Author Topic: 3 Reasons Some Sophisticated Investors Don't Buy Index Funds (Joshua Kennon)  (Read 42538 times)

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Re: 3 Reasons Some Sophisticated Investors Don't Buy Index Funds (Joshua Kennon)
« Reply #100 on: December 31, 2014, 01:57:53 PM »
It's great work but I don't know if one 32 year backtest is going to convince me. It'll be interesting to see how things like that perform over time.

Here is a good article on sector weighting:

https://blog.personalcapital.com/investing/is-smart-indexing-a-good-investment-strategy/

Sector weighting helps smooth out your portfolio returns by removing sector specific the booms and busts. Examples: the tech craze and crash in 2000 and the 2008 financial collapse. The portfolio is also tilted toward the small caps to enhance return (similar to VTI).

Here is a equal weighted portfolio vs. the S&P. Note the excess size of the tech and finance companies and the small size of communications, utilities, and materials.



The weighting works because it negates the effect of cap weighting. Example: Index funds buy more and more Apple as it becomes larger. This is great if something keeps growing larger, but amplifies "hot stocks" that grow beyond their valuation (an extreme example is in 1999 when the dotcom companies were selling for 200-300x their earnings).

Here us another back tested equal weight portfolio:






Dodge

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Re: 3 Reasons Some Sophisticated Investors Don't Buy Index Funds (Joshua Kennon)
« Reply #101 on: December 31, 2014, 02:01:15 PM »

Tax loss harvesting adds about 1% per year to the return of a taxable account.

The above portfolio (An equal weight total market portfolio) adds ~2% to the return of a cap weighed index fund.

That's the difference between 10k turning into 27k in 15 years or 41k. The complication might be worth it...

Only if there are the losses to use the tax loss harvesting to get that 1%.

Only if your particular weights  result in that 2% additional return.

There is not free lunch. You haven't discovered some magical index combination that will always perform better. It will sometimes and it won't others. It is essentially just a riskier and therefore potentially more profitable AA.

Furthermore the whole point of the thread was about a discussion about sophisticated investors and not buying index funds. I was merely trying to point out that you and Scandium actually share more in common in regards to the bigger picture of this thread.

"Only if there are the losses to use the tax loss harvesting to get that 1%."

Correct.  History shows that after the first year or two, any individual deposit (tax lot) loses all ability to tax loss harvest.

"Only if your particular weights result in that 2% additional return."

Correct again.  For any new investors reading the thread, this is a common trap many investors fall into.  Be sure to avoid it.  History has shown that choosing a portfolio based on past returns is not likely to end well.  Keep it simple, stay the course, and the odds are overwhelmingly in your favor that you will end up well ahead of these portfolios over the long term.
« Last Edit: December 31, 2014, 02:03:35 PM by Dodge »

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"Only if there are the losses to use the tax loss harvesting to get that 1%."

Correct.  History shows that after the first year or two, any individual deposit (tax lot) loses all ability to tax loss harvest.

"Only if your particular weights result in that 2% additional return."

Correct again.  For any new investors reading the thread, this is a common trap many investors fall into.  Be sure to avoid it.  History has shown that choosing a portfolio based on past returns is not likely to end well.  Keep it simple, stay the course, and the odds are overwhelmingly in your favor that you will end up well ahead of these portfolios over the long term.

Do you not understand how a portfolio like this works or are you just telling people to keep it simple because 14 ETFs are overwhelming?

There is no trap. There is no choosing random securities. All this portfolio is attempting to do is to correct the short comings of traditional index portfolios, ie the 3 fund portfolio. I'll go ahead and quote this because it is clear you did not read the thread:

Quote
Most S&P selection criteria actually runs contrary to making good investment decisions:

-a market cap of $5.3 billion - It is harder to compound 5+ billion dollars than a smaller sum.

-headquartered in the U.S. - Nestle, Diageo, Munich Re, Honda, Toyota, Airbus, Budweiser are all left out of the index.

-the value of its market capitalization trade annually - This was an element added for indexing funds. You cannot buy millions of shares if their is not sufficient turnover.   

-at least a quarter-million of its shares trade in each of the previous six months - Same as above. This is why Berkshire Hathaway was left out of the index before its 50:1 stock spit.

-most of its shares in the public’s hands - Wouldn't you rather partner with management who held significant "skin in the game"? Google the "wealth index" to see what happens when you invest in an index of companies where the founder still works as the ceo and ownes a significant portion of the company. Buffett, John Malone, Nicholas Howley etc...

If you want to index. That's fine, but do so intelligently. What are ways you can index and minimize the negatives of the S&P's selection criteria? My problem with many of the indexes, especially those mirrored by vanguard, is the selection criteria. The criteria centers around liquidity and is necessary so vanguard can invest 100's of billions of dollars, not because it is a good way to weight your portfolio. 

These points are not opinions. You can choose to ignore them, but you are giving up portfolio diversity and returns.

Why do you use VTI as opposed to the S&P 500 EFT? VTI is more diversified and outperforms the S&P 500 with similar risk. Why do you add bonds and international to your 3 fund portfolio? To diversify and lessen risk. All this "smart" portfolio is doing is getting rid of cap*liquidity weighting which exists to allow for the creation of larger indexes, not to enhance returns or represent the market as a whole.

Think of it this way:

You hold 3 funds as opposed to only VTI to increase the Sharpe ratio (measure of return vs risk) .05 from 0.49 to 0.54. This portfolio increases the Sharpe ratio .06 from 0.54 to 0.6. It might not seem like much, but this portfolio is as superior to your 3 fund portfolio as the three fund is to a 100% VTI portfolio.

