The Money Mustache Community

Learning, Sharing, and Teaching => Investor Alley => Topic started by: Keith123 on May 08, 2016, 06:07:51 PM

Title: Indexing sucks
Post by: Keith123 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?
Title: Re: Indexing sucks
Post by: SwordGuy 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.


Title: Re: Indexing sucks
Post by: Jeremy E. 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.
Title: Re: Indexing sucks
Post by: Jeremy E. 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.
Title: Re: Indexing sucks
Post by: Interest Compound 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  (https://www.bogleheads.org/forum/viewtopic.php?t=85022#p1217334)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:

(https://i.sli.mg/mYGkm6.png)

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

(http://fail.brm.sk/o_rly/so_smug.jpg)
Title: Re: Indexing sucks
Post by: EarlyStart 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.
Title: Re: Indexing sucks
Post by: Cyaphas 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.
Title: Re: Indexing sucks
Post by: Seppia on May 09, 2016, 12:23:05 AM
Lorena Bobbit

LOL
Title: Re: Indexing sucks
Post by: MustacheAndaHalf 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.
Title: Re: Indexing sucks
Post by: Interest Compound on May 09, 2016, 12:58:05 AM
Lorena Bobbit

LOL

Hehe, every time I quote that, someone points that one out :)
Title: Re: Indexing sucks
Post by: Cyaphas 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!
Title: Re: Indexing sucks
Post by: Seppia 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 :)
Title: Re: Indexing sucks
Post by: alsoknownasDean on May 09, 2016, 03:07:39 AM
Looks like someone's optimism gun isn't working all that well today :)
Title: Re: Indexing sucks
Post by: steveo 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.
Title: Re: Indexing sucks
Post by: money_bunny 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.
Title: Re: Indexing sucks
Post by: davisgang90 on May 09, 2016, 06:54:18 AM
Well, I'm convinced.  Selling all my index funds for hybrid seeds and silver coins.
Title: Re: Indexing sucks
Post by: MrDelane 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?
Title: Re: Indexing sucks
Post by: GuitarStv 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.
Title: Re: Indexing sucks
Post by: mohawkbrah 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

Title: Re: Indexing sucks
Post by: Retire-Canada 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!?!? ;)
Title: Re: Indexing sucks
Post by: Kaspian 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.
Title: Re: Indexing sucks
Post by: zephyr911 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.
Title: Re: Indexing sucks
Post by: MgoSam 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!
Title: Re: Indexing sucks
Post by: Frankies Girl 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. :)
Title: Re: Indexing sucks
Post by: zephyr911 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
Title: Re: Indexing sucks
Post by: ShortInSeattle 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
Title: Re: Indexing sucks
Post by: Paul der Krake 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.
Title: Re: Indexing sucks
Post by: Keith123 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? 
Title: Re: Indexing sucks
Post by: matchewed 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.
Title: Re: Indexing sucks
Post by: MustacheAndaHalf 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.
Title: Re: Indexing sucks
Post by: Aphalite 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
Title: Re: Indexing sucks
Post by: Aphalite 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
Title: Re: Indexing sucks
Post by: Keith123 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  (https://www.bogleheads.org/forum/viewtopic.php?t=85022#p1217334)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:

(https://i.sli.mg/mYGkm6.png)

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

(http://fail.brm.sk/o_rly/so_smug.jpg)
Title: Re: Indexing sucks
Post by: matchewed 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.
Title: Re: Indexing sucks
Post by: Interest Compound 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:
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:

(https://i.sli.mg/vJ7lvH.png)

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.

(http://izquotes.com/quotes-pictures/quote-you-can-t-reason-someone-out-of-a-position-they-didn-t-reason-themselves-into-anonymous-298728.jpg)

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?
(http://www.simpleguidetohumanism.org.uk/images/quotes/quotes_1.1_03.gif)
Title: Re: Indexing sucks
Post by: Mr. Green 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.
Title: Re: Indexing sucks
Post by: thd7t 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:

(https://i.sli.mg/vJ7lvH.png)

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.
Title: Re: Indexing sucks
Post by: Aphalite 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)
Title: Re: Indexing sucks
Post by: frugledoc 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.

Title: Re: Indexing sucks
Post by: doggyfizzle 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%.
Title: Re: Indexing sucks
Post by: Mr. Green 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.
Title: Re: Indexing sucks
Post by: Aphalite 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
Title: Re: Indexing sucks
Post by: Interest Compound 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:

(https://i.sli.mg/vJ7lvH.png)

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
Title: Re: Indexing sucks
Post by: doggyfizzle 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.
Title: Re: Indexing sucks
Post by: Kaspian 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. 
Title: Re: Indexing sucks
Post by: steveo 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.
Title: Re: Indexing sucks
Post by: steveo 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.
Title: Re: Indexing sucks
Post by: mrpercentage on May 09, 2016, 03:53:39 PM
mmm hmm
Title: Re: Indexing sucks
Post by: Aphalite 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
Title: Re: Indexing sucks
Post by: GuitarStv 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.

(http://assets.bwbx.io/images/igHEtdV1fJms/v1/-1x-1.png)

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.
Title: Re: Indexing sucks
Post by: protostache on May 09, 2016, 06:39:59 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.

(http://assets.bwbx.io/images/igHEtdV1fJms/v1/-1x-1.png)

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.

Do you have a link to the report or data behind that chart?
Title: Re: Indexing sucks
Post by: thd7t on May 09, 2016, 07:04:13 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.
Well, Interest Compound addressed this pretty well , but contextually, if a claim of 100% is made, then a very broad interpretation of" survivorship " is valid. Further, we know that entire markets have crashed in history for reasons of natural disaster and lack of diversification. I admit that we are largely discussing the US market and that I disagree with Keith123's assertion, but putting the argument in terms of absolutes did it a disservice.
Title: Re: Indexing sucks
Post by: Aphalite on May 09, 2016, 07:49:22 PM
it's a statement of fact.  The person picking the stocks needs to be significantly better than the average active manager. It's a difficult game to win at consistently over long periods of time, and very few do.

Um, no, none of the three statements you stated are true.

1) It's not a statement of fact that you are likely to statistically underperform the index if you pick stocks. It is a statement of fact that if you incur UNNECESSARY EXPENSE, you are likely to underperform the index. You are getting stock picking and ACTIVELY MANAGED FUND picking confused. A lot of people have this misconception that just because you're a stock picker, you're automatically running up all these transaction costs and taxes, again, please separate the VEHICLE from the underlying holdings.

2) The person picking stocks doesn't need to be better at all than the active manager. In fact, if you perform as well as a manager before expenses, or as well as an index before expenses, you will likely perform better than them AFTER expenses. Again, you're making the god awful assumption that being a stock picker AUTOMATICALLY means more expenses when that couldn't be further from the truth - especially given the context in which Keith has posted in these forums (his stance is, use valuation based approach to pick stocks, then never sell)

3) It is definitely not a difficult game to win long term. If you mean that it's impossible to beat EVERY year, then yes, you would be right. But total performance? Over a long period of time? There's a ton of academic research showing buying a equal weighted portfolio of stocks, then doing literally nothing but reinvest into the original securities (letting winners ride and losers go to zero) outclasses index investing (see Jeremy Siegel's work)
Title: Re: Indexing sucks
Post by: AlmstRtrd on May 09, 2016, 08:42:13 PM
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

Wait, that's total contributions of ¥300,000 with a real total return of only 20% over 25 years, correct? And that's with 2012 and 2013 being very good years for the Nikkei Index. Looks like a very poor performance to me but maybe it's too late and I should be sleeping instead of doing math.
Title: Re: Indexing sucks
Post by: GuitarStv on May 10, 2016, 06:31:54 AM
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.

