Author Topic: Why I am reducing mkt exposure+have been since 2015.  (Read 185273 times)

Keith123

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Re: Why I am reducing mkt exposure+have been since 2015.
« Reply #100 on: February 09, 2016, 06:34:51 AM »
Keith, I'm also impressed by your subject knowledge and willingness to engage a fairly hostile audience. With that said, I still disagree with you.

If you buy a business for $10 that earns $1 per year, you will have a 10% return.  So...if I want to have a 10% return on my money, I can't pay more than $10 for $1 of earnings.  Now, we have to agree on an assumption to move forward from here.  That assumption is:  The stock market value, over the long-term, will correlate to earnings performance.

This is a huge oversimplification - the future prospects of the business matter at least as much as the current / average earnings. A business that earned 10% last year (i.e. PE of 10), and loses money this year and every year thereafter will not give provide a 10% return. Similarly, a business with a PE of 20 which grows earnings at 50% per year will return significantly more than the5% implied by its PE ratio. As you're likely aware given your background, the value of a business depends heavily on its future earnings. The problem is that these future factors are incredibly difficult to predict and can remain irrational for decades - certain valuation measures have been above their long term average since 1990.

Basically, if the overall market grows earnings, the market price will go up.  If the overall market earnings shrink, so will the market price.  This movement establishes long-term trends, ratios, benchmarks, etc.  If you don't believe that, there isn't any point in discussion.

I agree that there is historical correlation between certain valuation metrics and market returns (Shiller). I think it is extremely risky to sell everything based on these valuation metrics, especially when they are only slightly outside of historical norms. You are then betting the farm on a correlation in past data. Imagine for a moment that there are long term social forces forces which very slowly reduce the average rate of return. The long term Shiller PE might tend to have a slight upward slope*. I don't claim that this is reality, but it is conceivable.  In this case, an investor might sell based on high valuations and miss out on years of returns waiting for valuations to return to their historical (flat) average which they never will. The problem here is that we have less than 100 years of historical data to base correlations on. There may be long term trends which you are not accounting for that render your entire thesis moot. I would rather have the guaranteed market return (which historically has been more than enough to quickly retire) than try to do a little better and risk significantly under performing.

Let me leave you with a personal story. I spent seven years value investing based on the Buffet/Graham model. I put in several hours a week analyzing markets and reading earnings reports. After expending a huge amount of effort on the project... I had exactly matched the market returns for the period while incurring a moderate tax bill.  In effect all those hours of analyzing were completely wasted. I wish you the best in your investing endeavors and hope sincerely that it is more worthwhile for you than it was for me.

*see some of William Bernstein's writings on the very long term return on equities. I don't know if he is correct, but he proposes that valuation metrics should increase very slowly with time.

I know it was a gross over simplification.  I was just trying to illustrate the implied return from a PE ratio.  I have the impression that a lot readers think it's a ratio that I'm using as a relative measure exclusively when I'm actually use it as an objective fundamental valuation measure.  It's do believe it does give some insight as a relative measure also though. 

In terms of earnings expectations:  "According to economist Robert Shiller, earnings per share on the S&P 500 grew at a 3.8% annualized rate between 1874 and 2004 (inflation-adjusted growth rate was 1.7%). Since 1980, the most bullish period in U.S. stock market history, real earnings growth according to Shiller, has been 2.6%." - earnings, over the very long-term, don't grow much when you average it out.  While the market's yearly earnings fluctuate a lot, individual companies even more, the very long term trend is small upward growth.  I expect that.

Regarding how I use these measures,  I never sell once I have invested.  I ride out the ups and downs with whatever I have in the market.  I only use the valuation metrics when I am buying.  I know the market can stay elevated for painfully long periods.  While 100 past years of market history isn't a huge sample, it does show long term patterns.  Plus, its all we have to work with.  I really don't spend as much time do research as everyone seems to think I do.  I only look at macro stuff (sectors and the overall market) and only periodically.  I don't invest in individual companies, options, etc. 

Just to make it clear.  If I was of the opinion that the total market could return 7% annually over the long term, I would go all in VTI with whatever I had.  I'm not trying to beat the market, I'm trying to secure future annual returns of 7% or better safely.  I don't think you can do that with VTI right now. 

BBub

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Re: Why I am reducing mkt exposure+have been since 2015.
« Reply #101 on: February 09, 2016, 08:44:15 AM »
Here's the problem with trying to time the market: a single screw-up will significantly hamper your returns for a very long time to come.  And if you try to time your buys/sells based on the macro climate, in the long run you are bound to get at least one call wrong.  Then you are toast vs. the index on a risk adjusted basis.  If you sat out 2013, for example, you are so far behind that you may never recover to index levels without either a.) taking on far greater risk than the index, or b.) waiting a very long time.  And there wasn't an obvious, glaring indicator leading up to that particular year.  In hindsight the massive recovery helped along by easy monetary policy is perfectly obvious.  But at the time, the macro view was muddied with euro-crisis fears, double dip predictions, record debt levels, income inequality activism, government shutdowns, etc.   

I do believe that educated people can make accurate assessments of market valuation & general economic conditions at a given point in time.  And I don't think it's hocus pocus to read up on the current economic environment, have a point of view, etc.  But there is great danger in trying to make capital allocation decisions based on your macro views.  Peter Lynch summed up this concept nicely in "beating the street".  He would attend a panel each year with the top investors on wall street & each manager would lay out his predictions.  Often times, these predictions were very gloomy - but the good managers, despite their outlook, would never stop buying.  So on the one hand, these managers often believed the economy was heading down into the abyss - but on the other, they would keep buying good companies at good prices.  He asserts in that book that one of the defining characteristics of successful investors is that they continue to invest despite their personal views about the general economic outlook.
« Last Edit: February 09, 2016, 08:49:24 AM by BBub »

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Re: Why I am reducing mkt exposure+have been since 2015.
« Reply #102 on: February 09, 2016, 09:31:52 AM »
I'm not smarter.  I don't have better information.  If fundamentals imply a good enough return, buy.  If they don't, you don't have to sell what you have, just don't add new money.   Personally, I want a 7% return or greater for the long term because that is the average inflation-adjusted, dividends included annual return for the stock market over it's history.  I don't think that is possible based on the fundamentals of the overall market right now.  If you want a 3% or 4% return over the long-term, then buying the market right now seems ok.  It depends on the return you want.

VDE has a 22 TTM PE right now in the middle of an energy crash.  As is, this implies a return of 4.6%.  However, I believe the last 12 months of earnings are not representative of what earnings will be in the future.  They are obviously depressed.  I expect them to be higher in the future which will push the pe back down into my comfortable range of 15 to 17 or lower which should safely give me a ~7% return or better, maybe much better, long term.

But if energy sector will return 8%, and VTI will return 4%, why doesn't everyone sell VTI and buy VDE until their PEs/returns are in line? Nobody would by something with 4% return if an option of 8% was available with the same risk.

So are you saying the market has accepted your number of 4% and 8% return and don't care, are are you in disagreement with the rest of the market about future returns?

Keith123

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Re: Why I am reducing mkt exposure+have been since 2015.
« Reply #103 on: February 09, 2016, 11:18:00 AM »
I'm not smarter.  I don't have better information.  If fundamentals imply a good enough return, buy.  If they don't, you don't have to sell what you have, just don't add new money.   Personally, I want a 7% return or greater for the long term because that is the average inflation-adjusted, dividends included annual return for the stock market over it's history.  I don't think that is possible based on the fundamentals of the overall market right now.  If you want a 3% or 4% return over the long-term, then buying the market right now seems ok.  It depends on the return you want.

VDE has a 22 TTM PE right now in the middle of an energy crash.  As is, this implies a return of 4.6%.  However, I believe the last 12 months of earnings are not representative of what earnings will be in the future.  They are obviously depressed.  I expect them to be higher in the future which will push the pe back down into my comfortable range of 15 to 17 or lower which should safely give me a ~7% return or better, maybe much better, long term.

But if energy sector will return 8%, and VTI will return 4%, why doesn't everyone sell VTI and buy VDE until their PEs/returns are in line? Nobody would by something with 4% return if an option of 8% was available with the same risk.

So are you saying the market has accepted your number of 4% and 8% return and don't care, are are you in disagreement with the rest of the market about future returns?