I understand if you are just directing new investors to keep them from being overwhelmed. If you are arguing because you think a 3 fund porfolio is superior, you are ignoring facts. A lazy 3 fund portfolio will do fine in the long run, but has unperformed this portfolio in 5/6 5 year periods since 1982 (the only period it did not outperform what the tech crazy which ended up being a good thing). If you are too lazy to run a superior portfolio then state that as your reason. An extra % is worth it too me.

matchewed

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"Only if there are the losses to use the tax loss harvesting to get that 1%."

Correct.  History shows that after the first year or two, any individual deposit (tax lot) loses all ability to tax loss harvest.

"Only if your particular weights result in that 2% additional return."

Correct again.  For any new investors reading the thread, this is a common trap many investors fall into.  Be sure to avoid it.  History has shown that choosing a portfolio based on past returns is not likely to end well.  Keep it simple, stay the course, and the odds are overwhelmingly in your favor that you will end up well ahead of these portfolios over the long term.

Do you not understand how a portfolio like this works or are you just telling people to keep it simple because 14 ETFs are overwhelming?

There is no trap. There is no choosing random securities. All this portfolio is attempting to do is to correct the short comings of traditional index portfolios, ie the 3 fund portfolio. I'll go ahead and quote this because it is clear you did not read the thread:

Quote
Most S&P selection criteria actually runs contrary to making good investment decisions:

-a market cap of $5.3 billion - It is harder to compound 5+ billion dollars than a smaller sum.

-headquartered in the U.S. - Nestle, Diageo, Munich Re, Honda, Toyota, Airbus, Budweiser are all left out of the index.

-the value of its market capitalization trade annually - This was an element added for indexing funds. You cannot buy millions of shares if their is not sufficient turnover.   

-at least a quarter-million of its shares trade in each of the previous six months - Same as above. This is why Berkshire Hathaway was left out of the index before its 50:1 stock spit.

-most of its shares in the public’s hands - Wouldn't you rather partner with management who held significant "skin in the game"? Google the "wealth index" to see what happens when you invest in an index of companies where the founder still works as the ceo and ownes a significant portion of the company. Buffett, John Malone, Nicholas Howley etc...

If you want to index. That's fine, but do so intelligently. What are ways you can index and minimize the negatives of the S&P's selection criteria? My problem with many of the indexes, especially those mirrored by vanguard, is the selection criteria. The criteria centers around liquidity and is necessary so vanguard can invest 100's of billions of dollars, not because it is a good way to weight your portfolio. 

These points are not opinions. You can choose to ignore them, but you are giving up portfolio diversity and returns.

Why do you use VTI as opposed to the S&P 500 EFT? VTI is more diversified and outperforms the S&P 500 with similar risk. Why do you add bonds and international to your 3 fund portfolio? To diversify and lessen risk. All this "smart" portfolio is doing is getting rid of cap*liquidity weighting which exists to allow for the creation of larger indexes, not to enhance returns or represent the market as a whole.

Think of it this way:

You hold 3 funds as opposed to only VTI to increase the Sharpe ratio (measure of return vs risk) .05 from 0.49 to 0.54. This portfolio increases the Sharpe ratio .06 from 0.54 to 0.6. It might not seem like much, but this portfolio is as superior to your 3 fund portfolio as the three fund is to a 100% VTI portfolio.

I understand if you are just directing new investors to keep them from being overwhelmed. If you are arguing because you think a 3 fund porfolio is superior, you are ignoring facts. A lazy 3 fund portfolio will do fine in the long run, but has unperformed this portfolio in 5/6 5 year periods since 1982 (the only period it did not outperform what the tech crazy which ended up being a good thing). If you are too lazy to run a superior portfolio then state that as your reason. An extra % is worth it too me.

I think it's the point that all you're doing is moving risks from one thing to another. An equal weight portfolio has more sector risk in some sectors than a market cap portfolio. It doesn't lessen risk just shifts it to somewhere else.

This equal weight portfolio will also have higher turnover as each sector will behave differently and you have to buy/sell some sectors to maintain that equal weight. This in turn means more active management which means more fees.

Again no free lunch. It's an interesting idea but it is no different than any other guessing game. I'd still advise most people to stick with simple market based index funds. If you're a "sophisticated investor" then you're probably not looking for advice on this board anyway for investing, you're already sophisticated.

Dividend Growth Investor

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Re: 3 Reasons Some Sophisticated Investors Don't Buy Index Funds (Joshua Kennon)
« Reply #104 on: February 11, 2015, 10:12:58 AM »
That's an interesting article, with good points. The thread of course has a lot of interesting comments. I  think that the strategy someone chooses to invest their money ultimately depends on:
1) Investor goals
2) Level of knowledge & experience
3) Ability to stick to strategy through thick and thin
4) Investor limitations, such as time commitments, or workplace restraints

I personally know several people who would never even touch stocks. But they are doing pretty well financially by investing in rental real estate. So whether their "total returns" are lower or higher than what an investment in S&P 500 would have been over the past 10 - 20 - 30 years is irrelevant to them. They bought what they knew, they live off those rent checks, and reinvested the rest into more properties
I personally have most of my money in dividend growth stocks and would feel uncomfortable holding a portfolio:
- which someone else picked, and charges me money for it
- which can be changed on a whim regardless of insane valuation levels ( e.g. Yahoo being added in 1999 to S&P 500)
- which is structured in a way that it accommodates large money inflows from funds, not underlying business fundamentals
- which would require me to sell off assets, and expose me to return frequency risk ( which could be bad during a prolonged flat or down market – like the 1999 – 2012 period)
- which looks diversified on the surface, but the largest 30 – 40 components account for almost half of portfolio
- which exhibits a lot of turnover, and as we all know, frequent churning of holdings is bad for long-term returns
Instead, I buy companies that pay and grow dividends. I expect to hold them “forever”, or if something changes (if they cut those dividends).  My dividends are always positive, and grow above the rate of inflation. I have a say on valuation,  portfolio weights , I monitor my companies, I research them,  and I enjoy it. My annual investment expenses are lower than the lowest cost Vanguard fund, and I rarely sell.  It is easier for me to focus on dividend income growth, rather than focus on stock price fluctuations ( particularly relative to another group of securities). I cannot tell you whether the stock market will up, down, or sideways in the next 10 years. But I can be reasonably certain that the companies I own as a group will pay me good and growing dividends. If they don’t then we will have much bigger problems to worry about than the performance of investment portfolios.

