Comments on: Looking for Investing Answers in Formulas

By: mlgreen8753

mlgreen8753 — Sat, 12 Sep 2009 07:44:18 +0000

I'm sure mathematics has it's place in investing, but never will it reduce all risk. I use my intuition and passion in addition to simple mathematics, to help me decide which stock is worth investing in. Right now I have my eye on Mentor Capital, which has a 20% stake in a biotech company working on an ingenious breast cancer treatment that I believe will help shoot the price of Mentor Capital stock up once it gets out of it's FDA authorized clinical trials and on the market. The financial highlights mentioned on BreastCancerInvesting.com are where my mathematical consideration was derived from.

By: mlgreen8753

mlgreen8753 — Sat, 12 Sep 2009 00:44:18 +0000

By: cav

cav — Wed, 29 Jul 2009 20:46:04 +0000

I noted a worthy adaptation of Buffet's “Beware of geeks bearing formulas” the other day:

“Beware of formulas bearing greeks”!

By: Kent_TheFinancialPhilosopher

Kent_TheFinancialPhilosopher — Fri, 24 Jul 2009 17:50:12 +0000

Great points, Carl. Vast knowledge does not translate to good judgment. Any fool making observations can find a pattern and create a formula from which to make predictions. The fool with knowledge may be even more dangerous…

“Too keen an eye for pattern will find it anywhere.” ~ T.L. Fine

By: RobBennett

RobBennett — Fri, 24 Jul 2009 17:10:23 +0000

Thank you for your kind words, Carl. I love your blog concept (I discovered your blog through your Guest Blog Entry at the Get Rich Slowly blog).

The home page of my blog has links to just about everything in the left-hand and right-hand columns:

http://arichlife.passionsaving.com/

The best place to start for the numbers-oriented is with The Stock-Return Predictor, a calculator that uses a regression analysis of the historical stock return data to reveal the most likely 10-year stock return starting from all possible valuation levels (over-valuation and under-valuation are emotional phenomena, so factoring in valuations is factoring in the often-ignored emotional aspect of stock investing):

http://www.passionsaving.com/stock-valuation.html

I suggest that the non-numbers-oriented (that's me!) look through the titles of the RobCasts to see if there any that possess possible appeal (I list my favorites at the "Favorite Robcasts" section on the right-hand column at the blog home page):

http://www.passionsaving.com/personal-finance-p...

If you are interested in learning about the problems with the Old School retirement studies, please go to the link below (to my New School retirement calculator, "The Retirement Risk Evaluator") and scroll down to the bottom of the page for the articles entitled "The Experts Speak on the Problems of Holding Overvalued Stocks in Retirement" and "Community Comments on Using Stock Data to Diminish Retirement Risk." There you will find lots of quotes from people other than be commenting on the huge mess we have created. The analytical error was to fail to adjust the safe withdrawal rate for the valuation level that applies on the day the retirement begins; the historical data shows that the valuation level that applies on the day the retirement begins is the single biggest factor affecting retirement safety:

http://www.passionsaving.com/retirement-calcula...

Rob

By: thinkingcarl

thinkingcarl — Fri, 24 Jul 2009 14:03:09 +0000

@RobBennett- Thanks for the thoughtful comment. Where I can I (and BG
readers) find more of what you have written?

By: RobBennett

RobBennett — Fri, 24 Jul 2009 12:26:06 +0000

I discovered analytical errors in the Old School safe-withdrawal-rate studies (these are the studies that financial planners use to tell us how to plan our retirements) in May 2002 and have written about the problems widely on the internet. The errors are not small ones. They are large enough that, if I am right, there are going to be millions of people suffering busted retirements in days to come as a result of their reliance on the demonstrably false claims made in these studies. Numerous big-name experts have acknowledged that I am right. Yet not one of the studies has been corrected to this day. Not even one yet contains a warning letting people know that there is a possible problem.

The problem with data-based analysis in the investing field is that investing is primarily an emotional endeavor and only secondarily a rational one. People decide what they want to believe and then they look for rationalizations to support that belief. Numbers-based analyses offer great support. So you see a lot of numbers-based analysis being employed in this field.

We need to address the emotional/psychological/behavioral side of the story before we can have any hope of putting the numbers-based analyses to good use. Numbers-based analysis is a good thing in the right circumstances. We are not there today. We are not even close to being there today.

Rob

By: Rick Francis

Rick Francis — Thu, 23 Jul 2009 21:12:09 +0000

>the formulas were based on faulty data or were designed to fit a desired scenario versus the reality?

My suspicion is that the real problem wasn't that the data was inherantly faulty or was based off of total fiction- it is just based on data that no longer applied!

There were a lot fundametal changes to the housing market in the 2000's : The housing price bubble, the lowered lending standards, the exotic mortgages, the increase in speculators etc.

After these changes the old data for things like a rete of mortgage defaults was no longer valid. Even if the people managing the models knew about these changes and tried to correct for them there is a problem: Since there is no data (yet) any corrections would have to be based on someone's best guess.

-Rick Francis

By: Dylan

Dylan — Wed, 22 Jul 2009 22:33:27 +0000

The problem with formulas in matters of personal finance, including investing, is that they address the “finance” but miss the “personal.” Formulas are standardized while each individual's priorities are not.