There is more risk by investing in 1 sector than in a whole market.  There is less diversification.  I assume this is where you are going with this.  It's not always reflected in the market though, which I believe is your assumption.   

I believe the energy sector has been in near-panic selling mode.  Panic selling is not based on fundamentals.  When it swings too far on the downside due to panic and fear selling, there is often undervalued opportunities.  The balance between risk and return get out of whack.  Not to be cliche, but its classic Buffett "Buy when others are fearful." While I do not have the ability to forecast the future perfectly, I am making an educated guess that oil has swung too far to the downside and the risk/reward balance seems to be appealing over the long term at current price levels.  More appealing than VTI right now.

Keith123

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Re: Why I am reducing mkt exposure+have been since 2015.
« Reply #104 on: February 09, 2016, 11:25:26 AM »
Here's the problem with trying to time the market: a single screw-up will significantly hamper your returns for a very long time to come.  And if you try to time your buys/sells based on the macro climate, in the long run you are bound to get at least one call wrong.  Then you are toast vs. the index on a risk adjusted basis.  If you sat out 2013, for example, you are so far behind that you may never recover to index levels without either a.) taking on far greater risk than the index, or b.) waiting a very long time.  And there wasn't an obvious, glaring indicator leading up to that particular year.  In hindsight the massive recovery helped along by easy monetary policy is perfectly obvious.  But at the time, the macro view was muddied with euro-crisis fears, double dip predictions, record debt levels, income inequality activism, government shutdowns, etc.   

I do believe that educated people can make accurate assessments of market valuation & general economic conditions at a given point in time.  And I don't think it's hocus pocus to read up on the current economic environment, have a point of view, etc.  But there is great danger in trying to make capital allocation decisions based on your macro views.  Peter Lynch summed up this concept nicely in "beating the street".  He would attend a panel each year with the top investors on wall street & each manager would lay out his predictions.  Often times, these predictions were very gloomy - but the good managers, despite their outlook, would never stop buying.  So on the one hand, these managers often believed the economy was heading down into the abyss - but on the other, they would keep buying good companies at good prices.  He asserts in that book that one of the defining characteristics of successful investors is that they continue to invest despite their personal views about the general economic outlook.

I never sell.  Once I'm in, I'm in for the long-term.  I only worry about buying during appealing valuation periods.  I pretty much agree with Peter Lynch.  I look for undervalued sectors within an overvalued market, and buy those ETFs.  It's not like the whole market has to be undervalued for me to buy, but it would be nice.  However, if there is not even a sector that looks appealing from a valuation standpoint, I wouldn't buy anything.  I'd just accumulate cash and wait for an opportunity. 

frugledoc

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Re: Why I am reducing mkt exposure+have been since 2015.
« Reply #105 on: February 09, 2016, 11:39:48 AM »
Here's the problem with trying to time the market: a single screw-up will significantly hamper your returns for a very long time to come.  And if you try to time your buys/sells based on the macro climate, in the long run you are bound to get at least one call wrong.  Then you are toast vs. the index on a risk adjusted basis.  If you sat out 2013, for example, you are so far behind that you may never recover to index levels without either a.) taking on far greater risk than the index, or b.) waiting a very long time.  And there wasn't an obvious, glaring indicator leading up to that particular year.  In hindsight the massive recovery helped along by easy monetary policy is perfectly obvious.  But at the time, the macro view was muddied with euro-crisis fears, double dip predictions, record debt levels, income inequality activism, government shutdowns, etc.   

I do believe that educated people can make accurate assessments of market valuation & general economic conditions at a given point in time.  And I don't think it's hocus pocus to read up on the current economic environment, have a point of view, etc.  But there is great danger in trying to make capital allocation decisions based on your macro views.  Peter Lynch summed up this concept nicely in "beating the street".  He would attend a panel each year with the top investors on wall street & each manager would lay out his predictions.  Often times, these predictions were very gloomy - but the good managers, despite their outlook, would never stop buying.  So on the one hand, these managers often believed the economy was heading down into the abyss - but on the other, they would keep buying good companies at good prices.  He asserts in that book that one of the defining characteristics of successful investors is that they continue to invest despite their personal views about the general economic outlook.

I never sell.  Once I'm in, I'm in for the long-term.  I only worry about buying during appealing valuation periods.  I pretty much agree with Peter Lynch.  I look for undervalued sectors within an overvalued market, and buy those ETFs.  It's not like the whole market has to be undervalued for me to buy, but it would be nice.  However, if there is not even a sector that looks appealing from a valuation standpoint, I wouldn't buy anything.  I'd just accumulate cash and wait for an opportunity.

If only I'd known it was so easy to beat the market I'd be miles ahead by now!

Keith123

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Re: Why I am reducing mkt exposure+have been since 2015.
« Reply #106 on: February 09, 2016, 12:36:55 PM »
Here's the problem with trying to time the market: a single screw-up will significantly hamper your returns for a very long time to come.  And if you try to time your buys/sells based on the macro climate, in the long run you are bound to get at least one call wrong.  Then you are toast vs. the index on a risk adjusted basis.  If you sat out 2013, for example, you are so far behind that you may never recover to index levels without either a.) taking on far greater risk than the index, or b.) waiting a very long time.  And there wasn't an obvious, glaring indicator leading up to that particular year.  In hindsight the massive recovery helped along by easy monetary policy is perfectly obvious.  But at the time, the macro view was muddied with euro-crisis fears, double dip predictions, record debt levels, income inequality activism, government shutdowns, etc.   

I do believe that educated people can make accurate assessments of market valuation & general economic conditions at a given point in time.  And I don't think it's hocus pocus to read up on the current economic environment, have a point of view, etc.  But there is great danger in trying to make capital allocation decisions based on your macro views.  Peter Lynch summed up this concept nicely in "beating the street".  He would attend a panel each year with the top investors on wall street & each manager would lay out his predictions.  Often times, these predictions were very gloomy - but the good managers, despite their outlook, would never stop buying.  So on the one hand, these managers often believed the economy was heading down into the abyss - but on the other, they would keep buying good companies at good prices.  He asserts in that book that one of the defining characteristics of successful investors is that they continue to invest despite their personal views about the general economic outlook.

I never sell.  Once I'm in, I'm in for the long-term.  I only worry about buying during appealing valuation periods.  I pretty much agree with Peter Lynch.  I look for undervalued sectors within an overvalued market, and buy those ETFs.  It's not like the whole market has to be undervalued for me to buy, but it would be nice.  However, if there is not even a sector that looks appealing from a valuation standpoint, I wouldn't buy anything.  I'd just accumulate cash and wait for an opportunity.

If only I'd known it was so easy to beat the market I'd be miles ahead by now!

"According to economist Robert Shiller, earnings per share on the S&P 500 grew at a 3.8% annualized rate between 1874 and 2004 (inflation-adjusted growth rate was 1.7%). Since 1980, the most bullish period in U.S. stock market history, real earnings growth according to Shiller, has been 2.6%."

If you take dividends out, the real annual S&P 500 return (inflation-adjusted) from 1871 to 2016 is 2.17%.  Use this - http://dqydj.net/sp-500-return-calculator/.  Pretty close to Shiller's 1.7% real earnings growth number over a similar period.  This is why I believe we all should be focused on earnings when doing valuation.  It's seems to me that the real return of the S&P over the long-term (without dividends reinvested) is pretty correlated to the long-term real earnings growth rate of the S&P.  If you are a buy and hold forever investor, which I assume is most everyone on this site, you can't ignore this. 

It's all about earnings.  Forget what the price might be in the future because of XYZ whatever.  The market price, over the long-term, closely reflects earnings.  Just pay a reasonable price multiple (CAPE around 15 for an 6.67% annual return with ~2% annual growth over the long-term) for those future earnings and you should do well based on 130 years of market history.  Why is this so hard to digest?
« Last Edit: February 09, 2016, 12:43:00 PM by Keith123 »

NoStacheOhio

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Re: Why I am reducing mkt exposure+have been since 2015.
« Reply #107 on: February 09, 2016, 12:43:46 PM »
Why is this so hard to digest?

I think you're conflating "hard to digest" with "disagree."

Keith123

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Re: Why I am reducing mkt exposure+have been since 2015.
« Reply #108 on: February 09, 2016, 12:58:37 PM »
Why is this so hard to digest?

I think you're conflating "hard to digest" with "disagree."

