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birb_cromble  2mo ago (text post)   1784 thread views

Weekly Finance Thread

Since a lot of us here have expressed interest in not starving to death in a gutter, I figured I'd start a weekly thread to discuss financial matters.

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Should be easy to show why and score a black eye on Big Dollar Cost Averaging.

Trivial observation: If you have perfect information, your strategy should not do worse than one that ignores it.

There are two errors he's making1: He's buying when a drop is forthcoming, and failing to buy at a price that's the lowest it will ever be. The proper strategy looks like this. Every dollar buys the most shares that it would ever be offered (e.g. your December 1999 dollars will eventually be offered the 2009 price, so don't buy the microdip in January 2000. Your 2010 dollars will never get a better deal, so don't wait for 2012ish.).

I guess I'm more powerful than God? Feels weird.

1 If he was highlighting the mistake for other people instead of making it himself, I'd think he would show more analysis of exactly why it fails, instead of the raw fact that a flawed strategy can be bad.

He's buying when a drop is forthcoming, and failing to buy at a price that's the lowest it will ever be.

This isn't true - he's buying at the bottom between every pair of ATHs.

The point isn't that this is the best you can do with perfect information - the point is that even if you time each trough perfectly you still usually lose to DCA. More complicated strategies can beat DCA, but they are even harder to get right.

This isn't true - he's buying at the bottom between every pair of ATHs.

Both things can be true. For example:

  1. He bought in January 2000
  2. There was a drop ranging from 2001-2009
  3. Therefore, he bought when a drop was coming.

and

  1. He didn't buy in 2010
  2. Prices never went down as low as they were in 2010 again
  3. Therefore, he failed to buy at a price that was the lowest it would ever be

The algorithm he followed wasn't looking for that, but it happened anyways.

The point isn't that this is the best you can do with perfect information

The blog post could've fooled me. Between the implication that DCA is generally unbeatable and his talks about market timing in general, I'd expect it to do more than shoot down an obviously-flawed strategy while covering up its flaws.

My strategy ("skip the bubbles"? idk a good name) also matches opt-out's post better than buy-the-dip does, as buy-the-dip always buys one wobble before the stock's bubble bursts.

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