2-3% per year in up periods, and 1/2 to 1% less losses in down periods. The question is how do they fare during the roller coaster ride.

Oh...I also agree with the above that political leanings would not affect those general principles. However, political leanings may affect your decision to move in or out of the market for substantial portions of your portfolio. eg, I dont think a Democratic victory in '08 if full priced into the market yet, but will be around the time of the early primaries. I will be out of the market in a big way at that point, or, more accurately start taking hedged short positions unless something big happens between now and then to reduce the likelihood of a Democratic sweep.

Re: Political ideology and investing
 

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It just seems absurd to me to think you can beat the market with anything short of inside information. But people think that way. And they're probably the same people who assume hands on political solutions work too.

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Care to explain this leap a little further?

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I think people's political persuasions are, for the most part, a function of how their minds work. I'm just saying that it dawned on me (despite believing strongly in index funds and separately in the concept of the free market for a few years) that these things are very much related. It basically hit me like a ton of bricks, when I was thinking about a "socialist" type friend of mine who has a very hands on approach to investing. I'm just saying that I think it's the same general thought process that contributes to this belief (since when it comes to public policy, the goal is also to be better off) and I'm surprised I didn't connect those dots sooner.

I admit though that what I'm saying entirely ignores the belief that equality is good in its own right. In my analogy, I am basically referring to people who agree they want more people to make more money, but think government intervention helps.


Or did you want me to elaborate on why I think it's near impossible to beat the market? What you quoted makes what you're asking sort of vague.



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To any libertarians/ACers who invest money, if your investments aren't index fund heavy, then I think you just don't know what an index fund is, and you should consider them.

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This is an exclusive tip?

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This snide comment makes it seem like you're misunderstanding what I'm getting at. I'm not offering investing advice as much as I am looking for confirmation to my theory that libertarians are more likely to invest in index funds.

Hence (erac22), why I put it in politics.

Re: Political ideology and investing
 

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Welcome to the effiecient market theory and its effects.

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Ya, of course.

I didn't use the word though because I'm more comfortable with (and subsequently more able to defend) my own thoughts than some formal theory I think I might understand but maybe am wrong about.

Re: Political ideology and investing
 

quote] You seem to be misunderstanding what I'm getting at. I'm not offering investing advice as much as I am looking for confirmation to my theory that libertarians are more likely to invest in index funds.


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Because most Libertarians are at least marginally aware of how markets work. It is the basis of the philosophy. They are also generally smarter than the average bear.

2+2= don't [censored] up w/ money

Re: Political ideology and investing
 

you may have missed my edit on the political side of things.

Re: Political ideology and investing
 

Oops, ya I did. But I was basically just saying that, ya, the "efficient market theory" is something I'm aware of. (I got the impression you were suggesting I'd never heard of it or something... but I maybe misread you.)

Re: Political ideology and investing
 

"Oh...I also agree with the above that political leanings would not affect those general principles. However, political leanings may affect your decision to move in or out of the market for substantial portions of your portfolio. eg, I dont think a Democratic victory in '08 if full priced into the market yet, but will be around the time of the early primaries. I will be out of the market in a big way at that point, or, more accurately start taking hedged short positions unless something big happens between now and then to reduce the likelihood of a Democratic sweep."

The political outlook may affect how you invest (although I recently saw an article saying that the Street is starting to shift more democratic based on where political donations from employees at the big banks are going, which would seem counterintuitive) but I'm still don't see how there would be a correlation between one's political ideology and HOW he invests. I think it's more based on personality, risk appetites, and desired involment in one's portfolio. If you're claiming that a particular political ideology implies a greater risk appetite or more desire to actively trade, please share your reasoning.

Re: Political ideology and investing
 

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perhaps 15% of fund managers beat the market, and they are rarely ever the same funds from year to year.

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This is such an important thing to understand.

If more people knew this and took 5 seconds to ponder the ramifications of it, I think you'd see a lot of mutual fund managers out of work.

EDIT: Please take the effort to realize this does NOT imply there could be a >50% chance you can pick one of the "winning" mutual funds if you make good selections. It implies that there is a ~15% chance you will be better off with a mutual fund. Or in other words, a ~100% chance you made the wrong decision.

