Tuesday, April 21, 2009

the future ain't what it used to be

This professor, author of the book The Black Swan, gives an hour lecture that explains everything about why we should never take advice from people wearing a suit and tie. Basically, we are being hypocrites when we are skeptical of our religious experts (the pope, bishops, ministers) aka athiests, and yet we trust in the stock market.

i found the entire lecture fascinating and insightful. He is a colleague of Nial Ferguson, author of The Ascent of Money, and offers great ideas about history, society, science, philosophy, everything.

for all those amateur investors, pay close attention to the section around the 1 hour 11 minute mark. He is asked if he buys stock, ever. His answer is that if you look at the investment data objectively, if you construct your portfolio as the average guy trying to save his income for retirement you need to rethink moderate risk.

- Take the vast majority of your savings and put them into investments that have zero risk to losing the principal.
- take a small percentage and expose it to securities that give you the maximum exposure to risk.
- a ratio of 93% in investments guaranteed to return your principal, 7% of the riskiest investments you are interested in. this represents a truly and objectively diversified and moderate exposure to risk.

- if you lose all of your riskiest investments (where your capital is not guaranteed to be returned) you still have only lost 7% of your net-worth, in what could only be described as a worst case scenario
- if a best case scenario results and you double or triple your 7% investment, you have still been able to capitalize on a high risk gamble while still risking minimal capital.

- every source of prediction (especially from finance, investing, analysts and forecasters) are based on fundamentally flawed data:

our understanding of the past is warped retrospectively (ex. the belief that WW1 was predictable and inevitable) and hence not useful in reliable predictions of the future, which simply do not exist and have never existed. predicting the future is for over-sized egos, outright thieves and messianic lunatics.


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