The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: GreyMatters on October 14, 2014, 10:32:44 AM
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I'm moving this over from another thread.
CAPE (U.S) sits at around 25, which has historically been followed by a reversion to the mean (or lower). The general consenus of the US population seems to be, "stocks for the long run, they always go up" - which is the same thing that could be said about tulips, housing, and dotcom in the 90s. Sure they all go up over time, but they still get too expensive when demand is high.
What are your thoughts of sitting on 100% cash and waiting for a better price based on lower CAPE ratio?
My current plan until I learn more, at 31 and beginning my cash accumulation phase (about $7k now and making a sprint for $100k), I figure I've got time and patience to wait for a crash or least a major correction - at which point I'll go in 90/10 (equity/cash) in something like VTSAX with what I've accumulated up to that point.
I can learn more about other investment opportunities and look for deals elsewhere in the mean time. I might even come across information that could convince me to buy in at a CAPE (U.S) of 25, or whatever number, to some degree. Currently, however, I'm convinced it's too expensive.
I believe there are so many other factors (personal and otherwise) to consider, but what thoughts/advice could you offer regarding current market valuations in general and/or relative to my plan?
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While you're learning more, make sure to take some time to read about how market timing is a losers game. You may be waiting for a crash that never comes. Or at least, we may never see prices lower than today, even with a future crash. You just don't know. Neither do I. Retire that crystal ball and stop trying to convince yourself that you can successfully predict the future.
http://forum.mrmoneymustache.com/investor-alley/is-the-stock-market-too-expensive-to-get-back-in/
A bunch of links to other similar threads in this above thread as well
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Looking at historical charts its pretty obvious when things are expensive and when things are cheap. But since you don't know when things will turn around most investors under perform index performance because of their attempt to time the market.
I would state however that do what you are comfortable with, if you can't handle a big down turn then don't invest, because there is nothing worse than buying high and then selling low. Just remember the objective of investing is not to earn the highest possible returns, it's to reach your financial goals. You cannot control market returns, the only thing you can control is how you handle market fluctuations.
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There are plenty of people that have sat out the last two years waiting for a correction and missed out on all the growth. Just pull the trigger, it won't make much of a difference if you are in for the long haul and keep adding as you go.
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Using the CAPE ratio to time 1 market (US Stocks) is a bad idea IMO. It will probably work if you use it on a relative basis across all markets. As in, comparing the CAPE ratios of various worldwide countries and buying the cheapest ones.
The problem with using CAPE on a single market is finding what static number tells you that it's 'cheap' vs 'expensive.' A CAPE of 10 or less may have been historically cheap, but what if the market environment changes in the future and 5 turns out to be cheap, or 15? What if expensive in the future is really 35?
The answer has to be finding a dynamic number that can change with the market environment and tells you what is cheap vs what is expensive. I don't know what that is at this time unfortunately.
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The CAPE has averaged 26.79 over the past 20 years, 23.35 over the past 30 years. Suddenly 25 isn't looking egregiously overvalued.
The historical average CAPE that you may hear (around 17) uses data going back to the late 19th century. Does market data from the late 19th century and early 20th century really have that much of a bearing on the modern market? How reliable are the data from those periods anyway? Back then, before the rigorous accounting controls and auditing that we have today, isn't it possible that earnings were inflated to make companies look good (thus driving the price/earnings ratio lower)?
Don't try to time the market, just decide on an asset allocation and stick to it.
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Jan 1, 1996 CAPE 10 was at 25.76.Lets say you decided to wait til it crossed 20 to buy back in. You would have sat in cash til jan 1, 2009. Do you
a) think you could have done that?
b) Stocks returned 4.75 and cash did 3.6%. Did you come out ahead.
And of course none of that takes into account the inflation of CAPE10s that happened due to accounting rule changes in 2001. Throw those in and the CAPE10s look a lot like they did in the early 90s.
I am not saying valuations don't matter. But the current ones are not extreme enough to lose sleep over. Yes a 20-30% correction is probably coming in the next 3-4 years. But figuring out if it is before or after the market goes up another 30% is a total crap shoot.
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I don't think it makes sense to get completely out of the market based on CAPE. I do make marginal annual adjustments to my allocation based on CAPE:
Changes to Asset Allocations Based on PE10
| Current PE10 | Stock Allocation Change | Bond Allocation Change |
| < 7 | +30% | -30% |
| 7 12 | +20% | -20% |
| 12 17 | +10% | -10% |
| 17 22 | No change | No change |
| 22 27 | -10% | +10% |
| 27 32 | -20% | +20% |
| > 32 | -30% | +30% |
For example, if I my normal allocation is 50-50 and CAPE is 25, then I would adjust my allocation to 40% equities and 60% bonds. The most I would ever adjust is 30% which means I would have 20% equities and 80% bonds or vice versa. I think of CAPE as slightly increasing the odds of a market going up or down depending on whether it is high or low.
At this point, I'm assuming that a "normal" or average CAPE is between 17 and 22.
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Thank you for all for your helpful insight.
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Just go for 90-10 now and lets roll !
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I'm going to highjack my topic and I'll probably start a new topic if I don't receive any insight on this.
My goal is build up to $100k sometime in the range of 3-4 years and quit my job. I may quit sooner with less money in a shorter period.
I'll use this savings and take time to explore other possibilities. The possibilities that come to mind are: taking some time to decompress; travel; sign up for classes at the local CC; figure out what different career/profession/job I could get into; start a business; make art; play music; write; and read among others. Any one of these things could lead me down a different path altogether. Regardless, I feel like I need to mix it up.
When I get to my magic number, I may even just go down to part-time (12-14) hours a week and request some time off also. It's definitely not the worst gig I could have and at part-time I'd still be making enough to meet my current expenses and then some.
So, how this relates to the original topic is I guess the level of risk I'm willing to accept right now is low-to-no.
If between now and when I decide to quit or move down to part-time there's a major market correction, I'll plow it all into the market and just stay on for longer than I originally planned (sticking to full-time). When a major correction happens and I've fully quit with no other income, I'll average whatever is left into the market and use that timeframe to run out to increase my income by at minimum getting a job.
I'm sort of thinking out loud here now, but your thoughts are welcome on any of this.
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I'm going to highjack my topic and I'll probably start a new topic if I don't receive any insight on this.
My goal is build up to $100k sometime in the range of 3-4 years and quit my job. I may quit sooner with less money in a shorter period.
I'll use this savings and take time to explore other possibilities. The possibilities that come to mind are: taking some time to decompress; travel; sign up for classes at the local CC; figure out what different career/profession/job I could get into; start a business; make art; play music; write; and read among others. Any one of these things could lead me down a different path altogether. Regardless, I feel like I need to mix it up.
When I get to my magic number, I may even just go down to part-time (12-14) hours a week and request some time off also. It's definitely not the worst gig I could have and at part-time I'd still be making enough to meet my current expenses and then some.
So, how this relates to the original topic is I guess the level of risk I'm willing to accept right now is low-to-no.
If between now and when I decide to quit or move down to part-time there's a major market correction, I'll plow it all into the market and just stay on for longer than I originally planned (sticking to full-time). When a major correction happens and I've fully quit with no other income, I'll average whatever is left into the market and use that timeframe to run out to increase my income by at minimum getting a job.
I'm sort of thinking out loud here now, but your thoughts are welcome on any of this.
I think the point some are trying to make is that it doesn't make sense to wait for a market correction. The market could go up another 30% before you ever see a 30% correction which will pretty much put you in the same position you are today. There are no guarantees that the market will ever be 30% lower than it is today. I am not trying to say that it will happen this way either. The whole point is you cannot predict what the markets will do over any particular time period. Saving cash today to invest in the next crash may mean that you will never get to invest at today's values. If you market strategy is built around guessing it may no be the best thing to design your future around.
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Then, just go 25% VTI and 75%BND, you'll be on the edge of the efficient frontier on a risk/return basis. 100% cash is a loser game because of inflation and waiting a major correction to buy some equity is market timming. Hope this help !
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Value investing is not the same as market timing. The advice of these posters is basically to pay any price for stocks, no matter how ridiculous. That is the opposite of being frugal and the opposite of being a good investor.
Take your money and put it into something that promises a better return than stocks. Currently, the CAPE ratio is showing an implied return of 1.4%, so if you can beat that, you've found a better value.
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Value investing is not the same as market timing. The advice of these posters is basically to pay any price for stocks, no matter how ridiculous. That is the opposite of being frugal and the opposite of being a good investor.
Take your money and put it into something that promises a better return than stocks. Currently, the CAPE ratio is showing an implied return of 1.4%, so if you can beat that, you've found a better value.
That is what I have in mind. I'm not talking about timing, but getting a better deal for my money, i.e. value investing. It seems more like speculating by going in at any price (if we're still talking about the broad market).
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http://awealthofcommonsense.com/worlds-worst-market-timer/
Nuff said.
If your timeframe is 3 years, go ladder CD or high yield savings acct. Stay the hell away from stocks.
-W
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International CAPEs are a lot cheaper. The PIIGS are all much lower, with implied returns ~10%.
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http://awealthofcommonsense.com/worlds-worst-market-timer/
Nuff said.
If your timeframe is 3 years, go ladder CD or high yield savings acct. Stay the hell away from stocks.
-W
Cool story, bro. :)
That's confidence inspiring. Basically I plan to do what he hypothetically did, except wait for general market panic until I invest.
I'll build up warchests just like Bob that will fund multiple years when I don't have to worry about generating income, and when doom hits, I split whatever I have left by investing one portion and living off the other portion while I look for more work so I can generate more income that I can split between a new warchest and DCA in to the broad market. When I build up a large enough fund that I can live on for at least 7 years, I repeat the process as necessary. Never selling my position. If I get close to running out of money before the next doom scenario, I'll look for more income and repeat.
Am I crazy or crazy like a fox?
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Mathematically, your strategy loses to both DCA and lump-sum investing anytime you have money (and DCA loses to lump-sum, assuming you've got a big stash of cash to invest), just due to inflation and missing out on gain/dividends while you're in cash and waiting for a crash. That's the average result, of course. You could get lucky and do great with your timing. Or you might wait and miss a decade of gains and dividends in a time of high inflation and lose horribly.
So non-fox crazy, though that doesn't mean you won't succeed at timing/beating the market. The odds are just against it. Loads of threads here on market timing with good research and links if you're interested, run a search.
-W
http://awealthofcommonsense.com/worlds-worst-market-timer/
Nuff said.
If your timeframe is 3 years, go ladder CD or high yield savings acct. Stay the hell away from stocks.
-W
Cool story, bro. :)
That's confidence inspiring. Basically I plan to do what he hypothetically did, except wait for general market panic until I invest.
I'll build up warchests just like Bob that will fund multiple years when I don't have to worry about generating income, and when doom hits, I split whatever I have left by investing one portion and living off the other portion while I look for more work so I can generate more income that I can split between a new warchest and DCA in to the broad market. When I build up a large enough fund that I can live on for at least 7 years, I repeat the process as necessary. Never selling my position. If I get close to running out of money before the next doom scenario, I'll look for more income and repeat.
Am I crazy or crazy like a fox?
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Mathematically, your strategy loses to both DCA and lump-sum investing anytime you have money (and DCA loses to lump-sum, assuming you've got a big stash of cash to invest), just due to inflation and missing out on gain/dividends while you're in cash and waiting for a crash. That's the average result, of course. You could get lucky and do great with your timing. Or you might wait and miss a decade of gains and dividends in a time of high inflation and lose horribly.
So non-fox crazy, though that doesn't mean you won't succeed at timing/beating the market. The odds are just against it. Loads of threads here on market timing with good research and links if you're interested, run a search.
-W
http://awealthofcommonsense.com/worlds-worst-market-timer/
Nuff said.
If your timeframe is 3 years, go ladder CD or high yield savings acct. Stay the hell away from stocks.
-W
Cool story, bro. :)
That's confidence inspiring. Basically I plan to do what he hypothetically did, except wait for general market panic until I invest.
I'll build up warchests just like Bob that will fund multiple years when I don't have to worry about generating income, and when doom hits, I split whatever I have left by investing one portion and living off the other portion while I look for more work so I can generate more income that I can split between a new warchest and DCA in to the broad market. When I build up a large enough fund that I can live on for at least 7 years, I repeat the process as necessary. Never selling my position. If I get close to running out of money before the next doom scenario, I'll look for more income and repeat.
