The best investment advice you'll never get

I think this has to do with the age distribution in Western countries. As the baby boomers retire, they no longer are adding but start removing funds from the system.

A friend and I talked about this 20 years ago when 401(k)'s became the rage, lamenting that we were on the wrong side of the boom.

Actually population growth all over the wold is slowing down. China is already at almost neutral and growth is even slowing in India and Africa.

And a static or shrinking population would have an adverse affect on total market cap, however it would also mean a great job market, because even as the economy shrinks the labor pool would shrink faster.

So your investments would not do well, but you'd always be able to get a high paying job.

Warren Buffet said sort of the same thing in one of his annual shareholder letters a few years ago. That exponential economic growth has natural limits, and that if we extrapolate the stock market's 20th century returns to the 21st century, you end up with a mind bogglingly (and unrealistically) large market cap in 2099.

I forgot what year he wrote that, but it was sometime between 2006 and now. I don't have time to dig it up and find it, but here are his letters for anyone interested:

http://www.berkshirehathaway.com/letters/letters.html

Edit: Got myself curious, had to find it. Here it is, from the 2007 letter, ps 18-19:

"Decades of option-accounting nonsense have now been put to rest, but other accounting choices remain – important among these the investment-return assumption a company uses in calculating pension expense. It will come as no surprise that many companies continue to choose an assumption that allows them to report less-than-solid “earnings.” For the 363 companies in the S&P that have pension plans, this assumption in 2006 averaged 8%. Let’s look at the chances of that being achieved.

The average holdings of bonds and cash for all pension funds is about 28%, and on these assets returns can be expected to be no more than 5%. Higher yields, of course, are obtainable but they carry with them a risk of commensurate (or greater) loss.

This means that the remaining 72% of assets – which are mostly in equities, either held directly or through vehicles such as hedge funds or private-equity investments – must earn 9.2% in order for the fund overall to achieve the postulated 8%. And that return must be delivered after all fees, which are now far higher than they have ever been. How realistic is this expectation?

Let’s revisit some data I mentioned two years ago: During the 20th Century, the Dow advanced from 66 to 11,497. This gain, though it appears huge, shrinks to 5.3% when compounded annually. An investor who owned the Dow throughout the century would also have received generous dividends for much of the period, but only about 2% or so in the final years. It was a wonderful century.

Think now about this century. For investors to merely match that 5.3% market-value gain, the Dow – recently below 13,000 – would need to close at about 2,000,000 on December 31, 2099. We are now eight years into this century, and we have racked up less than 2,000 of the 1,988,000 Dow points the market needed to travel in this hundred years to equal the 5.3% of the last.

It’s amusing that commentators regularly hyperventilate at the prospect of the Dow crossing an even number of thousands, such as 14,000 or 15,000. If they keep reacting that way, a 5.3% annual gain for the century will mean they experience at least 1,986 seizures during the next 92 years. While anything is possible, does anyone really believe this is the most likely outcome?

Dividends continue to run about 2%. Even if stocks were to average the 5.3% annual appreciation of the 1900s, the equity portion of plan assets – allowing for expenses of .5% – would produce no more than 7% or so. And .5% may well understate costs, given the presence of layers of consultants and high-priced managers (“helpers”).

Naturally, everyone expects to be above average. And those helpers – bless their hearts – will certainly encourage their clients in this belief. But, as a class, the helper-aided group must be below average. The reason is simple: 1) Investors, overall, will necessarily earn an average return, minus costs they incur; 2) Passive and index investors, through their very inactivity, will earn that average minus costs that are very low; 3) With that group earning average returns, so must the remaining group – the active investors. But this group will incur high transaction, management, and advisory costs. Therefore, the active investors will have their returns diminished by a far greater percentage than will their inactive brethren. That means that the passive group – the “know-nothings” – must win.

I should mention that people who expect to earn 10% annually from equities during this century – envisioning that 2% of that will come from dividends and 8% from price appreciation – are implicitly forecasting a level of about 24,000,000 on the Dow by 2100. If your adviser talks to you about double- digit returns from equities, explain this math to him – not that it will faze him. Many helpers are apparently direct descendants of the queen in Alice in Wonderland, who said: “Why, sometimes I’ve believed as many as six impossible things before breakfast.” Beware the glib helper who fills your head with fantasies while he fills his pockets with fees."

As a developer you are bounded by how much you can develop in a fixed amount of time, how much someone will pay you for it, and how many customers you have. If you could, would you not get payed more for your work? If you are working for someone, as I am, then you essentially have only one customer and they are paying you a fixed amount (+ some bonuses and raises). Or you could be like the author of minecraft, so you could be racking in hundreds of thousands a month.

Now if you say you have found a way to beat the market through research, technical or fundamental analysis, your limit would be unbounded (theoretically). Your charts looks good and are very impressive, but it is only 2 years and you would not be showing them if they didn't do well. So for all I know you are just one of the random lucky ones that beat the market. Now if you had a way to consistenlty get 10% (and maybe you did!), in a decade or so you could be another Donald Trump. You need to convince others that you can do it and then soon you will start getting large investments.

> What defines there success is that they stay in the black. Hence, they are able to time the market.

If they can time the market, are they fully invested in it. Would they sell their house and get everyone they know to do the same so they can pour that into the market, then re-invest and eventually rule the world? Another way to ask the question is why haven't the big investment banks figured out the strategy, and as a result, diluted the strategy by now?

Also what about the ones that don't stay in the black. Will they tell you, would you know how many have tried and failed? That is the true criteria. You would have to have a large group of traders commited to making money in the market. Then they all try for a fixed amount of time and in the end you see how they perform as a group. Now, essentially, you are just pickding the ones that performed in the black and using that as an argument that invididual trading can be a 100% profitable business.

You don't trade cash for the creation unit, you trade one creation unit of shares in the underlying securities. If 1 share of AMSETF is claimed to be equal to 0.5 shares in AAPL and 0.5 shares in MS, you hand 50k shares of AAPL and 50k shares of MS to the managers of AMSETF. They create 50k shares of AMSETF and hand them to you.

No cash changes hands (unless cash is one of the underlying assets of the ETF), so the ETF is never sitting on cash with the obligation to purchase shares.

In general, it's very unusual to hand cash to an ETF in return for shares (unless cash is one of the underlying assets). I'm not even sure it is legal to do so.