WHAT TO DO ABOUT YOUR INVESTMENTS DURING THESE HARD TIMES The COVID-19 pandemic has sent the stock market down dramatically, so Tom brought in an expert: Mitch Tuchman, Chief Investment Officer of Rebalance360.com. Mitch and Company manage over 10,000 portfolios worth over $4 billion. Find out what you should be doing with your investments right now.
Here's the book that Mitch referenced, A Random Walk Down Wall Street by Burton Malkiel (it's on Tom's bookshelf!).
Money questions for a future episode? Send them right here: tom@blowmeuptom.com.
HOUR 1
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GOLD , The metal of the Emotional week
Platinum 30 times less common and way more useful in industry than Gold. At the moment Platinum $790/oz , Gold $1650/oz , don't you find prices Backwards? Gold Can hold value, but will never make you Wealthy.
Gold is a emotional metal, with a Cult following.
Bitcoin not a COIN so its worth nothing.
You cant wipe your A$$ with Crypto like you can with Venezuelan Fiat.
Thanks Tom , Good interview & money episode.
Two Different Markets
Well it is important to remember that there are two different markets when it comes to precious metals. There is the non numismatic bullion market which is tied to the day to day swings of precious metal prices on the stock market. The second market is the collectable numismatic coins one. In this market, the majority of value in these coins is based off of collectability and history. What year was the coin minted? How many were lost, stolen and melted? How many remain? What was going on in US history the year this coin was minted? What is the grade rating of the coin? I have been involved in the numismatic coin market for many years and it has served me well thus far ;)
Random Walk? Not at all...
Ah finance. I love this topic. I find it interesting that Mr. Tuchman didn't reference passive investments risk, which is a growing concern.
On to the main subject of my post -- The Random Walk Hypothesis.
From a synopsis of the book "A Random Walk Down Wall Street" -- "Malkiel argues that asset prices typically exhibit signs of random walk and that one cannot consistently outperform market averages."
This, is absolute bullshit. I know, because I wouldn't be able to make any money at all if it was true. But I have more than just my word to go on.
Harold Hurst was an interesting man -- reference here -- https://en.wikipedia.org/wiki/Hurst_exponent
The main point here is that he created a means to understand a time series, like a list of daily closes for a stock or index, and determine if that series had one of three properties:
Hurst Exponent value less than 0.5 == Mean Reverting, which means that prices tend to reverse direction over time
Hurst Exponent value equals 0.5 == Truly Random, but the funny thing here is that financial data doesn't produce this reading like "A Random Walk On Wall Street" says it should.
Hurst Exponent value greater than 0.5 == Persistent, where prior changes influences future changes - often seen in financial markets following long term cycles/trends.
You can test this by setting up a spreadsheet and loading it up with daily close prices, then calculating the exponent value. If you shuffle the data in the time series -- you'll get a 0.5 or Random result. If you don't, you'll get other values that debunk the theory that financial prices are a random walk -- or a "Bell Curve" gaussian distribution.
Besides the Hurst Exponent, there's another method that is quite simple to perform -- creating a frequency distribution to view the actual spread of prices over time. What you'll find is that instead of conforming to that perfect "Bell Curve", you'll often find that that "tails" of the curve are far more lumpy -- or have extreme change events -- than the standard distribution would assume.
The market isn't perfectly efficient, price data has a "memory" or persistence as shown by the Hurst Exponent, and anyone using the standard or Gaussian distribution as a method to price instruments or make models is a complete fool.
Final proof? Block and Scholes derived a option pricing model that assumed the standard distribution. Its well known that the standard B&S model isn't that great at pricing options, but its better than nothing. Most firms have tweaked their models to fit what financial data actually does.
Funnily enough, Long Term Capital Management or LTCM hired Mr Scholes as part of their advisory board. They based their strategies on his models and input. Unfortunately, they learned the hard way -- they ended up getting on the wrong side of lots of derivatives and essentially needed the Federal Reserve to bail them out -- reference -- https://en.wikipedia.org/wiki/Long-Term_Capital_Management
So, in short, don't trust someone who backs "A Random Walk On Wall Street" as the bible of investing. Its dangerous and misinformed.