Hi, Less. Theoretical-type question that I'm not sure which board it belongs on.
A market agnostic believes that any public information about a company has already been priced into its stock, so never trade on public information. (We'll ignore once-a-generation events like Cisco would have to earn the world's GDP to justify its tech-bubble price, and concentrate on more normal situations.)
Under mathematical optimization models, like modern portfolio theory, the investment value of any asset is the ratio of two numbers: its expectation and its variability. Since the average S&P 500 stock is turned over about 1-2 times a year, its variability to the average market investor is greater than to a long-term investor with a 10+ year time horizon. My question is-- is this reason stocks are the best investment to a market agnostic? I'll assume I know no more about a stock's expectation (probably a lot less) than the average owner of that particular stock. So is the fact that my time horizon is longer (and hence variability is less) the reason stocks are a good value for me?
A market agnostic believes that any public information about a company has already been priced into its stock, so never trade on public information. (We'll ignore once-a-generation events like Cisco would have to earn the world's GDP to justify its tech-bubble price, and concentrate on more normal situations.)
Under mathematical optimization models, like modern portfolio theory, the investment value of any asset is the ratio of two numbers: its expectation and its variability. Since the average S&P 500 stock is turned over about 1-2 times a year, its variability to the average market investor is greater than to a long-term investor with a 10+ year time horizon. My question is-- is this reason stocks are the best investment to a market agnostic? I'll assume I know no more about a stock's expectation (probably a lot less) than the average owner of that particular stock. So is the fact that my time horizon is longer (and hence variability is less) the reason stocks are a good value for me?
Seriously, I'm still unsure as to the reason for the equity premium. Beta (variability) has long ago been exploded
as a tool for measuring expected returns (William Sharpe, who won a Nobel Prize in Economics for the idea, modestly quipped a few years ago that it's a
good thing for him Nobel Prizes can't be revoked).