Ok.  I'll stick to math and history for investing though.  I'll have to assume the other side of the argument is that there is no long-term predictability in the stock market whatsoever.

BBub

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Re: Why I am reducing mkt exposure+have been since 2015.
« Reply #109 on: February 09, 2016, 01:07:39 PM »
Here's the problem with trying to time the market: a single screw-up will significantly hamper your returns for a very long time to come.  And if you try to time your buys/sells based on the macro climate, in the long run you are bound to get at least one call wrong.  Then you are toast vs. the index on a risk adjusted basis.  If you sat out 2013, for example, you are so far behind that you may never recover to index levels without either a.) taking on far greater risk than the index, or b.) waiting a very long time.  And there wasn't an obvious, glaring indicator leading up to that particular year.  In hindsight the massive recovery helped along by easy monetary policy is perfectly obvious.  But at the time, the macro view was muddied with euro-crisis fears, double dip predictions, record debt levels, income inequality activism, government shutdowns, etc.   

I do believe that educated people can make accurate assessments of market valuation & general economic conditions at a given point in time.  And I don't think it's hocus pocus to read up on the current economic environment, have a point of view, etc.  But there is great danger in trying to make capital allocation decisions based on your macro views.  Peter Lynch summed up this concept nicely in "beating the street".  He would attend a panel each year with the top investors on wall street & each manager would lay out his predictions.  Often times, these predictions were very gloomy - but the good managers, despite their outlook, would never stop buying.  So on the one hand, these managers often believed the economy was heading down into the abyss - but on the other, they would keep buying good companies at good prices.  He asserts in that book that one of the defining characteristics of successful investors is that they continue to invest despite their personal views about the general economic outlook.

I never sell.  Once I'm in, I'm in for the long-term.  I only worry about buying during appealing valuation periods.  I pretty much agree with Peter Lynch.  I look for undervalued sectors within an overvalued market, and buy those ETFs.  It's not like the whole market has to be undervalued for me to buy, but it would be nice.  However, if there is not even a sector that looks appealing from a valuation standpoint, I wouldn't buy anything.  I'd just accumulate cash and wait for an opportunity.

If only I'd known it was so easy to beat the market I'd be miles ahead by now!

"According to economist Robert Shiller, earnings per share on the S&P 500 grew at a 3.8% annualized rate between 1874 and 2004 (inflation-adjusted growth rate was 1.7%). Since 1980, the most bullish period in U.S. stock market history, real earnings growth according to Shiller, has been 2.6%."

If you take dividends out, the real annual S&P 500 return (inflation-adjusted) from 1871 to 2016 is 2.17%.  Use this - http://dqydj.net/sp-500-return-calculator/.  Pretty close to Shiller's 1.7% real earnings growth number over a similar period.  This is why I believe we all should be focused on earnings when doing valuation.  It's seems to me that the real return of the S&P over the long-term (without dividends reinvested) is pretty correlated to the long-term real earnings growth rate of the S&P.  If you are a buy and hold forever investor, which I assume is most everyone on this site, you can't ignore this. 

It's all about earnings.  Forget what the price might be in the future because of XYZ whatever.  The market price, over the long-term, closely reflects earnings.  Just pay a reasonable price multiple (CAPE around 15 for an 6.67% annual return with ~2% annual growth over the long-term) for those future earnings and you should do well based on 130 years of market history.  Why is this so hard to digest?

In theory, the strategy is simple and should work.  Applying it over years with a consistent discipline and assuming flawless execution is a different story.  Furthermore, the market can undergo years, even decades of overvaluation.  Then it can languish on for years at a high P/E, trading sideways until earnings catch up - then off to the races again.  When do you buy, exactly, in a scenario like that?  And, if the market P/E never drops below your threshold what do you do in the meantime?  Just hold cash & miss out on decades of dividends and modest growth?  Try to cherrypick sectors, etc leading to an imbalance?  What is the threshold for exposure to one sector?  How do you avoid value traps - based on P/E alone, oil stocks were very cheap this time last year.  At some point, after years upon years of the strategy under-performing, would you just cave in & throw the money in an index? 

A seemingly simple strategy can introduce a great deal of complexity into portfolio management.  Systematic DCA has proven, in study after study, to provide an overwhelmingly high probability of out-performance versus the average investor.  Simply matching the index puts you in the top quintile or even decile of all investors - amateur and professional.  Introducing additional elements, even just a single one as simple as a valuation discipline, has the potential to lead to errors which could derail long term performance.  It's certainly possible to outperform, and several investors have managed to do so.  But it's highly unlikely that you will, and I think that's the reason you'll get pushback.  Your strategy may outperform, but the odds are not in your favor.  Try to buck the odds - you certainly won't be the first or last.  But do so with eyes wide open to all of the potential pitfalls.

Rollin

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Re: Why I am reducing mkt exposure+have been since 2015.
« Reply #110 on: February 09, 2016, 01:17:47 PM »
Is there a way to bookmark this post and revisit it in 1, 2, and 5 years? It'll be interesting to see whose predictions bear out.

I haven't the foggiest what will happen; I have realized that like the weather, the stock market is a chaotic system and therefore literally unpredictable, at least in the short term.

We just recently left our financial planner and moved all our money into Vanguard index funds. No dollar-cost averaging here, just one big plunge. And we're just going to let it ride. If it drops, it drops. It will eventually recover, and then, over time, increase. If our seasoned, experienced financial planner couldn't beat the market (and she couldn't, even over 10 years of trying), I surely can't either, and I won't try.

Good luck to all.

I think you should reconsider.  Please average in over the next 2 years minimum.  Even the god of Vanguard, John Bogle, thinks the market is going to give poor returns for a while - http://www.marketwatch.com/story/john-bogle-says-you-wont-make-much-money-from-stocks-2015-11-05

Maybe not the 7% that most would like to see, but 4% doesn't sound so bad (and 3.5% for a balanced portfolio).  Where can we do better with our money?

Also, to an earlier post about a 10 year window of investing (slow to low yields) I am reminded often that even though I may look to pull from my invested $$ in 2017 (plus no more contributions or DCA) I don't plan on taking it somewhere other than investing in a balanced portfolio (stocks and bonds).  Maybe too simple?

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Re: Why I am reducing mkt exposure+have been since 2015.
« Reply #111 on: February 09, 2016, 03:57:55 PM »
I'll have to assume the other side of the argument is that there is no long-term predictability in the stock market whatsoever.

You don't have to assume anything. The other side of the argument has been presented in detail by many different posters in multiple threads.


Keith123

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Re: Why I am reducing mkt exposure+have been since 2015.
« Reply #112 on: February 10, 2016, 06:57:02 PM »
If anyone is interested, please read this:  http://archive.fortune.com/magazines/fortune/fortune_archive/1999/11/22/269071/index.htm

It is a talk by Warren Buffett in November 1999, right before the crash.  The guy just has a ridiculous talent of explaining things so well and simply.  It is without a doubt the most valuable piece of financial literature I have ever read. 

AdrianC

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Re: Why I am reducing mkt exposure+have been since 2015.
« Reply #113 on: February 11, 2016, 05:51:43 AM »
If anyone is interested, please read this:  http://archive.fortune.com/magazines/fortune/fortune_archive/1999/11/22/269071/index.htm

It is a talk by Warren Buffett in November 1999, right before the crash.  The guy just has a ridiculous talent of explaining things so well and simply.  It is without a doubt the most valuable piece of financial literature I have ever read.

Let me summarize what I've been saying about the stock market: I think it's very hard to come up with a persuasive case that equities will over the next 17 years perform anything like--anything like--they've performed in the past 17. If I had to pick the most probable return, from appreciation and dividends combined, that investors in aggregate--repeat, aggregate--would earn in a world of constant interest rates, 2% inflation, and those ever hurtful frictional costs, it would be 6%. If you strip out the inflation component from this nominal return (which you would need to do however inflation fluctuates), that's 4% in real terms. And if 4% is wrong, I believe that the percentage is just as likely to be less as more. - Buffett November 22, 1999

S&P500 annualized returns from then till Jan 31, 2016, dividends reinvested, adjusted for inflation: 1.694%.


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Re: Why I am reducing mkt exposure+have been since 2015.
« Reply #114 on: February 11, 2016, 05:53:27 AM »
And yet I'm putting as much money as I can get my hands on to work weekly...