My thing is, if I needed say $30K/year, and my portfolio throws off $30K/year, then why do I care about how much more I would have earned in another scenario? When you compare yourself to others, you will never be happy, and you are much more likely to do a stupid thing at the wrong time ( e.g. change a strategy if it has a temporary setback, and thus compound problems).
I mean, if I had studied to be a software engineer, rather than business school, I might have made more money but be totally miserable and much less likely to stick to working in the field.

skyrefuge

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Re: 3 Reasons Some Sophisticated Investors Don't Buy Index Funds (Joshua Kennon)
« Reply #105 on: February 11, 2015, 11:31:30 AM »
I personally have most of my money in dividend growth stocks

LOL. Who knew all we had to do was post some links to the blogs of the Dividend Boys, and after checking the referrers they would suddenly poof into existence here like a couple of genies!

Except genies grant wishes.

All we get from you is a tired spiel on dividend growth investing that you've probably repeated 100 times on your blog, in a thread that has nothing to do with dividend investing, based on an article that had nothing to do with dividend investing.

What a ripoff. I want my wishes. :-(

Retire-Canada

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Re: 3 Reasons Some Sophisticated Investors Don't Buy Index Funds (Joshua Kennon)
« Reply #106 on: February 11, 2015, 02:18:50 PM »
It saddens me that MMM readers (who are taking the time to air dry laundry for God sake)  won't take the time to become sophisticated investors. 

Hahaha....I liked that. As I make decisions along my retirement path I try to keep a big picture view of things are not spend time on 10.001% stuff when there is 8% gains to be made.

One thing though at the moment my investment skills are low and my time to learn is limited. Once I am working less than 50% of the time I'll be able to gain better investment knowledge, but the time to grow my money fast is now and later on I'll need to be more cautious with it.

Dividend Growth Investor

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Re: 3 Reasons Some Sophisticated Investors Don't Buy Index Funds (Joshua Kennon)
« Reply #107 on: February 12, 2015, 07:29:59 AM »
I personally have most of my money in dividend growth stocks

LOL. Who knew all we had to do was post some links to the blogs of the Dividend Boys, and after checking the referrers they would suddenly poof into existence here like a couple of genies!

Except genies grant wishes.

All we get from you is a tired spiel on dividend growth investing that you've probably repeated 100 times on your blog, in a thread that has nothing to do with dividend investing, based on an article that had nothing to do with dividend investing.

What a ripoff. I want my wishes. :-(

Anytime someone launches a personal attack against me, I remind myself of the words of Charlie Munger:

"Never wrestle with a pig because if you do you'll both get dirty, but the pig will enjoy it."




clifp

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Re: 3 Reasons Some Sophisticated Investors Don't Buy Index Funds (Joshua Kennon)
« Reply #108 on: February 12, 2015, 09:31:14 PM »
Buffett's public advice is also very different from his private advice and what he does. He also just gives so much advice that a lot of it is contradictory. He always talks about buying companies with moats and competitive advantages, but he does do cigar-butt net-net investing whenever he has the opportunity, even quite recently (see PetroChina, Daehan Flour Mills, etc.).

He says individual investors should index, but he also talks about how someone can do what he did in the '50s (invest in obscure securities and make high rates of return) now, too, many of the same factors exist.

The point is that disciplined index investing is in fact the optimal strategy for the vast majority of people. But that doesn't mean it's literally the only strategy that works for anyone. MMM is about DIY. If someone has the aptitude and interest in becoming educated in finance and accounting, and the emotional discipline to invest in individual securities, and the willingness to spend a lot of time on it, they may in fact be able to beat the market (or otherwise achieve their individual goals that may not have to do with beating the market as such, which was the point of Joshua's article).

It's like saying no one should make furniture because everyone can buy cheap furniture at IKEA. If you have the aptitude and ability to make furniture, it can still make sense for you because you can make better furniture and you have fun doing it. If you can get good results and enjoy the process, you shouldn't be ostracized as only a lucky gambler because you aren't only investing in index funds.

Very well said.

One of the things I find frustrating in these discussion is the insistence by the index zealots that inability of most mutual funds to beat the S&P or even the appropriate index over extended periods of time, should be broaden to conclude individuals can't either.  Mutual funds are not individual people, they are almost always made up of  teams of people.  The membership of the team is constantly changing, the average tenure of mutual fund manager is 4.5 years, and I suspect the tenure of the assistant manager, or the junior analyst is even shorter.

I like to use a sport analogy.  Think of individual professional athlete as stocks,  Aaron Rodgers as Apple, Kevin Durant as GE, and   Clayton Kershaw as Google.  There are only a couple thousand major league players and several thousand more minor league players, a similar number to number of US stocks.  There is a great deal of information and analysis available about the top players, and Dow company, much less about minor league players or microcap stocks.  There is a strong consensus that Apple, GE, and Google will all make billions of dollars next year, and the Rodgers will throw lots of TDs, Durant score lots of points, block shots, and Kershaw pitch some great games and have a low ERA.  Now stuff might happen that would cause the company/player to have a bad year. 