(http://assets.bwbx.io/images/igHEtdV1fJms/v1/-1x-1.png)

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.

Do you have a link to the report or data behind that chart?

Sure:  http://www.bloomberg.com/view/articles/2015-11-11/why-indexing-beats-stock-picking (http://www.bloomberg.com/view/articles/2015-11-11/why-indexing-beats-stock-picking)

It's specifically a chart showing how purchasing some of the stocks held in an index at random will nearly always under-perform the index, until you purchase enough of the stocks to roughly simulate the index.
Title: Re: Indexing sucks
Post by: protostache on May 10, 2016, 07:01:25 AM
Sure:  http://www.bloomberg.com/view/articles/2015-11-11/why-indexing-beats-stock-picking (http://www.bloomberg.com/view/articles/2015-11-11/why-indexing-beats-stock-picking)

It's specifically a chart showing how purchasing some of the stocks held in an index at random will nearly always under-perform the index, until you purchase enough of the stocks to roughly simulate the index.

(Here's the original paper (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2673262) in case anyone wants to read some math while drinking their morning coffee)

It's hard for me to give randomized models much credit, since they don't model actual investor behavior. Given a random subset of 500 randomly generated, randomly moving stocks, run it 10,000 times. Most of the time the random subsets don't include the very tiny number of significant outliers in their model so they lose over 5 year periods (an incredibly short time period, FWIW).

Do real life investors actually just pick completely randomly? More importantly, do the investors on this forum who advocate for picking individual equities pick randomly? I know I don't and I'm pretty sure Aphalite doesn't either (side note: trading something because Cramer says so is to be considered "random", IMO).

Picking better than random takes effort and research, absolutely. Nobody disputes that. If you don't put the work in you're going to have subpar results, and in my mind "picking random subsets" is not putting the work in.
Title: Re: Indexing sucks
Post by: Aphalite on May 10, 2016, 07:03:49 AM
(Here's the original paper (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2673262) in case anyone wants to read some math while drinking their morning coffee)

It's hard for me to give randomized models much credit, since they don't model actual investor behavior. Given a random subset of 500 randomly generated, randomly moving stocks, run it 10,000 times. Most of the time the random subsets don't include the very tiny number of significant outliers in their model so they lose over 5 year periods (an incredibly short time period, FWIW).

Do real life investors actually just pick completely randomly? More importantly, do the investors on this forum who advocate for picking individual equities pick randomly? I know I don't and I'm pretty sure Aphalite doesn't either (side note: trading something because Cramer says so is to be considered "random", IMO).

Picking better than random takes effort and research, absolutely. Nobody disputes that. If you don't put the work in you're going to have subpar results, and in my mind "picking random subsets" is not putting the work in.

+1
Title: Re: Indexing sucks
Post by: FIPurpose on May 10, 2016, 10:20:22 AM
it's a statement of fact.  The person picking the stocks needs to be significantly better than the average active manager. It's a difficult game to win at consistently over long periods of time, and very few do.

Um, no, none of the three statements you stated are true.

1) It's not a statement of fact that you are likely to statistically underperform the index if you pick stocks. It is a statement of fact that if you incur UNNECESSARY EXPENSE, you are likely to underperform the index. You are getting stock picking and ACTIVELY MANAGED FUND picking confused. A lot of people have this misconception that just because you're a stock picker, you're automatically running up all these transaction costs and taxes, again, please separate the VEHICLE from the underlying holdings.

2) The person picking stocks doesn't need to be better at all than the active manager. In fact, if you perform as well as a manager before expenses, or as well as an index before expenses, you will likely perform better than them AFTER expenses. Again, you're making the god awful assumption that being a stock picker AUTOMATICALLY means more expenses when that couldn't be further from the truth - especially given the context in which Keith has posted in these forums (his stance is, use valuation based approach to pick stocks, then never sell)

3) It is definitely not a difficult game to win long term. If you mean that it's impossible to beat EVERY year, then yes, you would be right. But total performance? Over a long period of time? There's a ton of academic research showing buying a equal weighted portfolio of stocks, then doing literally nothing but reinvest into the original securities (letting winners ride and losers go to zero) outclasses index investing (see Jeremy Siegel's work)

I understand what you are saying, but have a couple of differences of opinion on this:

1. Buy and hold of individual stocks seems like suicide.  Companies go through a natural lifecycle where they have inception, growth, maturity, then decline.  It's very difficult to identify which stocks are going to become the next Apple during the inception phase so most of the time you will be selecting stocks that are well into growth / maturity phase.  And what will naturally happen is that some of these stocks will eventually be overtaken by a new company that does things better, will fall apart due to incompetence, or some kind of accounting scandal, lawsuit, etc.  Picking the index fund takes care of this for you as you aren't beholden to a single company and they get rid of the losers over time. 

2. If you are using the buy and hold strategy you won't have much new money to invest in startups / small caps which have a lot more growth left.  Your portfolio will age and decline.

Therefore, to keep up with new technology, individual stock pickers need to adjust their portfolio over time, and I have extreme doubt that anyone can operate cheaper than the Vanguard S&P 500 index fund.

1. If you read the OP, the author is not talking about picking the next Apple. He is talking about picking companies that have maintained dividend payouts for decades, and have the ability to continue to do so. Also just because the OP does not mention an exit strategy does not mean he doesn't have one. I agree that every company eventually declines, but many can sustain healthy profits for decades. And those same companies don't just disappear over night. Walmart is not going anywhere, and any trouble that they may face can easily be abandoned early on. Most long-term dividend investors will bail if there are any headwinds in the dividend payout.

2. I agree with this point. It is difficult to find high growth, dividend payers. There are a few out there, but they are a rare breed.

You can easily operate cheaper in individual stocks. Comparing to a .06% expense ratios that equates to about 12 trades per $100,000 per year. Most buy-hold stock buyers are not coming anywhere close to that number. So yes they are likely doing it cheaper than Vanguard.
Title: Re: Indexing sucks
Post by: Aphalite on May 10, 2016, 10:28:04 AM
1. Buy and hold of individual stocks seems like suicide.  Companies go through a natural lifecycle where they have inception, growth, maturity, then decline.  It's very difficult to identify which stocks are going to become the next Apple during the inception phase so most of the time you will be selecting stocks that are well into growth / maturity phase.  And what will naturally happen is that some of these stocks will eventually be overtaken by a new company that does things better, will fall apart due to incompetence, or some kind of accounting scandal, lawsuit, etc.  Picking the index fund takes care of this for you as you aren't beholden to a single company and they get rid of the losers over time. 

2. If you are using the buy and hold strategy you won't have much new money to invest in startups / small caps which have a lot more growth left.  Your portfolio will age and decline.

Therefore, to keep up with new technology, individual stock pickers need to adjust their portfolio over time, and I have extreme doubt that anyone can operate cheaper than the Vanguard S&P 500 index fund.