Am I crazy or crazy like a fox?
Why wouldn't one account for economic cycles - expansion and contraction? As the US expands, credit is more available, business booms, wages and hiring rise, and people gain more confidence/capital to invest, why wouldn't one use the inverse (contraction) of that scenario as information (among others) to invest during a time of uncertainty among the general population? It's not just about timing, it's about getting a good price. Actually, it's solely about getting a good price, timing is just considered.
"Be greedy when others are fearful", right?
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I guess the point of all this is that it's difficult to know what economic cycle we are currently in right now. Economist can't even predict it and they spend all their lives studying and training to do it. That is why Economics is a social science and not a hard science. The actors are humans and are irrational, they do not follow any fundamentals laws, history changes our behavior. All the text book current, backward, and leading indicators are constantly revised. During the GFC economist did not know when went into an official recession until 18 months later due to adjustments in the data.
So can I ask you what cycle we are currently on, downturn, trough, expansion, or peak?
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I would argue the most efficient way to "time the market" is to just re-balance according to your IPS and keep investing.
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I guess the point of all this is that it's difficult to know what economic cycle we are currently in right now. Economist can't even predict it and they spend all their lives studying and training to do it. That is why Economics is a social science and not a hard science. The actors are humans and are irrational, they do not follow any fundamentals laws, history changes our behavior. All the text book current, backward, and leading indicators are constantly revised. During the GFC economist did not know when went into an official recession until 18 months later due to adjustments in the data.
So can I ask you what cycle we are currently on, downturn, trough, expansion, or peak?
I agree with this. You can use all of the information you want to make decisions about the market, but I just don't think you will ever have enough information. Value investing is a great strategy and has worked very well for many people you have heard of. WB used that strategy to become recognized as the greatest investor of all time. Kudos to him. But his investment strategy was to identify individual companies with strong management teams and great business plans that he felt he could buy at a bargain. If that is what you are proposing, and you have the knowledge and ability to identify those companies, it can work very well for you.
But trying to apply value investing based principles to the entire market is impossible. There are too many factors to consider. You can look at ratios and averages and everything else you want and they tell you nothing but a small part of what happened before. Acting on that information is just guessing. You may guess correctly, but the odds are against it. Index investing simplifies all of that. You are buying a part of a market that you think will continue to be profitable going forward.
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I'm moving this over from another thread.
CAPE (U.S) sits at around 25, which has historically been followed by a reversion to the mean (or lower). The general consenus of the US population seems to be, "stocks for the long run, they always go up" - which is the same thing that could be said about tulips, housing, and dotcom in the 90s. Sure they all go up over time, but they still get too expensive when demand is high.
What are your thoughts of sitting on 100% cash and waiting for a better price based on lower CAPE ratio?
My current plan until I learn more, at 31 and beginning my cash accumulation phase (about $7k now and making a sprint for $100k), I figure I've got time and patience to wait for a crash or least a major correction - at which point I'll go in 90/10 (equity/cash) in something like VTSAX with what I've accumulated up to that point.
I can learn more about other investment opportunities and look for deals elsewhere in the mean time. I might even come across information that could convince me to buy in at a CAPE (U.S) of 25, or whatever number, to some degree. Currently, however, I'm convinced it's too expensive.
I believe there are so many other factors (personal and otherwise) to consider, but what thoughts/advice could you offer regarding current market valuations in general and/or relative to my plan?
As you appear to be out of the market and in cash right now, I would remain there until the market again increases above it's 200 day MA ( moving average). The recent sell-off was triggered by going below this average.
Here you can track 10 month moving averages ( 200 trading days ) for various sectors
http://www.advisorperspectives.com/dshort/updates/Interim-Timing-Updates.php,
Of course if your in for the long haul and not worried about big bear markets then buy hold and check yearly
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I guess the point of all this is that it's difficult to know what economic cycle we are currently in right now. Economist can't even predict it and they spend all their lives studying and training to do it. That is why Economics is a social science and not a hard science. The actors are humans and are irrational, they do not follow any fundamentals laws, history changes our behavior. All the text book current, backward, and leading indicators are constantly revised. During the GFC economist did not know when went into an official recession until 18 months later due to adjustments in the data.
So can I ask you what cycle we are currently on, downturn, trough, expansion, or peak?
I'll be the first to admit I've got a lot to learn. Still, it seems to be a good time to be suspicious of broad market returns when most are all for it. I'm not trying to pick the bottom, but I think the general economic climate along with various metrics is a decent indicator of when to drop a lump sum. Because it's a social science, the irrational emotions and by extension the claims of the population at large can be an informative, I think.
Again, I know that I know very little about all of this. My general mode of thinking is finding connections and pattens in seemingly disparate things. From what I have learned, I can't help but make these connections, but I digress.
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I'm moving this over from another thread.
CAPE (U.S) sits at around 25, which has historically been followed by a reversion to the mean (or lower). The general consenus of the US population seems to be, "stocks for the long run, they always go up" - which is the same thing that could be said about tulips, housing, and dotcom in the 90s. Sure they all go up over time, but they still get too expensive when demand is high.
What are your thoughts of sitting on 100% cash and waiting for a better price based on lower CAPE ratio?
My current plan until I learn more, at 31 and beginning my cash accumulation phase (about $7k now and making a sprint for $100k), I figure I've got time and patience to wait for a crash or least a major correction - at which point I'll go in 90/10 (equity/cash) in something like VTSAX with what I've accumulated up to that point.
I can learn more about other investment opportunities and look for deals elsewhere in the mean time. I might even come across information that could convince me to buy in at a CAPE (U.S) of 25, or whatever number, to some degree. Currently, however, I'm convinced it's too expensive.
I believe there are so many other factors (personal and otherwise) to consider, but what thoughts/advice could you offer regarding current market valuations in general and/or relative to my plan?
As you appear to be out of the market and in cash right now, I would remain there until the market again increases above it's 200 day MA ( moving average). The recent sell-off was triggered by going below this average.
Here you can track 10 month moving averages ( 200 trading days ) for various sectors
http://www.advisorperspectives.com/dshort/updates/Interim-Timing-Updates.php,
Of course if your in for the long haul and not worried about big bear markets then buy hold and check yearly
Thanks for this. I don't have time to check it out right now, but I'll look into it.
Regardless, I think all of your comments are helpful in helping me find the holes in what I'm proposing.
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Look, you are just proposing market timing. Lots of people try to do this, and they mostly fail at it, which is why everyone here advises against it. Lots of people sit in cash because "the market is at an all time high!" and lose out because the market never takes the big dump they're waiting for, so everyone here advises against it.
It is quite possible that the S&P will never go lower than it is today, ever. It's also possible it'll fall 50% tomorrow. But the math says trying to time the market is a sucker's bet. Lots and lots of studies have been done about it, and it's not at all controversial. You will lose more waiting for the crash unless you get lucky.
Some reading for you:
http://www.schwab.com/public/schwab/nn/articles/Does-Market-Timing-Work
http://www.ifa.com/12steps/step4/
-W
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Look, you are just proposing market timing. Lots of people try to do this, and they mostly fail at it, which is why everyone here advises against it. Lots of people sit in cash because "the market is at an all time high!" and lose out because the market never takes the big dump they're waiting for, so everyone here advises against it.
It is quite possible that the S&P will never go lower than it is today, ever. It's also possible it'll fall 50% tomorrow. But the math says trying to time the market is a sucker's bet. Lots and lots of studies have been done about it, and it's not at all controversial. You will lose more waiting for the crash unless you get lucky.
-W
Do I detect an air of condecension?
I've been pretty lucky so far in life, so I like my odds. Seriously though, it just so happens that sitting in cash is part of my personal life strategy so it's rather convenient for me to wait on the sidelines.
Once I'm in, I'm in though.
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From Bogleheads
Mark W. Riepe, from Charles Schwab, tests perfect market timing against four other investment strategies in his article, Does Market Timing Work?
The study tracks the performance of five hypothetical long-term investors following one of the five following investment strategies.
Perfect timing: investing at the market low each year;
Invest immediately: invest at the beginning of each year;
Dollar cost average: invest in 12 monthly installments (also mirrors payroll installment investments in a 401-k type retirement plan);
Bad timing: invest at the market high each year;
Stay in cash investments: stay invested in treasury bills.
Each investor received $2,000 at the beginning of every year for the 20 years ending in 2012 and left the money in the market, as represented by the S&P 500 index.
The table below shows the ranking order of performance and accumulated wealth over the 1993 2012 period for each investment strategy:
Strategy Terminal wealth
Perfect timing $87,004
Invest immediately $81,650
Dollar cost averaging $79,510
Bad timing $72,487
Stay in cash investments $51,291
The totally unrealistic strategy of perfect timing will always occupy the top place in the ranking. The measured period was also one which included a realized equity premium return over cash investments.
The study then examined 68 rolling 20-year periods dating back to 1926. In 58 of the 68 periods, the ranking order was exactly the same. In only one period did investing immediately fall to the fourth ranking (in 1962 to 1981, a period of weak equity markets). However, during that period, fourth, third and second places were virtually tied.
The study concludes that the best strategy for most of us mere mortal investors is not to try to market-time at all. Instead, make a plan and invest as soon as possible.
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Nobody is being condescending, AFAIK. I'm sorry if I came across that way. But your strategy is almost certainly a bad one, according to all the available research, because it's impossible to execute without perfect information.
-W
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Look, you are just proposing market timing. Lots of people try to do this, and they mostly fail at it, which is why everyone here advises against it. Lots of people sit in cash because "the market is at an all time high!" and lose out because the market never takes the big dump they're waiting for, so everyone here advises against it.
It is quite possible that the S&P will never go lower than it is today, ever. It's also possible it'll fall 50% tomorrow. But the math says trying to time the market is a sucker's bet. Lots and lots of studies have been done about it, and it's not at all controversial. You will lose more waiting for the crash unless you get lucky.
Some reading for you:
http://www.schwab.com/public/schwab/nn/articles/Does-Market-Timing-Work
http://www.ifa.com/12steps/step4/
-W
"You will lose more waiting for the crash unless you get lucky" - this may hold true if one is waiting for a crash, but to suggest that you should go ahead and invest with the knowledge that a major correction may be underway ( ie last 3 days ) would not be sound advice. With DCA it may be ok to continue and ignore recent momentum or if your are already in for the long haul stay invested, but a big initial investment surely hold your cash until the momentum shows some upside.?
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Look, you are just proposing market timing. Lots of people try to do this, and they mostly fail at it, which is why everyone here advises against it. Lots of people sit in cash because "the market is at an all time high!" and lose out because the market never takes the big dump they're waiting for, so everyone here advises against it.
It is quite possible that the S&P will never go lower than it is today, ever. It's also possible it'll fall 50% tomorrow. But the math says trying to time the market is a sucker's bet. Lots and lots of studies have been done about it, and it's not at all controversial. You will lose more waiting for the crash unless you get lucky.
Some reading for you:
http://www.schwab.com/public/schwab/nn/articles/Does-Market-Timing-Work
http://www.ifa.com/12steps/step4/
-W
"You will lose more waiting for the crash unless you get lucky" - this may hold true if one is waiting for a crash, but to suggest that you should go ahead and invest with the knowledge that a major correction may be underway ( ie last 3 days ) would not be sound advice. With DCA it may be ok to continue and ignore recent momentum or if your are already in for the long haul stay invested, but a big initial investment surely hold your cash until the momentum shows some upside.?
I'll just leave this discussion (http://forum.mrmoneymustache.com/investor-alley/article-the-pros-and-cons-of-using-dollar-cost-averaging-to-invest/) right here. Feel free to ignore it and keep up with the market timing er... sideline waiting.
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Note that even professor Shiller (as indicated in recent interviews) would only marginally adjust his asset allocation based on the Graham (his) P/E ratio.
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From Bogleheads
[SNIP]
Thanks for posting this trailrated. Good stuff.
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Acting on that information is just guessing. You may guess correctly, but the odds are against it. Index investing simplifies all of that. You are buying a part of a market that you think will continue to be profitable going forward.
Does anybody else see the glaring contradiction here?
Index investing is based on paying any price for an investment. Value investing is based on paying a good price. You can apply the principles to individual companies, sectors, or entire markets.
