Author Topic: Indexing sucks  (Read 59475 times)

Keith123

  • 5 O'Clock Shadow
  • *
  • Posts: 96
Indexing sucks
« on: May 08, 2016, 06:07:51 PM »
I'm convinced indexing is a dead strategy for the foreseeable future.  Indexing works well in a growth environment when a rising tide lifts all ships.  Growth worldwide is stalling.  4th qtr GDP for US was 1.4%, 1st qtr 2016 was .5%.  Just read the financial news on a daily basis and you are slammed with overwhelming evidence that the world economic environment is not in good shape and likely going to get worse for a while.  Why is anyone indexing anymore?  It just doesn't makes sense in this environment.   The risk/reward is just too out of whack.  Very, very little upside and potentially tremendous downside.  Ridiculous valuations thanks to low interest rates.  I think everyone is going to have to start taking a valuation approach to individual equities to do well for the foreseeable future.  I would suggest picking strongly positioned companies with competitive advantages that also have a history of paying above market dividends.  To get a general idea of what companies fall into this realm, look for "wide-moat" companies with low payout ratios.  A quick shortcut for this would be to use Morningstar's filter for wide moat companies and cross-reference it against David Fish's Dividend Champions spreadsheet.  Do a little data sorting and look at the companies that have the longest histories of paying increasing dividends.  If you find a company with a wide moat, above market dividend (2.5% or higher), long history (25+ years) of paying increasing dividends with no interruption, and a payout ratio of 60% or less, I'd seriously consider buying that equity over indexing.  Valuations are hard to stomach right now but I'll take an equity with those characteristics over the total market index in this environment. 

This shit is just baffling to me.  Seriously, does anyone think the economy is just going to starting booming again and things are going to be fine and dandy?  This is not a normal event that is happening worldwide.  This is a structural breakdown in the economic model.  Central banks have not been able to stimulate growth, and they have pulled out almost every tool they have.  I honestly don't believe that they can no matter what at this point.  They are just delaying the inevitable crash.  This could be a really, really bad period for the next 20 years if central banks never back off or it could be a violent, horrible period of 5 years if they just let the free market hit the credit reset button, smash asset prices back to true valuation levels, and get interest rates back to normal.  Either way, shit is hitting the fan.  There is no way, not a chance, that we are growing our way out of this if GDP is this low after this much central back intervention.  I think the best case scenario is endless QE and low interest rates, probably even negative, that just keep kicking this can down the road and keeping the markets artificially high and assets prices in general artificially high.  But even that will hit a wall eventually, it will just take decades.  Japan's economy is the perfect example of this.  Why aren't we learning from that real world example instead of repeating it?

SwordGuy

  • Walrus Stache
  • *******
  • Posts: 6310
  • Location: Fayetteville, NC
Re: Indexing sucks
« Reply #1 on: May 08, 2016, 06:37:13 PM »
US and worldwide companies are chock full of clever, motivated, hard-working people figuring how to make more money for less.

Historically, US companies in particular have done a bang-up job of it.

I'm banking on that collective greed. :)

But then again I'm not banking 100%.  Some of my income will come from farmland, some will come from rental property, some will come from social security, and some will come from part time fun income.   I've got 5 income streams and only need 3 at the most.



Jeremy E.

  • Handlebar Stache
  • *****
  • Posts: 1946
  • Location: Lewiston, ID
Re: Indexing sucks
« Reply #2 on: May 08, 2016, 06:50:46 PM »
What qualifications do you have to make these assumptions? You are using an example of the last 2 quarters doing bad, to say an investment strategy that has been around for many decade is no longer good. Some years the market will go up, others it will go down. There's occasionally depressions, sometimes bear markets that last a few years. But then there are ridiculous times when the market will grow like crazy and historically the market always goes up. You probably weren't investing in 2008-2009, but if you were, I'm sure you would of been one of the doomsayers that was saying everyone should sell their stocks and thus making them miss out on annual 20-40% returns for the next 5 years. Everyone take what he's saying with a grain of salt.

Jeremy E.

  • Handlebar Stache
  • *****
  • Posts: 1946
  • Location: Lewiston, ID
Re: Indexing sucks
« Reply #3 on: May 08, 2016, 07:00:45 PM »
http://jlcollinsnh.com/2012/04/15/stocks-part-1-theres-a-major-market-crash-coming-and-dr-lo-cant-save-you/
http://jlcollinsnh.com/2012/04/19/stocks-part-ii-the-market-always-goes-up/
http://jlcollinsnh.com/2012/01/06/index-funds/
http://jlcollinsnh.com/2011/06/02/why-i-cant-pick-winning-stocks-and-you-cant-either/

I'd like to also add, you are bashing index funds in general, but it seems you are only talking about the S&P 500. There are indexes for pretty much every type of investment strategy, value stocks, growth stocks, small cap, medium cap, large cap, REITs, government bonds, international, international bonds, etc.

Interest Compound

  • Pencil Stache
  • ****
  • Posts: 658
Re: Indexing sucks
« Reply #4 on: May 08, 2016, 08:45:56 PM »
Hello Keith123, welcome back! Last we talked, this is how we left it:

So you think you're beating the market. That's great. Have you calculated your personal returns and compared them to a benchmark? I'm shocked that 100% of the people I've asked that question either say, "No", or they say "Yes" then end up having 0 knowledge on how to actually calculate returns.

To a person, literally 100% of the people I've met who think they're beating the market, fail this test. And when we properly run the numbers, they end up way behind. Keith123 failed this test pretty embarrassingly. The "I'm not going to spend hours and hours back-testing something for you." response is quite telling. Not because he won't do it for me...he even refuses to do it for himself.

To the newbies of the thread, I'd like you to think about that for a moment. Does this sound like a good idea?

Unfortunately, your unwillingness to review the past is biting you again :(

I genuinely think you need to step back, and take a look at the past. If you can, check the news reports over every possible period over the past 150 or so years we have data. You'll find something very interesting. The news is ALWAYS bad! Always!

You need to change your mindset and realize you don't have the knowledge you think you do. This is a ticking timebomb waiting to happen.

Here's a fun post from Bogleheads:

---------------------------------
With all the bearish posts recently I thought that it was time to update and repost this list that I have posted before to put the current situation into perspective

Selected world events.

1900's San Francisco Earthquake, Russian revolution and rise of communism, multiple regional wars, President McKinley Assassinated

1910's World war one, influenza epidemic, Armenian Genocide, Daylight Saving Time Introduced, The Chinese Revolution, KKK reemerges with over 4 million members, Titanic

1920's Stock market crash, prohibition and gangsters, Teapot Dome Scandal, Scopes (Monkey) Trial, Hoover Appointed FBI Director

1930's Spanish Civil War, Hitler rises to power, Depression, Dust Bowl, Bonnie and Clyde,

1940's World War two, birth of the Bomb, Pearl Harbor, Nuclear detonations destroy the cities of Hiroshima and Nagasaki, Gandhi Assassinated, Joseph Stalin, the Holocaust, Japanese American internment camps, Berlin Airlift

1950's The Cold War and Korea, McCarthy, Civil rights movement unrest, Credit Card Introduced, apartheid, London Smog of 1952 kills 12,000, Rosa Parks, Sputnik starts space race, Great Leap Forward

1960's Vietnam, assignations, riots in the streets, rise of drugs, Bay of Pigs, Cuban Missile Crisis, Berlin Wall, Northeast Blackout, Cultural Revolution, Chappaquiddick, Charles Manson

1970's More Vietnam, Stagflation, double digit inflation, Gas lines, Nixon, Three Mile Island. Pol Pot, Kent State, U.S. Drops gold standard, Lebanon, Jonestown Massacre, Iran Hostages

1980's S&L crash/scandal, Black Monday stock crash (Oct 87), Iran Hostages, more inflation, emergence of AIDS, Falkland Islands, Moonies, Bhopal India, New Coke, Iran-Contra Scandal, Exxon Valdez

1990's Kuwait war, Rodney King L.A. Riots, Yugoslavia, Bosnia, Clinton scandal/impeachment, Waco Texas, Rwandan Genocide, Lorena Bobbit, Mad Cow Disease, Columbine High School

2000's Dot Com Crash, 9/11, Iraq, Hurricanes, Oil price spike, Afghanistan, financial bailouts, severe recession, housing bubble.