I agree that it's not easy. As for your points:

1) You don't need to find the next apple to do really well, total market indices have a very small slice devoted to the apples and netflix and pricelines anyways - if you had one home depot, or starbucks, or walmart, in your portfolio, just one, it really drags up the rest of your portfolios. An example is the "dividend aristocrats" in 1989. While I would never invest based only on dividend records, the thought experiment turned out to be very interesting. Here's a post from almost a year ago:

Here's a quick and dirty calculation of $1000 investment per 1989 Dividend Aristocrat starting January 2, 1990 and ending December 31, 2014 - populated using:

Dividend Aristocrat list: http://www.suredividend.com/25-year-review-of-dividend-aristocrats-why-companies-fell-off-the-list/
Return calculation (dividend reinvested) - this could have errors, I haven't backtested, but seems to be pretty accurate: longrundata.com

For firms that were acquired or no longer exist, I assume total loss of principal, even though this isn't what actually happened:

Symbol   Return    Ending Value
K   8.41%    $7,543
PH   13.99%    $26,465
BAX   11.12%    $13,986
FPL/NEE   12.04%    $17,179
IFF   8.95%    $8,536
DOV   11.36%    $14,746
EMR   10.41%    $11,914
JNJ   13.58%    $24,179
KO   11.26%    $14,407
LOW   20.06%    $96,736
MMM   11.83%    $16,404
PG   12.34%    $18,376
CL   14.46%    $29,310
GPC   10.82%    $13,052
MAS   5.46%    $3,782
TMK   10.03%    $10,929
CSR   0.00%    $-   
HI   0.00%    $-   
RBD   0.00%    $-   
WLA   0.00%    $-   
AMP   0.00%    $-   
AHP   0.00%    $-   
LDG   0.00%    $-   
WIN   0.00%    $-   
TXU   0.00%    $-   
NSI   0.00%    $-   
Total    $26,000     $327,543
   11.13%   

You end up with $327.5k on a $26k investment (with Lowe's doing the heavy lifting) - I don't have the numbers for SP500/VTSAX going back to 1990, but 11.13% with assumed total principal loss on 10/26 holdings in the index would be acceptable to me

And keep in mind, total return would actually probably be much higher because you would have received cash on the companies in the list that were acquired or went private, such as CSR, HI, RBD, WLA, AMP, and TXU

I crossed out a section from the quote - VFINX from 1990 through 12/31/14 returned $246,859.48, for 9.42%. Even though you didn't have any "superstars" per se, one star (Lowe's) compounding at 20% a year for 25 years dragged your total portfolio return up to an index beating 11.13% (at the lower range of an estimate since we assume no recovery of capital from the companies that were acquired) even though 10/26 holdings were assumed to have gone "bankrupt". It's just the math of how portfolio returns work

I think your other point pertaining to takeovers and decline of companies has its heart in the right place, but again, in reality, this isn't what happens. Companies get acquired and you end up with the stock of the new company, or cash that you would redeploy. Joshua Kennon explains this with a lot more clarity than I am able to do so at this moment, so I'll direct you to his article: http://www.joshuakennon.com/im-building-ghost-ship-portfolio-someone-sort-index-fund-steroids/ as well as this comment by him:

"I'd bet money 25 years from now the DJIA bought and held with no changes that had AT&T a part of it would do better than the DJIA index fund. The academic evidence on this sort of thing always shows the same pattern and I'm not sure I'd want to bet against it but you'd be shocked how many people just don't understand the math.

I mean, look at this blog post (http://dailyreckoning.com/a-better-way-than-buy-and-hold/), which took me less than a few seconds to find. He argues against buy and hold investing because, "Of all of the stocks that were part of the original Dow Jones Industrial Average, only General Electric is still a part of the index." Only it's complete nonsense.

American Cotton Oil? Yeah, that's now part of Unilever, one of the most profitable, successful investments of the past century.

American Tobacco Company? Sweet Lord it ended up becoming Fortune Brands, one of the most successful spin-off and compounding enterprises in the history of human civilization. It went through so many reorganizations and spin-offs that you ended up owning everything from home security systems to Jim Beam whiskey.

Distilling & Cattle Feeding Company? Yeah, that ended up part of British giant Hanson PLC before being spun-off as an independent business with a name change, and then taken private.

Chicago Gas Company? That was aquired by Peoples Energy, which later merged in Integrys Energy Group, which was acquired last year by Wisconsin Energy Corporation.

General Electric? Still around plus a bunch of spin-offs.

Laclede Gas Company? The largest natural gas company in my home state of Missouri. It may be a boring utility but in my lifetime, it's compounded at just shy of 9% assuming no dividends reinvested.

United States Rubber Company ended up finding its way into French blue chip Michelin.

National Lead? It's complicated but it is one of those situations like Eastman Kodak where you didn't lose money despite horrific losses on the surface if your family held it as part of the original index. The company itself, which worked on the atomic bomb for the government and was known for its Dutch Boy paints, paid out dividends and spun-off its Baroid division, which is now part of Halliburton.

North American Company? That was broken up by the SEC, and permitted by the Supreme Court decision in 1946 thanks to the earlier-enacted PUHCA, shattering a public utility empire that was straight out of the gilded age; a sort of Standard Oil of electric companies operating an incredible network of subsidiaries that spanned the country.

Tennessee Coal, Iron, and Railroad Company found its way into U.S. Steel.

U.S. Leather Company has the distinction of being the only original Dow component that went into liquidation. It final reorganization involved a distribution of cash and a one-for-one share exchange for Keta Gas & Oil Corporation, which was subsequently abused by a scoundrel named Lowell Birell, who hid his misdeeds in the financial statements as a sort of front. So, yes, this one was largely a failure.

Historically, you did very well. Of course, everyone now ignores the huge portfolio of shares you inherit spanning multiple continents and currencies because ... face it ... people are lazy. They just want to pull up a quote and get a quick answer but that's not how the real world works."


2) The no new money part is true if you're not in the accumulation stage, but how many of the posters here have no cash streams coming in? Even the ones that are FI have rents or dividends pouring in. The owner of this website is generating 400k a year in ad/affiliate revenue!!! This is what I mean when I constantly say separate the vehicle from the underlying holdings. Even if all you own when you are FI is VTSAX/VTI or some other broad market index, you're getting cash streams from all of the underlying companies you are holdings. Same for a individual stock portfolio constructed carefully and rationally over 30 years. Even if you started with all small caps/fast growers that weren't paying a dividend, at some point, the ROI on new projects isn't as good for shareholders as return of capital via cash dividends or buybacks - you can see evidence of this with Apple by the way, they've run out of new projects to invest in so they've recently started paying dividends. Berkshire, when Warren passes, will most likely also institute some sort of capital return to shareholders.

Good comment, thanks for the discussion
Title: Re: Indexing sucks
Post by: Aphalite on May 10, 2016, 10:34:05 AM
I want to add that indexing tends to promote good behavior, low costs, and tax efficiency, which is actually the main ingredient to good investing returns. Morgan Housel's little illustration is pretty spot on for this:

(https://g.foolcdn.com/editorial/images/172122/hierarchy_large.jpg)

Notice that security selection is near the very tip of the pyramid, meaning that if you get the behavior right, the asset allocation right, and keep your fees/transaction costs down, you will do just fine. It doesn't matter if your security selection comes from making your own judgments, or from using someone else's judgment (Vanguard funds, for example, pay licensing fees to SP500, CRSP, MSCI, etc. to use their allocations, no matter what, you're using a person's judgment, don't forget that)
Title: Re: Indexing sucks
Post by: k9 on May 10, 2016, 11:31:36 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
Lol. Economic growth or doom. There is no alternative.

Indexing can fail for (at least) two reasons :

Title: Re: Indexing sucks
Post by: Keith123 on May 10, 2016, 12:23:28 PM
Exactly, try getting to you're FIRE number with that. 

How about this:  You finally reach your number (let's use 1000000 to make it easy).  25 times your spending to follow the 4% safe withdrawal rule.  Assume you have DCAed into the Japanese market index to get there.  Great, you're finally ready to retire and plan to withdraw 4% (40000) yearly from here on out and live off of it.  If you retired in 1989 and withdrew 4% per year, I believe you would be flat broke by 2001 - 12 years.  This is inflation adjusted and dividends reinvested.  If my math is wrong, please correct me.  But if this is correct, the DCA accumulation period and final retirement with a 4% withdrawal rate expectation fails.  It doesn't always work like everyone seems to think it does.  Investors will need to adapt, even in retirement, as you cannot count on markets always going up over the long term, something everyone here seems to expect.  That's one of the issues I have a really hard time with, I don't have that expectation.  I think one needs to adapt to new investing environments and deploy new capital to the best potential investments they see available at the current time, not just the index all the time.  Maybe go 50/50 like Alphalite or something at least. 