The CAPE ratio shows that stocks have a really low expected return over the next decade. That means stocks are a poor value. Other asset classes should be favored if they show a higher expected return.
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Do I detect an air of condecension?
I've been pretty lucky so far in life, so I like my odds. Seriously though, it just so happens that sitting in cash is part of my personal life strategy so it's rather convenient for me to wait on the sidelines.
Once I'm in, I'm in though.
I don't think there was any condescension there. He simply pointed out (with plenty of people posting backup hard data) that sideline sitting rarely works out the best if you are interested in making the best return. If you view the historical data and still chose to do it, of course that's your prerogative.
There is a difference between holding cash because you might need it in the short term or in general your risk tolerance is low and you prefer XX% cash allocation and will accept the correspondingly higher safety net/lower return, and holding it because you want it to be in the market and are trying to time it, which is what I understood your circumstance to be.
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"hard data" ? seriously, anyone can dig around the web to select data to support their argument
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"hard data" ? seriously, anyone can dig around the web to select data to support their argument
Literally posted this a few comments before, but alas feel free to argue with these "cherry-picked" results.
Mark W. Riepe, from Charles Schwab, tests perfect market timing against four other investment strategies in his article, Does Market Timing Work?
The study tracks the performance of five hypothetical long-term investors following one of the five following investment strategies.
Perfect timing: investing at the market low each year;
Invest immediately: invest at the beginning of each year;
Dollar cost average: invest in 12 monthly installments (also mirrors payroll installment investments in a 401-k type retirement plan);
Bad timing: invest at the market high each year;
Stay in cash investments: stay invested in treasury bills.
Each investor received $2,000 at the beginning of every year for the 20 years ending in 2012 and left the money in the market, as represented by the S&P 500 index.
The table below shows the ranking order of performance and accumulated wealth over the 1993 2012 period for each investment strategy:
Strategy Terminal wealth
Perfect timing $87,004
Invest immediately $81,650
Dollar cost averaging $79,510
Bad timing $72,487
Stay in cash investments $51,291
The totally unrealistic strategy of perfect timing will always occupy the top place in the ranking. The measured period was also one which included a realized equity premium return over cash investments.
The study then examined 68 rolling 20-year periods dating back to 1926. In 58 of the 68 periods, the ranking order was exactly the same. In only one period did investing immediately fall to the fourth ranking (in 1962 to 1981, a period of weak equity markets). However, during that period, fourth, third and second places were virtually tied.
The study concludes that the best strategy for most of us mere mortal investors is not to try to market-time at all. Instead, make a plan and invest as soon as possible.
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So, where's *your* data supporting your argument? Dig some up, homeboy!
-W
"hard data" ? seriously, anyone can dig around the web to select data to support their argument
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Acting on that information is just guessing. You may guess correctly, but the odds are against it. Index investing simplifies all of that. You are buying a part of a market that you think will continue to be profitable going forward.
Does anybody else see the glaring contradiction here?
Index investing is based on paying any price for an investment. Value investing is based on paying a good price. You can apply the principles to individual companies, sectors, or entire markets.
The CAPE ratio shows that stocks have a really low expected return over the next decade. That means stocks are a poor value. Other asset classes should be favored if they show a higher expected return.
And I am saying that you cannot determine a good price accurately and consistently. That doesn't mean you shouldn't invest; it means you shouldn't worry about the perfect investment.
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So, where's *your* data supporting your argument? Dig some up, homeboy!
-W
"hard data" ? seriously, anyone can dig around the web to select data to support their argument
The main objective of using moving averages is not to beat the market on returns ( which it also appears to do) but to greatly reduce maximum drawdowns, the system like any other is not perfect but who would have liked a maxDD of -0.59% ( timing ) v -30.01% ( B&H ) in 2008 along with slightly better long term returns.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=962461
I am aware that most people on this site are big supporters of B&H and for good reasons outlined on this thread and elsewhere on MMM, however if other options are shown to work longterm while allowing retirees to sleep better during prolonged bear markets why dismiss them as "homeboy" ramblings.
Its all well and good to say ignore the crashes but how blase will you be if it happens when your 65 with no other source of income and your 1 million dollar portfolio drops to 600k and is still dropping, are you going to ride it out, maybe, maybe not, 6 months later down another 10%, still rock solid? , - honest answers please.
Bogleheads are a popular point of reference for persons here - so here is a link to 200-day ma dissussion, good arguments for and against - and without the name calling ;)
http://www.bogleheads.org/forum/viewtopic.php?t=27460
For those not wanting to read the paper - this website from an early retiree discusses quant investing in layman terms
http://investingforaliving.wordpress.com/2014/09/22/a-better-retirement-through-quantitative-investing/
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From that great thread:
psteinx wrote:
"I'd be interested in seeing a huge grid of analysis - overlaying many lag periods and different buffer sizes. Then I'd like to see the results for different markets, time frames, and perhaps different assumptions about transaction costs and taxes. Results would include simple returns, risk-adjusted returns, number of trades, and perhaps a few other things.
I'm sure if you backtest enough strategies and tinker with the variables enough, some would look good.
And in fact, it's possible that there's a bit of merit to these kinds of strategies, provided your costs are low enough, because from various things I've read, there is a bit of momentum to the stock market, short term.
But I wonder how robust these strategies are, on the whole. If we backtest and find that a 200 DMA with a 1% boundary looks good, but that the same thing with a 2% boundary does not, or that using a 180 DMA yields substantially different results, then the whole exercise becomes a bit suspicious. In theory, by varying a number of the key parameters, you could come up with thousands or perhaps even millions of potential strategies. If 70% of strategies with reasonable parameters work, then I'd be somewhat interested. If only 15% of them work, and somebody is cherry picking the most successful from within that 15% to advocate the strategy, then I'd be very skeptical. Of course, many folks might have different thresholds/standards for saying something "works", as well."
That pretty much sums it up for me. The stock market is *random*, folks. You can't "beat" random with a formula. Luckily, it trends up, so if in doubt, invest.
-W
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So you see no value in limiting you maxDD in retirement?
PS - why change a habit, pick an argument from the thread that supports your vieww
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I am aware that most people on this site are big supporters of B&H and for good reasons outlined on this thread and elsewhere on MMM, however if other options are shown to work longterm while allowing retirees to sleep better during prolonged bear markets why dismiss them as "homeboy" ramblings.
Its all well and good to say ignore the crashes but how blase will you be if it happens when your 65 with no other source of income and your 1 million dollar portfolio drops to 600k and is still dropping, are you going to ride it out, maybe, maybe not, 6 months later down another 10%, still rock solid? , - honest answers please.
Yes still rock solid. Even when I'm 65 my timeline isn't going to be a six month perspective. It will be a twenty year perspective. Furthermore I expect that between FIRE and 65 that my portfolio would have grown and I will handily exceed my needs for 65+. Even if I don't I'll have gained the skills and knowledge to mitigate these circumstances. Fear mongering doesn't hold much water w/ me. Maybe this sort of emotionally based investing based on how you feel about your investments works for others but for me I'm investing in an entire country's economy. A country that may have some dips in the short term thinking but will continue to be successful for my lifetime. But go ahead and wait until the Shiller P/E hits... what level again?
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You could buy GVAL, which uses the Shiller PE to invest in the global stock market.
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Anyone else use the following website?
http://www.multpl.com/
Super basic, but I like the presentation of the various bits of data without commentary. You can click on the "more" button in the upper right to see a ton more historical data charts they have available.
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I am aware that most people on this site are big supporters of B&H and for good reasons outlined on this thread and elsewhere on MMM, however if other options are shown to work longterm while allowing retirees to sleep better during prolonged bear markets why dismiss them as "homeboy" ramblings.
Its all well and good to say ignore the crashes but how blase will you be if it happens when your 65 with no other source of income and your 1 million dollar portfolio drops to 600k and is still dropping, are you going to ride it out, maybe, maybe not, 6 months later down another 10%, still rock solid? , - honest answers please.
Yes still rock solid. Even when I'm 65 my timeline isn't going to be a six month perspective. It will be a twenty year perspective. Furthermore I expect that between FIRE and 65 that my portfolio would have grown and I will handily exceed my needs for 65+. Even if I don't I'll have gained the skills and knowledge to mitigate these circumstances. Fear mongering doesn't hold much water w/ me. Maybe this sort of emotionally based investing based on how you feel about your investments works for others but for me I'm investing in an entire country's economy. A country that may have some dips in the short term thinking but will continue to be successful for my lifetime. But go ahead and wait until the Shiller P/E hits... what level again?
Clearly you have read only parts of my post
1/ I refer to the 200 day ma to reduce maxDD - not P/E
2/ The averages are clearly based on data, no emotion involved - one of the strong points I would say
I still hold that the possibilty of reducing DD in retirement is worth consideration, you talk about "short term thinking" the 200MA has not prompted a sell in 2 years, hardly day trading. What about a 50% DD in first few years of retirement, I guess sequence of return risk is to be ignored also.
Let me be clear B&H is hard to beat, but only if you stomach the DD's and extended bear markets that can last for years (no fear mongering intended)
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Also, for those saying that index investing beats value investing Ben Graham, Tweedy & Browne, Peter Lynch, and Warren Buffet would like to have a word with you. Please note that all of these investors have 20-30 year plus track records that absolutely trounce the index markets.
Secondly, this stuff isn't rocket science but the same type of common sense that MMM advocates - buying wisely. Go read Ben Graham's Security Analysis or Tweedy & Browne's report on how they make their investments below:
http://www.grahamanddoddsville.net/wordpress/Files/Gurus/Christopher%20Browne/WhatHasWorkedInInvesting.pdf
For those who are critical of 2lazy2retire's 200MA please go read about Ed Seykota who uses a very similar trend following system. His audited, post management fee (2% + 20%) returns are 30% compounded over 30 years. His first client started an account with him in the 1970s that was $10,000. It is worth well over $15 million today. There are others like him: Paul T. Jones, George Soros, Stanley Druckenmiller, Tom Basso and many others.
The silly stuff you hear in the media that average investors lose money and average mutual funds don't beat the average index are nonsensical. Of course you must be better than average. Consider that MMM philosophy is not average either - after all the average person is a volcano of wastefulness and a complete sukka.
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The silly stuff you hear in the media that average investors lose money and average mutual funds don't beat the average index are nonsensical. Of course you must be better than average. Consider that MMM philosophy is not average either - after all the average person is a volcano of wastefulness and a complete sukka.
Getting the average market return actually places you well above the average investor. That's because lots of people think they can beat the market using this formula or that, dancing in and out, and predicting the future. But the fact remains that most don't. If you're one of the lucky ones, then great! But even if you succeed, your extra returns did not come for free. You're likely trading lots of free time to earn that extra return.
I'm an accountant. The thought of wading through financial reports and reading prospectuses and board meeting notes in my free time makes me think I'll soon wake up in a cold sweat, thankful that it was only a bad dream. I'll gladly choose to be in the 75th percentile of investors, with no risk of being lower, while also using all of my free time for enjoyable activities. But if your idea of fun is to read, log, analyze, and act on quarterly profit reports, then more power to you. And even then, you may find that spending your free time doing this didn't net you any extra return and possibly you did worse than the market, which would seem to be the worst of both worlds to me. It seems like a common enough outcome that the double downside risk isn't worth it to me. But of course everyone will have to decide on their own path.
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And I am saying that you cannot determine a good price accurately and consistently. That doesn't mean you shouldn't invest; it means you shouldn't worry about the perfect investment.
Anybody with an average IQ can determine a good price accurately and consistently. Read some investment books. Study the fundamentals. Valuing a cash-generating asset isn't rocket science. People do it every day so it's a skill set that can be learned just like everything else on this site.
Ask yourself, how much cash is this investment likely to earn you? How much is this stream of cash selling for? What are the risks to this cash flow?
Right now, the cash being generated by the stock market is not enough to compensate me for the risk or the prices being asked. Better returns can be had elsewhere for a lower entry price and less risk.
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Getting the average market return actually places you well above the average investor. That's because lots of people think they can beat the market using this formula or that, dancing in and out, and predicting the future. But the fact remains that most don't. If you're one of the lucky ones, then great! But even if you succeed, your extra returns did not come for free. You're likely trading lots of free time to earn that extra return.