2010's Gulf oil spill, Unemployment

It is easy to lose sight that the current problems stand a pretty good chance of being like all the past problems in that the most likely outcome is that while some people are terribly hurt, the rest of the world continues on even though it may change.

I guess since then you could add the Euro/Greece Crises, fallout from the Arab Spring, and the Japanese Earthquake/Tsunami but it might take a bit more time to see how important they turn out to be.
---------------------------------

Stock market performance during this time:



Once you realize the news media have a financial incentive not to give us accurate news, but to be negative and generate fear (because fear sells!), you'll be much better off. I used to be a regular on a mainstream news TV channel. I was their economy/stock investing expert. One day a few years back they called me in and explicitly asked for my opinion on the stock market...here's their email, word-for-word:

------------------------------------------------------------
The focus of the story will be about the US stock market, your predictions, and the importance of interest rates on effecting the US economy.

- Statements by members of the U.S. Federal exaggeration about the investors in the U.S. markets and to avoid the word "concern" about a downturn or correction.
- The S & P went nearly 28 months without a correction of more than 10% or approaching that for the first time since 1928, where U.S. markets haven't corrected any increase, which usually happens about every 9 months.
- Declined requests for U.S. companies to buy shares in the market dramatically and sharply over the past month, amounting to 23 billion dollars from 60 billion dollars for the same period last year, giving the explicit story that the companies themselves think the price of the shares are overpriced at current levels!
- I hope to focus on the probability of a correction, and to what extent we can expect a correction, if we consider that the contributing factor is to raise interest rates in the future.
------------------------------------------------------------

I went in for the interview, same as always, and gave them my opinion. Something like:

------------------------------
"If prices are this high, that means the collective knowledge of everyone, from the billionaires of the world, to the 80 hour a week Harvard-Grad Wall Street investors, with nearly unlimited resources...have all decided this is the right price. Not only that, but they put their money where their mouth is, and kept buying until prices got pushed up to their current level.

Who am I to say they're wrong?

You want my prediction? Over time the market typically goes up, so there's a much better chance of prices increasing than decreasing. Sure, it will drop 10% eventually, but no one knows when. For all we know, prices will increase 30% from their current level before they drop 10%. The only winning move, is not to play. Just keep your money in for the long-term, and avoid the noise."
------------------------------

I checked the news report later, and they didn't use my piece. It's the first time that has happened. Instead they went out and interviewed someone else, who gave them the typical "SELL EVERYTHING DOOMSDAY IS UPON US" message (Hey Keith123, was that you? :-P).

Oh, and they never contacted me again \_(ツ)_/

The best part? The market promptly rose 10+%, and as of this writing, is still there


EarlyStart

  • Stubble
  • **
  • Posts: 115
Re: Indexing sucks
« Reply #5 on: May 08, 2016, 09:43:29 PM »
Seriously, does anyone think the economy is just going to starting booming again and things are going to be fine and dandy? 


A resounding "yes". I won't make any predictions about the near term. We can always go into a recession, and usually it's not that big of a deal. But there are plenty of good developments I believe will take place over the next couple of decades.

1) Demographics in the United States are about to be great, contrary to the doomsday references to our aging population. The largest generation (the millennials) are rapidly approaching household formation. In the past, when the biggest generation is in it's primary earnings years (35-50) the economy experiences above-trend growth. I expect this to occur again. Inflation will likely tick back up as demand for single family homes, autos, etc. picks up which leads me to my next point.


2) The U.S. consumer has remarkably little debt. This is a hangover effect from the balance sheet recession we just incurred. Debt service payments as a percentage of disposable income are very, very low. Part of this is low interest rates, admittedly, but part of it is also the lack of demand for consumer credit. This means that the U.S. consumer's future spending is not held back by debt incurred today.


3) Input prices of many sorts are down. Energy, metals, various agricultural commodities have declined dramatically in price. In the short run, this may be a negative as those industries decrease capital expenditures, people get laid off, and the market adjusts. But in the intermediate or longer term, this means lower input costs for EVERYTHING. Profit margins of basically any good or service you can imagine are a partial function of energy prices. The lower prices also free up disposable income to be spent on other things.


I could go on for days about why we're not like Japan. People from all over the world want to move to the United States. We have a solid baseline of population growth (and therefore economic growth as a result). Japan is an island... So they have some inherent immigration barriers there.

The Japanese stock market, the Nikkei, hit 80 or 90 times earnings at its peak. I'd agree that our broad stock market in the U.S. is on the expensive side, but it's not a bubble. It's just not completely devoid of economic reality like the Nikkei was, like the tech bubble was, etc. I would never tell you not to buy an individual stocks because that would make me a hypocrite, but the doomsday narrative, "screw the index", etc. is not wise in my opinion.

facepunch:

If it weren't for the fear perpetrated by worthless media pundits and emotional investors eager for any reason to remove uncertainty from their lives, equities wouldn't produce excess returns. Part of the reason I may be able to retire early may be explained by all weak hands that lose their minds when we get a 15% correction.

Mankind will continue to trudge toward ever-greater prosperity with speed bumps to be expected. The perma-bears will continue to look stupid, only to get invited on CNBC and Bloomberg during market corrections to bask in the glory of their broken clock being right once in a blue moon.
« Last Edit: May 08, 2016, 09:47:41 PM by EarlyStart »

Cyaphas

  • Bristles
  • ***
  • Posts: 495
  • Age: 37
  • Location: DFW, TX
Re: Indexing sucks
« Reply #6 on: May 08, 2016, 10:46:50 PM »

I think the best case scenario is endless QE and low interest rates, probably even negative, that just keep kicking this can down the road and keeping the markets artificially high and assets prices in general artificially high.  But even that will hit a wall eventually, it will just take decades.  Japan's economy is the perfect example of this.  Why aren't we learning from that real world example instead of repeating it?


While I agree with you and have put my money where my mouth is. You're not going to win this argument until it's too late. Then you don't even get to say I told you so or you're just going to feel like crap for it. People can argue until they're blue in the face about how great everything is when the reality is quite the opposite. The velocity of money is nowhere near what we need it to be and it's not getting better. Debt levels are at record highs both public and private. Even the markets that didn't exist before have ridiculous debt levels. There are negative interests rates being forced on populations. NEGATIVE INTEREST RATES! Governments are heavily considering eliminating cash to enforce them. The Central Banks are out of bullets and the cheer leaders keep on pumping those pom poms. The funny part is, the cheer leaders have been right. It takes a lot of bravery to stare this market down and see it for what it really is. But, this style of market has lasted over 100 years. Bet against it at your own peril, many have lost fortunes and their sanity doing so.

Seppia

  • Pencil Stache
  • ****
  • Posts: 616
  • Age: 39
  • Location: NYC
Re: Indexing sucks
« Reply #7 on: May 09, 2016, 12:23:05 AM »

MustacheAndaHalf

  • Handlebar Stache
  • *****
  • Posts: 1967
Re: Indexing sucks
« Reply #8 on: May 09, 2016, 12:39:35 AM »
I think OP's idea boils down to this quote from the initial post in this thread:
"Ridiculous valuations thanks to low interest rates."