Keith123

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Re: Why I am reducing mkt exposure+have been since 2015.
« Reply #115 on: February 11, 2016, 06:30:27 AM »
If anyone is interested, please read this:  http://archive.fortune.com/magazines/fortune/fortune_archive/1999/11/22/269071/index.htm

It is a talk by Warren Buffett in November 1999, right before the crash.  The guy just has a ridiculous talent of explaining things so well and simply.  It is without a doubt the most valuable piece of financial literature I have ever read.

Let me summarize what I've been saying about the stock market: I think it's very hard to come up with a persuasive case that equities will over the next 17 years perform anything like--anything like--they've performed in the past 17. If I had to pick the most probable return, from appreciation and dividends combined, that investors in aggregate--repeat, aggregate--would earn in a world of constant interest rates, 2% inflation, and those ever hurtful frictional costs, it would be 6%. If you strip out the inflation component from this nominal return (which you would need to do however inflation fluctuates), that's 4% in real terms. And if 4% is wrong, I believe that the percentage is just as likely to be less as more. - Buffett November 22, 1999

S&P500 annualized returns from then till Jan 31, 2016, dividends reinvested, adjusted for inflation: 1.694%.

Exactly.  All I'm suggesting is that there are periods of valuation when you shouldn't be investing, at least not in the total market index.  You shouldn't invest all the time just because.  There are times, like now in my opinion, when it is pretty likely that returns are going to be very low over the long-term.  Right now it is simply too much to ignore.  The market is already expensive by most measures.  Interest rates can't go much lower to support equities (if the fed is being honest, rates will go up slowly over time, pushing down equity prices), corporate profit margins are very elevated vs its historical norm (reversion downward will hurt equity prices).  We might not be at 1999 levels, but this is just not an attractive time to be investing in the total market. 
« Last Edit: February 11, 2016, 06:38:17 AM by Keith123 »

trialbyFIRE

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Re: Why I am reducing mkt exposure+have been since 2015.
« Reply #116 on: February 11, 2016, 06:43:28 AM »
Long time lurker, great information on this forum in general but I found this discussion particularly interesting and wanted to chime in.

I am in agreement with Keith's perspective and i think views like that which go against the grain on this particular forum generate some very interesting conversation, which is important because it seems like the view of the majority here are of the 'continuously plow funds into straight index investing, regardless of what the market is doing'. How is that any different from being the completely opposite doom and gloom views?

All Keith is questioning is the wisdom of continuing to plow money into the overall market when it seems to be overvalued. Sure one can call it timing the market but I would personally consider it prudent, comparing the risk of missing some upside versus putting more funds at risk.

I came across this article recently and thought it was very interesting compared to the views generally represented here. Most important being a particular investor's time to retirement and WHEN one chooses to get into the market: http://www.zerohedge.com/news/2016-01-25/why-you-should-question-buy-and-hold-advice

2lazy2retire

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Re: Why I am reducing mkt exposure+have been since 2015.
« Reply #117 on: February 11, 2016, 07:16:17 AM »
My 2 cents worth - If you are already invested in the market stay in - kinda goes without saying, but if your sitting on a large amount of bonds or cash I would be inclined to sit back and watch what happens

Retire-Canada

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Re: Why I am reducing mkt exposure+have been since 2015.
« Reply #118 on: February 11, 2016, 07:31:46 AM »
All Keith is questioning is the wisdom of continuing to plow money into the overall market when it seems to be overvalued. Sure one can call it timing the market but I would personally consider it prudent, comparing the risk of missing some upside versus putting more funds at risk.

What Keith is proposing has a number of risks:

1. valuation methods are wrong and market does not correct 50% in any reasonable time frame
2. poorly diversified sector ETFs are not heavily undervalued and do not increase in value as expected
3. cash position devalues waiting for an asset class to meet valuation criteria
4. missing optimal market timing window when market corrects to appropriate levels and starts to recover
5. costs associated with moving $$ between sector ETFs and market as you determine what is correctly valued

If the strategy Keith is proposing was reasonably easy to implement and reliably outperformed regular contributions to broad based index funds I think you'd get a lot of takers, but folks are not seeing that based on what has been presented.

He is suggesting trading one set of risks for another set of risks. Most folks here are comfortable with the risks involved in regular contributions to index funds. Nobody is saying the typical MMM approach is risk free.

I really appreciate your feedback.  I'm really not sure where I stand on this anymore.  Maybe I'll try systematic indexing with 50% of my investment funds and try fundamental valuation strategy with the other 50%.  Someone suggested that a while back. 

Even Keith has noted several times he doesn't feel comfortable with the strategy he is promoting. Are you shocked other folks aren't rushing to get onboard with their life savings?

To my mind one of the most important aspects of an investment plan is having enough confidence in it to ride out the inevitable poor performance runs without doing something irrational. You need to be pretty committed to the plan for that to happen.
« Last Edit: February 11, 2016, 08:31:53 AM by Retire-Canada »

BBub

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Re: Why I am reducing mkt exposure+have been since 2015.
« Reply #119 on: February 11, 2016, 07:38:08 AM »
Long time lurker, great information on this forum in general but I found this discussion particularly interesting and wanted to chime in.

I am in agreement with Keith's perspective and i think views like that which go against the grain on this particular forum generate some very interesting conversation, which is important because it seems like the view of the majority here are of the 'continuously plow funds into straight index investing, regardless of what the market is doing'. How is that any different from being the completely opposite doom and gloom views?

All Keith is questioning is the wisdom of continuing to plow money into the overall market when it seems to be overvalued. Sure one can call it timing the market but I would personally consider it prudent, comparing the risk of missing some upside versus putting more funds at risk.

I came across this article recently and thought it was very interesting compared to the views generally represented here. Most important being a particular investor's time to retirement and WHEN one chooses to get into the market: http://www.zerohedge.com/news/2016-01-25/why-you-should-question-buy-and-hold-advice


Congrats on the De-lurk!  Welcome to the convo - hope you'll continue to participate.

I think reasonable people will agree that one can identify when the market is overvalued relative to historical averages.  It's extremely simple actually - one google search for historical cape ratio, and voila!  But very few people are able to accurately time buys and/or sells accordingly.  Over the very long run, the market will revert back to the mean.  But the market, in the short run, is often irrational and will run up for year after year despite high valuations. 

Systematic dollar cost averaging has historically been an excellent strategy.  I believe many people here recognized that fact at some point, developed a plan, and implemented it accordingly.  That conclusion was not reached out of blind ignorance, as you suggest, but rather it was a willful decision and acknowledgement of one's own limitations.  It's almost like a humble admission, "I can't time the market, I can't reliably time my buys based on valuation, I'm not smart enough, or disciplined enough, or lucky enough to pull that off successfully over a lifetime of 50+ years without running the risk of a major screwup.  The evidence suggests that a systematic DCA program will generate great results over time, so that's what I'm going to do.  It's a decision that will undoubtedly fall in and out of favor over the years, but I'm committed based on the evidence I've seen."

Make sense?

2lazy2retire

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Re: Why I am reducing mkt exposure+have been since 2015.
« Reply #120 on: February 11, 2016, 07:44:24 AM »
So you can't use public information, so everything is speculation then right-- because the market already knows and it does what it wants.

Well I can't make the market do what I want, but I did suspect-- and have been saying for a long time (long trollers be my witness) that Ford would do well on earnings, that is would increase sales, but the market didn't budge.. it didn't move.. it didn't care.. it said China dude. Numbers came back from China good. Market still doesn't care. I think the whole damn market is speculating in index funds. Forget Fords numbers because auto with be down because of X, X, and X. Market says Ford go down (Ford beats earnings) Market says Ford go down (Ford has recording smashing month) market says Ford go down (Ford pays special dividend on top of a 4.5% dividend because they are responsible enough not to expanding beyond their means) Market says screw you Ford Im buying Vanguard.

Seriously dude. That is how I see it.


I think what you are talking about was raised in a interview with Bogle some time back - to my uneducated ear his response was that index funds in themselves do not add efficiency to the market - but went on to point out that currently only around 30% of the US market is in index funds - leaving the other 70% ( active funds) to add the efficiency an ensure stock prices reflect underlying company value, surprisingly the the number for the global market was only 5% indexed.


On the other side of the fence this article argues that Index funds distort the value of stocks -

"The combination of a long-toothed bull market and the significant shift to passive investing has indiscriminately buoyed all stocks in major indexes like the S.&P. 500 and the Russell 2000. Stocks that might not be bought singly on their own merits have been lifted by the package buying. Some portfolio managers, academics and market trackers now contend that the soaring of the mediocre alongside the exceptional has produced unusually elevated valuations."