Actually the other downside is that if you're doing active trading, you're likely going to be mainly experiencing short-term capital gains, which are taxed as ordinary income. Sitting in index funds tends to result in mainly long-term capital gains as well as dividends. Especially if you're in a fund like VHDYX (https://personal.vanguard.com/us/funds/snapshot?FundId=0623&FundIntExt=INT) which is biased even more than usual towards dividend yields as opposed to capital gains. That's great if you're trying to keep your total costs as low as possible by having a low reportable income.
I did hear an interesting quote today that really stuck with me as being one of those golden rules of investing. It was in this Business Insider article (http://www.businessinsider.com/rosenberg-avoiding-overreaction-2014-10) where David Rosenberg said "...what is most important for building wealth is not 'timing' the market but rather 'time in' the market."
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From that great thread:
psteinx wrote:
"I'd be interested in seeing a huge grid of analysis - overlaying many lag periods and different buffer sizes. Then I'd like to see the results for different markets, time frames, and perhaps different assumptions about transaction costs and taxes. Results would include simple returns, risk-adjusted returns, number of trades, and perhaps a few other things.
I'm sure if you backtest enough strategies and tinker with the variables enough, some would look good.
And in fact, it's possible that there's a bit of merit to these kinds of strategies, provided your costs are low enough, because from various things I've read, there is a bit of momentum to the stock market, short term.
But I wonder how robust these strategies are, on the whole. If we backtest and find that a 200 DMA with a 1% boundary looks good, but that the same thing with a 2% boundary does not, or that using a 180 DMA yields substantially different results, then the whole exercise becomes a bit suspicious. In theory, by varying a number of the key parameters, you could come up with thousands or perhaps even millions of potential strategies. If 70% of strategies with reasonable parameters work, then I'd be somewhat interested. If only 15% of them work, and somebody is cherry picking the most successful from within that 15% to advocate the strategy, then I'd be very skeptical. Of course, many folks might have different thresholds/standards for saying something "works", as well."
That pretty much sums it up for me. The stock market is *random*, folks. You can't "beat" random with a formula. Luckily, it trends up, so if in doubt, invest.
-W
Nice post Waltworks. I genuinely feel sorry for posters in threads like this, and many others on the Investor Alley forum. So many logical fallacies, I fear they won't realize their folly until it's too late, no matter how many times you show them.
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From that great thread:
psteinx wrote:
"I'd be interested in seeing a huge grid of analysis - overlaying many lag periods and different buffer sizes. Then I'd like to see the results for different markets, time frames, and perhaps different assumptions about transaction costs and taxes. Results would include simple returns, risk-adjusted returns, number of trades, and perhaps a few other things.
I'm sure if you backtest enough strategies and tinker with the variables enough, some would look good.
And in fact, it's possible that there's a bit of merit to these kinds of strategies, provided your costs are low enough, because from various things I've read, there is a bit of momentum to the stock market, short term.
But I wonder how robust these strategies are, on the whole. If we backtest and find that a 200 DMA with a 1% boundary looks good, but that the same thing with a 2% boundary does not, or that using a 180 DMA yields substantially different results, then the whole exercise becomes a bit suspicious. In theory, by varying a number of the key parameters, you could come up with thousands or perhaps even millions of potential strategies. If 70% of strategies with reasonable parameters work, then I'd be somewhat interested. If only 15% of them work, and somebody is cherry picking the most successful from within that 15% to advocate the strategy, then I'd be very skeptical. Of course, many folks might have different thresholds/standards for saying something "works", as well."
That pretty much sums it up for me. The stock market is *random*, folks. You can't "beat" random with a formula. Luckily, it trends up, so if in doubt, invest.
-W
Nice post Waltworks. I genuinely feel sorry for posters in threads like this, and many others on the Investor Alley forum. So many logical fallacies, I fear they won't realize their folly until it's too late, no matter how many times you show them.
Easy on the sympathy there, none required. But if you have anything of value to add I'm all ears.
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Hey, MMM may have called the market peak
http://www.mrmoneymustache.com/2014/08/20/how-to-invest-in-overvalued-market/
Whenever popular blogs say 'it only goes up' it often translates as 'watch out below!'
The fundamentals always catch up to valuations. We may be in a catch-up cycle now. It seems rather anti-Mustachian to purchase an item which is known to be overvalued. Would we do it with a coffee pot or bicycle? no. Then why the stock market?
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Hey, MMM may have called the market peak
http://www.mrmoneymustache.com/2014/08/20/how-to-invest-in-overvalued-market/
Whenever popular blogs say 'it only goes up' it often translates as 'watch out below!'
The fundamentals always catch up to valuations. We may be in a catch-up cycle now. It seems rather anti-Mustachian to purchase an item which is known to be overvalued. Would we do it with a coffee pot or bicycle? no. Then why the stock market?
Overvalued in what sense? The short view? Or the next sixty years? I understand that you think you're seeing some market inefficiency that you can exploit. But what about all the other people with way more resources on hand, aren't they also exploiting those same inefficiencies?
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True, the price can go down to catch the value OR the value can rise to catch the price. You NEVER know with stock !
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Overvalued in what sense? The short view? Or the next sixty years? I understand that you think you're seeing some market inefficiency that you can exploit. But what about all the other people with way more resources on hand, aren't they also exploiting those same inefficiencies?
Overvalued as in 'not a good investment'; yes; time will tell; perhaps.
I'm a value/fundamentals investor. Businesses are in business to make money. We buy stocks of business to make money. Stock prices of businesses are wildly under-and-over evaluated by the speculation-driven Mr Market. An index guarantees an average/mediocre return.
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At the top of the cycle (end of a long bull mkt) ppl are always optimistic and advocate buy and hold (forever) the strongest, thinking they will never sell and can easily withstand any future fluctuations
Happened in 2000 and 2007 as well - unfortunately very few ppl can resist selling in the midst of a punishing bear mkt - sometimes due to emotions from watching their investments and net worth go down, many times due to circumstance (recessions and bear mkts often coincide with job loss and inability to get side gigs, etc - when there is no hope in sight; when times are good, almost everyone overestimates his resilience to not do the wrong thing when times are bad
At the bottom of the cycle ppl give up and are not so quick to buy every dip or advocate buy and hold
I find many of this forum's comments to be borderline arrogant with very little respect for the mkt and how bad things can get; history has shown that approaching the investing process with humility as opposed to dogmatic certainty (the mkt can only go up in the long run!) might be a wiser and certainly more prudent approach
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At the top of the cycle (end of a long bull mkt) ppl are always optimistic and advocate buy and hold (forever) the strongest, thinking they will never sell and can easily withstand any future fluctuations
Happened in 2000 and 2007 as well - unfortunately very few ppl can resist selling in the midst of a punishing bear mkt - sometimes due to emotions from watching their investments and net worth go down, many times due to circumstance (recessions and bear mkts often coincide with job loss and inability to get side gigs, etc - when there is no hope in sight; when times are good, almost everyone overestimates his resilience to not do the wrong thing when times are bad
At the bottom of the cycle ppl give up and are not so quick to buy every dip or advocate buy and hold
I find many of this forum's comments to be borderline arrogant with very little respect for the mkt and how bad things can get; history has shown that approaching the investing process with humility as opposed to dogmatic certainty (the mkt can only go up in the long run!) might be a wiser and certainly more prudent approach
Lots of people don't actually buy and hold, therefore buy and hold doesn't work? Seems like a strange conclusion.
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I find many of this forum's comments to be borderline arrogant with very little respect for the mkt and how bad things can get; history has shown that approaching the investing process with humility as opposed to dogmatic certainty (the mkt can only go up in the long run!) might be a wiser and certainly more prudent approach
On the contrary I think most people here understand that the market is not guaranteed but it's the best game in town if you want a hands off approach to investing. Most people here work on their own skill to help them lower expenses or raise their income, remember we mostly focus on savings rate and not investment returns to reach FI. That is why a lot people here invest in real-estate because it is a combination of skill/knowledge and passive investments.
I personally invest capital that I am not dependent on to maintain my current lifestyle, which helps lower my anxiety when the markets tank, like they did in 2008. During that time people were getting laid off through no fault of their own, but most managed to find employment a few months after, with unemployment and savings to help them get through it. By minimizing or eliminating any form of debt, learning to live well below your means without impacting your overall level of happiness, it helps us weather the downturns, which we all know will happen a few times in our lifetimes.
So when we say buy and hold, it's not because we know with certainty that the markets will always go up, but we think there is a greater chance that they will trend up instead of down. We are investing in companies that generate value and understand that the stock market is just a proxy based on the last buyers and sellers agreed price. A perfect example of that is when companies are trading below book value, why would a company trade significantly below the value of assets it owns, well one reason is one owner was forced to sell, and it is really not reflective of the overall value of the company.
Are we saying that everyone should invest in the stock market, hell no. Most people that are living pay check to pay check, the ones that live beyond their means, those that cannot reduce their expenses in tough times, and those with no capacity to support themselves for a few months in the event they lose their jobs, should definitely not be investing in the stock market. That is why in every case study, the general consensus is lower expenses, eliminate debt, build up an EF, increase income capacity, and then invest if you understand what you are getting into.
So I don't see how you can take isolated pieces of comments and apply it to the broader theme of this forum as having "very little respect for the markets and how bad things can get". We know how bad things can get, we just went trough it a few years ago, and have tons of historical examples.
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At the top of the cycle (end of a long bull mkt) ppl are always optimistic and advocate buy and hold (forever) the strongest, thinking they will never sell and can easily withstand any future fluctuations
Happened in 2000 and 2007 as well - unfortunately very few ppl can resist selling in the midst of a punishing bear mkt - sometimes due to emotions from watching their investments and net worth go down, many times due to circumstance (recessions and bear mkts often coincide with job loss and inability to get side gigs, etc - when there is no hope in sight; when times are good, almost everyone overestimates his resilience to not do the wrong thing when times are bad
At the bottom of the cycle ppl give up and are not so quick to buy every dip or advocate buy and hold
I find many of this forum's comments to be borderline arrogant with very little respect for the mkt and how bad things can get; history has shown that approaching the investing process with humility as opposed to dogmatic certainty (the mkt can only go up in the long run!) might be a wiser and certainly more prudent approach
Lots of people don't actually buy and hold, therefore buy and hold doesn't work? Seems like a strange conclusion.
Clearly there seems to be an almost universal acceptance that B&H works in the long term, the point is how many who have steely resolve now will still have it under adverse conditions - if not there is a high probability that they will bail and then B&H as a total solution fails in it objective.
What others are trying to show is ( at least that was what I was advocating ) there may be systems or methods that can limit the horrendous DD's we have seen in the past which are more are likely to ensure the retiree stays the course and is not driven by emotion and circumstance to abandon at the worst time possible.
-
At the top of the cycle (end of a long bull mkt) ppl are always optimistic and advocate buy and hold (forever) the strongest, thinking they will never sell and can easily withstand any future fluctuations
Happened in 2000 and 2007 as well - unfortunately very few ppl can resist selling in the midst of a punishing bear mkt - sometimes due to emotions from watching their investments and net worth go down, many times due to circumstance (recessions and bear mkts often coincide with job loss and inability to get side gigs, etc - when there is no hope in sight; when times are good, almost everyone overestimates his resilience to not do the wrong thing when times are bad
At the bottom of the cycle ppl give up and are not so quick to buy every dip or advocate buy and hold
I find many of this forum's comments to be borderline arrogant with very little respect for the mkt and how bad things can get; history has shown that approaching the investing process with humility as opposed to dogmatic certainty (the mkt can only go up in the long run!) might be a wiser and certainly more prudent approach
Lots of people don't actually buy and hold, therefore buy and hold doesn't work? Seems like a strange conclusion.
Where does my post above say anything about buying and holding not working?
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At the top of the cycle (end of a long bull mkt) ppl are always optimistic and advocate buy and hold (forever) the strongest, thinking they will never sell and can easily withstand any future fluctuations
Happened in 2000 and 2007 as well - unfortunately very few ppl can resist selling in the midst of a punishing bear mkt - sometimes due to emotions from watching their investments and net worth go down, many times due to circumstance (recessions and bear mkts often coincide with job loss and inability to get side gigs, etc - when there is no hope in sight; when times are good, almost everyone overestimates his resilience to not do the wrong thing when times are bad
At the bottom of the cycle ppl give up and are not so quick to buy every dip or advocate buy and hold
I find many of this forum's comments to be borderline arrogant with very little respect for the mkt and how bad things can get; history has shown that approaching the investing process with humility as opposed to dogmatic certainty (the mkt can only go up in the long run!) might be a wiser and certainly more prudent approach
Lots of people don't actually buy and hold, therefore buy and hold doesn't work? Seems like a strange conclusion.