Compared to what?  If your concern is high P/E, you can shift more investments to international where P/E ratios are lower.  So instead of US indexing, you make sure you're indexing world wide.  You could also "value tilt", to bring the ratios that concern you lower - like P/E, P/B, etc.

You mention a crash, but don't show evidence that high P/E always results in a crash.  Vanguard's white paper "Forecasting Stock Returns"[1] looks at what is most correlated with returns.  While P/E seems more predictive in that paper, it only racks up a 0.40 correlation over 10+ year time frames.  So even that doesn't predict a crash 5 years away based on P/E.
[1] https://personal.vanguard.com/pdf/s338.pdf

If you want lower P/E, you can switch from S&P 500 to "Vanguard Value" index.  Indexing doesn't die because one anonymous poster assumes a crash is imminent.

Interest Compound

  • Pencil Stache
  • ****
  • Posts: 658
Re: Indexing sucks
« Reply #9 on: May 09, 2016, 12:58:05 AM »
Lorena Bobbit

LOL

Hehe, every time I quote that, someone points that one out :)

Cyaphas

  • Bristles
  • ***
  • Posts: 495
  • Age: 37
  • Location: DFW, TX
Re: Indexing sucks
« Reply #10 on: May 09, 2016, 01:43:03 AM »
Lorena Bobbit

LOL

Hehe, every time I quote that, someone points that one out :)

It was an... agonizing case. To say the least!

Seppia

  • Pencil Stache
  • ****
  • Posts: 616
  • Age: 39
  • Location: NYC
Re: Indexing sucks
« Reply #11 on: May 09, 2016, 02:05:09 AM »
I love how it's casually slipped in among a list of horrible disasters, in a very serious post :)

alsoknownasDean

  • Handlebar Stache
  • *****
  • Posts: 2035
  • Age: 35
  • Location: Melbourne, Australia
Re: Indexing sucks
« Reply #12 on: May 09, 2016, 03:07:39 AM »
Looks like someone's optimism gun isn't working all that well today :)

steveo

  • Handlebar Stache
  • *****
  • Posts: 1943
Re: Indexing sucks
« Reply #13 on: May 09, 2016, 03:46:11 AM »
It makes no rational sense to me why an idea that the stock market will underperform for the foreseeable future leads to the conclusion that indexing sucks.

If you believe that the stock market will underperform put less money into the stock market. If you believe it's just the US stock market put less in US stocks and more into other stock markets.

What you don't do is state the stock market will underperform but I'll be fine because I will pick the right stocks. It's statistically unlikely that you will pick the better performing stocks. Look at Warren Buffet's recent bet that compares hedge funds performances (these guys should be able to pick the good stocks) versus the S&P index.

Personally I'll just stick to my dumb index investing approach and let the world's economies do whatever they are going to do. I reckon I'll be fine.
« Last Edit: May 09, 2016, 03:47:49 AM by steveo »

money_bunny

  • Stubble
  • **
  • Posts: 114
Re: Indexing sucks
« Reply #14 on: May 09, 2016, 06:01:29 AM »
So you have this money. You don't want to index. So now what?

Do you want to leave it in a bank account getting maybe 1% if you lock it up with a minimum balance of 50K?

You don't have to do the market. You can do all other sorts of things with it.

davisgang90

  • Handlebar Stache
  • *****
  • Posts: 1276
  • Location: Roanoke, VA
    • Photography by Rich Davis
Re: Indexing sucks
« Reply #15 on: May 09, 2016, 06:54:18 AM »
Well, I'm convinced.  Selling all my index funds for hybrid seeds and silver coins.

MrDelane

  • Pencil Stache
  • ****
  • Posts: 604
Re: Indexing sucks
« Reply #16 on: May 09, 2016, 07:02:30 AM »
Let's not strawman his viewpoint.  Keith mentioned exactly what he plans to do as an alternative to index investing:

Do a little data sorting and look at the companies that have the longest histories of paying increasing dividends.  If you find a company with a wide moat, above market dividend (2.5% or higher), long history (25+ years) of paying increasing dividends with no interruption, and a payout ratio of 60% or less, I'd seriously consider buying that equity over indexing.

Keith - do you have a list of the specific equities you'll be investing in?

GuitarStv

  • Senior Mustachian
  • ********
  • Posts: 14849
  • Age: 38
  • Location: Toronto, Ontario, Canada
Re: Indexing sucks
« Reply #17 on: May 09, 2016, 07:15:24 AM »
Well, I'm convinced.  Selling all my index funds for magic beans and silver coins.

It just reads better now.

mohawkbrah

  • Bristles
  • ***
  • Posts: 272
  • Age: 24
  • Location: Herefordshire, UK
  • every day they see me hustling those pennies away
Re: Indexing sucks
« Reply #18 on: May 09, 2016, 07:33:22 AM »
if indexing fails we have more to worry about than not making money. that would mean economic collapse and we should start stockpiling food and bullets


Retire-Canada

  • Walrus Stache
  • *******
  • Posts: 7096
Re: Indexing sucks
« Reply #19 on: May 09, 2016, 07:56:32 AM »
if indexing fails we have more to worry about than not making money. that would mean economic collapse and we should start stockpiling food and bullets

Start? You haven't started!?!? ;)

Kaspian

  • Handlebar Stache
  • *****
  • Posts: 1536
  • Location: Canada
    • My Necronomicon of Badassity
Re: Indexing sucks
« Reply #20 on: May 09, 2016, 10:07:22 AM »
Two years in a sideways market and a strategy sucks?  I'm not sure you're made for this, fellah.  Market trends last a hella lot longer than that in general.  It's not like fashion, music, or technology.  Are you an investor or a thrillseeker?  By their very definition, indexing is supposed to be a boring long-term strategy.

zephyr911

  • Magnum Stache
  • ******
  • Posts: 3624
  • Age: 41
  • Location: Northern Alabama
  • I'm just happy to be here. \m/ ^_^ \m/
    • Pinhook Development LLC
Re: Indexing sucks
« Reply #21 on: May 09, 2016, 10:20:06 AM »
Well, I'm convinced.  Selling all my index funds for hybrid seeds and silver coins.
I thought they made hybrids in factories.

********serious note***********

One of my good friends who just retired from the USAF, comfortably, with rentals, stock, pension, etc, in her 40s, recently returned to her parents' home to help one of them through a serious illness. At some point it came out that they had cashed out 100% of their market holdings when Obama was elected because whoever they trust for advice on those things was convinced the market would tank on his watch.

They bought gold. And land. Which they were going to develop, but didn't, and can't sell for what they paid.

I feel pretty bad for them, but they made their bed. At least they have SS and such, and probably a paid-for house, so they're not destitute, but they walked away from a huge run of earnings because they were scared. Fear is a terrible basis for investing decisions.

MgoSam

  • Magnum Stache
  • ******
  • Posts: 3643
  • Location: Minnesota
Re: Indexing sucks
« Reply #22 on: May 09, 2016, 10:34:58 AM »
Zephyr, I've met a few people that have done that.

In Chicago there's a salesmen that will spend hours railing about Obama if you let him and then will continue giving you his investment advice. I usually tell him to piss off (done being polite to him), but in my head the whole time I'm thinking, "You're 65 and still driving around the country trying to make a buck, why would I listen to your investing advice."

Oh, his advice is on the line of, Buy Gold, screw stocks because Obama, and don't buy insurance because Obama. He claims that his rate was going to go up like 300% but when I offered to get him quotes on the exchange he walked away. To me it became clear that he hasn't bothered checking, he likely just got a letter from his current provider and said SCREW IT. 

The current insurance scheme isn't perfect, last year I got a letter that my insurance plan was going to cost significantly higher, but I just went to my state's exchange and saw that I could get an identical plan from a different provide for about 18% less in premiums. SCORE!

