There are a lot of idiots on forums.
Listen, it’s not a problem if you’re not the sharpest tool in the shed. I know I’m not.
But I DO have a problem when you (1) don’t know what you’re talking about and (2) condescendingly tell everyone else they are dumb…WHEN YOU ARE THE DUMB ONE.
The worst is when you see someone doing this with investing, a complicated topic with seemingly contradictory findings where it’s easy to bamboozle ordinary people with fancy phrases and hand-wavy findings. Soon enough, you have a tribe of people following your decrees.
A few days ago, I was reading a forum filled with a bunch of people who think they’re smarter than they really are. Because they’re good at one thing (programming), they tend to believe they’re smart at everything else. Medical research? Ha! Peer-reviewed papers on psychology? I’ll tell YOU how humans behave, old crotchety researchers.
But when one of them posted these comments (below), I had to show them to you.
Here’s the thread. Who can spot the mistakes?
Just for fun, I bolded some of the most….“interesting” comments.[ORIGINAL QUESTION IS INNOCENTLY ASKED BY SOMEONE]
“Dumb question, as I literally know nothing about stock or savings: isn’t it generally a bad idea to put 100% of your long term money in any one place?”[NOW, THE RESPONSES BEGIN]
“Isn’t it stupid to just to have one job, one car, be a citizen of one country, have one house and one family. I mean really – one must diversify. What would you do if you lost any one of those?
No, it’s not stupid to concentrate wealth. Problems only arise when you do it stupidly, like buying too big a house, being part of the wrong family, living in the wrong country or buying an unsafe car.
Diversification does not reduce risk but it cuts your returns in half. All correlations go to one in a crisis and you can’t hedge the end of the world.
Note: To all downvoters – putting all your eggs in multiple baskets does not protect you from an asteroid impact any more than a person with all eggs in one basket.
People who think diversification makes them safe are frankly wrong.”[I STOPPED CHOKING LONG ENOUGH TO CONTINUE READING ON. HE CONTINUED…]
“If you want to diversify you need to actually buy reverse correlated assets. So go ahead – hedge with options, hedge with futures, hedge with shorting the indices.
But don’t think buying disparate companies protects you – it doesn’t.
I fully understand the arguments for diversification. Just like I fully understand CAPM, modern portfolio theory and the assumption that var=risk.
But it’s all bullshit. Why are you investing in companies that have that risk? If you understand which companies return higher returns – why aren’t you all in on them?
It’s bloody hard to find good companies and when you do – why on earth would you diversify into their worse off counterparts? You need to have heavy concentration in great companies where you are perfectly fine having a 10 year hold on at the right price.”[I CANNOT STOP READING NOW]
“Risk and return are not correlated. There are risks and there are returns. See AAA bonds during GFC. Great businesses are great companies at reasonable prices not overvalued growth stocks.
Most of modern economic and finance theory is based on fundamentally broken models of risk and return.[MORE]
“Diversification doesn’t work. It not only leaves your risk essentially the same in case of catastrophic market failure (see GFC/debt crisis – bonds are safe RIGHT?).
It also cuts your returns in half and brings you down along with everyone else – and gives you a false sense of security – nothing is safe – not even shorting the world (end of the world/counter party/regulatory risks).
As an investor you must think long and hard about the future/companies/investments make very few super high signal, super high impact trades/positions/companies that you know inside and out (financials/GDP winds etc).
I’d rather invest in 20 companies I know inside and out than 500 mediocre ones that I know nothing about. But that’s me – most people don’t know anything and they SHOULD diversify.
If you don’t know anything – the best thing you could do is assume no better than random.”[FINALLY, HE SAYS…]
“Local failure is obviously much more common than catastrophic failure (although the latter does have a much greater impact).
I like to think of it in terms of car crashes and catastrophes.
Companies are represented by cars – I pick good cars, with good people driving them, surrounded by a safe environment and hope they don’t crash – it’s how risk works.
Hurricanes destroy everyone – no matter how good the driver is – no exceptions.
The whole point of investing is to make above and beyond the S&P 500 benchmark over the long term – and that requires taking concentrated risks where one must bet on the right drivers with the right cars in awesome environments (most critical) and watching the horizon warily for distant hurricanes (debt crisis/nuclear war/WWIII/currency devaluations/governmental collapse).
I really can’t do any more than that. It’s a trade off obviously.
I understand local failures quite well – I rely on my ability to make decisions to mitigate that risk and the fact that I’m still young (older people should not do this).”
Ok, by the time you read this, I may have sat in my garage and gassed myself to death while eating $14 of Taco Bell. It would be a sweet death.
But assuming I’m still here, can you spot the mistakes? Don’t just mention what he said that’s ludicrous. Also analyze the techniques he used to convey his message (one hint: He constantly references a highly unlikely galactic meltdown to make his point).
Leave your comments below. This should be good.
Also, if I ever catch one of you using what you learned on this site to intimidate other people like this, I will kill you myself.
Want help sorting through what’s real (and not) — along with systems and strategies to automate your savings, invest easily, and live a rich life?