Clearly there seems to be an almost universal acceptance that B&H works in the long term, the point is how many who have steely resolve now will still have it under adverse conditions - if not there is a high probability that they will bail and then B&H as a total solution fails in it objective.
What others are trying to show is ( at least that was what I was advocating ) there may be systems or methods that can limit the horrendous DD's we have seen in the past which are more are likely to ensure the retiree stays the course and is not driven by emotion and circumstance to abandon at the worst time possible.
Such an attempt to reduce draw down will almost certainly result in selling low, buying high, and lowering returns. Probably by a large margin.
I'm sure you'll dispute this, but most people who advocate such strategies don't believe it until they live through it, and see for themselves, so I doubt you'll be convinced.
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At the top of the cycle (end of a long bull mkt) ppl are always optimistic and advocate buy and hold (forever) the strongest, thinking they will never sell and can easily withstand any future fluctuations
Happened in 2000 and 2007 as well - unfortunately very few ppl can resist selling in the midst of a punishing bear mkt - sometimes due to emotions from watching their investments and net worth go down, many times due to circumstance (recessions and bear mkts often coincide with job loss and inability to get side gigs, etc - when there is no hope in sight; when times are good, almost everyone overestimates his resilience to not do the wrong thing when times are bad
At the bottom of the cycle ppl give up and are not so quick to buy every dip or advocate buy and hold
I find many of this forum's comments to be borderline arrogant with very little respect for the mkt and how bad things can get; history has shown that approaching the investing process with humility as opposed to dogmatic certainty (the mkt can only go up in the long run!) might be a wiser and certainly more prudent approach
Lots of people don't actually buy and hold, therefore buy and hold doesn't work? Seems like a strange conclusion.
Where does my post above say anything about buying and holding not working?
You're right, you didn't specifically spell it out. That was the conclusion I drew from the overarching tone. If that's not what you meant, I apologize for the misunderstanding.
I guess I must be somewhat of a robot when it comes to this stuff, because buy and hold has always been easy for me. 2007 & 2008 was not a problem at all, and I'd bet real money that that crash was the largest we'll see in our lifetimes, so I guess I'm just not worried about future crashes or my ability to weather the next one and don't understand how it can be so hard. Especially while you're still in the accumulation phase. It's just a simple change in mindset. It's not "OMG my investments are losing so much money". Instead it's "Wow, I'm getting so many shares for so cheap!". Simple and effective.
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I guess I must be somewhat of a robot when it comes to this stuff, because buy and hold has always been easy for me. 2007 & 2008 was not a problem at all, and I'd bet real money that that crash was the largest we'll see in our lifetimes, so I guess I'm just not worried about future crashes or my ability to weather the next one and don't understand how it can be so hard. Especially while you're still in the accumulation phase. It's just a simple change in mindset. It's not "OMG my investments are losing so much money". Instead it's "Wow, I'm getting so many shares for so cheap!". Simple and effective.
Buy and hold works for me because I hate, HATE, to take losses. 2007 and 2008 were anxious times for me, but there was no way I was going to sell at such a huge loss. This is why I don't gamble--it kills me to lose a nickel.
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Overvalued in what sense? The short view? Or the next sixty years? I understand that you think you're seeing some market inefficiency that you can exploit. But what about all the other people with way more resources on hand, aren't they also exploiting those same inefficiencies?
Overvalued as in 'not a good investment'; yes; time will tell; perhaps.
I'm a value/fundamentals investor. Businesses are in business to make money. We buy stocks of business to make money. Stock prices of businesses are wildly under-and-over evaluated by the speculation-driven Mr Market. An index guarantees an average/mediocre return.
What do you mean time will tell perhaps?
I agree businesses are in business to make money, what does that have to do with value investing? It's just as worthwhile for any method of investing and isn't particular to value/fundamentals investing. You ignored the fact that there are people with more resources than you, faster programs, probably smarter, and with more money that are also value/fundamental investors. Why do you think you're guaranteed to beat an average/mediocre return just because you don't index? Because you're not guaranteed it. And in fact odds are you won't.
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Overvalued in what sense? The short view? Or the next sixty years? I understand that you think you're seeing some market inefficiency that you can exploit. But what about all the other people with way more resources on hand, aren't they also exploiting those same inefficiencies?
Overvalued as in 'not a good investment'; yes; time will tell; perhaps.
I'm a value/fundamentals investor. Businesses are in business to make money. We buy stocks of business to make money. Stock prices of businesses are wildly under-and-over evaluated by the speculation-driven Mr Market. An index guarantees an average/mediocre return.
What do you mean time will tell perhaps?
I agree businesses are in business to make money, what does that have to do with value investing? It's just as worthwhile for any method of investing and isn't particular to value/fundamentals investing. You ignored the fact that there are people with more resources than you, faster programs, probably smarter, and with more money that are also value/fundamental investors. Why do you think you're guaranteed to beat an average/mediocre return just because you don't index? Because you're not guaranteed it. And in fact odds are you won't.
I answered 3 questions with 3 answers:
"Overvalued in what sense?" Overvalued as in 'not a good investment'
"The short view?" yes
"Or the next sixty years?" perhaps
"Why do you think you're guaranteed to beat an average/mediocre return just because you don't index?" I did not state that - you jumped to that conclusion .
"Because you're not guaranteed it." Very few guarantees in life, death & taxes, right?
"And in fact odds are you won't." Can I see the calculation of odds? You state this is fact, can you prove it?
All the above misses the main point: Purchasing an investment is exactly the same as any other purchase. The item can be purchased on-sale, at regular price, or an inflated price. The item can be purchased from Wal-Mart, or from Nordstrom's with the accompanying mark-up for the pretty package & sales people.
There is strong Mustachian vibe on this board (understandably!) of purchasing assets via the cheapest means possible, i.e. cheap index funds etc, instead of going through a pricy broker.
This misses the big question though, which is Should the asset be purchased at all?
Various indicators claim this is an over-bought market; the last week melt-down notwithstanding. All that means is the current price may be too high for the value of the item purchased.
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Getting the average market return actually places you well above the average investor. That's because lots of people think they can beat the market using this formula or that, dancing in and out, and predicting the future. But the fact remains that most don't. If you're one of the lucky ones, then great! But even if you succeed, your extra returns did not come for free. You're likely trading lots of free time to earn that extra return.
I'm an accountant. The thought of wading through financial reports and reading prospectuses and board meeting notes in my free time makes me think I'll soon wake up in a cold sweat, thankful that it was only a bad dream. I'll gladly choose to be in the 75th percentile of investors, with no risk of being lower, while also using all of my free time for enjoyable activities. But if your idea of fun is to read, log, analyze, and act on quarterly profit reports, then more power to you. And even then, you may find that spending your free time doing this didn't net you any extra return and possibly you did worse than the market, which would seem to be the worst of both worlds to me. It seems like a common enough outcome that the double downside risk isn't worth it to me. But of course everyone will have to decide on their own path.
I concur that one must be above average. I did want to point out though that MMM philosophy isn't about being average. It takes above average discipline, stoicism, and intelligence to not live paycheck paycheck like the average American. Consider the fact that this bar is much lower than you think.
There is no such thing as free money, agreed. However, how much work do you put into your MMM practices? Advanced mustachians are growing gardens, becoming the equivalent of trained contractors to DIY at home, doing moderately advanced cooking, and tracking their expenses to the penny. None of these things are free in the sense that they take time and effort. Learning about how to buy a stock at a good deal is a similar level of effort to any of these activities.
As to whether these activities are worth it? Consider the fact that long-term buy and hold average returns compound at approximately 8%. Also consider that average businesses themselves net approximately 12-15%. Since you don't own these businesses in their entirety consider that the best you may ever do as a value investor is 10% CAGR (others have done this or better). That 2% difference will equate to you having a realized improvement of 30% in your retirement portfolio over a 30 year period. To put that in real dollars that means someone making $100k a year and saving 10% annually over 30 years would have a retirement portfolio of $952,000 vs. $648,000 in today's dollars.
That being said I'm not belittling anyone who wants to do buy and hold. My point is that some people might be interested in doing a bit of work in this area since it could substantially affect their retirement plans for the better.
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Overvalued in what sense? The short view? Or the next sixty years? I understand that you think you're seeing some market inefficiency that you can exploit. But what about all the other people with way more resources on hand, aren't they also exploiting those same inefficiencies?
Overvalued as in 'not a good investment'; yes; time will tell; perhaps.
I'm a value/fundamentals investor. Businesses are in business to make money. We buy stocks of business to make money. Stock prices of businesses are wildly under-and-over evaluated by the speculation-driven Mr Market. An index guarantees an average/mediocre return.
What do you mean time will tell perhaps?
I agree businesses are in business to make money, what does that have to do with value investing? It's just as worthwhile for any method of investing and isn't particular to value/fundamentals investing. You ignored the fact that there are people with more resources than you, faster programs, probably smarter, and with more money that are also value/fundamental investors. Why do you think you're guaranteed to beat an average/mediocre return just because you don't index? Because you're not guaranteed it. And in fact odds are you won't.
I answered 3 questions with 3 answers:
"Overvalued in what sense?" Overvalued as in 'not a good investment'
"The short view?" yes
"Or the next sixty years?" perhaps
"Why do you think you're guaranteed to beat an average/mediocre return just because you don't index?" I did not state that - you jumped to that conclusion .
"Because you're not guaranteed it." Very few guarantees in life, death & taxes, right?
"And in fact odds are you won't." Can I see the calculation of odds? You state this is fact, can you prove it?
All the above misses the main point: Purchasing an investment is exactly the same as any other purchase. The item can be purchased on-sale, at regular price, or an inflated price. The item can be purchased from Wal-Mart, or from Nordstrom's with the accompanying mark-up for the pretty package & sales people.
There is strong Mustachian vibe on this board (understandably!) of purchasing assets via the cheapest means possible, i.e. cheap index funds etc, instead of going through a pricy broker.
This misses the big question though, which is Should the asset be purchased at all?
Various indicators claim this is an over-bought market; the last week melt-down notwithstanding. All that means is the current price may be too high for the value of the item purchased.
So if you don't think you can beat a mediocre/average return why are you pursuing an active investment strategy?
Yes it can be proven that odds are you can't beat the index. First active managers can't (https://pressroom.vanguard.com/content/nonindexed/Updated_The_Case_for_Index_Fund_Investing_4.9.2014.pdf) they have way more assets and resources on hand yet are incapable of doing so. Yet every single person who has dreams of being the next Buffett and throws out his quotes as if they actually mean things in the larger context of investing for average people thinks they too are at the edge of the bell curve. Momentum investing can't (http://www.aqrindex.com/resources/docs/PDF/News/News_Case_for_Momentum.pdf) given that their annualized returns are for a 30 year period are worse than the S&P 500 annualized returns over the same period. (http://www.moneychimp.com/features/market_cagr.htm)
What indicators? If all these indicators are so apparent don't you think the market has already taken those indications into account with the asset price? What inefficiency do you think you're capable of exploiting?
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Various indicators claim this is an over-bought market;
Seriously? We're talking about a market made up of people, not a petri dish of growing bacteria. If you really believe these indicators are accurate, then why is the market as high as it is? People have billions of dollars in the market right now, if your indicators were shown to be accurate, don't you think those people would have sold already? Causing price to fall in-line with your indicators?
This is an honest question...do you think you know something they don't?
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Getting the average market return actually places you well above the average investor. That's because lots of people think they can beat the market using this formula or that, dancing in and out, and predicting the future. But the fact remains that most don't. If you're one of the lucky ones, then great! But even if you succeed, your extra returns did not come for free. You're likely trading lots of free time to earn that extra return.