1989   1000000
1990   544129
1991   487701
1992   331286
1993   323611
1994   311002
1995   278760
1996   220319
1997   134292
1998   84746
1999   96777
2000   32905
2001   
   





 
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

Wait, that's total contributions of ¥300,000 with a real total return of only 20% over 25 years, correct? And that's with 2012 and 2013 being very good years for the Nikkei Index. Looks like a very poor performance to me but maybe it's too late and I should be sleeping instead of doing math.
Title: Re: Indexing sucks
Post by: Aphalite on May 10, 2016, 12:42:18 PM
If my math is wrong, please correct me. 

It's not wrong, but why are you ignoring all of the points posters have already laid out? Nikkei was at 78 PE, it's not a valid comparison to compare US today vs Japan then. A good comparison could be US in 1965 (and even then, valuations weren't at Japan bubble levels), Jeremy at GoCurryCracker wrote an article on this: http://www.gocurrycracker.com/the-worst-retirement-ever/

Valuations aren't that bad, relax
Title: Re: Indexing sucks
Post by: Kaspian on May 10, 2016, 12:51:47 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.
Well, Interest Compound addressed this pretty well , but contextually, if a claim of 100% is made, then a very broad interpretation of" survivorship " is valid. Further, we know that entire markets have crashed in history for reasons of natural disaster and lack of diversification. I admit that we are largely discussing the US market and that I disagree with Keith123's assertion, but putting the argument in terms of absolutes did it a disservice.

No way, I did!  Because that's not at all what "survivorship bias" means.   If someone's going to talk about logical fallacies, trying to tell us the market's going to crash, then at least they'd better get their ideas straight.  The main point--the market and indexes will crash (because they haven't already) is logically unfounded.  There is no cognitive bias in ideas such as "gravity has always worked, therefore it will likely work tomorrow."  What happened to Japan's whole economy 20 years ago does not automatically up the probability of it happening in our lifetimes in the United States. 

If someone's going to bring up biases, fallacies, and logical argument terms--his whole side of the discussion is loaded to overflowing with them.  Correct me if I'm wrong:


The issue I have with all this is some poor newb is gonna read this thread, think, "Oh, indexing doesn't work--so scratch that idea, " then run off and buy gold, Apple, real estate or some other crazy thing.
Title: Re: Indexing sucks
Post by: Telecaster on May 10, 2016, 01:03:05 PM
Exactly, try getting to you're FIRE number with that. 

How about this:  You finally reach your number (let's use 1000000 to make it easy).  25 times your spending to follow the 4% safe withdrawal rule.  Assume you have DCAed into the Japanese market index to get there.  Great, you're finally ready to retire and plan to withdraw 4% (40000) yearly from here on out and live off of it.  If you retired in 1989 and withdrew 4% per year, I believe you would be flat broke by 2001 - 12 years. 

Not quite.  For one, as Alphalite points out the Nikkie was at a crazy, crazy valuation that is nothing like we are experiencing now, and secondly the  4% rule is based on 60/40 stocks and bond allocation.  While stocks were plummeting, bonds were doing great. 

I don't know how things would have shaken out, probably not great, but certainly better than your example.  I really think you are trying too hard to find doom and gloom where there really isn't any.   



 
Title: Re: Indexing sucks
Post by: FIPurpose on May 10, 2016, 01:24:47 PM
it's a statement of fact.  The person picking the stocks needs to be significantly better than the average active manager. It's a difficult game to win at consistently over long periods of time, and very few do.

Um, no, none of the three statements you stated are true.

1) It's not a statement of fact that you are likely to statistically underperform the index if you pick stocks. It is a statement of fact that if you incur UNNECESSARY EXPENSE, you are likely to underperform the index. You are getting stock picking and ACTIVELY MANAGED FUND picking confused. A lot of people have this misconception that just because you're a stock picker, you're automatically running up all these transaction costs and taxes, again, please separate the VEHICLE from the underlying holdings.

2) The person picking stocks doesn't need to be better at all than the active manager. In fact, if you perform as well as a manager before expenses, or as well as an index before expenses, you will likely perform better than them AFTER expenses. Again, you're making the god awful assumption that being a stock picker AUTOMATICALLY means more expenses when that couldn't be further from the truth - especially given the context in which Keith has posted in these forums (his stance is, use valuation based approach to pick stocks, then never sell)

3) It is definitely not a difficult game to win long term. If you mean that it's impossible to beat EVERY year, then yes, you would be right. But total performance? Over a long period of time? There's a ton of academic research showing buying a equal weighted portfolio of stocks, then doing literally nothing but reinvest into the original securities (letting winners ride and losers go to zero) outclasses index investing (see Jeremy Siegel's work)

I understand what you are saying, but have a couple of differences of opinion on this:

1. Buy and hold of individual stocks seems like suicide.  Companies go through a natural lifecycle where they have inception, growth, maturity, then decline.  It's very difficult to identify which stocks are going to become the next Apple during the inception phase so most of the time you will be selecting stocks that are well into growth / maturity phase.  And what will naturally happen is that some of these stocks will eventually be overtaken by a new company that does things better, will fall apart due to incompetence, or some kind of accounting scandal, lawsuit, etc.  Picking the index fund takes care of this for you as you aren't beholden to a single company and they get rid of the losers over time. 

2. If you are using the buy and hold strategy you won't have much new money to invest in startups / small caps which have a lot more growth left.  Your portfolio will age and decline.

Therefore, to keep up with new technology, individual stock pickers need to adjust their portfolio over time, and I have extreme doubt that anyone can operate cheaper than the Vanguard S&P 500 index fund.

1. If you read the OP, the author is not talking about picking the next Apple. He is talking about picking companies that have maintained dividend payouts for decades, and have the ability to continue to do so. Also just because the OP does not mention an exit strategy does not mean he doesn't have one. I agree that every company eventually declines, but many can sustain healthy profits for decades. And those same companies don't just disappear over night. Walmart is not going anywhere, and any trouble that they may face can easily be abandoned early on. Most long-term dividend investors will bail if there are any headwinds in the dividend payout.

2. I agree with this point. It is difficult to find high growth, dividend payers. There are a few out there, but they are a rare breed.

You can easily operate cheaper in individual stocks. Comparing to a .06% expense ratios that equates to about 12 trades per $100,000 per year. Most buy-hold stock buyers are not coming anywhere close to that number. So yes they are likely doing it cheaper than Vanguard.

1. Companies do disappear all the time - for every Walmart there is a Kodak.  And I strongly disagree that the typical investor can bail out before taking a huge loss if a company experiences a downturn.  You should be skeptical of companies that have smooth earnings and dividends growth throughout their existence - in certain cases this can be due to manipulating their financial statements for short term results - eventually this strategy could collapse.  And the average investor would not be able to fish that out by visiting the company, talking to management, and performing due diligence like Warren Buffett does.

Walmart is actually a pretty good example of what I'm talking about.  Although they are paying a high dividend, their stock price has not grown since the year 2000.  I'm sticking with the S&P 500 if I hope to have a 7% return to fund a 4% SWR.

2. Don't forget dividend reinvestment - Vanguard will do that for you for free where you will need to do it yourself and incur transaction costs in individual stocks.  Dividend reinvestment is great because you naturally will buy more shares when the price is low than you do when it's high.

