The Investment Scientist

Archive for April 2010

[Guest post by Mike Piper] Conventional investing wisdom states that the risk of holding stocks decreases as the length of the holding period increases. But is that true?

The answer depends primarily upon how you define “risk.”

Decreasing Risk Over Time

If you define risk as “chance of losing money,” then yes, stocks have historically become less risky the longer the holding period:

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China has 1.3 billion people.  In the last two decades, it is the source of seemingly limitless supplies of cheap labor to the world’s manufacturing industries.  Believe it or not, this pool is about to run dry. When that happens, there will be huge implications for the world.

Even before my trip to China, I had read with incredulity that China’s exporting provinces are experiencing severe labor shortages requiring firms to raise wages 20%–30% just to keep the workers they have. My first stop in China was Shenzhen, a city that is home to Walmart’s worldwide procurement center. I stayed in the Evergreen Resort, a facility owned and operated by my friend Mr. Lin.

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[Guest post by Tom Warburton] Last week a buddy walked into my office distressed over unemployment, the economic malaise, gold prices, the prospect of inflation, government debt, currency fluctuations, trade imbalance and future prospects for the stock market.  He basically covered the waterfront of issues we see on the front page of financial magazines and issues we hear talked about on CNBC.

When my buddy left my office (somewhat soothed – I believe – in the knowledge that his portfolio was positioned to achieve his financial goals without regard to the speculations of Jim Cramer), I found myself thinking about the many obstacles that humans have overcome and the unlikelihood that ‘conditions will last’.

In the words of John Allen Paulos, Professor of Mathematics at Temple University and versatile author with books on a wide range of philosophical topics:

“Uncertainty Is The Only Certainty There Is, And Knowing How To Live With Insecurity Is The Only Security”

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What a difference eighteen years have made.

Eighteen years ago, I was awarded a scholarship to study mathematics in the U.S. The China I left behind was very different from the China of today:

  • Then there was no private ownership of automobiles; now China boasts the world’s largest car market.
  • Then there was no private ownership of houses; now there is little public housing left.
  • Then China had a grand total of 28 kilometers (17 miles) of expressway; now China’s expressway network is second only to the U.S.
  • Then there was no high-speed train service to speak of; now China has the fastest high-speed train service in the world covering the equivalent distance of New York to Chicago in three hours.
  • Then China’s economy was the 13th largest; now it is the second largest.

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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.


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