For example, a toy car is a model of a real car. For the purpose of "entertaining a 4 year old" it is a useful model. For the purpose of measure the safety features of the vehicle, it is not particularly useful.
Similarly, architects drawings are a model of a house. For the purpose of "instructions for the builder" they should be particularly useful, and should they not serve this purpose well, the model could be considered "incorrect".
So, models can be considered "inaccurate" if they are not useful. Of course, two models can be very different, and both very useful.
My basic strategy for investing goes something like this:
- Identify quality companies.
- If/when they become cheap, buy them.
- Hold cash in the mean time.
A friend once dismissed this model of investing because I treated cash differently to stocks. He had a model where all asset classes where just "places to put your money". For example, by deciding to sell a stock, you were, at the same time, deciding to buy cash. And, therefore, cash should be considered just another stock.
So, which is a better model? The one that considers AUD to be "just another stock on the ASX", or the one that considers AUD to be "outside" of all the stocks on the ASX?
I understand where he is coming from. However, to munge in a well known phrase by Einstein: "Models should be as simple as possible, but no simpler". By trying to treat cash as a stock, I think that my friend has simplified one-level too far. And I just can't find that model intuitive or useful.
Anyway, I think that I'm just procrastinating. I believe that holding cash whilst waiting for great buys is the best thing to do, in terms of maximizing my long term rate of return, however I'm yet to do the work to prove it.
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Okay, at the risk of rehashing old arguments, if AUD is more than 'just another stock', then what is USD? It is 'cash' or 'another stock'? What about EUR, GBP or CNY? Many people have made lots of money on forex 'investment'. What about gold?
ReplyDeleteHolding a particular form of wealth is just a position. Holding the currency of a particular government is taking a position on the viability and integrity of that government (if the government collapses or starts printing more money quickly, you can expect your holdings to go down in relation to other holdings).
"Well I play the stock market of the spirit, and I sell short." - Ellsworth M. Toohey.
I'm currently sitting in a room with 4 walls and a ceiling.
ReplyDeleteI'm currently sitting in a room with 5 walls - 4 of which are vertical and 1 is horizontal, sitting on top of the other 4.
By trying to oversimplify, you can actually create complexity.
My strategy requires that funds are available in the limited and brief times that the quality companies are cheap. Holding cash supports this requirement, and being 100% in stocks does not.
Holding multiple currencies, or trying to gamble in anyway with the "cash" component creates complexity and risk for the strategy, and is distracting from the core of the strategy, and so they are not necessary for the model.
I have modeled my strategy on Buffett's investing strategy, and Buffett has made more money from investing that any forex trader, and so I believe that my strategy, or some close variant, is the way to maximum the expectation value of returns.