1. No there is not a Kodak for every Walmart. (Obligatory kodak investment post: http://www.joshuakennon.com/eastman-kodak-example/ (http://www.joshuakennon.com/eastman-kodak-example/)) And I've attached a chart that shows Walmart's total return has been tracking pretty closely to VTSAX. It has been rough for a year or two but is quickly realigning. Plus Walmart would have provided a steady dividend income and stock value through both 2000-2002 and 2008-2009 (in fact it went up).

2. Vanguard and basically every other reputable broker does free stock reinvestment of dividends, so no there is no transactional cost here.
Title: Re: Indexing sucks
Post by: Keith123 on May 10, 2016, 01:35:17 PM
I was more trying to illustrate that DCA indexing and the 4% rule are not some flawless system and that no one should count on this to work 100% of the time.  Markets don't always go up long-term and returns can be really bad for a long period of time even with dividends reinvested included.  This is an extreme example but it does the job. 

If my math is wrong, please correct me. 

It's not wrong, but why are you ignoring all of the points posters have already laid out? Nikkei was at 78 PE, it's not a valid comparison to compare US today vs Japan then. A good comparison could be US in 1965 (and even then, valuations weren't at Japan bubble levels), Jeremy at GoCurryCracker wrote an article on this: http://www.gocurrycracker.com/the-worst-retirement-ever/

Valuations aren't that bad, relax
Title: Re: Indexing sucks
Post by: doggyfizzle on May 10, 2016, 01:38:26 PM
2. I agree with this point. It is difficult to find high growth, dividend payers. There are a few out there, but they are a rare breed.

It isn't hard at all.  Literally just buy Altria.  Re-invest dividends.  Wait to retire.  Philip Morris produced common stock returns of 19% a year for 50 years.  Right now Altria (PM USA parent) is paying a 3.6% yield, sits on nearly $4b in cash, actually recorded shipment growth in its most recent quarter, and looks to benefit from converting its 27% interest in SABMiller into $2.5b pre-tax cash and an 11% stake in ABI/Miller.  The company prints money from a government-enforced monopoly industry.
Title: Re: Indexing sucks
Post by: Aphalite on May 10, 2016, 01:45:24 PM
That Kodak article was ridiculous.  He takes an arbitrary starting point and then makes decision to dump the stock with perfect hindsight.

Maybe you're not reading the article right? He let his Kodak shares go to zero, but Kodak had a chemical division that it spun off an gave to shareholders. This resulted in a 5.5% compounded return even as the main investment went to zero. This is what FI was trying to get at - when people think of Kodak, they think of total 100% loss, but in this case, instead of going from 100,000 to zero, the investment actually went from 100,000 to 425,000, from dividends and the spinoff

From the article: "Let me repeat the lesson: You cannot just look at stock charts to gauge the performance of your holdings.  Sometimes, you can walk away with more money even though your shares experience a 100% loss.  Wipeout losses are always bad – you should do everything you can do avoid them – but they are often not the entire story."
Title: Re: Indexing sucks
Post by: Retire-Canada on May 10, 2016, 01:56:13 PM
I was more trying to illustrate that DCA indexing and the 4% rule are not some flawless system and that no one should count on this to work 100% of the time.

Using historical data [cFIREsim] I get a 96.6% success rate for a 80/20 portfolio and a 4% WR. Keep in mind that assumes zero flexibility in spending or earning during FIRE.

If I use a 3.5% to 4.5% variable WR responding to market performance it averages out better than 4% overall with a 100% historical success rate.

Can the future be worse than the past sure, but it may also be better.
Title: Re: Indexing sucks
Post by: Tyson on May 10, 2016, 02:04:38 PM
I have yet to see anyone present an alternative to indexing that doesn't involve stock picking.  IMO, you as a person are much more likely to fail at stock picking than the entire US market is going to stagnate for the long term.
Title: Re: Indexing sucks
Post by: thd7t on May 10, 2016, 02:20:18 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.
Well, Interest Compound addressed this pretty well , but contextually, if a claim of 100% is made, then a very broad interpretation of" survivorship " is valid. Further, we know that entire markets have crashed in history for reasons of natural disaster and lack of diversification. I admit that we are largely discussing the US market and that I disagree with Keith123's assertion, but putting the argument in terms of absolutes did it a disservice.

No way, I did!  Because that's not at all what "survivorship bias" means.   If someone's going to talk about logical fallacies, trying to tell us the market's going to crash, then at least they'd better get their ideas straight.  The main point--the market and indexes will crash (because they haven't already) is logically unfounded.  There is no cognitive bias in ideas such as "gravity has always worked, therefore it will likely work tomorrow."  What happened to Japan's whole economy 20 years ago does not automatically up the probability of it happening in our lifetimes in the United States. 

If someone's going to bring up biases, fallacies, and logical argument terms--his whole side of the discussion is loaded to overflowing with them.  Correct me if I'm wrong:

  • Focusing effect — prediction bias occurring when people place too much importance on one aspect of an event; causes error in accurately predicting the utility of a future outcome.
  • Neglect of probability — the tendency to completely disregard probability when making a decision under uncertainty.
  • Attentional bias — neglect of relevant data when making judgments of a correlation or association.
  • Availability heuristic — a biased prediction, due to the tendency to focus on the most salient and emotionally-charged outcome.
  • Subadditivity effect — the tendency to judge probability of the whole to be less than the probabilities of the parts.

The issue I have with all this is some poor newb is gonna read this thread, think, "Oh, indexing doesn't work--so scratch that idea, " then run off and buy gold, Apple, real estate or some other crazy thing.
We are miscommunicating, some. I didn't mean that you put this in terms of absolutes. I was referring to IC's argument, earlier. He had stated that buy and hold index investing will beat Keith123's strategy 100% of the time.  That was based on a misunderstanding of his strategy. I agree that indexing will beat Keith123's strategy most of the time, but not all of it.
Regarding your concern over new investors making poor decisions due to reading this thread, I absolutely see the concern. I am 100% in index funds.  I also strongly agree with the biases that you see in the evaluation that indexing will fail. I just want our arguments to be the clearest and most cogent.
Title: Re: Indexing sucks
Post by: FIPurpose on May 10, 2016, 03:02:34 PM

Nice try, but you pretty much took the 2000 low for Walmart as your starting point, although I did the same thing as I was taking the 2000 high (Jan 1) :)

That Kodak article was ridiculous.  He takes an arbitrary starting point and then makes decision to dump the stock with perfect hindsight.

Nice catch, though I wasn't trying to be misleading. That's just the max lookback for the particular website I was using. (I think it's because that was the beginning of VTSAX?) Though there's more to glean than just the final number. Sure Walmart has recently gone down, but it's hasn't followed the over S&P trend. It provided a stable dividend even during the major downturns. Walmart is an extremely low volatility stock, with a consistent return, and owners can likely expect a 3-6% long-term return from it. Odds of it going out of business are extremely low, and it's a stock you'll be happy to own in down times. I'm not saying it makes a portfolio, but it definitely can be a good compliment in one.
Title: Re: Indexing sucks
Post by: Keith123 on May 10, 2016, 03:53:25 PM
http://fortune.com/2016/05/10/carl-icahn-crash-stock/

"In a recent filing with the SEC, Icahn Enterprises showed that the investor isn’t fooling around, announcing that it had a net short position of 149%.  That means that the value of Icahn’ s short positions—or financial assets that his funds have borrowed rather than bought—is worth 149% more than the value of his long positions."

"Icahn Enterprises CEO Keith Cozza underscored these views. “We’re much more concerned about the market going down 20% than we are it going up 20%,” he said."

Guess I'm not the only one who thinks things are more likely to go down than up.  Just thought it was funny that that story came out today. 
Title: Re: Indexing sucks
Post by: steveo on May 10, 2016, 03:57:51 PM
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
Lol. Economic growth or doom. There is no alternative.