Frankies Girl

  • Magnum Stache
  • ******
  • Posts: 3093
  • Age: 82
  • Location: The laboratory
  • Ghouls Just Wanna Have Funds!
Re: Indexing sucks
« Reply #23 on: May 09, 2016, 10:43:07 AM »
I think y'all are so sweet to take him seriously.
Bet it makes him feel better to have some drang for his sturm. :)

zephyr911

  • Magnum Stache
  • ******
  • Posts: 3624
  • Age: 41
  • Location: Northern Alabama
  • I'm just happy to be here. \m/ ^_^ \m/
    • Pinhook Development LLC
Re: Indexing sucks
« Reply #24 on: May 09, 2016, 10:43:18 AM »
I'm gonna be in Chicago in July. Maybe I should look him up for some hot investing tips.
Or I'll just keep my 30% leveraged cap rates on NORAL real estate... lulz

ShortInSeattle

  • Pencil Stache
  • ****
  • Posts: 576
Re: Indexing sucks
« Reply #25 on: May 09, 2016, 10:44:43 AM »
Please check back in with us in 10 years and let us know how your stock picking strategy worked out for you. Not being sarcastic here.

If you are convinced that indexing is dumb, don't index. We all get to make our own choices and live by them. No need for dramatics on either side of the argument.

Let's compare notes in 2026.

SIS

Paul der Krake

  • Magnum Stache
  • ******
  • Posts: 4742
  • Age: 12
  • Location: UTC-10:00
Re: Indexing sucks
« Reply #26 on: May 09, 2016, 10:55:18 AM »
There are negative interests rates being forced on populations. NEGATIVE INTEREST RATES! Governments are heavily considering eliminating cash to enforce them.
Negative interest rates apply to deposits at central banks, not retail banks. They are not forced on "populations". Governments proposing cashless societies are not proposing it to prevent people from saving, they are proposing it to reduce the cost of printing and theft of paper currency.

Keith123

  • 5 O'Clock Shadow
  • *
  • Posts: 96
Re: Indexing sucks
« Reply #27 on: May 09, 2016, 12:52:23 PM »
I'm really not some doomsday guy.  I actually think I'm pretty optimistic most of the time.  I'm not stockpiling guns, ammo, and food...lol.  I don't think the world is going to end.  I just wish everyone would stop running with this assumption that this is just part of the normal cycle and will work itself out nice and easy. As another poster said, aggregate debt is sky high.  There is very little room for additional borrowing to fund consumption without further drops in interest rates, but they are already at rock bottom.  The only weapons central banks have left are negative interest rates and helicopter money.  Both might happen before this ends...but when that fails to spur growth and all faith is lost in central banks ability to fix things, what then?  I guess everyone thinks the magic market fairies will come and make the market go up...because.  The amount of arrogance on this board is incredible considering your investing philosophy is based on blind faith that because the markets have gone up in the past they will forever go up.  We missed a global meltdown in 2007/2008 by a centimeter, and that still was bad.  Only by a bazillion dollar bailout did it not happen.  Even with a perfect real world example (Japan) of what we are probably facing, everyone just shrugs it off.  It's just odd to me to keep indexing in the face of mountains of evidence and a large consensus from some of the greatest investors in history that the markets are, at best, going to perform poorly for the foreseeable future. 

Please, instead of just saying I'm full of shit and no one should listen to me because I'm crazy, would someone like to make the case for how the world is going to come out of this situation without a big credit reset (big crash) or a result like the Japanese economy with endless central bank intervention.  Maybe you just don't care?  I dunno.  Like I said before, its pretty obvious that if all the QE and central bank intervention around the globe hasn't helped yet, why is it all of a sudden going to kick in? 

matchewed

  • Magnum Stache
  • ******
  • Posts: 4346
  • Location: CT
Re: Indexing sucks
« Reply #28 on: May 09, 2016, 01:00:30 PM »
I'm really not some doomsday guy.  I actually think I'm pretty optimistic most of the time.  I'm not stockpiling guns, ammo, and food...lol.  I don't think the world is going to end.  I just wish everyone would stop running with this assumption that this is just part of the normal cycle and will work itself out nice and easy. As another poster said, aggregate debt is sky high.  There is very little room for additional borrowing to fund consumption without further drops in interest rates, but they are already at rock bottom.  The only weapons central banks have left are negative interest rates and helicopter money.  Both might happen before this ends...but when that fails to spur growth and all faith is lost in central banks ability to fix things, what then?  I guess everyone thinks the magic market fairies will come and make the market go up...because.  The amount of arrogance on this board is incredible considering your investing philosophy is based on blind faith that because the markets have gone up in the past they will forever go up.  We missed a global meltdown in 2007/2008 by a centimeter, and that still was bad.  Only by a bazillion dollar bailout did it not happen.  Even with a perfect real world example (Japan) of what we are probably facing, everyone just shrugs it off.  It's just odd to me to keep indexing in the face of mountains of evidence and a large consensus from some of the greatest investors in history that the markets are, at best, going to perform poorly for the foreseeable future. 

Please, instead of just saying I'm full of shit and no one should listen to me because I'm crazy, would someone like to make the case for how the world is going to come out of this situation without a big credit reset (big crash) or a result like the Japanese economy with endless central bank intervention.  Maybe you just don't care?  I dunno.  Like I said before, its pretty obvious that if all the QE and central bank intervention around the globe hasn't helped yet, why is it all of a sudden going to kick in?

But you're starting with this premise that these things didn't help. You state "this situation", what situation?

Maybe I'm missing something but are you then saying that the US economy has stagnated? What proof do you have of that because I have oodles of proof that it hasn't; jobs, market growth, company profits...etc. These things are evidence that companies and therefore the general economy is doing just fine right now.

And even if the immediate evidence doesn't convince you then how do you know that your viewpoint will be true in 60+ years? Because that is the time frame that we're working with.

MustacheAndaHalf

  • Handlebar Stache
  • *****
  • Posts: 1967
Re: Indexing sucks
« Reply #29 on: May 09, 2016, 01:05:08 PM »
"I guess everyone thinks the magic market fairies will come and make the market go up...because."

Could you cite where I mentioned "magic market faeries"?  If you lump everyone in the same bucket, and don't reply specifically to any poster, there isn't much room for discussion.

Aphalite

  • Bristles
  • ***
  • Posts: 425
Re: Indexing sucks
« Reply #30 on: May 09, 2016, 01:24:24 PM »
I'm really not some doomsday guy.  I actually think I'm pretty optimistic most of the time.  I'm not stockpiling guns, ammo, and food...lol.  I don't think the world is going to end.  I just wish everyone would stop running with this assumption that this is just part of the normal cycle and will work itself out nice and easy. As another poster said, aggregate debt is sky high.  There is very little room for additional borrowing to fund consumption without further drops in interest rates, but they are already at rock bottom.  The only weapons central banks have left are negative interest rates and helicopter money.  Both might happen before this ends...but when that fails to spur growth and all faith is lost in central banks ability to fix things, what then?  I guess everyone thinks the magic market fairies will come and make the market go up...because.  The amount of arrogance on this board is incredible considering your investing philosophy is based on blind faith that because the markets have gone up in the past they will forever go up.  We missed a global meltdown in 2007/2008 by a centimeter, and that still was bad.  Only by a bazillion dollar bailout did it not happen.  Even with a perfect real world example (Japan) of what we are probably facing, everyone just shrugs it off.  It's just odd to me to keep indexing in the face of mountains of evidence and a large consensus from some of the greatest investors in history that the markets are, at best, going to perform poorly for the foreseeable future. 