The real challenging thing is for a general manager figure out it these star players are worth their salary/draft picks.   On average sports team lose as many games as they win, and over long periods (25+ years) almost no teams are over 600 (The Yankees, Lakers,and Celtics I believe being the only exceptions last I looked). Yet there is a little doubt that some General Manager (e.g. A's manager Billy Beane of Money Ball fame) are more skilled at evaluating talent than others.  The difficulty that sports franchise have is the same that mutual funds have it is really difficult to spot the great general manager/coach of money manager in advance, and once you know about them they become very expensive and often unobtainable.  There is also a significant amount of luck involved in both sports and stock picking which makes it hard to differentiate skill vs luck.

A really recent phenomena is fantasy sports league, where players get to act as their own general manager and create their own team.   Eventhough I love games, and have enjoyed sports game in the past, I have no interest in participating in fantasy sports.  This is for a simple reason, I know a little about basketball, even less about football, and virtually nothing about baseball.  As such I know that I'd be crushed in fantasy sport league.  Now that doesn't mean I might not get lucky and have a winning team or two, but I pretty convinced that there is skilled involved fantasy sports, and I don't have it.  In fact, I suspect that there are actually fantasy sport players who are better managers than many college and even a few professional general managers.

I am willing to invest roughly as much time as most serious fantasy sports fans in investing in stocks. I don't have to be Warren Buffett, or Peter Lynch  I just have to be better than most folks to make it worth my while, and after 30+ years of doing it, I am pretty convinced I am.
« Last Edit: February 12, 2015, 11:12:43 PM by clifp »

Jags4186

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Joshua Kennon is obviously a smart guy--and if he's telling the truth about everything (no doubt that he isn't) he's super successful and has made a boat load of money.  I haven't read all of his blog posts, but many of his investing ones show how he has made impressive gains picking blue chip stocks, as well as huge gains picking up great values in IPOs and also penny stocks (American Eagle/Yankee Candle).  I can't help but wonder how much of this is luck vs true skill.  Again, not saying he doesn't have skill, but it was hard to not make money after 2009 picking up companies like GE, JNJ, KO, MCD.  Of course--I didn't do it because I am a brainwashed indexer.  I would feel like a failure if I were to venture off and try to pick stocks to outperform my VFIAX/VTSAX benchmark. 

I read Joshua Kennon and I go "is it really that hard to see that Disney and Coca Cola and Exxon make boat loads of money every year?  Buy them!" and then I read Jim Collins and go "man Jim is way smarter than me and he just says buy VTSAX...he pissed away money trying to do what Joshua is doing." 

So here I am, an indexer, unable to bring myself to try to take chances and pick up some stocks.  I guess  I'll just have to stick to average.

bacchi

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Again, not saying he doesn't have skill, but it was hard to not make money after 2009 picking up companies like GE, JNJ, KO, MCD.  Of course--I didn't do it because I am a brainwashed indexer.  I would feel like a failure if I were to venture off and try to pick stocks to outperform my VFIAX/VTSAX benchmark. 

VTI did done better that any of those picks. :)

tj

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Again, not saying he doesn't have skill, but it was hard to not make money after 2009 picking up companies like GE, JNJ, KO, MCD.  Of course--I didn't do it because I am a brainwashed indexer.  I would feel like a failure if I were to venture off and try to pick stocks to outperform my VFIAX/VTSAX benchmark. 

VTI did done better that any of those picks. :)

VTI did bette than GE, JNJ, KO or MCD over what time period period? Certainly not true over all time periods.

bacchi

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Again, not saying he doesn't have skill, but it was hard to not make money after 2009 picking up companies like GE, JNJ, KO, MCD.  Of course--I didn't do it because I am a brainwashed indexer.  I would feel like a failure if I were to venture off and try to pick stocks to outperform my VFIAX/VTSAX benchmark. 

VTI did done better that any of those picks. :)

VTI did bette than GE, JNJ, KO or MCD over what time period period? Certainly not true over all time periods.

Correct. I was looking at 1/1/2010 - 3/10/2015.

If it was timed correctly, a MCD sale in in 2012-2013 would've done better than VTI.

retireatbirth

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Index,

Just so I have this straight, the idea is to basically decompose the index fund into a collection of index funds thereby giving you more gains when you rebalance?

skyrefuge

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Yet there is a little doubt that some General Manager (e.g. A's manager Billy Beane of Money Ball fame) are more skilled at evaluating talent than others.

I think you misunderstood the story of 'Moneyball' a bit. Billy Beane's success came not because he was a good talent evaluator (he was almost the opposite), but because he was good at finding inefficiencies in the market and exploiting them. During the Moneyball era, it was that on-base-percentage was undervalued by the market. Rather than looking at a player's talent, he'd just look at their OBP statistic, see how much the market was paying them, and acquire them if it could be done cheaply.

I was actually quite astonished that such inefficiencies could exist for decades in a market with so much money flying around, but given that there are only 30 players in that market at any one time, and most of them didn't come from a math or financial background, it made at least a bit of sense. But once Beane started revealing an inefficiency, the rest of the market quickly wised up, closed the inefficiency, and forced Beane to find another one. As the teams hired more statistically-minded people, it's become more and more difficult for Beane to stay ahead of anyone else.

I'm quite sure that if these inefficiencies are finally being wrung out of the baseball market, they were wrung far more thoroughly out of financial markets ages ago, given the amount of financially-motivated brainpower that dwarfs that found in the MLB market.