Indexing can fail for (at least) two reasons :

  • economy stagnates; that happened a lot during the course of History, and people didn't call it a collapse nor did they run for bullets; Japan is the most obvious example
  • stock markets do OK but index fund companies fail to meet expectations; a company can go bankrupt for a bunch of reasons (shares lending at a bad moment or synthetic replication of indexes via swaps can have bad consequences, and fraud is always possible). Or the market can go crazy, fears indexes for no good reason and starts to keep far away from them. Indexers have to sell their shares at a discount. It sucks, sure, but it will only impact stock indexers, so the world will keep rolling.

I don't believe that either of these options have anything to do with indexing.

If option 1 happens then the stock market is toast but so are your individual stocks.
I don't really understand option 2 because an index is owning the underlying stocks but just say you are correct. Typically you would still own the underlying stocks but I can't see this really happening. If the index was selling for $1 but the underlying stocks were worth $2 I think a lot of investors would be buying the index.
Title: Re: Indexing sucks
Post by: matchewed on May 10, 2016, 04:00:04 PM
Lots of people have crystal balls, not all are right. How do we know yours is? Or rather what makes yours more accurate?

Regardless, indexing is generally a long strategy, short events are minor bumps in the road.
Title: Re: Indexing sucks
Post by: frugledoc on May 10, 2016, 04:04:39 PM
http://fortune.com/2016/05/10/carl-icahn-crash-stock/

"In a recent filing with the SEC, Icahn Enterprises showed that the investor isn’t fooling around, announcing that it had a net short position of 149%.  That means that the value of Icahn’ s short positions—or financial assets that his funds have borrowed rather than bought—is worth 149% more than the value of his long positions."

"Icahn Enterprises CEO Keith Cozza underscored these views. “We’re much more concerned about the market going down 20% than we are it going up 20%,” he said."

Guess I'm not the only one who thinks things are more likely to go down than up.  Just thought it was funny that that story came out today.

Why would a mustachian indexer be concerned about the market going down 20%?  That is what markets are meant to do and these moves don't make much difference over decades of investing. 
Title: Re: Indexing sucks
Post by: steveo on May 10, 2016, 04:09:49 PM
I was more trying to illustrate that DCA indexing and the 4% rule are not some flawless system and that no one should count on this to work 100% of the time.  Markets don't always go up long-term and returns can be really bad for a long period of time even with dividends reinvested included.  This is an extreme example but it does the job. 

Agreed. Let's get the facts right. There is no flawless system. Statistically the 4% rule though is pretty safe but it's also not what you are arguing. You aren't very consistent when it comes to the point that you are making.

You are stating that markets can crash and therefore indexing doesn't work but individual stock picking does work. This is an illogical statement. Your statement should be markets can crash and therefore investing into stocks doesn't work. The vehicle is not the issue here. If anything individual stocks leave you more open to a crash.

I think you need to work out what your argument or position is and then discuss that issue. Unless this is all a big troll.
Title: Re: Indexing sucks
Post by: steveo on May 10, 2016, 04:11:43 PM
I have yet to see anyone present an alternative to indexing that doesn't involve stock picking.  IMO, you as a person are much more likely to fail at stock picking than the entire US market is going to stagnate for the long term.

This is the whole point. Keith needs to re-think his argument because it doesn't make any rational sense. You can't discuss something like this because it's nonsensical.
Title: Re: Indexing sucks
Post by: thd7t on May 10, 2016, 06:20:05 PM
http://fortune.com/2016/05/10/carl-icahn-crash-stock/

"In a recent filing with the SEC, Icahn Enterprises showed that the investor isn’t fooling around, announcing that it had a net short position of 149%.  That means that the value of Icahn’ s short positions—or financial assets that his funds have borrowed rather than bought—is worth 149% more than the value of his long positions."

"Icahn Enterprises CEO Keith Cozza underscored these views. “We’re much more concerned about the market going down 20% than we are it going up 20%,” he said."

Guess I'm not the only one who thinks things are more likely to go down than up.  Just thought it was funny that that story came out today.
Are you only afraid of a market correction? Ichan has to worry about that, because he's expected to anticipate market activity, but at the scale of the individual investor, it's just a bump to weather. Ichan isn't talking market stagnation.
Title: Re: Indexing sucks
Post by: aspiringnomad on May 10, 2016, 09:58:01 PM
http://fortune.com/2016/05/10/carl-icahn-crash-stock/

"In a recent filing with the SEC, Icahn Enterprises showed that the investor isn’t fooling around, announcing that it had a net short position of 149%.  That means that the value of Icahn’ s short positions—or financial assets that his funds have borrowed rather than bought—is worth 149% more than the value of his long positions."

"Icahn Enterprises CEO Keith Cozza underscored these views. “We’re much more concerned about the market going down 20% than we are it going up 20%,” he said."

Guess I'm not the only one who thinks things are more likely to go down than up.  Just thought it was funny that that story came out today.

Are you only afraid of a market correction? Ichan has to worry about that, because he's expected to anticipate market activity, but at the scale of the individual investor, it's just a bump to weather. Ichan isn't talking market stagnation.


Icahn being short makes me wonder if his supporting Trump isn't a strategic investment move. Kidding.

Anyway, I would agree with Keith on his point that past performance does not guarantee future results, and that's true even for the broad US stock market. As he or someone else pointed out, absent major government intervention in 2008, this point may be all too real. In the past, wars have actually boosted the US market. But it's hard to envision how the entire financial system collapsing would. But two major points of disagreement: 1) The concerns of today are nothing like the concerns of 2007-2008; and more importantly 2) Given the very low probability of complete disaster, the best calculated bet is always to invest. And as many here have argued, the best mode of investment for 99+% of the population is to index or otherwise diversify as much as possible.
Title: Re: Indexing sucks
Post by: MustacheAndaHalf on May 11, 2016, 12:12:23 AM
I plugged in $100 starting and $4 withdrawn per year into
https://www.portfoliovisualizer.com/backtest-asset-class-allocation
I started in 1989 with $100 in US stock market, withdrawing $4 / year ("4% rule").

That simulation shows just over $900 when run to 2015 ($775 with inflation included in withdrawal).  Maybe others used a different portfolio than 100% US stock market?  I tried 60/40 and a mix of 30 US/30 intl/40 bond but still didn't crash that portfolio to $0 in portfoliovisualizer.
Title: Re: Indexing sucks
Post by: ecomic on May 11, 2016, 03:09:04 AM
Benchmarking can be used to cover a horrific management of a portfolio. I have heard many advisors tell their clients "Markets are not giving any returns nowadays" or "price adjustments, corrections, bearish trends, bla bla bla" If you can't make a profit then dont dare to invest other poeple's money. To beat the market it is not that complicated, taking into account that in those indexes there are Exelent companies, Average companies, Bad companies and Horrible companies. When investing in ETFs you take all of the package, so the horrible ones too.

It has never happened to me, I have never lost any of my clients money, simply because I only invest in what i am sure it is worth to invest. Stock picking takes time and big efford to succesfuly choose the right stocks, but indexing your results is quite easy to just follow the trends of the market. 
Title: Re: Indexing sucks
Post by: k9 on May 11, 2016, 03:14:56 AM
Indexing can fail for (at least) two reasons :

  • economy stagnates; that happened a lot during the course of History, and people didn't call it a collapse nor did they run for bullets; Japan is the most obvious example
  • stock markets do OK but index fund companies fail to meet expectations; a company can go bankrupt for a bunch of reasons (shares lending at a bad moment or synthetic replication of indexes via swaps can have bad consequences, and fraud is always possible). Or the market can go crazy, fears indexes for no good reason and starts to keep far away from them. Indexers have to sell their shares at a discount. It sucks, sure, but it will only impact stock indexers, so the world will keep rolling.