“The evidence says that stock prices increasingly depend not just on fundamentals but also on the happenstance of index membership,”

http://www.nytimes.com/2015/10/11/business/mutfund/the-ease-of-index-funds-comes-with-risk.html?_r=0


Of course both sources have their own agenda - its something I always have an issue with - ie if people blindly buy/sell index funds the underlying stock price becomes distorted, or is Bogle correct ? anyone care to ally my concerns?
« Last Edit: February 11, 2016, 08:04:51 AM by 2lazy2retire »

dixonge

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Re: Why I am reducing mkt exposure+have been since 2015.
« Reply #121 on: February 11, 2016, 08:35:23 AM »
Furthermore, the market can undergo years, even decades of overvaluation.  Then it can languish on for years at a high P/E, trading sideways until earnings catch up - then off to the races again.

THIS. These two factors, earnings and price, are often discussed, but there seems to be an ever-present assumption that for things to 'correct' it requires that prices fall in order to come back down to where earnings are. But it is equally possible for earnings to rise until they are in line with price. Both are possible. Both are independent. Yes, there is a long-term general correlation, a mean to return to, but when and how is nigh impossible to predict.

The not-so-actively managed total index fund is the one island of sanity that has allowed me to even consider returning to equities. Unfortunately, we can't seem to learn 'fire....hot!' until we actually get burned.

trialbyFIRE

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Re: Why I am reducing mkt exposure+have been since 2015.
« Reply #122 on: February 11, 2016, 08:39:46 AM »

Congrats on the De-lurk!  Welcome to the convo - hope you'll continue to participate.

I think reasonable people will agree that one can identify when the market is overvalued relative to historical averages.  It's extremely simple actually - one google search for historical cape ratio, and voila!  But very few people are able to accurately time buys and/or sells accordingly.  Over the very long run, the market will revert back to the mean.  But the market, in the short run, is often irrational and will run up for year after year despite high valuations. 

Systematic dollar cost averaging has historically been an excellent strategy.  I believe many people here recognized that fact at some point, developed a plan, and implemented it accordingly.  That conclusion was not reached out of blind ignorance, as you suggest, but rather it was a willful decision and acknowledgement of one's own limitations.  It's almost like a humble admission, "I can't time the market, I can't reliably time my buys based on valuation, I'm not smart enough, or disciplined enough, or lucky enough to pull that off successfully over a lifetime of 50+ years without running the risk of a major screwup.  The evidence suggests that a systematic DCA program will generate great results over time, so that's what I'm going to do.  It's a decision that will undoubtedly fall in and out of favor over the years, but I'm committed based on the evidence I've seen."

Make sense?

Absolutely... I really appreciate everyone's input. Personally, I had been leaning towards doom and gloom for some time prior to finding this forum and looking to take the step towards creating a proper AA and investing in the markets. However, I still cannot be convinced that TODAY is a good time to do it based on increased uncertainties in the market (oxymoron, i know... nothing certain other than death or taxes). If you look at it at the most fundamental level, investments (say VTSAX) is based on owning a % of the underlying cash flows and regardless of the actions taken by the powers that be (race to the bottom with negative rates!!!) there are significant deflationary pressures which does not bode well for corporate earnings.
« Last Edit: February 11, 2016, 08:42:24 AM by trialbyFIRE »

Keith123

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Re: Why I am reducing mkt exposure+have been since 2015.
« Reply #123 on: February 11, 2016, 08:43:33 AM »
All Keith is questioning is the wisdom of continuing to plow money into the overall market when it seems to be overvalued. Sure one can call it timing the market but I would personally consider it prudent, comparing the risk of missing some upside versus putting more funds at risk.

What Keith is proposing has a number of risks:

1. valuation methods are wrong and market does not correct 50% in any reasonable time frame
2. poorly diversified sector ETFs are not heavily undervalued and do not increase in value as expected
3. cash position devalues waiting for an asset class to meet valuation criteria
4. missing optimal market timing window when market corrects to appropriate levels and starts to recover
5. costs associated with moving $$ between sector ETFs and market as you determine what is correctly valued

If the strategy Keith is proposing was reasonably easy to implement and reliably outperformed regular contributions to broad based index funds I think you'd get a lot of takers, but folks are not seeing that based on what has been presented.

He is suggesting trading one set of risks for another set of risks. Most folks here are comfortable with the risks involved in regular contributions to index funds. Nobody is saying the typical MMM approach is risk free.

I really appreciate your feedback.  I'm really not sure where I stand on this anymore.  Maybe I'll try systematic indexing with 50% of my investment funds and try fundamental valuation strategy with the other 50%.  Someone suggested that a while back. 

Even Keith has noted several times he doesn't feel comfortable with the strategy he is promoting. Are you shocked other folks aren't rushing to get onboard with their life savings?

To my mind one of the most important aspects of an investment plan is having enough confidence in it to ride out the inevitable poor performance runs without doing something irrational. You need to be pretty committed to the plan for that to happen.

I am simply open to accepting that I may be wrong.  That is the difference between you (Retire-Canada) and me.  You believe in DCA indexing like religion.  I am open to accepting change if there is convincing data and evidence.  I will admit that DCA index investing has a convincing argument.  However, in case you didn't notice, some of the best investors in history are buy and hold, fundamental valuation investors.  Wouldn't you study Michael Jordan if you wanted play basketball well? 
« Last Edit: February 11, 2016, 08:51:16 AM by Keith123 »

NoStacheOhio

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Re: Why I am reducing mkt exposure+have been since 2015.
« Reply #124 on: February 11, 2016, 08:56:22 AM »
"You believe in DCA like a religion" is a ridiculous thing to say. By definition, DCA (really systematic lump-sum indexing) by definition, requires regular buys, otherwise you're not doing it. You do you, but quit yelling about how others choose to invest as if it's somehow a personal attack on you.

EscapeVelocity2020

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Re: Why I am reducing mkt exposure+have been since 2015.
« Reply #125 on: February 11, 2016, 08:56:40 AM »
I was a Boglehead before MMM, and never found the investing advice here to be up to their level (not trying to offend, I just don't think one forum is going to be good at everything, and the Boglehead Forum already has experienced and impartial investing experts).  One gem from Bogleheads is the concept of 'willingness, need, and ability' to take risk.  You have to spend a long time with those 3 words to understand what they are getting at.  It is not market timing, but more in line with correlating your own returns with what your personal efficient frontier is per your horizon.  I'm not claiming out-performance because my only benchmark is myself, but I've been diversifying my portfolio since 2011 into muni funds, foreign currencies, TIPS, emerging markets...  basically things that are uncorrelated to or inversely correlated with the US economy.  By any measure, I'm way more exposed to the US than I would like - my job, my house, my cash, and a majority of my retirement.  That's not to say it hasn't been to my benefit so far.  But once I hit my number and now value keeping my relative net worth (no willingness or need to take risk), I'm doing everything I can to diversify.  Unfortunately, it is hard to find anything 'obviously' undervalued or with a satisfying expected rate of return in a ZIRP / QE cheap cash world.  The best I can hope for is some good volatility and opportunities to goose returns via annual rebalancing...

Good luck Keith123 (and Bbub, et. al), thanks for keeping an interesting thread going.   

Retire-Canada

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Re: Why I am reducing mkt exposure+have been since 2015.
« Reply #126 on: February 11, 2016, 09:05:00 AM »
I am simply open to accepting that I may be wrong.  That is the difference between you (Retire-Canada) and me.  You believe in DCA indexing like religion.  I am open to accepting change if there is convincing data and evidence.  I will admit that DCA index investing has a convincing argument.  However, in case you didn't notice, some of the best investors in history are buy and hold, fundamental valuation investors.  Wouldn't you study Michael Jordan if you wanted play basketball well?

I wouldn't base my FIRE financial plans on Michael Jordan because I am aware I cannot play basketball like him. I would base my FIRE plans on a strategy I know I can execute with my skills and abilities.

For the record I'm not suggesting you or anyone else who is following any given investment strategy won't do better than simply buying index funds regularly over the course of their lives. How could I know either way without knowing the future? Just like you have no idea that what you are proposing will do better than the typical MMM approach.