I don't know about general managers, but it's almost impossible to be a standout field manager in MLB (only 6 of 172 mangers in the last 30 years have been shown to improve their team). But your stats about the rarity of .600+ teams seem to show how rare outperforming GMs/owners are too. And I'd guess those are about an order of magnitude easier to find than a standout portfolio manager.

Chuck

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Index,

Just so I have this straight, the idea is to basically decompose the index fund into a collection of index funds thereby giving you more gains when you rebalance?
This + creating a "properly" weighted portfolio, by sector. Because some sectors are over/underweight. Which ones? I don't know. He's the one with the magic stock picking sector picking crystal ball.

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Quote
I am willing to invest roughly as much time as most serious fantasy sports fans in investing in stocks. I don't have to be Warren Buffett, or Peter Lynch  I just have to be better than most folks to make it worth my while, and after 30+ years of doing it, I am pretty convinced I am.

have you measured your performance against a benchmark?

Are you able to show us the  results?

cheers mate.

LordSquidworth

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Joshua Kennon is obviously a smart guy--and if he's telling the truth about everything (no doubt that he isn't) he's super successful and has made a boat load of money.  I haven't read all of his blog posts, but many of his investing ones show how he has made impressive gains picking blue chip stocks, as well as huge gains picking up great values in IPOs and also penny stocks (American Eagle/Yankee Candle).  I can't help but wonder how much of this is luck vs true skill.  Again, not saying he doesn't have skill, but it was hard to not make money after 2009 picking up companies like GE, JNJ, KO, MCD.  Of course--I didn't do it because I am a brainwashed indexer.  I would feel like a failure if I were to venture off and try to pick stocks to outperform my VFIAX/VTSAX benchmark. 

I read Joshua Kennon and I go "is it really that hard to see that Disney and Coca Cola and Exxon make boat loads of money every year?  Buy them!" and then I read Jim Collins and go "man Jim is way smarter than me and he just says buy VTSAX...he pissed away money trying to do what Joshua is doing." 

So here I am, an indexer, unable to bring myself to try to take chances and pick up some stocks.  I guess  I'll just have to stick to average.

Kennon's general advice for people is to just index. He's particular about sharing info on what he is investing in. If he's writing about it, seldom is it real time, rather he's already moved past that investment decision. He's not trying to give advice, most of his stock related posts are more case studies and he tents to keep to blue chips for those.

retireatbirth

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Another point that I don't know has been mentioned is that the bid/ask spread on ETFs can drag on performance. This is especially impactful when you are regularly purchasing. Vanguard has a tool to compare VTI to their equivalent fund and I found the fund came out on top after accounting for these factors. I'd be worried about bid/ask dragging my portfolio with so many sector ETFs.

Aphalite

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Correct. I was looking at 1/1/2010 - 3/10/2015.

If it was timed correctly, a MCD sale in in 2012-2013 would've done better than VTI.

If you're looking at price appreciation only, then you're not getting the full story

edit: looks like for total returns, VTI is still beating KO and GE for the time period listed (too lazy to look up the others)
« Last Edit: March 11, 2015, 05:52:21 PM by aphalite »

RapmasterD

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Again, not saying he doesn't have skill, but it was hard to not make money after 2009 picking up companies like GE, JNJ, KO, MCD.  Of course--I didn't do it because I am a brainwashed indexer.  I would feel like a failure if I were to venture off and try to pick stocks to outperform my VFIAX/VTSAX benchmark. 

VTI did done better that any of those picks. :)

VTI did bette than GE, JNJ, KO or MCD over what time period period? Certainly not true over all time periods.

Correct. I was looking at 1/1/2010 - 3/10/2015.

If it was timed correctly, a MCD sale in in 2012-2013 would've done better than VTI.

Such a short time frame with mostly nothing but up and to the right! Let's look at a 15 year time frame and use VTSMX instead of VTI, as I don't think VTI has been around for 15 years.

Total Returns (% per year) in the last 10 years according to Morningstar:
GE:-1.09%
JNJ: 8.66%
KO: 5.56%
MCD: 9.17%
VTSMX: 4.65%

So basically, every one of these stocks except GE (duh!) beats the Vanguard Total Stock Market Index. Now don't get me wrong -- I'm mostly an indexer, but as Joshua and Warren say, it's all about the holding period people....and within this lengthy timeframe you've got both a moderately crappy downturn (early 2000s) and a meltdown (2008) constituting "the lost decade."

tj

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Again, not saying he doesn't have skill, but it was hard to not make money after 2009 picking up companies like GE, JNJ, KO, MCD.  Of course--I didn't do it because I am a brainwashed indexer.  I would feel like a failure if I were to venture off and try to pick stocks to outperform my VFIAX/VTSAX benchmark. 

VTI did done better that any of those picks. :)

VTI did bette than GE, JNJ, KO or MCD over what time period period? Certainly not true over all time periods.

Correct. I was looking at 1/1/2010 - 3/10/2015.

If it was timed correctly, a MCD sale in in 2012-2013 would've done better than VTI.

Such a short time frame with mostly nothing but up and to the right! Let's look at a 15 year time frame and use VTSMX instead of VTI, as I don't think VTI has been around for 15 years.

Total Returns (% per year) in the last 10 years according to Morningstar:
GE:-1.09%
JNJ: 8.66%
KO: 5.56%
MCD: 9.17%
VTSMX: 4.65%

So basically, every one of these stocks except GE (duh!) beats the Vanguard Total Stock Market Index. Now don't get me wrong -- I'm mostly an indexer, but as Joshua and Warren say, it's all about the holding period people....and within this lengthy timeframe you've got both a moderately crappy downturn (early 2000s) and a meltdown (2008) constituting "the lost decade."