Re: Political ideology and investing
 

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Oops, ya I did. But I was basically just saying that, ya, the "efficient market theory" is something I'm aware of. (I got the impression you were suggesting I'd never heard of it or something... but I maybe misread you.)

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No, I was just giving the cliff notes to your realizations (aside from the political connection).

Re: Political ideology and investing
 

The thing is equity/commodity et al markets are irrational, not rational.

This means that at certain points they will have either to much fear or to much confidence. The idea is to buy when there is to much fear and sell when there is to much confidence. Easier said then done of course, but doable non the less.

This is not something you can do in the short term.

Re: Political ideology and investing
 

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Welcome to the effiecient market theory and its effects. With the exception of the above noted complex strategies, eg. covered calls, other derivatives, hedge funds etc. it is difficult to beat the indices, especially after the transaction costs of an actively traded portfolio.

Large, sophisticated investors, such as pension funds, are beginning to move away from traditional equity investments and replace them with "portable alpha" funds, basically funds of hedge funds. They have been successful at beating the indices during the bull market, but I wonder how well they have fared the last few weeks. Portable alpha managers claim to reduce volatility, but increase the mean return..ie raising but shortening a bar graph of probable returns. In the relatively stable markets up until now, Ive generally seen return improvements of 2-3% per year in up periods, and 1/2 to 1% less losses in down periods. The question is how do they fare during the roller coaster ride.

Oh...I also agree with the above that political leanings would not affect those general principles. However, political leanings may affect your decision to move in or out of the market for substantial portions of your portfolio. eg, I dont think a Democratic victory in '08 if full priced into the market yet, but will be around the time of the early primaries. I will be out of the market in a big way at that point, or, more accurately start taking hedged short positions unless something big happens between now and then to reduce the likelihood of a Democratic sweep.

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I worked for one of those funds of funds. We dealt nearly exclusively with the top 1% of performers, globally - who were consistently very very good after joining the matrix, down or up market. I don't remember the numbers off-hand, but the roller coaster scenario was a concern and I seem to recall the funds still easily beating traditional index investments in those situations as well. Of course, smaller sample size. And all of this is moot for the typical investor anyway, who doesn't have 25 million lying around.

I'm not a terribly strong believer in the efficient market hypothesis. Everyone's running the same fundamentals, but I certainly believe there are traditional manager minds out there who understand the psychology of it better than the vast majority of investors - and the real cream of the crop can fairly consistently beat the market with a concentrated approach - beyond the added costs of more volatility. And, they are not found managing mutual funds.

Re: Political ideology and investing
 

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The thing is equity/commodity et al markets are irrational, not rational.

This means that at certain points they will have either to much fear or to much confidence. The idea is to buy when there is to much fear and sell when there is to much confidence. Easier said then done of course, but doable non the less.

This is not something you can do in the short term.

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Its not something the "experts" have been able to do consistently for the long term either. Market timing strategies don't raise returns net of expenses. Simple dollar cost averaging into index funds (or their historical construct before they actually existed) beats 95% of the market timers for every 5,10, 15 and 20 year period since the depression, and none of the 5% appear in more than 2 consecutive such periods. Obviously the more recent results are more credible, since the data is much more robust, and there may be some bias from the strong bull markets,but you would expect a legitimate strategy to show at least a few consistent succeses.

Short term plays obviously can work, but they are too infrequent and require moves that are too big for large scale investors. Eg when the Dow was close to 14000 I closed out all my long positions since numbers like that are often ceilings that the Dow bounces off of. (More psychology than anything as OAFK noted.) I got back in a little too soon apparently but I did get back in close to the floor and its just been bouncing around since then.

A large fund cant make moves like that and my plans for early 08.

Re: Political ideology and investing
 

You are only talking about one market. Some investors have shown great consistency at calling the top of one market selling up and getting in at the bottom of another market rinse and repeat.

Re: Political ideology and investing
 

Honestly I think you're barking up the wrong tree asserting the correlation with people who try to beat the market and their strong support of interventionalist government.

Re: Political ideology and investing
 

ROOF! ROOF!!! That's right, TREE!!! It's on now.

Hmm. Do you really mean I'm "barking up the wrong tree," or are you saying my assertion is wrong? There's a big difference.

If you really mean barking up the wrong tree, then.. OK? My bad? If you mean you disagree with me, then feel free to let me know what you disagree with and I'll be happy to defend myself.