I'm simply pointing out why the concept you propose is not getting a lot of traction here.

Each approach has some assumptions and some risks.

The only thing I know for sure is that I am not comfortable with what you are proposing and I wouldn't put my money to work that way.
« Last Edit: February 11, 2016, 09:24:14 AM by Retire-Canada »

Keith123

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Re: Why I am reducing mkt exposure+have been since 2015.
« Reply #127 on: February 11, 2016, 09:12:15 AM »
"You believe in DCA like a religion" is a ridiculous thing to say. By definition, DCA (really systematic lump-sum indexing) by definition, requires regular buys, otherwise you're not doing it. You do you, but quit yelling about how others choose to invest as if it's somehow a personal attack on you.

Dude, relax.  Don't push this forum into that direction.  This isn't the comments section on yahoo.  I do not take any of this as a personal attack.  I'm not yelling.  I was simply pointing out that to be so bound to one strategy (DCA index investing) without considering other arguments is like believing in religion.  Religion gives no room for change in beliefs, even when presented with convincing arguments and evidence.  It is absolute.  Attitudes like that are unproductive to areas like investing.  It had nothing to do with "regular buys". 

Retire-Canada

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Re: Why I am reducing mkt exposure+have been since 2015.
« Reply #128 on: February 11, 2016, 09:16:52 AM »
  I was simply pointing out that to be so bound to one strategy (DCA index investing) without considering other arguments is like believing in religion. 

People have considered your arguments over multiple threads and several pages. You just aren't convincing a lot people with them. If the case you were presenting was compelling you'd get a lot of people agreeing.

As I noted above you are offering a strategy with a bunch of risk in it and saying "consider exchanging risk X,Y,Z for risks A,B,C." and folks are saying "No I am comfortable with risks X,Y,Z."

As I also noted being confident in your investment plan is critical to your success. If you can't weather the storm knowing you made a good choice you'll freak out and do something damaging. What you are proposing is not something folks feel confident will lead to a better outcome than the plan they are currently following.
« Last Edit: February 11, 2016, 09:18:57 AM by Retire-Canada »

Keith123

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Re: Why I am reducing mkt exposure+have been since 2015.
« Reply #129 on: February 11, 2016, 09:19:25 AM »
I am simply open to accepting that I may be wrong.  That is the difference between you (Retire-Canada) and me.  You believe in DCA indexing like religion.  I am open to accepting change if there is convincing data and evidence.  I will admit that DCA index investing has a convincing argument.  However, in case you didn't notice, some of the best investors in history are buy and hold, fundamental valuation investors.  Wouldn't you study Michael Jordan if you wanted play basketball well?

I wouldn't base my FIRE financial plans on Michael Jordan because I am aware I cannot play basketball like him. I would base my FIRE plans on a strategy I know I can execute with my skills and abilities.

For the record I'm not suggesting you or anyone else who is following any given investment strategy won't do better than simply buying index funds regularly over the course of their lives. How could I know either way without knowing the future? Just like you have no idea that what you are proposing will do better than the typical MMM approach.

I'm simply pointing out why the concept you propose is not getting a lot traction here.

Each approach has some assumptions and some risks.

The only thing I know for sure is that I am not comfortable with what you are proposing and I wouldn't put my money to work that way.

Ok.  You have no argument from me in that respect.  I would just like to point out though, that DCA index investing, from how I interpret it, assumes the investor has no skills or abilities at investing.  Or at least that the investor believes there are no skills or abilities that are useful at investing?  Is that a fair interpretation?

Retire-Canada

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Re: Why I am reducing mkt exposure+have been since 2015.
« Reply #130 on: February 11, 2016, 09:28:57 AM »
Ok.  You have no argument from me in that respect.  I would just like to point out though, that DCA index investing, from how I interpret it, assumes the investor has no skills or abilities at investing.  Or at least that the investor believes there are no skills or abilities that are useful at investing?  Is that a fair interpretation?

No I wouldn't agree with that. There are lots of folks on this forum that are knowledgeable about investing and have nevertheless decided the MMM approach is the best option for them. I think that's obvious by the contributions of several folks to this thread and your other related threads.

That said there are for sure some folks who know very little about investing and like the simplicity of the MMM approach.

BTW - it's not DCA it's serial lump sum investing. DCA implies you have a big chunk of money which you intentionally invest slowly overtime.
« Last Edit: February 11, 2016, 09:33:10 AM by Retire-Canada »

Retire-Canada

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Re: Why I am reducing mkt exposure+have been since 2015.
« Reply #131 on: February 11, 2016, 09:50:32 AM »
I'd also add that I don't plow money into VUN/VTI blindly every month. I hold 6 different globally diversified index funds and I rebalance every time I add money so to some degree buying what's cheaper.


Aphalite

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Re: Why I am reducing mkt exposure+have been since 2015.
« Reply #132 on: February 11, 2016, 09:50:44 AM »
Inconsistency avoidance is a hard mental barrier to penetrate.

Retire-Canada, you're just playing with terminology now -
BTW - it's not DCA it's serial lump sum investing. DCA implies you have a big chunk of money which you intentionally invest slowly overtime.

DCA doesn't equal serial lump sum investing?

If a self directed investor wants to spend the time to gain the knowledge necessary (which is cumulative, so you are always getting better and learning more), he or she can generate excellent alpha over the market. Indexing by definition is acting as a "know nothing" investor, because you accept that the market knows what's best. That's outsourcing your thinking no matter how you look at it. This isn't by definition a bad thing, as many have pointed out, consistently contributing into an index fund over time has proven to work out acceptably in history. But making out a valuation approach to be impossible or a waste of time is close minded and ironic, given that the MMM values of reducing waste and unnecessary expenses is consistently looked down on as impossible or a waste of energy by the general populace.

Retire-Canada

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Re: Why I am reducing mkt exposure+have been since 2015.
« Reply #133 on: February 11, 2016, 09:59:07 AM »
Inconsistency avoidance is a hard mental barrier to penetrate.

Retire-Canada, you're just playing with terminology now -
BTW - it's not DCA it's serial lump sum investing. DCA implies you have a big chunk of money which you intentionally invest slowly overtime.

DCA doesn't equal serial lump sum investing?

If a self directed investor wants to spend the time to gain the knowledge necessary (which is cumulative, so you are always getting better and learning more), he or she can generate excellent alpha over the market. Indexing by definition is acting as a "know nothing" investor, because you accept that the market knows what's best. That's outsourcing your thinking no matter how you look at it. This isn't by definition a bad thing, as many have pointed out, consistently contributing into an index fund over time has proven to work out acceptably in history. But making out a valuation approach to be impossible or a waste of time is close minded and ironic, given that the MMM values of reducing waste and unnecessary expenses is consistently looked down on as impossible or a waste of energy by the general populace.

No DCA doesn't equal serial lump sum investing. If you put 100% of your available money into your investments at any given time you are lump sum investing. DCA by definition implies you are holding back a portion of the money available to invest later.

There is a difference between being knowledgeable in an area and choosing a simple solution you feel is more effective for you compared to choosing a solution because you have no other option at your level of competence.

I wouldn't say what Keith is proposing is impossible. I've stated that clearly. I don't know whether it will turn out be better or worse in the long run. What I do know is that I am more comfortable with risks/rewards of the MMM approach than I am with what Keith is proposing.
« Last Edit: February 11, 2016, 10:24:46 AM by Retire-Canada »

iamlindoro

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Re: Why I am reducing mkt exposure+have been since 2015.
« Reply #134 on: February 11, 2016, 10:01:34 AM »
Inconsistency avoidance is a hard mental barrier to penetrate.

Retire-Canada, you're just playing with terminology now -
BTW - it's not DCA it's serial lump sum investing. DCA implies you have a big chunk of money which you intentionally invest slowly overtime.

DCA doesn't equal serial lump sum investing?

Retire-Canada is right.  DCA is *only* when you have a larger sum that you invest in smaller pieces.  Investing what you can from your biweekly paycheck (or whenever the funds become available) would be regular lump sum investing.  It is true that many people (including a lot of the financial media) use DCA to mean scheduled, regular investments, but it's a misuse of the term.

https://en.wikipedia.org/wiki/Dollar_cost_averaging#Confusion


BBub

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Re: Why I am reducing mkt exposure+have been since 2015.
« Reply #135 on: February 11, 2016, 10:27:38 AM »
Ok, the DCA vs lump sum is kind of derailing into a silly semantics argument.  We all know what is meant by DCA in the context of this conversation:  Invest $X each period regardless of general market conditions.  Moving on...