Please, instead of just saying I'm full of shit and no one should listen to me because I'm crazy, would someone like to make the case for how the world is going to come out of this situation without a big credit reset (big crash) or a result like the Japanese economy with endless central bank intervention.  Maybe you just don't care?  I dunno.  Like I said before, its pretty obvious that if all the QE and central bank intervention around the globe hasn't helped yet, why is it all of a sudden going to kick in?

I myself only index about half of my money (in my 401ks), and it really annoys me when people participate in index worship because they can't separate the vehicle from the reasons why indexing actually works (ie - low cost, wide diversification, lack of turnover)

You are doing the exact opposite, railing against the VEHICLE, and seemingly incapable of separating out the underlying versus alternatives.

1) Is a shiller PE of 26 expensive? It's a stock yield of ~4%, what's treasury rate currently? 1.8% and decreasing.
2) Do you think interest rates/opportunity cost will increase quickly enough that the underlying compounding growth will be washed out? Why do you think that?
3) As you've said, other countries around the world are going into NEGATIVE rates, which means asset values will be pressured up even more!
4) You need to decouple GDP growth and stock return in your thinking - the two aren't perfectly related. GDP growth will likely lag stock return because of two main components - dividends, which mostly isn't affected by GDP, and buybacks, which accelerate EPS growth over that of GDP.

That said, take a look at the top 10 of VTI, as well as their PE (taken from http://portfolios.morningstar.com/fund/holdings?t=VTI&region=usa&culture=en-US, the PE isn't really adjusted to show actual economic valuation but it'll do for this discussion)

1) Apple 10.33 - low
2) Microsoft 38.77 - overvalued
3) Exxon 28.47 - cyclical, could be over or undervalued depending on your feeling about energy
4) GE 47.74 - inaccurate since it just spun off synchrony
5) J&J 20.6 - fairly valued - 5% stock yield
6) BRK - 1.4 Book - fairly valued
7) FB - 73.41 - overvalued, but growing 90%+, so PEG isn't so terrible
8) AT&T - 16.54 - fair, tho obfuscated because of recent acquisition
9) AMZN - 278 - this one I truly don't understand, half of its profit is AWS, retail is at ~1.75% margin, pathetic overvaluation, but like Salesforce, has been irrational for years and years now
10) P&G - 26.74 - overvalued

So out of the top ten, 4 are truly overvalued, one is N/A (GE), and the others are either fair or a bit undervalued - are those terrible odds? Does a US stock index deserve to be compared with Japan, or even US in the late 1990s, with interest rates at 5-6%? Looking at the opportunity cost/economic landscape, my opinion is a resounding no

Aphalite

  • Bristles
  • ***
  • Posts: 425
Re: Indexing sucks
« Reply #31 on: May 09, 2016, 01:28:14 PM »
One other thought experiment I performed was to think through what would happen if the market is currently at a high pe ratio and will tend to go towards a normal pe ratio over time.  Break apart the equation into 2 different pieces (prices and earnings) and then project out 20-50 years into the future (enough time for compounding to occur).  What you will find is that if the market is overvalued, it doesn't matter, as long as earnings go up.  If earnings go up 7% over the next 50 years, prices might go up only 6.7%, the difference is not as much as you think due to compounding of that extra 0.3%.

This isn't true. 0.3% at 50 years is a difference of 15% in wealth

$1 million would be $25.6m at 6.7% compounded and $29.5m at 7% compounded - it's the equivalent of you claiming investing costs don't matter, so buying a fund that's 35 basis points expense when you have the choice of an equivalent fund for 5 basis points won't affect your end results

Keith123

  • 5 O'Clock Shadow
  • *
  • Posts: 96
Re: Indexing sucks
« Reply #32 on: May 09, 2016, 01:42:46 PM »
Hey IC,

Listen, I know you feel as if you are helping me and others.  I do appreciate the sentiment.  I can tell you are quite intelligent, truly.  If I may, I'd like to give you some constructive criticism.  Stop being such a tool. [MOD EDIT: manners, please] You can take the other side of an argument without being so arrogant and condescending.  They way you respond really makes me and very likely others not want to engage with you.  I understand you think I am a fool.  That's ok with me.  However, I have invested well in my lifetime and will continue to hopefully.   For my age, I am in the top 5% for both income and net worth.  I'm sure you don't believe me, but I'm not going to prove it to you either.  Don't worry about me, I'll be fine. 


Hello Keith123, welcome back! Last we talked, this is how we left it:

So you think you're beating the market. That's great. Have you calculated your personal returns and compared them to a benchmark? I'm shocked that 100% of the people I've asked that question either say, "No", or they say "Yes" then end up having 0 knowledge on how to actually calculate returns.

To a person, literally 100% of the people I've met who think they're beating the market, fail this test. And when we properly run the numbers, they end up way behind. Keith123 failed this test pretty embarrassingly. The "I'm not going to spend hours and hours back-testing something for you." response is quite telling. Not because he won't do it for me...he even refuses to do it for himself.

To the newbies of the thread, I'd like you to think about that for a moment. Does this sound like a good idea?

Unfortunately, your unwillingness to review the past is biting you again :(

I genuinely think you need to step back, and take a look at the past. If you can, check the news reports over every possible period over the past 150 or so years we have data. You'll find something very interesting. The news is ALWAYS bad! Always!

You need to change your mindset and realize you don't have the knowledge you think you do. This is a ticking timebomb waiting to happen.

Here's a fun post from Bogleheads:

---------------------------------
With all the bearish posts recently I thought that it was time to update and repost this list that I have posted before to put the current situation into perspective

Selected world events.

1900's San Francisco Earthquake, Russian revolution and rise of communism, multiple regional wars, President McKinley Assassinated

1910's World war one, influenza epidemic, Armenian Genocide, Daylight Saving Time Introduced, The Chinese Revolution, KKK reemerges with over 4 million members, Titanic

1920's Stock market crash, prohibition and gangsters, Teapot Dome Scandal, Scopes (Monkey) Trial, Hoover Appointed FBI Director

1930's Spanish Civil War, Hitler rises to power, Depression, Dust Bowl, Bonnie and Clyde,

1940's World War two, birth of the Bomb, Pearl Harbor, Nuclear detonations destroy the cities of Hiroshima and Nagasaki, Gandhi Assassinated, Joseph Stalin, the Holocaust, Japanese American internment camps, Berlin Airlift

1950's The Cold War and Korea, McCarthy, Civil rights movement unrest, Credit Card Introduced, apartheid, London Smog of 1952 kills 12,000, Rosa Parks, Sputnik starts space race, Great Leap Forward

1960's Vietnam, assignations, riots in the streets, rise of drugs, Bay of Pigs, Cuban Missile Crisis, Berlin Wall, Northeast Blackout, Cultural Revolution, Chappaquiddick, Charles Manson

1970's More Vietnam, Stagflation, double digit inflation, Gas lines, Nixon, Three Mile Island. Pol Pot, Kent State, U.S. Drops gold standard, Lebanon, Jonestown Massacre, Iran Hostages

1980's S&L crash/scandal, Black Monday stock crash (Oct 87), Iran Hostages, more inflation, emergence of AIDS, Falkland Islands, Moonies, Bhopal India, New Coke, Iran-Contra Scandal, Exxon Valdez

1990's Kuwait war, Rodney King L.A. Riots, Yugoslavia, Bosnia, Clinton scandal/impeachment, Waco Texas, Rwandan Genocide, Lorena Bobbit, Mad Cow Disease, Columbine High School

2000's Dot Com Crash, 9/11, Iraq, Hurricanes, Oil price spike, Afghanistan, financial bailouts, severe recession, housing bubble.

2010's Gulf oil spill, Unemployment

It is easy to lose sight that the current problems stand a pretty good chance of being like all the past problems in that the most likely outcome is that while some people are terribly hurt, the rest of the world continues on even though it may change.

