[lbo-talk] NYT on equity risk premium

Jordan Hayes jmhayes at j-o-r-d-a-n.com
Mon Feb 27 09:46:46 PST 2006


Doug asks:


> Why, if stocks are more volatile than bonds, should they return more?

I think there's a clue buried in this story:


>> there may just be something
>> special about American capital markets

Note the emphasis on _American_ capital markets. And there is: it's called liquidity, transparency, and regulation. Despite all the terrible stories you hear, on par, it's very difficult to be a publically traded company in the US. You're held to very high standards of those three; slip on any one of them, and you get dropped like a hot potato. This is related to the phenomenon of small-caps: the good ones don't stay small, they fall out of the average; so the group as a whole underperforms over time.

So: I think they win because they are well-run companies.

Joanna says:


> For one thing, for the last twenty years, the stock market
> has been subsidized by funnelling forced pension (401K)
> savings into it.

Sort of. But don't forget: a large percentage of 401k plans still don't have access to stock markets at all, but only offer access to a handful of mutual funds sponsored by whomever is administering the plan, many of them fixed-income based.

And it's hardly 'forced' if you're being encouraged in a big way. The plans that include employer contributions couldn't be any more attractive (except with higher limits).


> A friend told me once that 90% of those who invest in stocks lose
> money, but I find it hard to believe it's that bad.

That seems really unlikely. Doug counters with:


> That may be a twisting of the classic factoid that 80% of futures
> traders lose money.

And I'm not even sure that's true; every futures contract has a winner and a loser at each transaction point including the final one. The number you might be misremembering is 80% of options contracts expire worthless, which was put out there by "Options on Futures" by Summa and Lubow and backed up by some numbers from the CME and CBOE, but since American options are often profitable before expiry, only something like 60% of the open interest makes it to expiration.

The big thing about futures _traders_ (as opposed to _trades_) is that it's easy to go bust with whatever you came with: losing it all is a cinch. If you start with, say, $10k, doubling it to $20k is just about as easy as going to zero. But if you go to zero, you're out of the game. Many successful futures traders have done this multiple times before they learn about cash management :-)

/jordan



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