Framing this discussion in another way.  Consider a scenario in which we compiled a large sample of value-oriented forum participants then measured their performance vs. DCA continuous, automatic investing into an index over a 20 yr period.  On average, do you think that group would under perform, match, or outperform the DCA continuous, automatic investing strategy?
« Last Edit: February 11, 2016, 10:36:10 AM by BBub »

povertystrickenbastard

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Re: Why I am reducing mkt exposure+have been since 2015.
« Reply #136 on: February 11, 2016, 10:46:05 AM »
Ok, the DCA vs lump sum is kind of derailing into a silly semantics argument.  We all know what is meant by DCA in the context of this conversation:  Invest $X each period regardless of general market conditions.  Moving on...

The DCA/lump sum 'correctors' are always out in force and it's positively boring and also irrelevant as to the performance of the investment.  I guess with the rest of their time they go around correcting people that say PIN number because that makes it a Personal Identification Number Number.

Keith123

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Re: Why I am reducing mkt exposure+have been since 2015.
« Reply #137 on: February 11, 2016, 11:36:57 AM »
Ok, the DCA vs lump sum is kind of derailing into a silly semantics argument.  We all know what is meant by DCA in the context of this conversation:  Invest $X each period regardless of general market conditions.  Moving on...

Framing this discussion in another way.  Consider a scenario in which we compiled a large sample of value-oriented forum participants then measured their performance vs. DCA continuous, automatic investing into an index over a 20 yr period.  On average, do you think that group would under perform, match, or outperform the DCA continuous, automatic investing strategy?

I'm inclined to think the value-oriented participants would outperform the automatic indexers.  Just a guess.  Does anyone think a hybrid is possible that could balance out the good and bad from each approach - value-oriented index investing?  The automatic indexing side keeps you diversified and investing regularly while the value oriented side allocates it to the most likely places for long term solid returns.
« Last Edit: February 11, 2016, 11:38:53 AM by Keith123 »

AdrianC

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Re: Why I am reducing mkt exposure+have been since 2015.
« Reply #138 on: February 11, 2016, 11:37:07 AM »
Framing this discussion in another way.  Consider a scenario in which we compiled a large sample of value-oriented forum participants then measured their performance vs. DCA continuous, automatic investing into an index over a 20 yr period.  On average, do you think that group would under perform, match, or outperform the DCA continuous, automatic investing strategy?

As a group they will underperform, but I will outperform.
;

BBub

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Re: Why I am reducing mkt exposure+have been since 2015.
« Reply #139 on: February 11, 2016, 01:09:37 PM »
Ok, the DCA vs lump sum is kind of derailing into a silly semantics argument.  We all know what is meant by DCA in the context of this conversation:  Invest $X each period regardless of general market conditions.  Moving on...

Framing this discussion in another way.  Consider a scenario in which we compiled a large sample of value-oriented forum participants then measured their performance vs. DCA continuous, automatic investing into an index over a 20 yr period.  On average, do you think that group would under perform, match, or outperform the DCA continuous, automatic investing strategy?

I'm inclined to think the value-oriented participants would outperform the automatic indexers.  Just a guess.  Does anyone think a hybrid is possible that could balance out the good and bad from each approach - value-oriented index investing?  The automatic indexing side keeps you diversified and investing regularly while the value oriented side allocates it to the most likely places for long term solid returns.

The data suggests otherwise.  Cycle after cycle, the average investor has always drastically under performed.

Hybrid?  Sure - you can choose any strategy you'd like.  The world isn't cut and dry, and we are all free to choose our own path.  As far as I know, Ben Graham (The Intelligent Investor) pioneered the concept of the 'enterprising' vs 'passive' investor.  His book is well worth the price if you haven't read it.  The best strategy, IMO, is one you can stick with.  Over time, assuming you're somewhat competent you will likely enjoy plenty of days in the sun & many cream pies to the face regardless of your strategy.  Just make the best decision you can with the info you have, develop a solid program & stick with it for the long haul.  If that program is a combo of various strategies, and you think you can stay on top of the added complexity then more power to you.

FINate

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Re: Why I am reducing mkt exposure+have been since 2015.
« Reply #140 on: February 11, 2016, 02:14:04 PM »
Ok, the DCA vs lump sum is kind of derailing into a silly semantics argument.  We all know what is meant by DCA in the context of this conversation:  Invest $X each period regardless of general market conditions.  Moving on...

Framing this discussion in another way.  Consider a scenario in which we compiled a large sample of value-oriented forum participants then measured their performance vs. DCA continuous, automatic investing into an index over a 20 yr period.  On average, do you think that group would under perform, match, or outperform the DCA continuous, automatic investing strategy?

I'm inclined to think the value-oriented participants would outperform the automatic indexers.  Just a guess.  Does anyone think a hybrid is possible that could balance out the good and bad from each approach - value-oriented index investing?  The automatic indexing side keeps you diversified and investing regularly while the value oriented side allocates it to the most likely places for long term solid returns.

http://www.thinkadvisor.com/2015/03/30/value-investors-inconvenient-truth-they-lose-to-sp - from a company that manages a value fund, so keep that in mind. They found that people investing in value funds tended to try and time the market and they ended up underperforming by about 1%. If instead they had bought-and-held a value fund these investors would have beat the market.

Aphalite

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Re: Why I am reducing mkt exposure+have been since 2015.
« Reply #141 on: February 11, 2016, 03:00:15 PM »
http://www.thinkadvisor.com/2015/03/30/value-investors-inconvenient-truth-they-lose-to-sp - from a company that manages a value fund, so keep that in mind. They found that people investing in value funds tended to try and time the market and they ended up underperforming by about 1%. If instead they had bought-and-held a value fund these investors would have beat the market.

Normally, value investing doesn't mean you buy value funds or value ETFs, that's a quantitative measure only. Value investing means picking securities where the expectations baked into the security price is worse than what you think will actually happen. Investing returns is the difference between expectations and what really happens to the operating results of the underlying business. You can buy the cheapest stock out there, but if it's going out of business and earnings begin declining even more than what the market believes/has priced the security at, you're going to lose money. Conversely, even if you pay something crazy like 100 P/E, if the reality turned out to be better than expectations, such as a McDonald's, Starbucks, Home Depot, Microsoft, etc., you'll end up beating the market. Most value investing is done somewhere in the middle of those two extremes

Jack

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Re: Why I am reducing mkt exposure+have been since 2015.
« Reply #142 on: February 11, 2016, 03:26:27 PM »
Ok.  You have no argument from me in that respect.  I would just like to point out though, that DCA index investing, from how I interpret it, assumes the investor has no skills or abilities at investing.  Or at least that the investor believes there are no skills or abilities that are useful at investing?  Is that a fair interpretation?

On average, that assumption is correct -- most investors fail to beat the index. Moreover, you only find out whether you're skilled or not in hindsight (even if you think you're skilled, it could be the Dunning-Kruger effect instead). Therefore, for any random person asking "how do I invest" on this forum, index investing is the safest answer.

FINate

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Re: Why I am reducing mkt exposure+have been since 2015.
« Reply #143 on: February 11, 2016, 03:28:12 PM »
http://www.thinkadvisor.com/2015/03/30/value-investors-inconvenient-truth-they-lose-to-sp - from a company that manages a value fund, so keep that in mind. They found that value investors people investing in value funds tended to try and time the market and they ended up underperforming by about 1%. If instead they had bought-and-held a value fund these investors would have beat the market.

Normally, value investing doesn't mean you buy value funds or value ETFs, that's a quantitative measure only. Value investing means picking securities where the expectations baked into the security price is worse than what you think will actually happen. Investing returns is the difference between expectations and what really happens to the operating results of the underlying business. You can buy the cheapest stock out there, but if it's going out of business and earnings begin declining even more than what the market believes/has priced the security at, you're going to lose money. Conversely, even if you pay something crazy like 100 P/E, if the reality turned out to be better than expectations, such as a McDonald's, Starbucks, Home Depot, Microsoft, etc., you'll end up beating the market. Most value investing is done somewhere in the middle of those two extremes

I should be more careful with my terms...quote fixed. They found that value investors did worse on average.

faramund

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Re: Why I am reducing mkt exposure+have been since 2015.
« Reply #144 on: February 11, 2016, 05:07:39 PM »
http://www.thinkadvisor.com/2015/03/30/value-investors-inconvenient-truth-they-lose-to-sp - from a company that manages a value fund, so keep that in mind. They found that value investors people investing in value funds tended to try and time the market and they ended up underperforming by about 1%. If instead they had bought-and-held a value fund these investors would have beat the market.