I guess since then you could add the Euro/Greece Crises, fallout from the Arab Spring, and the Japanese Earthquake/Tsunami but it might take a bit more time to see how important they turn out to be.
---------------------------------

Stock market performance during this time:



Once you realize the news media have a financial incentive not to give us accurate news, but to be negative and generate fear (because fear sells!), you'll be much better off. I used to be a regular on a mainstream news TV channel. I was their economy/stock investing expert. One day a few years back they called me in and explicitly asked for my opinion on the stock market...here's their email, word-for-word:

------------------------------------------------------------
The focus of the story will be about the US stock market, your predictions, and the importance of interest rates on effecting the US economy.

- Statements by members of the U.S. Federal exaggeration about the investors in the U.S. markets and to avoid the word "concern" about a downturn or correction.
- The S & P went nearly 28 months without a correction of more than 10% or approaching that for the first time since 1928, where U.S. markets haven't corrected any increase, which usually happens about every 9 months.
- Declined requests for U.S. companies to buy shares in the market dramatically and sharply over the past month, amounting to 23 billion dollars from 60 billion dollars for the same period last year, giving the explicit story that the companies themselves think the price of the shares are overpriced at current levels!
- I hope to focus on the probability of a correction, and to what extent we can expect a correction, if we consider that the contributing factor is to raise interest rates in the future.
------------------------------------------------------------

I went in for the interview, same as always, and gave them my opinion. Something like:

------------------------------
"If prices are this high, that means the collective knowledge of everyone, from the billionaires of the world, to the 80 hour a week Harvard-Grad Wall Street investors, with nearly unlimited resources...have all decided this is the right price. Not only that, but they put their money where their mouth is, and kept buying until prices got pushed up to their current level.

Who am I to say they're wrong?

You want my prediction? Over time the market typically goes up, so there's a much better chance of prices increasing than decreasing. Sure, it will drop 10% eventually, but no one knows when. For all we know, prices will increase 30% from their current level before they drop 10%. The only winning move, is not to play. Just keep your money in for the long-term, and avoid the noise."
------------------------------

I checked the news report later, and they didn't use my piece. It's the first time that has happened. Instead they went out and interviewed someone else, who gave them the typical "SELL EVERYTHING DOOMSDAY IS UPON US" message (Hey Keith123, was that you? :-P).

Oh, and they never contacted me again \_(ツ)_/

The best part? The market promptly rose 10+%, and as of this writing, is still there


« Last Edit: May 10, 2016, 07:20:06 AM by FrugalToque »

matchewed

  • Magnum Stache
  • ******
  • Posts: 4346
  • Location: CT
Re: Indexing sucks
« Reply #33 on: May 09, 2016, 01:48:16 PM »
Hey IC,

Listen, I know you feel as if you are helping me and others.  I do appreciate the sentiment.  I can tell you are quite intelligent, truly.  If I may, I'd like to give you some constructive criticism.  Stop being such a tool.  You can take the other side of an argument without being so arrogant and condescending.  They way you respond really makes me and very likely others not want to engage with you.  I understand you think I am a fool.  That's ok with me.  However, I have invested well in my lifetime and will continue to hopefully.   For my age, I am in the top 5% for both income and net worth.  I'm sure you don't believe me, but I'm not going to prove it to you either.  Don't worry about me, I'll be fine. 

No need to sink into ad hominem. Try arguing the points instead of insulting.

Interest Compound

  • Pencil Stache
  • ****
  • Posts: 658
Re: Indexing sucks
« Reply #34 on: May 09, 2016, 01:49:16 PM »
Even with a perfect real world example (Japan) of what we are probably facing, everyone just shrugs it off.

One thing we don't shrug off, is debating people with your mindset. Your mindset is the real risk here. Look at it from history's perspective:
  • There has never been a time in recorded history when buy and hold would have failed.
  • 100% of the time anyone in recorded history followed Keith123's mindset, they were wrong.
Do you see?

How can you look at Japan in fear, when your proposed alternative ended up being much worse than Japan 100% of the time???

We discussed this in the other thread, did you purposely skip over all the information that counters your line of thinking? Did you do the math on this? This is a huge thing most people miss when looking at charts, you're only seeing how a single deposit would've done from end-to-end during that time period. A real portfolio with DCA (during the accumulation phase) doesn't look anything like that. I just worked it out up to 2013:



If you DCA'ed 1,000 a month into 100% Japanese stocks from 1989-2013, you'd end up with an inflation adjusted 360,717

Same calculation for USA stocks, in USD: $544,788
International stocks in USD: $357,746
50/50 USA/International in USD: $448,562
Total US Bond in USD: $333,170

At that rate you'd need to work an extra 3 years compared to the market-weighted world stock market, and you actually would've beaten International stocks in general. I wouldn't consider this "terrible shape", but that's my opinion :)

It's also quite telling that even 100% Japanese stocks starting from 1989 beat 100% US bonds, yet you're pointing at Japanese stocks as an indication of a nightmare scenario, and say nothing about US bonds during this period.



Debating people with your mindset is a waste of time, because evidence doesn't sway you. It's not an evidence-based argument, it's based on emotion. Keith123, if you can reflect and honestly answer this question, it would go a long way towards letting us properly explain our position to you:

Is there anything anyone could say, or show you, that could possibly convince you? If so, what is it? What information could someone present, that would completely change your viewpoint? What facts would change your mind?

Mr. Green

  • Handlebar Stache
  • *****
  • Posts: 2072
  • Age: 36
  • Location: Wilmington, NC
Re: Indexing sucks
« Reply #35 on: May 09, 2016, 02:02:42 PM »
This shit is just baffling to me.  Seriously, does anyone think the economy is just going to starting booming again and things are going to be fine and dandy?  This is not a normal event that is happening worldwide.  This is a structural breakdown in the economic model.  Central banks have not been able to stimulate growth, and they have pulled out almost every tool they have.  I honestly don't believe that they can no matter what at this point.  They are just delaying the inevitable crash.  This could be a really, really bad period for the next 20 years if central banks never back off or it could be a violent, horrible period of 5 years if they just let the free market hit the credit reset button, smash asset prices back to true valuation levels, and get interest rates back to normal.  Either way, shit is hitting the fan.  There is no way, not a chance, that we are growing our way out of this if GDP is this low after this much central back intervention.  I think the best case scenario is endless QE and low interest rates, probably even negative, that just keep kicking this can down the road and keeping the markets artificially high and assets prices in general artificially high.  But even that will hit a wall eventually, it will just take decades.  Japan's economy is the perfect example of this.  Why aren't we learning from that real world example instead of repeating it?
I think Warren Buffet has this argument covered quite nicely with his bet with those hedge fund guys. His index bet is absolutely destroying them. Did you see his sermon about indexing in this year's BH annual shareholders meeting? As baffled as you are that people are still indexing, he is just as baffled that people like you are advocating for not indexing. No offense, but if I was going to take advice from either you or Warren Buffet, I'd take Warren Buffet.

Could I spend tons of my time trying to figure out what companies or sectors might outperform the broader market? Sure, but hedge funds and active managers try to do that all the time and guess what? 85% of them lose. Why would I think I'd be any better at it than them? Plus, that's a whole heap of time that I'd have to devote to something I really don't care to be doing, when I could be enjoying my life and getting the same return as the S&P 500, which so far has been pretty good.

There are more worthwhile things to do with my time.

thd7t

  • Handlebar Stache
  • *****
  • Posts: 1321
Re: Indexing sucks
« Reply #36 on: May 09, 2016, 02:17:15 PM »
Even with a perfect real world example (Japan) of what we are probably facing, everyone just shrugs it off.

One thing we don't shrug off, is debating people with your mindset. Your mindset is the real risk here. Look at it from history's perspective:
  • There has never been a time in recorded history when buy and hold would have failed.
  • 100% of the time anyone in recorded history followed Keith123's mindset, they were wrong.
Do you see?