It doesn't make sense to you that people who think hands on public policies are most productive will also tend to think hands on investment approaches are most productive? And vice versa? Why do you disagree?

Do you just assume you disagree, because the analogy scares you, since index funds can strongly be argued to be objectively more efficient?

Re: Political ideology and investing
 

You are being naive.

There is so much much more to investing than just the Equity market and its indexes.

Some very very successful investors move funds across markets exploiting the irrationality of markets. Markets go through trends were they phase from being to confident to too fearfull. Exploiting this is called contrarian investing. You buy when everyone else is afraid (assets are cheap) and sell when everyone else is to confident (assets are expensive) this is the investing philosophy of Warren Buffet:

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Warren Edward Buffett (b. August 30, 1930, Omaha, Nebraska), often called the "Sage of Omaha" or the "Oracle of Omaha"[3], is an American investor, businessperson and philanthropist.

Buffett has amassed an enormous fortune from astute investments managed through the holding company Berkshire Hathaway, of which he is the largest shareholder and CEO. With an estimated current net worth of around US$52 billion,[2] he was ranked by Forbes as the third-richest person in the world as of April 2007, behind Bill Gates and Mexican businessman Carlos Slim Helú.[4]

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WB hasnt just beaten the market(S) he has crushed it.

I also find it interesting that you would believe a market to be rational and efficient but do not consider the pricing mechanism of that market to be rational and effecient e.g. fiat currency. That is not a logical position.

Re: Political ideology and investing
 

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ROOF! ROOF!!! That's right, TREE!!! It's on now.

Hmm. Do you really mean I'm "barking up the wrong tree," or are you saying my assertion is wrong? There's a big difference.

If you really mean barking up the wrong tree, then.. OK? My bad? If you mean you disagree with me, then feel free to let me know what you disagree with and I'll be happy to defend myself.

It doesn't make sense to you that people who think hands on public policies are most productive will also tend to think hands on investment approaches are most productive? And vice versa? Why do you disagree?

Do you just assume you disagree, because the analogy scares you, since index funds can strongly be argued to be objectively more efficient?

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Have you ever read any of my posts in the BFI forum? I haven't posted there much in awhile but I think it's clear from my posts that I strongly advocate indexing for most if not the vast majority of long term investors in the stock market. I had a long post in my original reply that I scrapped because I wasn't sure how much you understood about Portfolio Theory. Didn't want to get into it too much unless you're interested.

When I say you're "barking up the wrong tree" I mean that I have serious doubts about the correlation between people's political views and their investment choices. IMO FWIW you're delving into the area of investor psychology. Again IMO FWIW any discussion of investor psychology must include something about risk aversion. Put another way without a discussion of investor utility functions, discussions regarding investor psychology are basically not very meaningful.

Re: Political ideology and investing
 

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I sort of think of the people whose general investment strategy is to pick and choose individual stocks (or who would trust a mutual fund more than an index fund) in the same way I think about politicians (and voters) who think they can fix problems by interfering with the market. People see an idea and think it's a good one, but don't seem to fully realize that their idea is shared by a lot of people and already contributes to the price of the stock.

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i dont get your analogy. the only part i understand is the last sentence - would you mind elaborating on the earlier parts?

Regarding the last part, just because other people realize similar things as you do doesn't mean there isn't opportunity to make money. If the money put down by those who agree with you doesnt out number the money put down by those who dont agree with you than opportunities to make money still exist (assuming you're right).

Re: Political ideology and investing
 

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But I'm curious, what's your political persuasion and what's your general approach to investing?

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I used to invest in index funds. Now I don't invest in the market. I don't want to be part owner of the very institutions that I abhor (I'm trying to cut down on the consuming part to, doing much better although Diet Pepsi is till an occasional vice). I know this may cost me and my family, but I can live with that, and there's more to life than increasing my wealth -- we get by well enough, better than most of the world. Besides, I'd rather invest in myself. The few years I played serious poker, I did quite well and didn't have to be part of a government-made-and-protected entity to do it. Maybe I'd invest in a particular company or two in the future whose business plan I supported, but I don't have the resources to want to branch into individual businesses like that right now.

Paradoxically, I work for the government. And enjoy what I do.

