Author Archive: indexfundfan

Perfect market timer?

We all know that holding stocks for the long run is the recipe for wealth accumulation. According to MIT Professor Andrew Lo, $1 invested in the S&P 500 index on 1/1/1926 would have grown to about $4000 by the end of 2005. Not bad considering that $1 invested in the aggregate bond market over the same period would have only grown to $18.

However, for a “perfect market timer” who knows precisely when to sell and when to buy, this perfect timer would have grown the $1 to $23 billion. Now we know why market timing remains a popular sport among investors and speculators alike.

Source: April 2006 issue of Fund Alarm.

TIPS are getting attractive

According to data posted HERE, the real yields of TIPS are getting attractive

Date 5 yr 7 yr 10 yr 20 yr*
03/28/06 2.22% 2.25% 2.30% 2.28%

Larry posted a note (49100) on the Diehards website about this today. The upcoming treasury auctions on April 10 (10-yr TIPS) and April 20 (5-yr TIPS) might be good opportunities to get some nice yielding TIPS.

Cognitive Reflection Test

I found the following three questions from an article in the April 2006 issue of Smartmoney rather interesting:

1) A bat and a ball cost $1.10 in total. The bat costs $1 more than the ball. How much does the ball cost?

2) If it takes five machines five minutes to make five widgets, how long would it take 100 machines to make 100 widgets?

3) In a lake, there is a patch of lily pads. Every day, the patch doubles in size. If it takes 48 days for the patch to cover the entire lake, how long would it take for the patch to cover half the lake?

Each question has an intuitive — but wrong — answer. See if you are ‘tricked’ by your intuition. 😉

PS. The answers are given in the Comments.