I'm an accountant. The thought of wading through financial reports and reading prospectuses and board meeting notes in my free time makes me think I'll soon wake up in a cold sweat, thankful that it was only a bad dream. I'll gladly choose to be in the 75th percentile of investors, with no risk of being lower, while also using all of my free time for enjoyable activities. But if your idea of fun is to read, log, analyze, and act on quarterly profit reports, then more power to you. And even then, you may find that spending your free time doing this didn't net you any extra return and possibly you did worse than the market, which would seem to be the worst of both worlds to me. It seems like a common enough outcome that the double downside risk isn't worth it to me. But of course everyone will have to decide on their own path.
I concur that one must be above average. I did want to point out though that MMM philosophy isn't about being average. It takes above average discipline, stoicism, and intelligence to not live paycheck paycheck like the average American. Consider the fact that this bar is much lower than you think.
There is no such thing as free money, agreed. However, how much work do you put into your MMM practices? Advanced mustachians are growing gardens, becoming the equivalent of trained contractors to DIY at home, doing moderately advanced cooking, and tracking their expenses to the penny. None of these things are free in the sense that they take time and effort. Learning about how to buy a stock at a good deal is a similar level of effort to any of these activities.
As to whether these activities are worth it? Consider the fact that long-term buy and hold average returns compound at approximately 8%. Also consider that average businesses themselves net approximately 12-15%. Since you don't own these businesses in their entirety consider that the best you may ever do as a value investor is 10% CAGR (others have done this or better). That 2% difference will equate to you having a realized improvement of 30% in your retirement portfolio over a 30 year period. To put that in real dollars that means someone making $100k a year and saving 10% annually over 30 years would have a retirement portfolio of $952,000 vs. $648,000 in today's dollars.
That being said I'm not belittling anyone who wants to do buy and hold. My point is that some people might be interested in doing a bit of work in this area since it could substantially affect their retirement plans for the better.
Mostly agree with your post. But that 2% you're talking about doesnt mean stock picking like some could think. Personally, I actually increased my odds by about 3% with 2 simple changes. First, I dropped my RBC Funds at 2,1% MER for Vanguard and my portfolio MER is now 0.1% MER. Then, I increased my stock allocation from 75% to 100%. I own only 3 cores ETF and should get 3% more without spending time or money in the process
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There is no such thing as free money, agreed. However, how much work do you put into your MMM practices? Advanced mustachians are growing gardens, becoming the equivalent of trained contractors to DIY at home, doing moderately advanced cooking, and tracking their expenses to the penny. None of these things are free in the sense that they take time and effort. Learning about how to buy a stock at a good deal is a similar level of effort to any of these activities.
There's a big difference though. Learning to cook is guaranteed to save you money over eating at restaurants. Learning to fix your own shit is guaranteed to save you money over hiring out the work. Putting the same amount of effort into learning how to buy a stock at a good deal can still leave you with a 6% return when the market returned 8%. Or worse. Therefore, not only did you use up your time, you also got a worse return. If all that was required was effort to achieve greater returns, then it'd be obvious that it's worth it. But of course that's not how it works.
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I started a thread (http://forum.mrmoneymustache.com/investor-alley/is-value-averaging-superior/), but it could easily go here. Proponents of Value Averaging say it forces the investor to sell high and buy low based on a very simple formula of mandatory 3% quarterly returns. It seems like if an investor stuck with this plan they would definitely outpace a market timing approach and theoretically beat a buy and hold or DCA strategy. VA removes the decision making process from the investor (humans are bad at making decisions when perceived loss is present), thereby improving returns over the long term.
Thoughts?
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There's a big difference though. Learning to cook is guaranteed to save you money over eating at restaurants. Learning to fix your own shit is guaranteed to save you money over hiring out the work. Putting the same amount of effort into learning how to buy a stock at a good deal can still leave you with a 6% return when the market returned 8%. Or worse. Therefore, not only did you use up your time, you also got a worse return. If all that was required was effort to achieve greater returns, then it'd be obvious that it's worth it. But of course that's not how it works.
I think you are confusing the variance of returns over a statistically insignificant period of time (such as a year) with the variance of the overall returns over a period such as 30 years. If you follow a true value oriented market approach where you buy businesses (which are what stocks represent) when they are on sale and which have solid fundamentals (i.e., are a good business) then you are virtually guaranteed to far out-perform the broad market which consists of all businesses. This is just common sense not rocket science.
There are no certainties in the market or in life. Your vast cooking skills that you've spent many precious hours to obtain may end up yielding naught if you get hit by a bus tomorrow or choke on your chicken soup and die. Would we base the value of those cooking skills on an outlier statistic? That doesn't seem wise.
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There's a big difference though. Learning to cook is guaranteed to save you money over eating at restaurants. Learning to fix your own shit is guaranteed to save you money over hiring out the work. Putting the same amount of effort into learning how to buy a stock at a good deal can still leave you with a 6% return when the market returned 8%. Or worse. Therefore, not only did you use up your time, you also got a worse return. If all that was required was effort to achieve greater returns, then it'd be obvious that it's worth it. But of course that's not how it works.
I think you are confusing the variance of returns over a statistically insignificant period of time (such as a year) with the variance of the overall returns over a period such as 30 years. If you follow a true value oriented market approach where you buy businesses (which are what stocks represent) when they are on sale and which have solid fundamentals (i.e., are a good business) then you are virtually guaranteed to far out-perform the broad market which consists of all businesses. This is just common sense not rocket science.
I know, I know. Your system is guaranteed to beat the market. The trick is to only invest in the good companies and not the bad ones. Common sense!
Good luck with your late night infomercial campaign.
Edit -- sorry, that's a little harsh but you have to admit that it sounds exactly like an infomercial pitch
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There's a big difference though. Learning to cook is guaranteed to save you money over eating at restaurants. Learning to fix your own shit is guaranteed to save you money over hiring out the work. Putting the same amount of effort into learning how to buy a stock at a good deal can still leave you with a 6% return when the market returned 8%. Or worse. Therefore, not only did you use up your time, you also got a worse return. If all that was required was effort to achieve greater returns, then it'd be obvious that it's worth it. But of course that's not how it works.
I think you are confusing the variance of returns over a statistically insignificant period of time (such as a year) with the variance of the overall returns over a period such as 30 years. If you follow a true value oriented market approach where you buy businesses (which are what stocks represent) when they are on sale and which have solid fundamentals (i.e., are a good business) then you are virtually guaranteed to far out-perform the broad market which consists of all businesses. This is just common sense not rocket science.
I know, I know. Your system is guaranteed to beat the market. The trick is to only invest in the good companies and not the bad ones. Common sense!
Good luck with your late night infomercial campaign.
Edit -- sorry, that's a little harsh but you have to admit that it sounds exactly like an infomercial pitch
The best part is, you can do this with no money down!
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I know, I know. Your system is guaranteed to beat the market. The trick is to only invest in the good companies and not the bad ones. Common sense!
Good luck with your late night infomercial campaign.
Edit -- sorry, that's a little harsh but you have to admit that it sounds exactly like an infomercial pitch
Difference here is that the information is available for free in the links I and others provided earlier or in google for that matter. The methodology, the statistics, etc. But you fully admitted that you have no interest in reviewing this information or learning more so I guess it was naive to believe that you would read this and actually come to an informed conclusion for yourself.
Your pitch sounds similar to those folks in the Huffington post claiming that MMM is a fraud and nobody can live off of $25,000 a year.
Of course you are welcome to make ad hominem attacks on my character to defend your position; however, I think anyone of reasonable intelligence will recognize that ploy for what it is.
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There are lots of easy, true, and yet stupid things like this that I can say. If you want to win at basketball, just throw the ball through the hoop more than the other team. It's common sense, not rocket science!
Look, this is just becoming a beat-the-market-with-skill/tricks/"common sense" vs. you-can't-beat-the-market discussion. It's not going to get resolved. Do what you like. All the evidence says indexing and not trying to market time is your best bet. If you really feel like you're clever and dedicated enough to beat the market, you're welcome to try. You probably aren't, though, even though some people have.
-Walt
I think you are confusing the variance of returns over a statistically insignificant period of time (such as a year) with the variance of the overall returns over a period such as 30 years. If you follow a true value oriented market approach where you buy businesses (which are what stocks represent) when they are on sale and which have solid fundamentals (i.e., are a good business) then you are virtually guaranteed to far out-perform the broad market which consists of all businesses. This is just common sense not rocket science.
I know, I know. Your system is guaranteed to beat the market. The trick is to only invest in the good companies and not the bad ones. Common sense!
Good luck with your late night infomercial campaign.
Edit -- sorry, that's a little harsh but you have to admit that it sounds exactly like an infomercial pitch
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There are lots of easy, true, and yet stupid things like this that I can say. If you want to win at basketball, just throw the ball through the hoop more than the other team. It's common sense, not rocket science!
Look, this is just becoming a beat-the-market-with-skill/tricks/"common sense" vs. you-can't-beat-the-market discussion. It's not going to get resolved. Do what you like. All the evidence says indexing and not trying to market time is your best bet. If you really feel like you're clever and dedicated enough to beat the market, you're welcome to try. You probably aren't, though, even though some people have.
-Walt
I think you are confusing the variance of returns over a statistically insignificant period of time (such as a year) with the variance of the overall returns over a period such as 30 years. If you follow a true value oriented market approach where you buy businesses (which are what stocks represent) when they are on sale and which have solid fundamentals (i.e., are a good business) then you are virtually guaranteed to far out-perform the broad market which consists of all businesses. This is just common sense not rocket science.
I know, I know. Your system is guaranteed to beat the market. The trick is to only invest in the good companies and not the bad ones. Common sense!
Good luck with your late night infomercial campaign.
Edit -- sorry, that's a little harsh but you have to admit that it sounds exactly like an infomercial pitch
+1 said perfectly
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Look, if you can't be bothered to read an income statement or a balance sheet then you shouldn't try to buy good companies. Just keep index investing. What I don't get is why disparage those that are trying to do better? I think it's insecurity on the part of index investors. They want to believe they've found the "optimal" way to invest. Problem is there is no optimal way. You have to learn to evaluate income streams if you want to do better than average. That applies to stocks, bonds, or real estate.
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To each their own, and I know hindsight is 20/20 but here is a link to a thread with a prior 500 pages of posts from people that poured over balance sheets and income statements from GTAT and were convinced it was the best thing since sliced bread. The link is to the page where they found out it went bankrupt.
http://forum.thecontrarianinvestor.com/index.php?threads/gt-advanced-technologies-inc-gtat.69/page-501#post-25008 (http://forum.thecontrarianinvestor.com/index.php?threads/gt-advanced-technologies-inc-gtat.69/page-501#post-25008)
I am not saying that anyone here is naive enough to put all their chips in one basket as most of these people did, but there is more risk involved in the way you are choosing to invest. In the end, I wish you the best of luck and I hope I am wrong in your case and anyone else, but I myself am going to go the "safer" route where I believe in the long runs my returns will be better than the vast majority out there that attempt to beat the market.
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Look, this is just becoming a beat-the-market-with-skill/tricks/"common sense" vs. you-can't-beat-the-market discussion. It's not going to get resolved. Do what you like. All the evidence says indexing and not trying to market time is your best bet. If you really feel like you're clever and dedicated enough to beat the market, you're welcome to try. You probably aren't, though, even though some people have.
1. Value investing is not market timing. Market timing can mean buying overpriced assets in the hopes they will go higher. Value investing means buying cheap assets even if they have a shot of going lower in the short term. Price is what you pay. Value is what you get.
2. Earlier in this thread, there was a link to an article with over 50 studies showing that value approaches beat indexing. Not only is the evidence against indexing overwhelming, but good value investing techniques absolutely crush the returns from index investing over time.
http://www.grahamanddoddsville.net/wordpress/Files/Gurus/Christopher%20Browne/WhatHasWorkedInInvesting.pdf
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Fama, who is the king of the EMH and index investing, freely admits that value and momentum achieves higher returns than the market portfolio. I don't know why anyone tries to disagree with that.