Re: Political ideology and investing
 

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But I'm curious, what's your political persuasion and what's your general approach to investing?

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I used to invest in index funds. Now I don't invest in the market. I don't want to be part owner of the very institutions that I abhor (I'm trying to cut down on the consuming part to, doing much better although Diet Pepsi is till an occasional vice). I know this may cost me and my family, but I can live with that, and there's more to life than increasing my wealth -- we get by well enough, better than most of the world. Besides, I'd rather invest in myself. The few years I played serious poker, I did quite well and didn't have to be part of a government-made-and-protected entity to do it. Maybe I'd invest in a particular company or two in the future whose business plan I supported, but I don't have the resources to want to branch into individual businesses like that right now.

Paradoxically, I work for the government. And enjoy what I do.

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Not a paradox at all. It sounds very much like 1/2 the group of government employees I work with. The other half are more goal/wealth oriented and are just in the government to get credentials and then leave and sell themselves to the highest bidder.

Re: Political ideology and investing
 

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any discussion of investor psychology must include something about risk aversion

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This is a good point.

But what I meant was really more generalized. I'm by no means claiming that anywhere close to "all" libertarians favor indexes (and vice versa for socialists). I'm just saying that in general this is more likely.

Further, it's not as if public policy does not also contain an element of risk aversion. I think the free market is more volatile than a government regulated market. It makes sense that it would be. So still, voter preference contains this aversion, assuming they think about it.

Re: Political ideology and investing
 

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any discussion of investor psychology must include something about risk aversion

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This is a good point.

But what I meant was really more generalized. I'm by no means claiming that anywhere close to "all" libertarians favor indexes (and vice versa for socialists). I'm just saying that in general this is more likely.

Further, it's not as if public policy does not also contain an element of risk aversion. I think the free market is more volatile than a government regulated market. It makes sense that it would be. So still, voter preference contains this aversion, assuming they think about it.

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Out of curiosity, what kind of returns in terms of compounded percentage do you expect on holding an index fund (I'm assuming it's something that tracks the S&P 500) for a 20 year period or so?

Re: Political ideology and investing
 

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It just seems absurd to me to think you can beat the market with anything short of inside information.

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information is crucial. i have no knowledge of investing but i have couple of good friends who get some information occasionally and have some knowledge. i'm giving them 20% of my profit, but it still leaves me with around 100% of net profit / year (82% in 2005 and 111% last year) after paying taxes. generally in have 20% of my funds constantly in bonds, 40% liquid (movable in between bonds and individual stocks), 20% at bank and available for quick overnight stock investments and 20% at my friend, whose giving me 20% / year for that. at this point i would never accept a guaranteed 20%/year.

Re: Political ideology and investing
 

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any discussion of investor psychology must include something about risk aversion

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This is a good point.

But what I meant was really more generalized. I'm by no means claiming that anywhere close to "all" libertarians favor indexes (and vice versa for socialists). I'm just saying that in general this is more likely.

Further, it's not as if public policy does not also contain an element of risk aversion. I think the free market is more volatile than a government regulated market. It makes sense that it would be. So still, voter preference contains this aversion, assuming they think about it.

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Out of curiosity, what kind of returns in terms of compounded percentage do you expect on holding an index fund (I'm assuming it's something that tracks the S&P 500) for a 20 year period or so?

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Currently large fund managers are assuming 8.5-9% annual returns and 16%-21% standard deviations.

Re: Political ideology and investing
 

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any discussion of investor psychology must include something about risk aversion

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This is a good point.

But what I meant was really more generalized. I'm by no means claiming that anywhere close to "all" libertarians favor indexes (and vice versa for socialists). I'm just saying that in general this is more likely.

Further, it's not as if public policy does not also contain an element of risk aversion. I think the free market is more volatile than a government regulated market. It makes sense that it would be. So still, voter preference contains this aversion, assuming they think about it.

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Out of curiosity, what kind of returns in terms of compounded percentage do you expect on holding an index fund (I'm assuming it's something that tracks the S&P 500) for a 20 year period or so?

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Currently large fund managers are assuming 8.5-9% annual returns and 16%-21% standard deviations.

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Over and above about 5.0% on long term govt bonds I assume i.e. the spread between govt bonds of same duration as holding period of stocks is 3.5% to 4.0%. Interesting.