Keynesian beauty contest • Hacker News Board

Re: Keynesian beauty contest

#21

Post by hugh3 » Sun, Jun 12, 2011, 4:09 PM UTC

RickHull wrote: post #19

jakarta wrote: post #16

Earlier quoted context omitted.

Centuries of financial crises and speculative contagions seem to be enough evidence for me. If majority of market participants were value investors you simply would not have bubbles to the degree that we have seen historically. Value investors buy assets at a discount to their intrinsic value and they derive that intrinsic value using conservative assumptions on factors such as liquidation value and future cash flows…

> If majority of market participants were value investors you simply would not have bubbles to the degree that we have seen historically. There is an argument that bubbles are the result of overexpansion of credit. Granting systematic credit is the basic function of central banks.

Not really. Bubbles can easily occur in the absence of credit. I'm not sure how many people were borrowing money in the south seas or tulip bubbles, but probably not that many. Even in the first dot-com bubble (how quaint it sounds to say it now) most of the investing was being done by folks who had money rather than folks who were borrowing it.

The recent housing bubble, on the other hand, yes.

Re: Keynesian beauty contest

#22

Post by misterbee » Sun, Jun 12, 2011, 4:39 PM UTC

(Something like) Those are actually real!

My mother taught me that basic strategy for betting on a "horse race" carnival game with the similar design (but the winner was chosen randomply via multiple rolls of a die that represented each "step" along a racetrack)

She taught me to watch the bettors and bet on whichever horse had the least number of shares purchased. If the bets were semi-secret, and we had to engage people ("analysts"?) in conversation about their supposed bets, it would be even more like the real equities marker.

Re: Keynesian beauty contest

#23

Post by misterbee » Sun, Jun 12, 2011, 4:45 PM UTC

verroq wrote: post #11

Where are the people that estimate how much of the population classify into level 1, 2, 3 ... and pick choice of the people in the level with the most people.

In Hollywood.

Re: Keynesian beauty contest

#24

Post by olalonde » Sun, Jun 12, 2011, 4:45 PM UTC

I like it overall but as any analogy, it must be used with caution as it fails to infer a fundamental principle of the stock market. In a Keynesian beauty contest, contestants cannot lose as long as they pick the most popular face. In the stock market, it is very possible to lose even if you pick the most popular stock, in the event of a bankruptcy for instance.

Re: Keynesian beauty contest

#25

Post by wolfgangK » Sun, Jun 12, 2011, 5:30 PM UTC

mhansen wrote: post #15

jakarta wrote: post #12

Earlier quoted context omitted.

It might not be everyone, but I can say for certain that most market participants are NOT value investors.

Where's the evidence?

With a daily turnover of 4 trillions just on forex,it seems pretty obvious to me.

http://au.ibtimes.com/articles/110821/20110210/what-is-forei...

Re: Keynesian beauty contest

#26

Post by joejohnson » Sun, Jun 12, 2011, 5:49 PM UTC

So, if the strategy can be extended indefinitely, what is the rational strategy?

Re: Keynesian beauty contest

#27

Post by ArturSoler » Sun, Jun 12, 2011, 7:13 PM UTC

hugh3 wrote: post #21

RickHull wrote: post #19

Earlier quoted context omitted.

> If majority of market participants were value investors you simply would not have bubbles to the degree that we have seen historically. There is an argument that bubbles are the result of overexpansion of credit. Granting systematic credit is the basic function of central banks.

Not really. Bubbles can easily occur in the absence of credit. I'm not sure how many people were borrowing money in the south seas or tulip bubbles, but probably not that many. Even in the first dot-com bubble (how quaint it sounds to say it now) most of the investing was being done by folks who had money rather than folks who were borrowing it. The recent housing bubble, on the other hand, yes.

There was a monetary expansion during the tulip bubble (basically New World's gold + laws that made convenient routing that gold to the Netherlands).

Re: Keynesian beauty contest

#28

Post by Symmetry » Sun, Jun 12, 2011, 8:16 PM UTC

lionhearted wrote: post #2

> This would have people pricing shares not based on what they think their fundamental value is, but rather on what they think everyone else thinks their value is, or what everybody else would predict the average assessment of value is. This is true for people who are buying as speculative investors and focused on short term movements in stock price. However, that's not everyone by a longshot. There are plenty of peo…

I think buying for the long term is a very good thing, but I tend to assume that there aren't many undervalued stocks laying around. Bubbles happen even if there are smart people around who know not to take part, but if there are smart people around its hard for a stock to get too undervalued and I don't care to assume I can do a better job of computing a stocks overall value than professionals do. Sometimes people like Warren Buffet can find gems in the rough, but a large part of that is that they have the resources to swoop in and buy enough stock to sack managers who aren't doing a good job. I can't do that.

I tend to ask myself instead "What do I know that the market doesn't?" I have an engineering education and experience and I can make judgments about a companies products and the long term future of their products that Wall Street investors might not be able to. This is all no guarantee and I keep most of my money in index funds, but its worked out well for me so far.