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To each their own, and I know hindsight is 20/20 but here is a link to a thread with a prior 500 pages of posts from people that poured over balance sheets and income statements from GTAT and were convinced it was the best thing since sliced bread. The link is to the page where they found out it went bankrupt.
http://forum.thecontrarianinvestor.com/index.php?threads/gt-advanced-technologies-inc-gtat.69/page-501#post-25008 (http://forum.thecontrarianinvestor.com/index.php?threads/gt-advanced-technologies-inc-gtat.69/page-501#post-25008)
I am not saying that anyone here is naive enough to put all their chips in one basket as most of these people did, but there is more risk involved in the way you are choosing to invest. In the end, I wish you the best of luck and I hope I am wrong in your case and anyone else, but I myself am going to go the "safer" route where I believe in the long runs my returns will be better than the vast majority out there that attempt to beat the market.
I appreciate your attempt to bring some counter evidence instead of just hearsay; however, I don't see any value analysis presented in this thread (I did not read all 500 pages but I did read a few including the first) - I do see a lot of speculation on one particular stock. Also, no discussion of returns, risk, or anything else is evident here.
Also, GTAT - or GT Advanced Technologies - the stock that this thread describes a highly speculative and volatile technology stock that is currently halted and in bankruptcy. The stock was IPO'd in 2009 at $12 and traded down to under $1 within the first 4 months. To argue that this stock in any way was a value stock is to make a mockery of value investing. The company never made a profit or issued a dividend. This is the exact type of stock that you would never buy based on a proper balance sheet, income statement, and cash flow statement analysis.
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Of course you are welcome to make ad hominem attacks on my character to defend your position; however, I think anyone of reasonable intelligence will recognize that ploy for what it is.
Huh? No one attacked your character. Go for a walk and get some fresh air if this gets you too worked up.
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2. Earlier in this thread, there was a link to an article with over 50 studies showing that value approaches beat indexing. Not only is the evidence against indexing overwhelming, but good value investing techniques absolutely crush the returns from index investing over time.
http://www.grahamanddoddsville.net/wordpress/Files/Gurus/Christopher%20Browne/WhatHasWorkedInInvesting.pdf
Don't you see? You're providing evidence for what has worked *in the past*. This is not evidence for what will work *in the future*. This isn't a Petri dish full of bacteria, it's a competition. It is a mathematical fact that the majority of the money invested in the market, can't beat the average. If your evidence were so certain, the majority of the money would be there, and it would end up losing to the average (the market index).
The only way your assertion could be true, is if the market doesn't know about Value Investing, or they know about it and don't see it giving better returns.
The first chapter of Think Like a Freak has a great example of this. Consider you're kicking a penalty kick at the World Cup. You have a 75% chance of scoring a goal, but let's say you want to improve those odds. The statistics for World Cup penalty kicks say a right footed kicker shoots left (strong side) 60% of the time, shoots right 35% of the time, and shoots straight down the middle only 5% of the time. Since you kick 80mph, the goalie doesn't have time to wait and see where you've kicked, he needs to choose a side and blindly jump, and the goalie knows all the stats above.
So looking at the stats, where should you aim? Right down the middle of course! Now what happens when the secret of kicking down the middle is known, and more people start aiming there? The goalie adjusts, and starts blocking middle more, eliminating the advantage. The only way to maximize your return against the goalie, is to randomize your choice.
Your evidence on Value Investing is like a World Cup kicker writing a study on how kicking down the middle gives the best returns....then expecting the goalie not to adjust.
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Huh? No one attacked your character. Go for a walk and get some fresh air if this gets you too worked up.
I'm not at all mad - just pointing out that your statement delivered $0 in value.
Speaking of value let's discuss a stock that actually is a good candidate for value investing (the opposite of the GTAT example mentioned above).
Although many stocks are currently well over-valued there are a few diamonds in the rough still. One example I'd like to discuss is Verizon.
One of the classic checks to determine whether a stock is on sale or not is to estimate the intrinsic value of the business. There are numerous models for doing so but the one I want to discuss below was developed by Benjamin Graham and it looks at the historical and estimated cash flows or Earnings Per Share (EPS):
The original formula is as follows:
IV = (EPS x (8.5 +2g) x 4.4)/Y
IV = Intrinsic Value
EPS = Diluted Earnings Per Share
8.5 = Fair Price to Earnings Ratio for No Growth Company
(This implies a 11.76% earnings yield)
G = Conservatively estimated growth in EPS for the next 7 to 10 years
4.4 = The average yield for high grade corporate bonds in 1962 when the model was introduced
Y = The Current Yield on AAA Rated Corporate Bonds
The 12 month historical EPS for Verizon is $2.84 and based on historical data a projected growth of 6% per annum appears to be reasonable for the number one telecommunication company in the world based on analysis from Value Line. The current yield on AAA Rated Corporate Bonds is 4.11% according to Moody's.
Plugging these numbers in you get (2.84 X (8 + 2(6)) X 4.4)/4.11 which equals $62.32 as an intrinsic value. The current stock price for Verizon is $48.05.
This provides about a 30% discount to the stock's intrinsic value. $62.32/$48.05.
Obviously, this is one model of value and doesn't factor in two important components: Capital utilization and risk of obsolecence.
All telecommunications companies utilize a fairly high degree of Property, plant, and equipment to function and Verizon is no exceptions. A further analysis of existing and planned capitalal expenditures would be required to determine whether this is a major concern. Additionally, Verizon and it's major competitors are simultaneously facing pressure in the conversion of fixed phone lines to wireless. Currently, Verizon dominates the wireless industry in the U.S. (it's primary business geography) but other competitors are emerging particularly abroad.
What other key assumptions aren't reflected in this formula?
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I think you are confusing the variance of returns over a statistically insignificant period of time (such as a year) with the variance of the overall returns over a period such as 30 years. If you follow a true value oriented market approach where you buy businesses (which are what stocks represent) when they are on sale and which have solid fundamentals (i.e., are a good business) then you are virtually guaranteed to far out-perform the broad market which consists of all businesses. This is just common sense not rocket science.
There are no certainties in the market or in life. Your vast cooking skills that you've spent many precious hours to obtain may end up yielding naught if you get hit by a bus tomorrow or choke on your chicken soup and die. Would we base the value of those cooking skills on an outlier statistic? That doesn't seem wise.
I will preface this by saying that I don't think it's 'wrong/bad' to invest in individual stocks, a portion of my portfolio is also in individual stocks and I accept the associated risk in order for the opportunity to outperform. But I have a significant portion of my accounts in index funds/ETF's. I am aware of the many ways one can value a company as I do it as part of my profession, as part of managing my own investments, and learned how as a part of my formal education. I'm not claiming I'm an investing/valuation genius but in general I know the ropes and you are very right it's a valuable tool in the investing arsenal.
This is the part of the statement I disagree/take issue with:
'If you follow a true value oriented market approach where you buy businesses (which are what stocks represent) when they are on sale and which have solid fundamentals (i.e., are a good business) then you are virtually guaranteed to far out-perform the broad market which consists of all businesses. This is just common sense not rocket science.'
1- In a perfect world where you have all available information available to you (as an independent investor) this is somewhat 'true'. The part you are missing: you DON'T have access to all the information, no matter the amount of research you do. This is why when a company offers a merger/acquisition tender offer for a company, you are allowed a due diligence period where you are able to shine a flashlight into every nook and cranny, and not just a 'look at the publicly available data'. A vast amount of relevant and important info is NOT available to a retail investor, and as such you have no idea what skeletons are hiding in which closet. Broad market example: Enron. Viewed by many is a good solid business, the stock had performed admirably, people on Wall Street were high on it. Everybody was making money and patting themselves on the back about what great solid valuation business picking skills they had. Until the depth of corruption became apparent and the whole house of cards collapsed. No retail investor could uncover that scandal beforehand with any amount of 'diligent research'. Tons of Enron's own employees, some even fairly high up, had no idea. That can happen at ANY company in America...'Ah well I will just avoid companies with unknown scandals'...to that I say...OK.
2 - nobody has a crystal ball. Sometimes you can see the downfall of a company or industry coming (many astute people (not saying I am one, but they exist) saw the impending financial collapse in 07/08, some profited quite heavily)...but sometimes freak events happen and you can't see it. The most recent example to come to mind is the BP Macando spill. A well blows up one day and there are billions in damages....who could see that coming. In all other regards BP was functioning as well as any other oil company and had been doing fine. If you can tell me that a retail investor can discover lax safety protocols in a company that may have an incrementally higher chance of leading to such an event, I'll say it is technically 'possible', but lets be realistic. It's probably not, or at the very least, nobody puts in the effort to find out. That's one example. Freak events can happen in any industry to any company. Ask the drug companies who made the next life saving pill only to find it causes cancer 15 years later and drowned in litigation.
So I reject your assertion that by doing enough homework and knowing how companies are valued, you are 'virtually guaranteed' (your words) to outperform a broad basket of American companies. You MAY outperform...and you MAY not. Yes SOME people will outperform based on their skill and also because they were lucky enough not to have anything unforseeable blow up in their face. SOME people will have great skill and get the bad end of the draw and have the tar kicked out of them.
Thus why index funds are not purely the 'lazy/average' investor's avenue of choice as I feel has been implied by some in this thread, but rather an avenue for the investor who seeks the best combination of expected risk/return. When an Enron or Bear Stearns etc goes down, it's insulated by the diversification.
I hope you don't find this to be a personal attack. It is not meant to be, just for clarification. I just have issues with advocating 'virtually guaranteed'...nothing is virtually guaranteed, but picking individual stocks certainly is not.
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just pointing out that your statement delivered $0 in value.
I'm sure that my questioning your assertion that you have a guaranteed system to beat the market didn't deliver much value for you. Maybe someone else reading it will get some value from it though. I believe your statement from before of "anyone of reasonable intelligence will recognize that ploy for what it is" could apply here. There are few guarantees in life.
I'm thinking of a bumper sticker idea (or at least an internet ad):
There are 3 guarantees in life: Death, Taxes, and Beating the Market using my one weird trick
Good luck to you! I hope your system works out great and you retire years earlier than you otherwise would have. Just don't be surprised if others are skeptical until it actually happens.
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If you follow a true value oriented market approach where you buy businesses (which are what stocks represent) when they are on sale and which have solid fundamentals (i.e., are a good business) then you are virtually guaranteed to far out-perform the broad market which consists of all businesses. This is just common sense not rocket science.
Another more minor reason I feel this is untrue:
Essentially, the ceiling for a company is unlimited, while the floor for any company is always 0.
Take a basket of 100 companies that represent 'all businesses' in MustacheLand are all worth exactly the same market cap at the beginning of the year. 80 all averaged out to stay exactly the same for the period...no overall change...for every one that went up 5% there was one that went down by 5%. Zero net difference to the index for those 80 companies.
What happened with the other 20. 10 were doing amazing things, some doubled, some went up 3x, 4x...a couple went up 5x or 10x. This happens every year in the market. Some companies double or triple, some just absolutely explode. The final 10 companies all did horribly and went bankrupt...as bad as possible, you can't do worse than going to 0. A company can't lose 2x, 3x, 10x, 20x their market cap...they can only go from '1' to '0'. What happened at the end of the year. The index in general had to go up...even though most stocks cancelled each other out, 10 companies did very well and 10 did horrible...but all the upside for good companies is unlimited and outweighed the dead weight that became worthless. Perhaps the index went up 10% after accounting for all the exploding and bankrupt companies.
Then there is stockpicker X, perhaps he is good at valuing businesses and picked 10 that all went up. All 10! Great! He clearly picked 'better than average' businesses. But he didn't pick any of the 10 exploders (this is a reasonable scenario...many exploding companies are unexpected turnaround stories or carry some element of risk, and thus are unlikely to have been picked by a value investor). Does that mean he outperformed the index? NO. What if all the companies went up 8%. Good return. Maybe upper third of all companies in the example. Didn't beat the index.
So no I don't think the way you laid it out is common sense, and it's also one of the reasons in general the market trends up and not down. In an index you get ALL of the return of unlimited upside companies (it has a practical limit, but no theoretical limit). Do you also get the downside bankrupt/horrible companies, yes....but their downside in dollar terms is limited by their market cap.
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Huh? No one attacked your character. Go for a walk and get some fresh air if this gets you too worked up.
I'm not at all mad - just pointing out that your statement delivered $0 in value.
Speaking of value let's discuss a stock that actually is a good candidate for value investing (the opposite of the GTAT example mentioned above).
Although many stocks are currently well over-valued there are a few diamonds in the rough still. One example I'd like to discuss is Verizon.
