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Posted by dapperdobbs on March 20, 2008, 5:14 am
>
> All models are based on assumptions, and they break down when an
> assumption that nobody thought to question turns out to be wrong. And
> the unforeseen events happen more than you might think.
Isn't what you wrote above the mathematics of probability?
****
Isn't what you wrote below analysis of cause and effect?
> Buggy whips
> were a great investment (as long as horses were the mode of
> transportation and cars had not yet been invented). Brokerages are good
> places to buy stocks (as long as brokers stay honest). Banks will
> always be a safe place to keep your money (as long as there is no
> nuclear war). Etc., etc.
I'm not trying to be facetious or lay "traps" here - I really would
like to clarify this.
I see the probabilities as a mathematical game not unlike roulette.
I see analysis as absolutely critical to financial planning and
investment.
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Posted by Don on March 20, 2008, 12:50 pm
> I'm not trying to be facetious or lay "traps" here - I really would
> like to clarify this.
>
> I see the probabilities as a mathematical game not unlike roulette.
> I see analysis as absolutely critical to financial planning and
> investment.
True. Mathematical models for making predictions about the future have
to assert something like "If a, b, c, ... are present, then the
probability that x will happen is such-and-such." This may work for a
while and lead to some accurate predictions, but almost always some
further conditions not taken into consideration (d or e) will come
along and make the model useless. This is especially likely to happen
in long-term financial predictions, because so many unexpected
variables can enter the picture as governments change, new things are
invented, wars occur, etc.
The same principle applies not only to detailed mathematical models,
but also to a lot of generally accepted wisdom such as "stocks return
more in the long run than real estate," or "banks are secure," or
"government bonds are safe," and so on. That is a reason I would argue
that diversification among asset classes is just as important, if not
more important, as diversification among stocks.
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to keep the conversations on-topic for financial planning. Other posting
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Posted by dapperdobbs on March 20, 2008, 4:45 pm
Thanks for your reply. Your point about diversification among asset
classes is well taken - the neglect of that was a fatal flaw in LTCM's
blow up.
Augustine (on this thread) brought up a couple of good point that I
think apply to the "derivatives" models. He refers to what have been
called "fat tails" of the standard bell curve (the 'snake oil':-).
Have you (or has anyone here) read anything about the specifics of any
"derivatives risk model" that would give specific insight into their
construction?
[trim]
> The same principle applies not only to detailed mathematical models,
> but also to a lot of generally accepted wisdom such as "stocks return
> more in the long run than real estate," or "banks are secure," or
> "government bonds are safe," and so on. That is a reason I would argue
> that diversification among asset classes is just as important, if not
> more important, as diversification among stocks.
======================================= MODERATOR'S COMMENT:
While interesting, this thread is getting beyond the mandate of this newsgroup
which is general financial planning. Posters who respond to this thread are
requested to keep that in mind.
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Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
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which we respond. For all of the other tips and suggestions, see "FROM THE
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Posted by Don on March 21, 2008, 12:26 pm
> Thanks for your reply. Your point about diversification among asset
> classes is well taken - the neglect of that was a fatal flaw in LTCM's
> blow up.
It is interesting that diversification among different assets is
usually practiced by people with a whole lot of money to invest, but is
not so often recommended to small investors. For example, where I live
there are many large apartment buildings, office towers, high-end
condos, etc. owned by wealthy offshore investors. I wonder what a Hong
Kong billionaire with real estate holdings would say if someone
suggested he get out of real estate and put everything into mutual
funds. Or if someone told a Saudi Prince, "Take out a home equity loan
on your palace and put the money into this great limited partnership."
--------------------------------------
Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
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which we respond. For all of the other tips and suggestions, see "FROM THE
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