How about Mid cap index? As I recall, it did pretty well in the "lost decade"

clifp

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Quote
I am willing to invest roughly as much time as most serious fantasy sports fans in investing in stocks. I don't have to be Warren Buffett, or Peter Lynch  I just have to be better than most folks to make it worth my while, and after 30+ years of doing it, I am pretty convinced I am.

have you measured your performance against a benchmark?

Are you able to show us the  results?

cheers mate.

Using the Schwab portfolio tool, I'm up 16.4% annually since Jan 2009 vs 13.3% of a moderately aggressive portfolio (basically a 80/20) and I've done so while taking slightly less risk standard deviation of 12.3 vs 12.8% for the index. Over a longer period of time. I've taken my 16 yeasr of 401K contributions, ages 24-40 (when I retired) and over the last 30 years turned it into over a $1 million.
« Last Edit: March 11, 2015, 07:44:58 PM by clifp »

clifp

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Yet there is a little doubt that some General Manager (e.g. A's manager Billy Beane of Money Ball fame) are more skilled at evaluating talent than others.

I think you misunderstood the story of 'Moneyball' a bit. Billy Beane's success came not because he was a good talent evaluator (he was almost the opposite), but because he was good at finding inefficiencies in the market and exploiting them. During the Moneyball era, it was that on-base-percentage was undervalued by the market. Rather than looking at a player's talent, he'd just look at their OBP statistic, see how much the market was paying them, and acquire them if it could be done cheaply.

I was actually quite astonished that such inefficiencies could exist for decades in a market with so much money flying around, but given that there are only 30 players in that market at any one time, and most of them didn't come from a math or financial background, it made at least a bit of sense. But once Beane started revealing an inefficiency, the rest of the market quickly wised up, closed the inefficiency, and forced Beane to find another one. As the teams hired more statistically-minded people, it's become more and more difficult for Beane to stay ahead of anyone else.

I'm quite sure that if these inefficiencies are finally being wrung out of the baseball market, they were wrung far more thoroughly out of financial markets ages ago, given the amount of financially-motivated brainpower that dwarfs that found in the MLB market.

I don't know about general managers, but it's almost impossible to be a standout field manager in MLB (only 6 of 172 mangers in the last 30 years have been shown to improve their team). But your stats about the rarity of .600+ teams seem to show how rare outperforming GMs/owners are too. And I'd guess those are about an order of magnitude easier to find than a standout portfolio manager.

I did read the book, and I don't think I misunderstood it.   Beane determined that getting on base was more valuable to winning games than was generally understood by baseball manager who valued things like slugging percentage and RBI too highly.  His method of evaluating talent was to look at on base stats, rather than their swing, quickness,or the rather intangible leadership skills.  Given the hundreds of scouts, and hundreds of minor league teams out there I think there are a lot more than just 30 people paying attention, not to mention the million of fantasy league fans.   It doesn't surprise me in the least, that there were inefficiency most people are far more comfortable accepting conventional wisdom rather than engaging in first principal thinking.

My point about very winning teams, was that that mask the individual efforts of the good coaches and GMs.    Sports teams go through coaches very frequently, GM fairly often, and new owner perhaps every 20 years.  It is very hard to identify really good coaches or GM, except in hindsight. For years the knock against Phil Jackson was that hey anybody could win lots of games if you had Michael Jordan. It is the same problem with mutual fund, they go through fund manager and asst fund managers very rapidly and it is very difficult to judge who is really good vs lucky when comes to both assembling a sports team, or a collection of stocks in a portfolio.

I think is perfectly reasonable to say invest in index funds, cause you don't feel confident in your ability to pick a money manager who is truly good vs lucky.  I don't feel confident in that either. .
But to conclude that aren't folks who are more skilled at stock picking, doesn't make sense.


Scandium

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Joshua Kennon is obviously a smart guy--and if he's telling the truth about everything (no doubt that he isn't) he's super successful and has made a boat load of money.  I haven't read all of his blog posts, but many of his investing ones show how he has made impressive gains picking blue chip stocks, as well as huge gains picking up great values in IPOs and also penny stocks (American Eagle/Yankee Candle).  I can't help but wonder how much of this is luck vs true skill.  Again, not saying he doesn't have skill, but it was hard to not make money after 2009 picking up companies like GE, JNJ, KO, MCD.  Of course--I didn't do it because I am a brainwashed indexer.  I would feel like a failure if I were to venture off and try to pick stocks to outperform my VFIAX/VTSAX benchmark. 

I read Joshua Kennon and I go "is it really that hard to see that Disney and Coca Cola and Exxon make boat loads of money every year?  Buy them!" and then I read Jim Collins and go "man Jim is way smarter than me and he just says buy VTSAX...he pissed away money trying to do what Joshua is doing." 

So here I am, an indexer, unable to bring myself to try to take chances and pick up some stocks.  I guess  I'll just have to stick to average.

Kennon's general advice for people is to just index. He's particular about sharing info on what he is investing in. If he's writing about it, seldom is it real time, rather he's already moved past that investment decision. He's not trying to give advice, most of his stock related posts are more case studies and he tents to keep to blue chips for those.

I poked around his blog and read how he bought Smuckers for his mother in law "because people will always need to buy jam", and Diaego for his parent's because they make a lot of money (or something like that), so I'm not convinced he's a particularly smart guy.. Unfortunate his blog only started in 2009 so I can only see his posts during a massive bull market.

forummm

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Joshua Kennon is obviously a smart guy--and if he's telling the truth about everything (no doubt that he isn't) he's super successful and has made a boat load of money.  I haven't read all of his blog posts, but many of his investing ones show how he has made impressive gains picking blue chip stocks, as well as huge gains picking up great values in IPOs and also penny stocks (American Eagle/Yankee Candle).  I can't help but wonder how much of this is luck vs true skill.  Again, not saying he doesn't have skill, but it was hard to not make money after 2009 picking up companies like GE, JNJ, KO, MCD.  Of course--I didn't do it because I am a brainwashed indexer.  I would feel like a failure if I were to venture off and try to pick stocks to outperform my VFIAX/VTSAX benchmark. 