Normally, value investing doesn't mean you buy value funds or value ETFs, that's a quantitative measure only. Value investing means picking securities where the expectations baked into the security price is worse than what you think will actually happen. Investing returns is the difference between expectations and what really happens to the operating results of the underlying business. You can buy the cheapest stock out there, but if it's going out of business and earnings begin declining even more than what the market believes/has priced the security at, you're going to lose money. Conversely, even if you pay something crazy like 100 P/E, if the reality turned out to be better than expectations, such as a McDonald's, Starbucks, Home Depot, Microsoft, etc., you'll end up beating the market. Most value investing is done somewhere in the middle of those two extremes

I should be more careful with my terms...quote fixed. They found that value investors did worse on average.
I think you should state the first sentence of that article
"The average value investor underperforms an S&P 500 index fund, even before fees, by almost a percentage point — even though the average value fund outperforms the S&P 500.",

I think that statement says that there is worth in a value focused approach, but that most people who try to use it, aren't successful. From the article, it seems to say if you DCA/lump sum into a value based index, on average you will outperform - but that most people try to trade in and out of such funds, and like most buy-and-sellers, they do that badly enough to cancel out the value based advantage.

I think its the same for index funds, I've read that most index fund investors underperform the index fund, because they try to trade in and out, and again, are unsuccessful at that.

mrpercentage

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Re: Why I am reducing mkt exposure+have been since 2015.
« Reply #145 on: February 11, 2016, 10:51:12 PM »


I think its the same for index funds, I've read that most index fund investors underperform the index fund, because they try to trade in and out, and again, are unsuccessful at that.

Ha! Nobody can index out being human. The only way to really index invest is to bury your head in the sand. Fear is usually greater than the reality and so is enthusiasm.

My main problem with index funds is I always view them as my money. I don't see it as ownership in something valuable. I do not deny historically they work if you leave them alone

steveo

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Re: Why I am reducing mkt exposure+have been since 2015.
« Reply #146 on: February 11, 2016, 11:53:19 PM »
Ok, the DCA vs lump sum is kind of derailing into a silly semantics argument.  We all know what is meant by DCA in the context of this conversation:  Invest $X each period regardless of general market conditions.  Moving on...

Framing this discussion in another way.  Consider a scenario in which we compiled a large sample of value-oriented forum participants then measured their performance vs. DCA continuous, automatic investing into an index over a 20 yr period.  On average, do you think that group would under perform, match, or outperform the DCA continuous, automatic investing strategy?

I'm inclined to think the value-oriented participants would outperform the automatic indexers.  Just a guess.  Does anyone think a hybrid is possible that could balance out the good and bad from each approach - value-oriented index investing?  The automatic indexing side keeps you diversified and investing regularly while the value oriented side allocates it to the most likely places for long term solid returns.

I think your point here when you state just a guess is the key point. My take is that you believe that there is a way to beat the market. The problem is that this is really really hard. Just say that value oriented investors get it right. The thing is the value stocks will then rise in price. So you have to assume that you've gotten in before those people. Plus you won't be as diversified in stocks and there is the risk of one or some of those stocks not performing as well as expected.

The next point in my opinion is what sort of trade off will you get when it comes to time put into analysis and performance over time. I think it's unlikely that you will beat the market and its not worth the effort.

I think a better approach is to focus on your asset allocation and being comfortable with that.

steveo

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Re: Why I am reducing mkt exposure+have been since 2015.
« Reply #147 on: February 11, 2016, 11:59:02 PM »
Cycle after cycle, the average investor has always drastically under performed.

I think they also under-perform because they try and win the game. If you aren't trying to win then I think you can actually beat the average investor a lot by simply indexing. I'll mention asset allocation again because your asset allocation is what will determine if you are comfortable with your returns and the associated risk.

If you choose to have say a 50/50 stock/bonds portfolio you won't have the same ups and downs as a 100% stock allocation but you might be comfortable with that.

bryan

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Re: Why I am reducing mkt exposure+have been since 2015.
« Reply #148 on: February 12, 2016, 01:43:56 AM »
love how crazy this thread is.

I'm confused at so many people saying you can't beat the market. obviously one can beat the market. it's just that everyone has their own unique circumstances to consider (not the least of which is the capability to think up a real way to beat the market)

I don't understand why people think they can beat the market, outsmarting people with nearly unlimited resources who do this for a living.

So is Mr. Pro beating the market then? or have margins shrunk to 0?

Unlimited resources? how? if you had unlimited capital, I think you've broken the market, not beat it or underperformed it.

If you mean orders of magnitude more resources than another bruv, then bruv hopefully isn't limited to the exact same market options as Mr. Pro. Or bruv better have better info or processing of the info in a more novel way than Mr. Pro. More likely, Mr. Pro is in a different pond than bruv and both could be the ponds' respective big, predator fishs.

Forgot to mention all the people who decided in 2014 that Bitcoin was "the future" so bought in at $970 a pop to get on the action.  There has to be a few threads right here on MMM a few years ago saying that was a great idea.

if some people bought high, some people bought low. Market profiteers and losers. Plenty of people bought that summer when it was $60.

(sound digital cash is absolutely a great idea, careful speculating though)



, you should have a darn good answer to the following question:
"Why doesn't everyone get rich doing this?"

quite right.


I don't think the EMH is garbage.  I think it's misapplied frequently, I think it has spawned an undeservedly religious following in some circles, and I think market timers like to shit on it to justify their own delusions of superiority.  But under all of that I think it's a sound idea, because all it says is that the value of the investment is hard to know but the market is a tool for letting everyone vote on what they think it should be, and then they make that the price.  As long as people are rational and informed, that should work out as well as can be reasonably expected, for everyone, absent a working crystal ball.

I haven't actually read the original EMH. The way most people talk about it is 100% garbage and should be ignored (or use its popularity/acceptance to your advantage).

I am a fan of prediction markets, of course, but it's actually pretty amazing how dumb and inefficient (err.. bad at predicting) they can be.
« Last Edit: February 12, 2016, 01:50:27 AM by bryan »

faramund

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Re: Why I am reducing mkt exposure+have been since 2015.
« Reply #149 on: February 12, 2016, 03:24:09 AM »
I've read several studies that find that value investing outperform indexing. So why doesn't this disappear? I think its because there is always a group of people who chase after the next best thing.

So what happens, company X has a great vision, and its price goes up, it might still not have any earnings, but maybe its revenue or 'eyeballs' or whatever is rapidly increasing, more and more true believers buy into this, and justify its high price on the basis that it will keep increasing rapidly, eventually it either slows down, or fails, at which time its growth premium is destroyed, and it drops in price.

Its similar with IPOs, studies seem to indicate that if you buy say $1000 in every IPO ever launched, and checked their prices a year later, they will have lost money.. For more or less the same reason, irrational enthusiasm.

Studies compare value (low PE) versus growth (high PE) stocks, and show that value stocks increase in value by more than growth stocks. Why, because growth stocks are priced, typically, as if their growth will continue for a long time, so when it almost inevitably falls short, they lose value.

So if growth/hyped shares underperform, any approach that doesn't buy those shares, should overperform, and that's pretty much how value shares work.

I sometimes think its a bit odd.. people get very righteous about avoiding funds that have say a 1% management ratio, and say indexing is sooooo much better. Well, studies typically show about a 1% improvement of value investing over straight indexing, so surely thats also, just sooooo much better.

I think with stocks, as long as you buy a diverse group of non-bubble stocks, and don't ever sell because of panic or despair, you'll do relatively well, and will be in the top percentiles of successful stock investors.

So, its very easy to just go with indexing, if that's what you what to do, I'm sure you'll be fine. But I think its very arrogant or close minded to think its impossible to do better. You might think its not worth your while to look into value stocks, but that does not mean you can be 100% sure that its not a worthwhile approach.

I'm not convinced its 100% successful, but from both the theory I've read, and my ability to beat straight indexing by using a value-based approach, I think its very worthwhile to consider.