Political ideology and investing

[ALawPoker]

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.

[Dan.]

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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?

[Borodog]

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.

[erac22]

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...

[Copernicus]

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.

[ALawPoker]

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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?

[/ QUOTE ]

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.

[ALawPoker]

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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.

[NeBlis]

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

[Copernicus]

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

[ALawPoker]

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.)