I read Joshua Kennon and I go "is it really that hard to see that Disney and Coca Cola and Exxon make boat loads of money every year?  Buy them!" and then I read Jim Collins and go "man Jim is way smarter than me and he just says buy VTSAX...he pissed away money trying to do what Joshua is doing." 

So here I am, an indexer, unable to bring myself to try to take chances and pick up some stocks.  I guess  I'll just have to stick to average.

Kennon's general advice for people is to just index. He's particular about sharing info on what he is investing in. If he's writing about it, seldom is it real time, rather he's already moved past that investment decision. He's not trying to give advice, most of his stock related posts are more case studies and he tents to keep to blue chips for those.

I poked around his blog and read how he bought Smuckers for his mother in law "because people will always need to buy jam", and Diaego for his parent's because they make a lot of money (or something like that), so I'm not convinced he's a particularly smart guy.. Unfortunate his blog only started in 2009 so I can only see his posts during a massive bull market.

I've read several dozen of his posts. I think he's a smart guy in some ways and doesn't quite get it in others. He has way more insight on investing than the average person (low bar). He has some interesting articles about ways to make money through business when you don't have any capital (synthetic equity). He has many articles that show (in hindsight) that if you picked a really great company and bought a lot of stock in it and held it for a really long time you would make a lot of money through both price appreciation and dividends. An important point, but not earth-shattering. He doesn't point out that by only getting a handful of "great companies" you could easily lose out to an index fund because you're missing the companies that didn't look great at the time but then just blew up and made crazy money for the investors.

Some ways he doesn't get it is that he frequently says things that make it sound like he's a dividend growther, and doesn't understand that what you want is total return and are agnostic (in a tax advantaged account) or hurt by (in a taxable account) getting a dividend stream. Another way is that he is totally not mustachian. He talks about how he blows crazy money on things, because they are luxury goods, and idolizes brands like crazy and likes to include $100 bills in his photos as bookmarks, etc.

Aphalite

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Some ways he doesn't get it is that he frequently says things that make it sound like he's a dividend growther, and doesn't understand that what you want is total return and are agnostic (in a tax advantaged account) or hurt by (in a taxable account) getting a dividend stream. Another way is that he is totally not mustachian. He talks about how he blows crazy money on things, because they are luxury goods, and idolizes brands like crazy and likes to include $100 bills in his photos as bookmarks, etc.

http://www.joshuakennon.com/focus-on-total-return-to-manage-your-investments-better/

???

Aphalite

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I poked around his blog and read how he bought Smuckers for his mother in law "because people will always need to buy jam", and Diaego for his parent's because they make a lot of money (or something like that), so I'm not convinced he's a particularly smart guy.. Unfortunate his blog only started in 2009 so I can only see his posts during a massive bull market.

He admires Smuckers and Diaego because they're good businesses (structure, cash flow, return on asset/equity) and because they sell tangible goods. He doesn't like technology for the most part because there's a lack of intrinsic support behind the stock price (in most cases), not saying that he's right or wrong in the long term, but it's more about the thought process behind things. Here's the diaego post, where he talks about how the business is great but he WOULDN'T buy the stock:

http://www.joshuakennon.com/a-good-business-is-not-always-a-good-stock-a-case-study-of-diageo/

dungoofed

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Some ways he doesn't get it is that he frequently says things that make it sound like he's a dividend growther, and doesn't understand that what you want is total return and are agnostic (in a tax advantaged account) or hurt by (in a taxable account) getting a dividend stream. Another way is that he is totally not mustachian. He talks about how he blows crazy money on things, because they are luxury goods, and idolizes brands like crazy and likes to include $100 bills in his photos as bookmarks, etc.

http://www.joshuakennon.com/focus-on-total-return-to-manage-your-investments-better/

???

Maybe I misunderstood but that article seems to be saying "focus on total return instead of just stock price increase," not "focus on total return instead of just increasing dividends." Which would somewhat support forummm's statement.

forummm

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Some ways he doesn't get it is that he frequently says things that make it sound like he's a dividend growther, and doesn't understand that what you want is total return and are agnostic (in a tax advantaged account) or hurt by (in a taxable account) getting a dividend stream. Another way is that he is totally not mustachian. He talks about how he blows crazy money on things, because they are luxury goods, and idolizes brands like crazy and likes to include $100 bills in his photos as bookmarks, etc.

http://www.joshuakennon.com/focus-on-total-return-to-manage-your-investments-better/

???

He's somewhat inconsistent. This article talks about total return. Great. Another article talks about how he purposefully selected stocks that paid high dividends for a tax-advantaged account he had because he was limited to how much money he could add to the account each year, and that the dividends would allow him to keep buying more stocks in the account. Which is actually a bad strategy in the sense that 1) he'll have a lot of cash laying around uninvested, 2) he may not be picking stocks for the best total return, and 3) all those trading costs of continually buying more stocks.

I don't have the time to look for that article. Like I said, I've read several dozen posts. He's been posting for 6 years, so I don't have a full analysis of all his articles. Like I said, he has some interesting things to say. And some things I don't agree with.

bacchi

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Correct. I was looking at 1/1/2010 - 3/10/2015.

Such a short time frame with mostly nothing but up and to the right! Let's look at a 15 year time frame and use VTSMX instead of VTI, as I don't think VTI has been around for 15 years.

