finance – Page 5 – An Autonomous Agent

Zero Hedge

On February 3, 2013

In economics, education, finance, investing, modern monetary theory, stocks, website

Zero Hedge is veritable gold mine of website links and good articles on economics, finance, and markets. Its mission statement:

to widen the scope of financial, economic and political information available to the professional investing public.
to skeptically examine and, where necessary, attack the flaccid institution that financial journalism has become.
to liberate oppressed knowledge.
to provide analysis uninhibited by political constraint.
to facilitate information’s unending quest for freedom.

A Simple Strategy to Earn Good Returns

By anautonomousagent

On January 27, 2013

In benjamin graham, finance, investing, stocks, thoughts

Let’s say that you have started an IRA or some sort of long term retirement account. One strategy would be to invest 100% of your money in an index fund which follows the S&P 500. This would give you around 9 – 11% annual average returns over 50+ years. However, you will notice that there are several times throughout the life of the account in which the index suffers massive losses.

To counteract these loses it would be wise to find another index, such as a short term bond fund, where you could temporarily store your returns; then, once the market has crashed, you could invest these funds back into the stock market.

This strategy is a modified version of the one suggested by Benjamin Graham in The Intelligent Investor. His strategy was to always be in a range of 25-75% in a bond and stock fund. In other words, never have your portfolio more than 75% or less than 25% in either bonds or stocks. Then, depending on whether you “felt” the market was too optimistic or too pessimistic you would adjust your ratios accordingly. I feel that this idea of optimism and pessimism can somehow be quantified and developed into an algorithm.

Take two index funds: the S&P 500 index fund and a two year bond fund. Both have minimal expenses (Vanguard funds). The strategy is simple. Begin with 70% in stocks and 30% in bonds and wait 24 months. Now, check the past 24 months. Is there a gain or loss of magnitude greater than 50% in the S&P 500 index during this period? If true, then readjust your portfolio. If it is a gain, then bring the portfolio back to 70% S&P 500 index and 30% bond fund. If it is a loss, then bring the portfolio to 95% S&P 500 and 5% bond fund. Repeat this process every 24 months. Also, make sure you continue to make monthly deposits 50-50 into the stock and bond funds.

Performing this strategy with certain adjustments in these ratios will allow the investor to achieve better than market annual average returns for 50+ years. I am currently trying to work out the exact results and best parameters of this strategy. I believe these returns will be even better depending on the amount invested per month.

Sadly, most people make the mistake of decreasing their stock holdings right after a crash and increasing their stock holdings during a bull market which precedes a crash. This psychological reflex will lower the net return drastically.

Can a Stock Market Crash be Avoided? Can the Collapse of Society be Avoided?

By anautonomousagent

On January 8, 2013

In complexity theory, didier sornette, Douglas Hofstadter, finance, investing, isaac asimov, math, phase transitions, physics, science, stocks, thoughts

The idea in Why Stock Markets Crash is that there exists a critical point which represents the boundary between two regimes. The entire stock market exists as numerous agents whose decisions are not independent. These agents are in a state of disorder under “normal” trading conditions, thus creating return distributions which are normally distributed. As time progresses the market rises and the agents begin to enter a state bordering disorder and order. While in this state, the market attitudes of the agents can be abstracted to fractal islands just like the Ising model when close to criticality; in this state, attitudes are able to percolate through various hierarchies and organizations. I have left out many details, but the general concept is that once the market reaches this state, the probability for a crash becomes large; in other words, a crash is the result of instabilities caused by agents reaching a critical state.

Ising model representing attitudes of agents

My question is this: If market agents realize the instability and expect a crash, will the crash be avoided?

Perhaps there exists a critical proportion of agents who must expect the crash for it to be avoided. If a small number of agents expect the crash, then it will still occur. If more than the critical number of agents expect the crash, it will be avoided. But, if so many agents share the same attitude, doesn’t that make the market even more unstable? With all this order, there will be opportunities for arbitrage. As attitudes flip-flop and cascade through the system, this arbitrage opportunity will occur again and again; faster and faster; this creates the observed log-periodic oscillations. Eventually, the crash occurs. My conclusion seems to be that a crash can not be avoided.

Figure and Ground

People say that in reality there is no arbitrage. They believe that any pattern which arises will be quickly removed. BUT, isn’t the removal of a pattern a pattern itself? Perhaps similar to Hofstadter’s Figure and Ground? Caution: some Grounds are not themselves Figures. I believe that the ideas presented by Sornette may be the pattern of pattern removal. Perhaps there can be strategies based on the removal of a pattern, which is based on the removal of a different pattern… and so forth.

