The argument is here.
I don't think that the future is going to resemble the past. That doesn't mean I'm out of stocks, but I'm not going to buy an index fund the way I used to. I think a lot of industries that are represented in the major stock indexes will not be there when the long slump is over with. I currently think that I can beat index investing over a ten-year horizon. We'll see. I don't yet see which companies or industries I want to bet on. But I know I don't want to bet on financials or old media companies.
I should point out that the informal consensus among those at the Kauffman forum this past weekend is that Hamilton writes the most valuable posts of any economics blogger. He really puts a of analytics into what he writes, and he makes himself clear to the layman (Although the post I just linked to has some equations that could scare you, my guess is that you could follow the point even if you could not follow the math).
The folks who I would miss the most if they left the blogosphere would be Hamilton, Tyler Cowen, and Mark Thoma, all for different reasons.
Arnold,
Fascinating post by Hamilton.
Question for you: while you're waiting to decide what firms and industries to invest in, in what form are you holding your wealth now?
David
David,
Strategically, I am thinking in terms of a "barbell" or Black Swan objective. I want some stuff that will do really well if inflation gets out of control, and I want some stuff that will do really well if there is a long, deep recession. I want less in-between stuff.
Tactically, I think my execution leaves something to be desired. My inflation Black Swan portfolio is (a) stocks that will benefit from increases in raw materials prices and (b)an exchange-traded fund tied to the price of oil. My deflation Black Swan portfolio is a high-grade corporate bond fund.
Again, I am not thrilled with the tactics. I don't want to spend a whole lot of my life trying to optimize this, though, given that I think that luck will play a big role in the outcome.
Arnold,
I'm coming from a similar background of an index preferring investor now looking at the same type of portfolio you describe.
I didn't make the connection until reading your post, though our thoughts may be driven by Robin Hanson's near-far bias.
If I succumb to that bias, I will likely be looking into shorting a mix of treasuries and going long on TIPS.
I would be interested in learning what others are doing. Here is what I have been doing:
Before October 2008 I holding a lot of cash because I though the market was high because the total market was yielding less than 2%.
I have always liked safe relatively high divided yielding stocks with growing dividends (like KO) and have been buying those lately. For a while I put some money in index funds and I have now come to believe that was a mistake. Very recently I have bought some commodity ETFs (USO, UGA, DBC) but more as a hedge against inflation than an investment. The hedge is great E.G. I gain at the pump or on USO (better to gain at the pump because it is tax free illustrating the old line “a penny saved is two pennies earned because you are not taxed on the penny saved, which BTW illustrates dead weight loss). I have also started to buy selected low debt REITs, they can be a hedge against inflation. I liked BEP for that last few years and it could be good should stocks drift lower for years like they did on Japan. I still like stocks of companies in China risky but with great growth potential. I also bought a rental property recently after it fell 20% (it may be a down another 20% by now but it is rented). I still have a good amount of Cash but since October 2008, I have been investing more of my cash. I am well diversified but I am taking risk. I hope that I do well. IMO this is time to speculate.
HNP Huaneng Power International Inc.
KO is coke
USO is: United States Oil
UGA is: United States Gasoline
DBC is: PowerShares DB Commodity Idx Trking Fund
BEP is: S&P 500 Covered Call Fund Inc.
I have no idea how stocks are going to do, but I've continued to add new money to my IRA index funds.
Berkshire-Hathaway has intrigued me because it has only lost money in two years, and in those years the S&P lost a lot more. (It sometimes underperforms the S&P 500, but those are years in which the S&P has huge gains.)
Although I also fear that I would be getting in at the very top of the BH pyramid before they collapse.
As for inflation, I assume that stocks could deal with it well. 100 shares of Microsoft is 100 shares of Microsoft.
As I understand it, part of the appeal of indexing is the assumption that the market is going to, on average, do a better job than I will of picking the price of any given asset. What is it that you think you know now that is not reflected in current prices on the market? If the question is where to put money down, why are you thinking that the market is now, given all the new information about how crappy financials are, over-valuing these stocks?