You note it, but I don’t think your calculations truly take into account the counterparty / political risk of being unable to get liquid from Russian stocks. That risk factor is built into the current low price of Russian stocks—why do you think the market is wrong? Because of the longer time horizon of young investors?
Well, I guess I just see that markets nearly always recover to the long-term mean return (maybe wars are the exception?). So I would say that people are overly optimistic when the market is high relative to that mean, and people are overly pessimistic when the market is low relative to that mean. As Warren Buffett says, “Be greedy when others are fearful, and be fearful when others are greedy.” Of course we don’t know how long it will take to revert to the mean, so there is always short-term risk. But I’ve seen data indicating that seven years is a typical time, which is not too long.
My calculations just say, “if it reverts to the mean.” With all the issues with leverage, let’s say mean reversion means only 10 times the money. And let’s say that a random long-term investment is 8% per year-that’s a factor of 1.7 over seven years. If you are risk neutral, you would have to believe there is a >83% chance of losing all the money for this to not be a good investment, which I highly doubt (17% chance of making 10 times the money is worth 1.7 times the investment).
How does such a strategy work on historical markets? Do you have a principled way of identifying these below-mean stocks? Low P-E ratio? Political conflict?
I am not an expert here, but I am getting advice from an expert. I believe it is a combination of things like low P/E ratio, low price-to-book, and also whether the investment is diversified (one individual company could easily not mean revert by going bankrupt. I think the next step up it is a mutual fund in one market sector, and then one country, and then diversified across multiple countries.) I believe that political conflict would result in low valuations, so you do not need to specifically look for political conflict.
Hmm I thought widely traded markets were pretty efficient with regard to publicly available technical information like that. The thing is that if you’re using simple statistics like those, why not see how this would’ve performed on stocks traded 20 years ago? If they are successful on recent historical data, then why not quit one’s day job to raise a fund of many millions of dollars to trade on that basis?
There are people who do this, like Jeremy Grantham: https://en.wikipedia.org/wiki/Jeremy_Grantham . We get tips from him in part. The difficulty with retaining investors with this strategy is you will often miss out on big returns when markets are overvalued, like the US in the last few years.
You note it, but I don’t think your calculations truly take into account the counterparty / political risk of being unable to get liquid from Russian stocks. That risk factor is built into the current low price of Russian stocks—why do you think the market is wrong? Because of the longer time horizon of young investors?
Well, I guess I just see that markets nearly always recover to the long-term mean return (maybe wars are the exception?). So I would say that people are overly optimistic when the market is high relative to that mean, and people are overly pessimistic when the market is low relative to that mean. As Warren Buffett says, “Be greedy when others are fearful, and be fearful when others are greedy.” Of course we don’t know how long it will take to revert to the mean, so there is always short-term risk. But I’ve seen data indicating that seven years is a typical time, which is not too long. My calculations just say, “if it reverts to the mean.” With all the issues with leverage, let’s say mean reversion means only 10 times the money. And let’s say that a random long-term investment is 8% per year-that’s a factor of 1.7 over seven years. If you are risk neutral, you would have to believe there is a >83% chance of losing all the money for this to not be a good investment, which I highly doubt (17% chance of making 10 times the money is worth 1.7 times the investment).
How does such a strategy work on historical markets? Do you have a principled way of identifying these below-mean stocks? Low P-E ratio? Political conflict?
I am not an expert here, but I am getting advice from an expert. I believe it is a combination of things like low P/E ratio, low price-to-book, and also whether the investment is diversified (one individual company could easily not mean revert by going bankrupt. I think the next step up it is a mutual fund in one market sector, and then one country, and then diversified across multiple countries.) I believe that political conflict would result in low valuations, so you do not need to specifically look for political conflict.
Hmm I thought widely traded markets were pretty efficient with regard to publicly available technical information like that. The thing is that if you’re using simple statistics like those, why not see how this would’ve performed on stocks traded 20 years ago? If they are successful on recent historical data, then why not quit one’s day job to raise a fund of many millions of dollars to trade on that basis?
There are people who do this, like Jeremy Grantham: https://en.wikipedia.org/wiki/Jeremy_Grantham . We get tips from him in part. The difficulty with retaining investors with this strategy is you will often miss out on big returns when markets are overvalued, like the US in the last few years.