How can you look at Japan in fear, when your proposed alternative ended up being much worse than Japan 100% of the time???

We discussed this in the other thread, did you purposely skip over all the information that counters your line of thinking? Did you do the math on this? This is a huge thing most people miss when looking at charts, you're only seeing how a single deposit would've done from end-to-end during that time period. A real portfolio with DCA (during the accumulation phase) doesn't look anything like that. I just worked it out up to 2013:



If you DCA'ed 1,000 a month into 100% Japanese stocks from 1989-2013, you'd end up with an inflation adjusted 360,717

Same calculation for USA stocks, in USD: $544,788
International stocks in USD: $357,746
50/50 USA/International in USD: $448,562
Total US Bond in USD: $333,170

At that rate you'd need to work an extra 3 years compared to the market-weighted world stock market, and you actually would've beaten International stocks in general. I wouldn't consider this "terrible shape", but that's my opinion :)

It's also quite telling that even 100% Japanese stocks starting from 1989 beat 100% US bonds, yet you're pointing at Japanese stocks as an indication of a nightmare scenario, and say nothing about US bonds during this period.
Well, I disagree with Keith123's premise, and think you've made strong arguments up to now, but you just made an incorrect blanket statement for two reasons. First, he isn't saying to get out of the market. There will always be outliers who beat the market, if they are in it. Second, your 100% success rate is subject to survival bias. If an index followed a market and that market ceased to function, you could be wiped out. While I don't know of an index that has suffered cataclysmic failure, it's not outside the realm of possibility. Again, I say this because I agree with you and don't want you to weaken the argument by misrepresenting what was said or making unverified claims.

Aphalite

  • Bristles
  • ***
  • Posts: 425
Re: Indexing sucks
« Reply #37 on: May 09, 2016, 02:18:54 PM »
I think Warren Buffet has this argument covered quite nicely with his bet with those hedge fund guys. His index bet is absolutely destroying them. Did you see his sermon about indexing in this year's BH annual shareholders meeting? As baffled as you are that people are still indexing, he is just as baffled that people like you are advocating for not indexing. No offense, but if I was going to take advice from either you or Warren Buffet, I'd take Warren Buffet.

Could I spend tons of my time trying to figure out what companies or sectors might outperform the broader market? Sure, but hedge funds and active managers try to do that all the time and guess what? 85% of them lose. Why would I think I'd be any better at it than them? Plus, that's a whole heap of time that I'd have to devote to something I really don't care to be doing, when I could be enjoying my life and getting the same return as the S&P 500, which so far has been pretty good.

There are more worthwhile things to do with my time.

As much as I think Keith is going overboard with his "index sucks" claims, this is a dishonest argument as you're putting words in his mouth. Nowhere did he say to chase Hedge Funds - he is advocating a valuation approach to investing, which is a great, if difficult, way to manage your own money. The reason hedge funds and active managers lose is because of expenses and turnover, if you take out those two factors with an individual security portfolio, you will, on average, do no worse than an indexer (provided you both have the same temperament, buy and hold, and don't panic sell)

frugledoc

  • Pencil Stache
  • ****
  • Posts: 718
Re: Indexing sucks
« Reply #38 on: May 09, 2016, 02:21:56 PM »
Every time we have a correction the Bears think it is going to turn into a huge crash.

When it doesn't go their way they through their toys out the pram as they miss yet another wonderful opportunity to enter the market.

I love posters like krith123.  They are a great barometer of the fear and negative sentiment out there just now.

Of course,  the Bears will have their day again but not until the news is rosey and there is only positive sentiment.


doggyfizzle

  • Bristles
  • ***
  • Posts: 366
Re: Indexing sucks
« Reply #39 on: May 09, 2016, 02:23:27 PM »
5) J&J 20.6 - fairly valued - 5% stock yield

You need to re-check your Bloomberg Terminal. JNJ's yield is less than 3%.

Mr. Green

  • Handlebar Stache
  • *****
  • Posts: 2072
  • Age: 36
  • Location: Wilmington, NC
Re: Indexing sucks
« Reply #40 on: May 09, 2016, 02:30:27 PM »
I think Warren Buffet has this argument covered quite nicely with his bet with those hedge fund guys. His index bet is absolutely destroying them. Did you see his sermon about indexing in this year's BH annual shareholders meeting? As baffled as you are that people are still indexing, he is just as baffled that people like you are advocating for not indexing. No offense, but if I was going to take advice from either you or Warren Buffet, I'd take Warren Buffet.

Could I spend tons of my time trying to figure out what companies or sectors might outperform the broader market? Sure, but hedge funds and active managers try to do that all the time and guess what? 85% of them lose. Why would I think I'd be any better at it than them? Plus, that's a whole heap of time that I'd have to devote to something I really don't care to be doing, when I could be enjoying my life and getting the same return as the S&P 500, which so far has been pretty good.

There are more worthwhile things to do with my time.

As much as I think Keith is going overboard with his "index sucks" claims, this is a dishonest argument as you're putting words in his mouth. Nowhere did he say to chase Hedge Funds - he is advocating a valuation approach to investing, which is a great, if difficult, way to manage your own money. The reason hedge funds and active managers lose is because of expenses and turnover, if you take out those two factors with an individual security portfolio, you will, on average, do no worse than an indexer (provided you both have the same temperament, buy and hold, and don't panic sell)
Nowhere did I say he said to chase hedge funds. :P I admit my hedge fund example wasn't the greatest because the OP is talking about finding individual equities. I was only using it as an example to show that lots of professionals use active methods to try to beat the market and they don't win. I'd still rather spend my time getting the average market return while enjoying my life, because finding value investments will become a time sink. You won't pay a hedge fund or mutual fund manager a fee, but instead you'll pay the fee with hours from your own life.
« Last Edit: May 09, 2016, 02:35:06 PM by Mr. Green »

Aphalite

  • Bristles
  • ***
  • Posts: 425
Re: Indexing sucks
« Reply #41 on: May 09, 2016, 02:30:58 PM »
5) J&J 20.6 - fairly valued - 5% stock yield

You need to re-check your Bloomberg Terminal. JNJ's yield is less than 3%.

Hate to spoil your high and mighty fun, but stock yield is inverse P/E. The yield you are talking about is dividend yield. Stock yield is if the Board at JnJ decided, hey, instead of holding back some of the cash we earn for reinvestment or buybacks, let's distribute all of it to the shareholders. If they adopt such a policy and you buy JNJ at current prices, you would get a yield of 5%

EDIT: Perhaps I should have said "Earnings Yield" instead, maybe that would have avoided some confusion
« Last Edit: May 09, 2016, 02:35:47 PM by Aphalite »

Interest Compound

  • Pencil Stache
  • ****
  • Posts: 658
Re: Indexing sucks
« Reply #42 on: May 09, 2016, 02:33:00 PM »
Even with a perfect real world example (Japan) of what we are probably facing, everyone just shrugs it off.

One thing we don't shrug off, is debating people with your mindset. Your mindset is the real risk here. Look at it from history's perspective:
  • There has never been a time in recorded history when buy and hold would have failed.
  • 100% of the time anyone in recorded history followed Keith123's mindset, they were wrong.
Do you see?

How can you look at Japan in fear, when your proposed alternative ended up being much worse than Japan 100% of the time???

