Fails in Investing, Ask a Scientist !!!

#1
Interesting article to share:
Skeptical as they may be about most other things, modern citizens of the world put an amazing amount of trust in scientists.

People can't simply use common sense to figure out that cell phones in cars increase the danger of a crash. We insist on scientific studies to tell us so, and only then will we believe it.

If we don't like what some ordinary person has to say regarding a matter of nutrition, or health care, or the weather, we dismiss the speaker as ``not a scientist'' and therefore unfit to have an opinion.

So it's no surprise to find many hawkers of investment advice these days buttressing their sales pitches with claims of science. I happened upon two examples of this recently while doing Internet searches (they shall remain nameless, to avoid publicizing products or services that I haven't examined in any detail).

``Try the smart, scientific approach for picking the right funds for you,'' one Web site urged me.

The other advertised a system for market timing using mutual funds, stocks and other securities that it described as having been developed by ``a team of physics PhDs'' in 2000. On the very same page, the system was trumpeted as having produced a 100.5 percent annual return since early 1999.

Rare Find

Must be some system, I thought, to have started working its wonders a year before it was devised. Perhaps it was not really created by these scientists but rather found to exist as a natural phenomenon, the way Abner Doubleday can be said to have discovered baseball instead of inventing it.

Sorry, I digress. Though neither a scientist nor a mathematician, I could sense right away the unusual desirability of a plan that could double my money every 12 months. That is all I would need to set myself up nicely for the rest of my life.

How rare would a find like this be? Heck, the personal savings plan analyzer on my Bloomberg won't accept any calculation that presumes a return greater than 50 percent a year. More than that is too unrealistic, I guess.

Fortunately, the math was simple enough to do in my head. Let's see, $10,000 invested at a 100 percent annual return becomes $20,000 after one year, $40,000 after two, $80,000 after three, $160,000 after four and $320,000 after five.

Patience

At the end of eight years I would have $2.56 million, which by a common Wall Street rule of thumb is right around the absolute minimum ante one needs to entertain thoughts of retirement. If I could just stay with the plan through Year 10, I could head off to the beach at Coronado with $10 million or so in my account.

What might I have overlooked as I did these computations? While a 100 percent annual return may appear perfectly feasible to scientists in the laboratory, any fool can see it is an awful lot to expect in real life from any investment system, no matter how clever, that is offered for public sale.

The stock market cannot rise 100 percent each year indefinitely unless the economy and corporate earnings grow approximately that fast, which isn't plausible. Bonds operate under even greater constraints. If I deal in currencies or commodities, or trade in and out of any market, my 100 percent profit must come mostly at the expense of someone else.

In other words, there will never be enough investment return to go around that would allow more than a tiny fraction of investors to take home 100 percent a year.

If any trading system offered to the public can somehow achieve a sustained 100 percent result, more customers will show up fast, in sufficient numbers to make it more and more difficult for the goose to keep laying those golden eggs.

No doubt there is a scientific way to express these things. But why go to the trouble? Common sense tells us what we need to know. [By Chet Currier]
cheers,
nkpanjiyar
 

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