The potential for crash prevention has applications in societal collapse. My intuition tells me that the two are related. If we can answer the question: Can we prevent the crash of a market? Then we will know the answer to the question: Can we prevent the collapse of a society? To me this seems deeply connected with Isaac Asimov’s Foundation Series. In this series Hari Seldon develops psychohistory (from Wikipedia):

Using the laws of mass action, it can predict the future, but only on a large scale; it is error-prone on a small scale. It works on the principle that the behaviour of a mass of people is predictable if the quantity of this mass is very large (equal to the population of the galaxy, which has a population of quadrillions of humans, inhabiting millions of star systems). The larger the number, the more predictable is the future.

It seems that Asimov is once again ahead of his time!

An Organization which Creates a Market for Clean Air

By anautonomousagent

On January 5, 2013

In complexity theory, conservation, economics, finance, investing, science, self-organization, stocks, thoughts, warren buffett

This post is a sequel to a previous story.

Warren, Ben, David, and Taylor meet again. This time they are violently coughing.

Ben: Why is the air is so dirty?

Taylor: Yes, I can hardly see more than a mile through the pollution.

David: It’s sad that we have done this to our once beautiful city. Will we ever be able to clean the air?

Ben: Not sure, perhaps Warren has another great idea?

Warren: I have an idea, but I am not sure if it will work. More of hypothesis really…

David: Any idea is a good idea in these depressing times.

Taylor: Please tell us your idea Warren.

Warren: Well, it’s similar to that idea I had along time ago about pieces of the paper.

Ben: Yes! How could we forget, that idea made us very rich!

David: Make pieces of paper to clean air?

Taylor: I don’t see the point yet, but please continue.

Warren: Just think of these figures — the average human lives 67 years; this person will inhale about 11,000 to 14,000 liters of air each day; thus, in a life-time a person will inhale about 6.5 billion liters of air.

David: Wow! that seems like an enormous quantity of air.

Warren: It’s about the volume of 2,600 Olympic-size swimming pools.

Taylor: Remarkable when you put it into perspective.

Ben: What do these figures mean?

Warren: Ah, well they provide an upper estimate on the volume of air a person needs to live for a life-time. Now, we can place a value on clean-air.

Ben: With pieces of paper?

Warren: Yes, exactly.

David: Each piece of paper could be worth a life-time of clean air?

Taylor: Interesting…

Warren: Sounds like a good idea, right?

Ben: I think so, but there are some issues with this idea.

Warren: Please explain.

Ben: Well, what if a person does not own one of these pieces of paper? Do they not get to breathe? It does not seem possible to force people to buy these papers.

Warren: I would never allow that to happen! Rather, these pieces of paper are only theoretical rights to clean air. Much like the idea of paper representing the value of a company. The paper only obtains value through trading in a market.

David: I see! Through the complex interaction of market agents we will be able to establish the value of clean air.

Taylor: Not to mention the money we will intially raise by selling these pieces of paper.

Ben: Just like Warren’s other idea!

David: Ironically, people would expect the value to increase as pollution gets worse.

Warren: And, as the value increases, a larger amount of money can be raised by additional issuance of these papers. With this money we could develop sophisticated clean air technologies.

David: If the technologies work then the value of the papers should decrease.

Warren: True.

Ben: I like the idea. But I feel it would not work. An international organization would have to be responsible for issuing these pieces of paper; the organization’s sole purpose would be to clean and reduce pollution. And, as we know from history, corruption is always a problem.

Taylor: I agree. If the people running the organization don’t spend the money properly, the whole idea will crumble.

Warren: Well, like I said before, I am not sure if the idea will work.

David: I think it’s at least worth a try.

Ben: Agreed!

Taylor: So… how do we get this idea off the ground?

The Essays of Warren Buffett: Lessons for Corporate America – Warren Buffett

By anautonomousagent

On January 2, 2013

In book, business, finance, investing, stocks, warren buffett

To gain a better understanding of the investment philosophy and managerial skill of Warren Buffett I would suggest reading his book: The Essays of Warren Buffett : Lessons for Corporate America.

An Autonomous Agent

exploring the noosphere

Category: finance (Page 5 of 6)

Zero Hedge

A Simple Strategy to Earn Good Returns

Can a Stock Market Crash be Avoided? Can the Collapse of Society be Avoided?

An Organization which Creates a Market for Clean Air

The Essays of Warren Buffett: Lessons for Corporate America – Warren Buffett

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