One of the classic checks to determine whether a stock is on sale or not is to estimate the intrinsic value of the business. There are numerous models for doing so but the one I want to discuss below was developed by Benjamin Graham and it looks at the historical and estimated cash flows or Earnings Per Share (EPS):
The original formula is as follows:
IV = (EPS x (8.5 +2g) x 4.4)/Y
IV = Intrinsic Value
EPS = Diluted Earnings Per Share
8.5 = Fair Price to Earnings Ratio for No Growth Company
(This implies a 11.76% earnings yield)
G = Conservatively estimated growth in EPS for the next 7 to 10 years
4.4 = The average yield for high grade corporate bonds in 1962 when the model was introduced
Y = The Current Yield on AAA Rated Corporate Bonds
The 12 month historical EPS for Verizon is $2.84 and based on historical data a projected growth of 6% per annum appears to be reasonable for the number one telecommunication company in the world based on analysis from Value Line. The current yield on AAA Rated Corporate Bonds is 4.11% according to Moody's.
Plugging these numbers in you get (2.84 X (8 + 2(6)) X 4.4)/4.11 which equals $62.32 as an intrinsic value. The current stock price for Verizon is $48.05.
This provides about a 30% discount to the stock's intrinsic value. $62.32/$48.05.
Obviously, this is one model of value and doesn't factor in two important components: Capital utilization and risk of obsolecence.
All telecommunications companies utilize a fairly high degree of Property, plant, and equipment to function and Verizon is no exceptions. A further analysis of existing and planned capitalal expenditures would be required to determine whether this is a major concern. Additionally, Verizon and it's major competitors are simultaneously facing pressure in the conversion of fixed phone lines to wireless. Currently, Verizon dominates the wireless industry in the U.S. (it's primary business geography) but other competitors are emerging particularly abroad.
What other key assumptions aren't reflected in this formula?
Great formula, very simple and very accurate. The only slight problem is knowing what the various variable that go into the formula. As an example, you used 6% for growth. What if people who are much more knowledgeable in telecom understand that 6% is overly aggressive. Maybe the number should be 3% or negative 5%. Your bargain becomes grossly overpriced. The only way to beat the market is to have information that others do not. There are funds out there that hire the best and brightest to figure this stuff out. They spend huge dollars trying to determine those companies that are undervalued. They buy up the stock until the value is equal to their value. You are saying that you have the mental and financial resources to outperform the rest of the world. That is impressive! I believe that the market is fairly efficient and that if you are seeing bargains then you may be missing something huge. You are taking on more risk! You probably have a better shot at making those calls on lightly traded companies vs. Verizon. I would be very skeptical that you have greater insight than the 100's or thousands of analysts that have resources that you could only dream of.
YMMV
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Don't you see? You're providing evidence for what has worked *in the past*. This is not evidence for what will work *in the future*. This isn't a Petri dish full of bacteria, it's a competition. It is a mathematical fact that the majority of the money invested in the market, can't beat the average. If your evidence were so certain, the majority of the money would be there, and it would end up losing to the average (the market index).
Both sides of the argument are citing studies that use past data because it's the only data we have to work with. So your argument is equally valid as a criticism of index investing. Some studies have shown that it's the best way to invest. It's popular because of how simple it is. Now everybody has piled in with a religious fervor, helping to drive up valuations across the board. That means future returns will be smaller than past data indicates.
However, if the majority of money piles into a certain asset, then it ceases to be a good value. That means the value investor wouldn't be interested in buying or if they already owned it, they would look at selling. There's no way the majority of money could be somewhere without driving the price up, so by default, value investors would look elsewhere to deploy their money.
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Don't you see? You're providing evidence for what has worked *in the past*. This is not evidence for what will work *in the future*. This isn't a Petri dish full of bacteria, it's a competition. It is a mathematical fact that the majority of the money invested in the market, can't beat the average. If your evidence were so certain, the majority of the money would be there, and it would end up losing to the average (the market index).
Both sides of the argument are citing studies that use past data because it's the only data we have to work with. So your argument is equally valid as a criticism of index investing.
I didn't cite any studies. I cited math. I'm not referring to what happened in the past, I'm referring to mathematical law.
Let's consider the following statement:
"Indexing beat half of all invested dollars in the past, I do not expect mathematical laws to change, so I expect it to beat half of all invested dollars in the future."
How can we make a similar statement with Value Investing?
"Value Investing beat over half of all invested dollars in the past. While this information is public, I do not expect the losers to adopt my published strategy, or change to a better strategy, so I expect it to continue beating over half of all invested dollars in the future."
Which one of these statements are you willing to bet your life savings on?
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I didn't cite any studies. I cited math. I'm not referring to what happened in the past, I'm referring to mathematical law.
Let's consider the following statement:
"Indexing beat half of all invested dollars in the past, I do not expect mathematical laws to change, so I expect it to beat half of all invested dollars in the future."
How can we make a similar statement with Value Investing?
"Value Investing beat over half of all invested dollars in the past. While this information is public, I do not expect the losers to adopt my published strategy, or change to a better strategy, so I expect it to continue beating over half of all invested dollars in the future."
Which one of these statements are you willing to bet your life savings on?
Uh, the latter.
Your point that the market will adjust to any published information is equally applicable to index investing, which means your argument is self-defeating. Index investing is not a mathematical certainty to do well because the indexes themselves can become overvalued (as they are now) which means index investors will get punished disproportionately harder during market downturns than those that focused on unloved and undervalued assets. Additionally, index investors that overpay to own an index will be in for many years of under performance compared to those that paid fair or discounted prices for the same index. That is a mathematical certainty.
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I didn't cite any studies. I cited math. I'm not referring to what happened in the past, I'm referring to mathematical law.
Let's consider the following statement:
"Indexing beat half of all invested dollars in the past, I do not expect mathematical laws to change, so I expect it to beat half of all invested dollars in the future."
How can we make a similar statement with Value Investing?
"Value Investing beat over half of all invested dollars in the past. While this information is public, I do not expect the losers to adopt my published strategy, or change to a better strategy, so I expect it to continue beating over half of all invested dollars in the future."
Which one of these statements are you willing to bet your life savings on?
Uh, the latter.
Your point that the market will adjust to any published information is equally applicable to index investing, which means your argument is self-defeating. Index investing is not a mathematical certainty to do well because the indexes themselves can become overvalued (as they are now) which means index investors will get punished disproportionately harder during market downturns than those that focused on unloved and undervalued assets. Additionally, index investors that overpay to own an index will be in for many years of under performance compared to those that paid fair or discounted prices for the same index. That is a mathematical certainty.
The argument is not self-defeating. He is not saying it is a mathematical certainty it will do well, he is saying it is a mathematical certainty that it will have returns matching (minus minimal fees) the overall market. The overall market results will outperform most investors.
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I didn't cite any studies. I cited math. I'm not referring to what happened in the past, I'm referring to mathematical law.
Let's consider the following statement:
"Indexing beat half of all invested dollars in the past, I do not expect mathematical laws to change, so I expect it to beat half of all invested dollars in the future."
How can we make a similar statement with Value Investing?
"Value Investing beat over half of all invested dollars in the past. While this information is public, I do not expect the losers to adopt my published strategy, or change to a better strategy, so I expect it to continue beating over half of all invested dollars in the future."
Which one of these statements are you willing to bet your life savings on?
Uh, the latter.
Your point that the market will adjust to any published information is equally applicable to index investing, which means your argument is self-defeating.
It is mathematically impossible for the average to perform worse than half of all invested dollars. That's what average means. It does not matter how many times the definition of "average" and "index" is published, this will not change.
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The argument is not self-defeating. He is not saying it is a mathematical certainty it will do well, he is saying it is a mathematical certainty that it will have returns matching (minus minimal fees) the overall market. The overall market results will outperform most investors.
The overall market is comprised of all investors, buyers and sellers. That is by definition what a market is. To say that the average of the overall market (all investors) will outperform most investors is nonsensical. Half will perform better and half will perform worse.
By choosing to index invest, you are in essence accepting the fact that half of all investors will beat you, but at least that ensures you won't be in the half that loses to the index. The problem with this strategy is that sometimes the index itself is a loser. Sometimes stocks should be avoided altogether. Index investors will stay invested no matter how insane valuations become, but a value investor will look elsewhere. The index can be beat by avoiding it when valuations are high, which is what the original topic of this thread was pondering.
It is mathematically impossible for the average to perform worse than half of all invested dollars.
Maybe you want to restate that? By definition, the average will perform worse than half of all invested dollars and better than half of all invested dollars.
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The argument is not self-defeating. He is not saying it is a mathematical certainty it will do well, he is saying it is a mathematical certainty that it will have returns matching (minus minimal fees) the overall market. The overall market results will outperform most investors.
The overall market is comprised of all investors, buyers and sellers. That is by definition what a market is. To say that the average of the overall market (all investors) will outperform most investors is nonsensical. Half will perform better and half will perform worse.
Incorrect. "Dollars" does not equal "Investors". It is certainly possible for the majority of "Investors" to underperform the average, but it is not possible for the majority of all "Dollars" to underperform the average.
By choosing to index invest, you are in essence accepting the fact that half of all investors will beat you
Incorrect. "Dollars" does not equal "Investors", and even so, it is not a given that half of all investors or dollars will beat you, see the example below.
It is mathematically impossible for the average to perform worse than half of all invested dollars.
Maybe you want to restate that? By definition, the average will perform worse than half of all invested dollars and better than half of all invested dollars.
Incorrect. You forgot to take into account the dollars also in the index :-P
To make this easier to visualize, imagine 98% of all invested dollars are in the index with me, with 1% beating it and 1% losing to it. According to your definition I will have performed worse than half of all invested dollars, when in fact I would only have been worse than 1% of all invested dollars.
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"Indexing beat half of all invested dollars in the past, I do not expect mathematical laws to change, so I expect it to beat half of all invested dollars in the future."
Apparently the laws of math did change over just the past few days:
Maybe you want to restate that? By definition, the average will perform worse than half of all invested dollars and better than half of all invested dollars.
Incorrect. You forgot to take into account the dollars also in the index :-P
To make this easier to visualize, imagine 98% of all invested dollars are in the index with me, with 1% beating it and 1% losing to it. According to your definition I will have performed worse than half of all invested dollars, when in fact I would only have been worse than 1% of all invested dollars.
Oh well...
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It is mathematically impossible for the average to perform worse than half of all invested dollars.
Maybe you want to restate that? By definition, the average will perform worse than half of all invested dollars and better than half of all invested dollars.
Incorrect. You forgot to take into account the dollars also in the index :-P
To make this easier to visualize, imagine 98% of all invested dollars are in the index with me, with 1% beating it and 1% losing to it. According to your definition I will have performed worse than half of all invested dollars, when in fact I would only have been worse than 1% of all invested dollars.
Pretty sure you guys are confusing average and median, in any case.
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"Indexing beat half of all invested dollars in the past, I do not expect mathematical laws to change, so I expect it to beat half of all invested dollars in the future."
Apparently the laws of math did change over just the past few days:
Maybe you want to restate that? By definition, the average will perform worse than half of all invested dollars and better than half of all invested dollars.
Incorrect. You forgot to take into account the dollars also in the index :-P
To make this easier to visualize, imagine 98% of all invested dollars are in the index with me, with 1% beating it and 1% losing to it. According to your definition I will have performed worse than half of all invested dollars, when in fact I would only have been worse than 1% of all invested dollars.
Oh well...
Yes, the correct statement should have been:
"Indexing beat or matched half of all invested dollars in the past, I do not expect mathematical laws to change, so I expect it to beat or match half of all invested dollars in the future."
Thanks for catching that!
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It is mathematically impossible for the average to perform worse than half of all invested dollars.
Maybe you want to restate that? By definition, the average will perform worse than half of all invested dollars and better than half of all invested dollars.
Incorrect. You forgot to take into account the dollars also in the index :-P
To make this easier to visualize, imagine 98% of all invested dollars are in the index with me, with 1% beating it and 1% losing to it. According to your definition I will have performed worse than half of all invested dollars, when in fact I would only have been worse than 1% of all invested dollars.
Pretty sure you guys are confusing average and median, in any case.
The important takeaway from this, is that Value Investing can be worse than half of all invested dollars, if the losers adopt the published strategy, or change to a better strategy.
The index can never be worse than half of all invested dollars.