Re: Investments

Peter C. McCluskey (
Mon, 26 May 1997 09:07:07 -0700 (Robin Hanson) writes:
>Avoid making bets with other people, and everything but buying an
>average such as an index *is* a bet. One of you will lose the bet and

There is no way to avoid making a bet when investing. All you can do is
choose between low risk and high risk bets.
Buying an index today is a bet that todays index prices aren't inflated
by abnormal popularity of index investing. I could come up with other
bets involved with index investing, but that is probably the riskiest today.
It is important to avoid making bets where the person you are betting against
has more info than you. If you see a company whose price looks low enough
that it's obviously a good buy, stop and think about why people are selling.
If you can't find a good reason (i.e. they bought at a better price and are
deciding it's time to diversify), assume they have knowledge of problems at
the company that you haven't found yet.

>When investing in personal skills and new ventures, rather than in
>financial markets, there is less market arbitrage and so a better
>chance that your new idea really is better. But try to be honest with
>yourself about the degree to which you just enjoy this "investment"
>activity, vs. it really having a big chance of paying off well.

This advice is very much true for investing in financial markets
as well. Many investors fail to distinguish between the entertainment
value they get from betting on an interesting company and the wealth
they are likely to get from investing wisely. That usually interfers
with their ability to make money. (Max More) writes:
>I read an article (in Fortune, I think) that warned investors to be careful
>with index funds based on the Dow or the S&P 500. The writer noted that
>these stocks may be overvalued because index investing has become so
>incredibly popular that these stocks just keep getting pushed up. The
>writer suggested broader index funds, such as those based on the Wilshire
>5000. I'd be very interested to hear comments on this.

This concern should be taken seriously. I'd guess an S&P index fund
will underperform broader indexes by 0.5 to 1 percentage point over
the next decade.

>For those who haven't come across it, I recommend Microsoft Investor as a
>fine way to keep track of investments. Unfortunately, while expanding its
>features, Microsoft are about to start charging $9.95 per month for it.

My (very biased) advice is to check out

Peter McCluskey |                        | "Don't blame me. I voted | | for Kodos." - Homer Simpson |     |