I don't believe that either of these options have anything to do with indexing.

If option 1 happens then the stock market is toast but so are your individual stocks.
I don't really understand option 2 because an index is owning the underlying stocks but just say you are correct. Typically you would still own the underlying stocks but I can't see this really happening. If the index was selling for $1 but the underlying stocks were worth $2 I think a lot of investors would be buying the index.

For 1, you're right. I took "indexing won't fail" in the general sense, not in the sense "if the stock market as a whole doesn't fail, indexing won't".

For 2, it's a bit more complicated. In theory, the fund owns the stocks they are supposed to own. But most companies (at least iShares and Vanguard do it) do lend securities. That means there is a counterparty risk. If the counterparty fails to pay back the lended securities, that's a loss. This is a rare event, on a small part of the assets, so in general that's ok and the gains compensate for the losses. In a bad economic situation, though, the number of borrowers who fail to pay back securities can grow, leading to a sensible loss for the index company and to a loss of confidence from investors. You can then face a liquidity issue. The index is worth $2, but your share's net worth is now only $1.8 and, well, investors are being nervous (is the crisis over? Will it get worse?), so nobody actually wants to invest in it for the moment. So, you either have to wait or sell on a bargain (nervous investors won't buy $1.8 for $1.8, but they'll take the risk if they can pay only $1.6).

There are also synthetic index funds that are not actually invested in the stocks you think they are, but use derivatives to produce the same performance. It's cheaper, more efficient (you can track the index very closely) but counterparty risk is way higher. There are many such funds in Europe (most of them are synthetic), but they exist in the US, too (even Vanguard sells some).

As for bankrupcy, you are probably right, but beware. Fraud is always possible. Think MFGlobal. Vanguard seems to take these issues more seriously than others, though.

No need to be too nervous, though, but I wouldn't like to be invested only in one company's index fund.
Title: Re: Indexing sucks
Post by: Aphalite on May 11, 2016, 05:14:47 AM
I plugged in $100 starting and $4 withdrawn per year into
https://www.portfoliovisualizer.com/backtest-asset-class-allocation
I started in 1989 with $100 in US stock market, withdrawing $4 / year ("4% rule").

That simulation shows just over $900 when run to 2015 ($775 with inflation included in withdrawal).  Maybe others used a different portfolio than 100% US stock market?  I tried 60/40 and a mix of 30 US/30 intl/40 bond but still didn't crash that portfolio to $0 in portfoliovisualizer.

He was using Japan's market at  its peak in 1989
Title: Re: Indexing sucks
Post by: wienerdog on May 11, 2016, 06:20:26 AM
When I read this article last night, even though it is about asset allocation, the investor part made me think of this thread:

http://www.marketwatch.com/story/dont-be-the-victim-of-a-lackluster-stock-market-2016-05-10

"Our attitudes are actually extremely important assets: They shape our behavior almost automatically, while we aren't watching.

Some years back I asked my investment advisor colleagues to identify the most common attitudes they had observed among the best investors they knew. A handful of key attitudes emerged. Here are four:"




Title: Re: Indexing sucks
Post by: Mr. Green on May 11, 2016, 07:31:42 AM
I was more trying to illustrate that DCA indexing and the 4% rule are not some flawless system and that no one should count on this to work 100% of the time.  Markets don't always go up long-term and returns can be really bad for a long period of time even with dividends reinvested included.  This is an extreme example but it does the job. 
Do you live your life (literally) like you will die tomorrow? I suspect not because you likely wouldn't care about investing if you did. You don't live like that because you know that it is extremely unlikely that you will die tomorrow, unless you're 100 or something and then, sure, tomorrow could be your day. If you don't live your life like that, why would you invest like that, expecting a scenario that is such an outlier that it would be worse than anything we've ever experienced? I don't understand that. What a fearful way to live life! All history can give you is a rough guideline and there's only so much planning you can do.
Title: Re: Indexing sucks
Post by: cerat0n1a on May 11, 2016, 08:40:23 AM
He was using Japan's market at  its peak in 1989

It was an awesome response - a superb illustration of the power of regular investing/cost averaging into an index tracker. The Nikkei peaked at 38000 odd in 1989 on a PE of approaching 80. It was down at 8000odd in 2011 after the earthquake, its lowest value since 1982. Even if you pick that seriously bad time period and limit yourself to that one market rather than diversifying sensibly, you still get a pretty decent outcome.
Title: Re: Indexing sucks
Post by: Retire-Canada on May 11, 2016, 08:43:29 AM
What a fearful way to live life!

Agreed. But in the investing world fear is the equivalent sex in mainstream advertising. Draws in people like moths to a flame and makes them do crazy things.
Title: Re: Indexing sucks
Post by: Kaspian on May 11, 2016, 09:38:55 AM
I have yet to see anyone present an alternative to indexing that doesn't involve stock picking.  IMO, you as a person are much more likely to fail at stock picking than the entire US market is going to stagnate for the long term.

This is the whole point. Keith needs to re-think his argument because it doesn't make any rational sense. You can't discuss something like this because it's nonsensical.

^^ +1 to this.  Saying the historically best game in town sucks because it will possibly fail at some point is, in my opinion, doing a great disservice to new investors and those who aren't sure exactly what they're doing.  (Especially considering the alternatives--not playing or trying your hand at some cockamamie other strategy.)  This sounds like the bad advice you'd get from a high-MER financial advisor.  It's good to think things through carefully, put them under a microscope, but smarter people than me have already analyzed index data at length and found it to be the best strategy for the average investor.  "Seatbelts might fail and have in some models, so rip them out of all the cars," is indeed nonsensical.
Title: Re: Indexing sucks
Post by: Interest Compound on May 11, 2016, 10:15:30 AM
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

Wait, that's total contributions of ¥300,000 with a real total return of only 20% over 25 years, correct? And that's with 2012 and 2013 being very good years for the Nikkei Index. Looks like a very poor performance to me but maybe it's too late and I should be sleeping instead of doing math.

It beat US bonds.
It beat Total International Stocks.

Two of the three standard funds most commonly discussed here and at Bogleheads (the 3 Fund Portfolio), were beaten by 100% Japanese Stocks.
Title: Re: Indexing sucks
Post by: Interest Compound on May 11, 2016, 10:27:06 AM
Exactly, try getting to you're FIRE number with that. 

Keith. Really? Again, did you purposely skip over all the information that counters your line of thinking? I provided this information in the same post you're quoting:

"At that rate you'd need to work an extra 3 years compared to the market-weighted world stock market"

How about this:  You finally reach your number (let's use 1000000 to make it easy).  25 times your spending to follow the 4% safe withdrawal rule.  Assume you have DCAed into the Japanese market index to get there.  Great, you're finally ready to retire and plan to withdraw 4% (40000) yearly from here on out and live off of it.  If you retired in 1989 and withdrew 4% per year, I believe you would be flat broke by 2001 - 12 years.  This is inflation adjusted and dividends reinvested.  If my math is wrong, please correct me.  But if this is correct, the DCA accumulation period and final retirement with a 4% withdrawal rate expectation fails.  It doesn't always work like everyone seems to think it does.  Investors will need to adapt, even in retirement, as you cannot count on markets always going up over the long term, something everyone here seems to expect.  That's one of the issues I have a really hard time with, I don't have that expectation.  I think one needs to adapt to new investing environments and deploy new capital to the best potential investments they see available at the current time, not just the index all the time.  Maybe go 50/50 like Alphalite or something at least. 

1989   1000000
1990   544129
1991   487701
1992   331286
1993   323611
1994   311002
1995   278760
1996   220319
1997   134292
1998   84746
1999   96777
2000   32905
2001   
   





 
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

Wait, that's total contributions of ¥300,000 with a real total return of only 20% over 25 years, correct? And that's with 2012 and 2013 being very good years for the Nikkei Index. Looks like a very poor performance to me but maybe it's too late and I should be sleeping instead of doing math.