The post to which I was responding said "after 2009." Since 2005 is before 2009, I intentionally didn't include that year.

In other words, not just anyone could've picked any stock after 2009 and done better than the market. That's the point.

arebelspy

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I was looking on his site to see if there was a log of his historical returns.  I couldn't find that (though the reply after this one posted a link to it), but I did find this:

Quote
#2 What Are Your Ultimate Plans?
Within 5 years, I hope to consolidate everything I own into a single hedge fund or holding company and issue equity to outside investors.  I’m also considering launching a value based mutual fund for regular investors who want to buy shares of global stocks and bonds using the same method I use to choose investments for my firm.

Oh that makes me happy.  I had thought he said he wasn't going to do this.  Wonder when that was written.

« Last Edit: March 12, 2015, 03:09:14 PM by arebelspy »
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RapmasterD

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I poked around his blog and read how he bought Smuckers for his mother in law "because people will always need to buy jam", and Diaego for his parent's because they make a lot of money (or something like that), so I'm not convinced he's a particularly smart guy.. Unfortunate his blog only started in 2009 so I can only see his posts during a massive bull market.

He admires Smuckers and Diaego because they're good businesses (structure, cash flow, return on asset/equity) and because they sell tangible goods. He doesn't like technology for the most part because there's a lack of intrinsic support behind the stock price (in most cases), not saying that he's right or wrong in the long term, but it's more about the thought process behind things. Here's the diaego post, where he talks about how the business is great but he WOULDN'T buy the stock:

http://www.joshuakennon.com/a-good-business-is-not-always-a-good-stock-a-case-study-of-diageo/

And that's great. But HAD he purchased DEO ~15 years ago he'd be kicking the S&P 500's ass by a factor of 3 to 1.

Å’kålè ma’luna!

Jags4186

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Again I don't see how picking individual stocks for the long run is prudent when a company can go out of business at any time.

He does a great case study on Kodak.  According to Kennon even if you had just held Kodak all the way down to zero you still would have done well because you would have collected a boat load of dividends and had a significant amount of stock in one of its spin offs which did well.  A person who was "paying attention" wouldn't have held Kodak all the down because the signs were telling you to get out--I guess based on the annual reports/dividends getting cut etc.

But how do you know?  Apple was about to go out of business until Bill Gates came along and gave them a lifeline.  Fast forward 20 or so years and it's the largest company in the world. 

Using that logic...how do we know Smuckers or Disney will be the same way?  DUNNO.  But it's interesting to sit back and watch.

BTW I do like how he buys his nieces and nephews shares of companies that the kids are interested in.  I would do that as well...one or two shares at a time for birthday or christmas of course...  I think it would be fun to tell a 6 or 7 year old that they are a part owner of Disney!

phillyvalue

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Again I don't see how picking individual stocks for the long run is prudent when a company can go out of business at any time.

He does a great case study on Kodak.  According to Kennon even if you had just held Kodak all the way down to zero you still would have done well because you would have collected a boat load of dividends and had a significant amount of stock in one of its spin offs which did well.  A person who was "paying attention" wouldn't have held Kodak all the down because the signs were telling you to get out--I guess based on the annual reports/dividends getting cut etc.

But how do you know?  Apple was about to go out of business until Bill Gates came along and gave them a lifeline.  Fast forward 20 or so years and it's the largest company in the world. 

Using that logic...how do we know Smuckers or Disney will be the same way?  DUNNO.  But it's interesting to sit back and watch.

BTW I do like how he buys his nieces and nephews shares of companies that the kids are interested in.  I would do that as well...one or two shares at a time for birthday or christmas of course...  I think it would be fun to tell a 6 or 7 year old that they are a part owner of Disney!

Some companies and industries are more predictable than others. Technology, in general, is an industry that is very hard to forecast, and this is why many value investors have tended to stay away from tech companies. It's hard to value a business when you have no idea what the industry it is in will look like 10-20 years from now. Of course sometimes, something is so cheap that you don't have to do much forecasting - Apple was trading at roughly 5-6X cash flow in mid-2013, and in order to be comfortable buying at that price, you don't have to assume much of anything about 20 years down the road. In contrast when you pay 50 or 100 times earnings for a young tech company, you are forced to make long-term forecasts.

Businesses like Smuckers are much different than tech companies. Jam doesn't get reinvented year after year like tech does. If you have a powerful brand and a product people grew up with, you have a moat that isn't easy to circumvent. Disney has a brand and a cast of characters that have incredible value and can't be replicated or copied. It's very, very different than tech businesses.

I would throw in another category of businesses that are very difficult to value and can easily run into trouble: commodity businesses. Anytime you are selling a product and are a price taker in a market where people don't differentiate your product from that of anybody else, you can quickly run into trouble. Of course we're seeing that now with oil, but the same dynamics exist in many different other businesses as well. These businesses are flying high one day and then two years later are filing for bankruptcy.

Bottom line is you can only buy something (as an investor, and not a speculator) if you feel you know what it is worth and that you're buying at a discount to that value. Plenty of businesses will be totally out of reach for you to value, and you can just ignore those companies.
« Last Edit: March 12, 2015, 06:18:40 PM by phillyvalue »

RapmasterD

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Follow a rule of never investing more than 4% in a single individual security and XX% in individual securities overall as a percentage of your stock portfolio (my XX for individual securities is about 10-12%) and you should never lose any sleep. I remember working at a public company whose shares went from $219 to about $3 in the period from 2000 to 2003. We had old ladies calling IR and screaming, "I've lost everything!!!" to which one could only silently respond, "Why? Why did you DO that?"

And I'm confident Diageo will outlive me...highly confident. But if it goes POOF overnight I'll be fine.