Avoiding bad trades creates value. Identifying good trades creates value. There’s lots of stuff that can muck things up, but if profit comes from producing scarce things that have value, then ensuring that capital is allocated to where it creates the most value (and therefore profit), is a value-producing activity. Investing is a value-producing activity. I agree, however, that many investors (perhaps vastly) overstate how much value they add, and use that to try to extract value instead.
Investing, done properly, is definitely a value-added activity … “done properly” being the key words. Too many people get fooled by the brand institutional names though, and think people in those institutions have some special insight into generating alpha. All you have to do to understand otherwise is pick up the FT or WSJ and read it critically. Day after day, one of their funds or funds of their alumni blow up or show brutal performance. Today it’s the Carlyle Group. I’ve had seven weeks in of investing my ideas full time and they’re showing terrific performance even through terrible market conditions. It’s a small sample size but it’s still kind of a joke that churners who pile into the same garbage other funds pile into and lose money hand over fist are even still in the game. People are way too fooled by randomness.
+1 bchadwick However, seeing our markets sitting where they were a decade ago would suggest that while investing efficiently in the firms and industries that are most profitable would create value, investors (as a whole) are not investing correctly, and therefore have not been creating value, at least over the past decade. To sum up a run-on sentence: I think investors that are wise enough to choose the right investments add value, but many investors choose the wrong investments and do not add value.
This is what I tell all my friends & coworkers. The basic concept of an investment is a big NPV problem where you have an future cashflow discounted backed according to your opportunity cost. So deciding whether you should invest in a CD at your local bank is a whole lot simpler then buy Japanese equities while both are investments they have two different set of risks. These risk are unknown and the best you can do is estimate the parameters and make your best judgment (while it is a whole lot easier to quantify the risk of the CD at your bank). You might make money or you might lose money but that is apart of the game. The awesome part about investing is mr market, mr market is simply taking the average of all the collective players guesses’ (in a liquid market). Mr market changes when new information shows up and risk parameter changes again. No-one will ever really know whats going to come out next. So what I am trying to say investing in an efficient market is all about forming expectations on future events, the market’s expectations on future events, understanding the risk of an investment, and your own personal constraints. You can do everything that I listed above right and be a losing but good investor.
Also, By being participants in the capital markets are we not implicitly promoting innovation and progress by making sure that when a seemingly good idea comes up, it will have capital available for it.
needhelp Wrote: ------------------------------------------------------- > I question whether investments is a real science, > or even an art form, or a bit of both. I suspect > it’s neither. Its not art in an aesthetic sense. > It could be art as selling micorwaves could be an > art. > > Before I became a Charterholder and didn’t really > understand investments, I knew that alpha was a > myth and didn’t exist. Very few people agreed with > me and they were purists like me. Then I got lost > in all the investment talk but now I am realizing > how much I agree with my past self once again. > > Investments is all about sales and marketing. It’s > the same money exchanging hands over and over. > Whoever comes up with a new scam gets to keep the > money until someone comes up with a better sales > technique. It doesn’t matter what you are saying > as long as you look good and confident saying it. > > Nobody wants to hear the truth. If you tell the > truth then you become unpopular internally and > externally. It starts with external clients. They > don’t want to hear the bad news. I am talking > about institutional here, not individual clients. > > So yeah we are in the business of brochures, and > suits and sleek hair, smooth talking and using big > words. Its not really like being a doctor or an > engineer or an architect. Those people do > something real for a living. > > But since it pays the bills rather handily, I will > keep my job. For now. Did you work for Lehman Brothers?
I don’t work at Lehman. My point is that the size of the pie has not been increasing. Asset managers promise creating alpha but this is not economic alpha in that they aren’t looking to invest in areas that might expand the pie. Instead they are looking to enlarge their own slice of the pie.
Any chance of an invisible hand acting here?
I think it is beating the crap out of us. 