We discussed this in the other thread, did you purposely skip over all the information that counters your line of thinking? Did you do the math on this? This is a huge thing most people miss when looking at charts, you're only seeing how a single deposit would've done from end-to-end during that time period. A real portfolio with DCA (during the accumulation phase) doesn't look anything like that. I just worked it out up to 2013:



If you DCA'ed 1,000 a month into 100% Japanese stocks from 1989-2013, you'd end up with an inflation adjusted 360,717

Same calculation for USA stocks, in USD: $544,788
International stocks in USD: $357,746
50/50 USA/International in USD: $448,562
Total US Bond in USD: $333,170

At that rate you'd need to work an extra 3 years compared to the market-weighted world stock market, and you actually would've beaten International stocks in general. I wouldn't consider this "terrible shape", but that's my opinion :)

It's also quite telling that even 100% Japanese stocks starting from 1989 beat 100% US bonds, yet you're pointing at Japanese stocks as an indication of a nightmare scenario, and say nothing about US bonds during this period.
Well, I disagree with Keith123's premise, and think you've made strong arguments up to now, but you just made an incorrect blanket statement for two reasons. First, he isn't saying to get out of the market. There will always be outliers who beat the market, if they are in it. Second, your 100% success rate is subject to survival bias. If an index followed a market and that market ceased to function, you could be wiped out. While I don't know of an index that has suffered cataclysmic failure, it's not outside the realm of possibility. Again, I say this because I agree with you and don't want you to weaken the argument by misrepresenting what was said or making unverified claims.

Agreed. I considered that angle, and agree this is a valid criticism of my post.

I decided to leave the, "There has never been a time in recorded history when buy and hold would have failed." line, as Keith123 is referring to the US market, and indeed this has been true for the US market. Survivorship bias indeed makes this a weak argument. It also is true in reference to the cap-weighted world market, which I think is a much stronger point.

I also decided to leave the, "100% of the time anyone in recorded history followed Keith123's mindset, they were wrong." in reference not to individual stock picking, but in reference to the entire world economy collapsing as Keith123 fears. I think this is fair, but I should've explained it more. I was hoping Keith123 would respond on that point so I can have some insight into his/her thinking :-P

doggyfizzle

  • Bristles
  • ***
  • Posts: 366
Re: Indexing sucks
« Reply #43 on: May 09, 2016, 02:49:57 PM »
5) J&J 20.6 - fairly valued - 5% stock yield

You need to re-check your Bloomberg Terminal. JNJ's yield is less than 3%.

Hate to spoil your high and mighty fun, but stock yield is inverse P/E. The yield you are talking about is dividend yield. Stock yield is if the Board at JnJ decided, hey, instead of holding back some of the cash we earn for reinvestment or buybacks, let's distribute all of it to the shareholders. If they adopt such a policy and you buy JNJ at current prices, you would get a yield of 5%

EDIT: Perhaps I should have said "Earnings Yield" instead, maybe that would have avoided some confusion

Earnings yield was what I was looking for.

Kaspian

  • Handlebar Stache
  • *****
  • Posts: 1536
  • Location: Canada
    • My Necronomicon of Badassity
Re: Indexing sucks
« Reply #44 on: May 09, 2016, 03:00:08 PM »
Wait, NO--Hold the fucking phone here!  "Survivorship bias" is used when things drop out over shorter terms and people analyze what is leftover as though it's the only thing which ever existed.  You're using it totally wrong--on randomly invented scenarios.  When speaking of the Empire State Building and its construction you don't say it has survivorship bias because it didn't get taken out by an earthquake but might some day.  I'm not lucky to be alive because of survival bias because I didn't get abducted by UFOs.  Used the way you guys are anything be classified as suffering from "survivorship bias". 

It's for things like if a bank is measuring its mutual funds saying they all went up over the last 3 years but they don't take into consideration that 4 of the 20 were actually completely canned over the same timespan. 
« Last Edit: May 09, 2016, 03:03:03 PM by Kaspian »

steveo

  • Handlebar Stache
  • *****
  • Posts: 1943
Re: Indexing sucks
« Reply #45 on: May 09, 2016, 03:31:07 PM »
The amount of arrogance on this board is incredible considering your investing philosophy is based on blind faith that because the markets have gone up in the past they will forever go up. 

Your arguments for the world ending have nothing to do with indexing vs picking stocks. Can you see the hypocrisy in your statement here. You are the arrogant one in my opinion because you believe that you can pick the individual stocks that will outperform the world's economies crashing and burning.

Haven't we learned that picking the outperforming stocks is inherently difficult ? That is why you index.

As for the world's economies performing terribly I just don't see it. People continue to spend money hand over foot. Maybe stocks will have an underperforming decade or two but at some point they will boom again. It's the way markets work.

steveo

  • Handlebar Stache
  • *****
  • Posts: 1943
Re: Indexing sucks
« Reply #46 on: May 09, 2016, 03:52:24 PM »
I think Warren Buffet has this argument covered quite nicely with his bet with those hedge fund guys. His index bet is absolutely destroying them. Did you see his sermon about indexing in this year's BH annual shareholders meeting? As baffled as you are that people are still indexing, he is just as baffled that people like you are advocating for not indexing. No offense, but if I was going to take advice from either you or Warren Buffet, I'd take Warren Buffet.

Could I spend tons of my time trying to figure out what companies or sectors might outperform the broader market? Sure, but hedge funds and active managers try to do that all the time and guess what? 85% of them lose. Why would I think I'd be any better at it than them? Plus, that's a whole heap of time that I'd have to devote to something I really don't care to be doing, when I could be enjoying my life and getting the same return as the S&P 500, which so far has been pretty good.

There are more worthwhile things to do with my time.

This is exactly the way I see Keith's argument. Beating the market is really hard. Why spend the time and effort trying to do this when you will probably fail.

mrpercentage

  • Handlebar Stache
  • *****
  • Posts: 1236
  • Location: PHX, AZ
Re: Indexing sucks
« Reply #47 on: May 09, 2016, 03:53:39 PM »
mmm hmm

Aphalite

  • Bristles
  • ***
  • Posts: 425
Re: Indexing sucks
« Reply #48 on: May 09, 2016, 04:18:06 PM »
There are more worthwhile things to do with my time.

This is exactly the way I see Keith's argument. Beating the market is really hard. Why spend the time and effort trying to do this when you will probably fail.

I agree with the bolded in both of your comments, just seems to me like it's personal preference. I also don't think it's constructive to say that he will probably fail. I think most of the population in the US probably think the FI path is stupid and that we're bound to fail because we won't enjoy the process/"living like a pauper", but everyone here is making really great progress/achieving happiness even though we are a tiny minority. If Keith enjoys studying stocks or businesses, has the correct temperament, and behaves correctly, he'll do fine (remember, the chief benefit of indexing is the low cost, diversification, and lack of turnover, all of which can be replicated with individual security selection, this is what annoys me when people can't separate the vehicle from the actual underlying holdings). Even the folk hero Jack Bogle endorsed buying individual securities, not an index, if you have enough wealth.

My opinion is that the defeatist attitude of labeling stock picking as likely to fail is unhelpful and condescending, and I think there's a little bit of irony that such an attitude is so prevalent in a community like this, where all of us chose a life path that is in the minority that's looked down on by the general public with condescension (at least initially). Just my two cents

GuitarStv

  • Senior Mustachian
  • ********
  • Posts: 14849
  • Age: 38
  • Location: Toronto, Ontario, Canada
Re: Indexing sucks
« Reply #49 on: May 09, 2016, 06:12:20 PM »
My opinion is that the defeatist attitude of labeling stock picking as likely to fail is unhelpful and condescending

I think that you're missing the reasoning behind the use of that label.  Statistically, you are less likely to succeed following a stock picking strategy.



That's not attempting to put down someone who wants to follow this strategy, it's a statement of fact.  The person picking the stocks needs to be significantly better than the average active manager . . . who has access to the same information that they do.  It's a difficult game to win at consistently over long periods of time, and very few do.

It's not condescending to point out the reality of a suggested course of action.  It would be irresponsible not to do this.