No one claims the 4% rule never fails. You don't need to point to Japan to see that, US stocks from 1929 and 1966 shared the same fate. Is it your claim Indexing sucks because the 4% rule can sometimes fail? If so, that's a logical discussion we can all participate in. I'd recommend checking this post:

Stop Worrying About The 4% Rule (http://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/)
Title: Re: Indexing sucks
Post by: Aphalite on May 11, 2016, 10:58:05 AM
No one claims the 4% rule never fails. You don't need to point to Japan to see that, US stocks from 1929 and 1966 shared the same fate. Is it your claim Indexing sucks because the 4% rule can sometimes fail? If so, that's a logical discussion we can all participate in. I'd recommend checking this post:
Stop Worrying About The 4% Rule (http://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/)

His argument is also counterproductive to any discussion based on reality - if you decided to stop working at 1929, 1966, or 1989 in Japan, you would have experienced the huge run up in the immediate preceding years leading up to it, which means that you would have had to work far less than you originally planned. Arguing one side to death while ignoring what happened immediately preceding it is dishonest, imo
Title: Re: Indexing sucks
Post by: Interest Compound on May 11, 2016, 11:09:49 AM
No one claims the 4% rule never fails. You don't need to point to Japan to see that, US stocks from 1929 and 1966 shared the same fate. Is it your claim Indexing sucks because the 4% rule can sometimes fail? If so, that's a logical discussion we can all participate in. I'd recommend checking this post:
Stop Worrying About The 4% Rule (http://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/)

His argument is also counterproductive to any discussion based on reality - if you decided to stop working at 1929, 1966, or 1989 in Japan, you would have experienced the huge run up in the immediate preceding years leading up to it, which means that you would have had to work far less than you originally planned. Arguing one side to death while ignoring what happened immediately preceding it is dishonest, imo

Agreed. I started to make a graph showing this, but all my data on Japan (https://www.bogleheads.org/forum/viewtopic.php?t=23036&start=100) starts in 1989, so I couldn't :)

Good point to keep in mind.
Title: Re: Indexing sucks
Post by: Tyson on May 11, 2016, 02:33:48 PM
No one claims the 4% rule never fails. You don't need to point to Japan to see that, US stocks from 1929 and 1966 shared the same fate. Is it your claim Indexing sucks because the 4% rule can sometimes fail? If so, that's a logical discussion we can all participate in. I'd recommend checking this post:
Stop Worrying About The 4% Rule (http://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/)

His argument is also counterproductive to any discussion based on reality - if you decided to stop working at 1929, 1966, or 1989 in Japan, you would have experienced the huge run up in the immediate preceding years leading up to it, which means that you would have had to work far less than you originally planned. Arguing one side to death while ignoring what happened immediately preceding it is dishonest, imo

Isn't this precisely why you do a 70/30 or 60/40 stock/bond allocation when you retire?  That way if the stocks tank, you can leave it alone and just draw down on your bonds until the stocks recover.
Title: Re: Indexing sucks
Post by: Telecaster on May 11, 2016, 03:08:30 PM
His argument is also counterproductive to any discussion based on reality - if you decided to stop working at 1929, 1966, or 1989 in Japan, you would have experienced the huge run up in the immediate preceding years leading up to it, which means that you would have had to work far less than you originally planned. Arguing one side to death while ignoring what happened immediately preceding it is dishonest, imo

Isn't this precisely why you do a 70/30 or 60/40 stock/bond allocation when you retire?  That way if the stocks tank, you can leave it alone and just draw down on your bonds until the stocks recover.

Not quite, but sort of.    The 4% rule assumes annual rebalancing.   So let's say stocks tank.  At the end of the year your portfolio is now overweighted in bonds, so as you take your withdrawal and rebalance, you will be selling a greater percentage of bonds, and presumably buying more stocks. 
Title: Re: Indexing sucks
Post by: Aphalite on May 11, 2016, 03:15:55 PM
Isn't this precisely why you do a 70/30 or 60/40 stock/bond allocation when you retire?  That way if the stocks tank, you can leave it alone and just draw down on your bonds until the stocks recover.

It just depends. Why are stocks tanking? Is it because interest rates are rising or is it because they were just overvalued? That matters in today's world of zero interest rates. If interest rates start rising quickly, BOTH stocks and bonds will take a beating. Rebalancing doesn't really do much for your portfolio if the factor that sends stocks into a tailspin results in correlation between your asset classes. Just as the 4% rule doesn't always work 100% of the time, asset allocation isn't a 100% chance magic bullet either. The reason people advocate for an IPS and a set allocation is, again, it helps you get your BEHAVIOR right, and that's the most important part, before security selection, asset allocation, and even fees. Someone that buys the lowest cost vanguard fund but doesn't have it in him/herself to stay the course when things get bad won't do better than someone who pays an advisor 2% overall but keeps his wits about him/her when volatility occurs - you see?

That said, as has been repeated ad nauseum, the market isn't really that overvalued. If you think it is, what is an acceptable alternative investment at the moment? I suppose cash is okay since inflation is near zero, but when will you pull the trigger again? The market can stay overvalued until the valuation burns off, and then you'll have missed all of the underlying compounding and dividends along the way. If you're adopting a behavioral approach where you add a little bit to your investments on a scheduled basis, you'll probably do okay since you will catch both overvaluation times as well as undervaluation times.
Title: Re: Indexing sucks
Post by: Tyson on May 11, 2016, 04:28:05 PM
Oh I'm 80/20 stocks/bonds and all VTSAX for the stocks I do own.  But I'm also in my accumulation phase and really couldn't care less what happens in the short or even the medium term.  That's my strategy and I'm sticking to it :)  But I haven't thought as much about what my strategy will be when I retire.  That's why I was asking about the 60/40 split for stocks/bonds for retiree's, specifically.  Sorry if that wasn't clear.
Title: Re: Indexing sucks
Post by: Keith123 on May 15, 2016, 12:46:35 PM
Isn't this precisely why you do a 70/30 or 60/40 stock/bond allocation when you retire?  That way if the stocks tank, you can leave it alone and just draw down on your bonds until the stocks recover.

That said, as has been repeated ad nauseum, the market isn't really that overvalued.
For the S&P 500 index.  Goldman's conclusion: "The most likely future path of US equities involves a lower valuation."
(http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2016/05/13/GS%20stocks.jpg)
Title: Re: Indexing sucks
Post by: SamFinn on May 16, 2016, 01:47:27 AM
I have yet to see anyone present an alternative to indexing that doesn't involve stock picking.  IMO, you as a person are much more likely to fail at stock picking than the entire US market is going to stagnate for the long term
Title: Re: Indexing sucks
Post by: Aphalite on May 16, 2016, 08:44:44 AM
For the S&P 500 index.  Goldman's conclusion: "The most likely future path of US equities involves a lower valuation."

It's too bad zero hedge didn't create a table of current treasury rates as a percentile of historical norms
Title: Re: Indexing sucks
Post by: Keith123 on May 16, 2016, 01:44:48 PM
I understand the context of the valuations relative to the risk-free rate.  I suppose I am just holding out hope that putting capital at risk doesn't get rewarded with low single digit returns over the long-term.  I believe this is what you are referring to:
(https://assets.bwbx.io/images/users/iqjWHBFdfxIU/imbJ5kpsrKWo/v2/-1x-1.png)

 
For the S&P 500 index.  Goldman's conclusion: "The most likely future path of US equities involves a lower valuation."

It's too bad zero hedge didn't create a table of current treasury rates as a percentile of historical norms