Why I am reducing mkt exposure+have been since 2015.

[Interest Compound]

I respectfully disagree.  Aside from the fact that most investors are not blithely bullish enough to take losses to their life savings for 20 straight years without changing course, the author's point is that not everyone's goals are more than 20 years out.  IMHO, recognizing that everyone is different and planning accordingly is wise, not stupid. 

But that's not what he said.   He specifically used a 20 year time frame as his accumulation period before retirement.   That was his chosen investing horizon,  which he claimed was problematic.    As proof, he then gave the example of the period 1963-83 as a particularly bad time to be buying and holding stocks prior to retirement because of poor returns during that time frame.  There are, he said, MAJOR problems with buy and hold (emphasis his). 

He is completely, totally, full of shit.  The period 1963-83 (again, his example) was one of the best possible times in history to be buying and holding stocks.  This is the time frame he chose as an example supporting his thesis that buy and hold doesn't work.   Yet buy had hold worked incredibly, fabulously well!  Almost unbelievably well.  It would have been a monumental mistake not to buy stocks back then.  Yet here he is, advocating people make the same epic mistake and pay him for the privilege.     

Does that make any sense at all to anyone?  I mean, we're talking hindsight here.  He's saying people should avoid doing something in the future that that would have made them fabulously rich in the past.    Is that advice anything other than ridiculously stupid? 

You're right, a lot of people emotionally aren't going to invest in a down or sideways trending market.  But it doesn't follow the emotional decision is automatically the right one.   We should strive to make decisions based on reason and logic, at least some of the time.  A bad decision based on emotion is still a bad decision. 

And if you can't make the right decision in hindsight.... Good lord, this guy an idiot.

Here's what it would've looked like if someone started working in 1963, and invested an inflation-adjusted $1,000 a month for 20 years:





I don't see how anyone could live through this and perceive it as "taking losses to their life savings for 20 straight years". I agree, this guy is full of it. Fear-mongering at its worst. I posted a thorough breakdown showing how literally all his predictions from 2012 were laughably wrong...not only did no one respond, I see he's being linked to again. How many times do we have to show in this thread that he's an idiot before people stop taking him seriously?

[steveo]

You are missing nothing, and plus you would have dividends paid out during that period on top of that!

I think that this was something that should have been in that article. I think it makes a big difference. If you are accumulating I also think a market not performing as well as possible is probably a good thing. You'd expect the market to go up at some point.

[steveo]

The fact that the stock market (including dividends) lost inflation-adjusted money for the 20 year period starting in 1963 is backed up by other sources.

Tyler - I think yourself and myself both got out of that article that having some form of asset allocation that you can stick with may be better for you than 100% stocks. I didn't get the impression that the article was stating that market timing works but rather to utilise some form of asset allocation.

Still I think dividends and being in the accumulation phase does change the picture a lot.

[BattlaP]

I posted a thorough breakdown showing how literally all his predictions from 2012 were laughably wrong...not only did no one respond, I see he's being linked to again. How many times do we have to show in this thread that he's an idiot before people stop taking him seriously?

Just FYI, that post was pretty much end thread for me. I skipped to the last page here to see how it ended up and can't believe you've had to continue the argument. You'd have to have your head literally buried in sand and screaming LA-LA-LA to ignore what you stated so simplistically in your initial response. Thanks and don't stop compounding interestedly.

[steveo]

You see, Frodo was loading up on stocks at probably the best time in history to buy stocks.   And just as he retires, the market takes off like a rocket!   Frodo sees his portfolio explode with double digit returns year after year after year.   Frodo is now in physical danger---from falling off his wallet and breaking an arm.  And if he had bought a few bonds along the way, he would have made a bundle there, too.  Just for grins, go look at your chart and see what the annual returns were from 1983 when he retires until say, 2003 when presumably he dies at age 85.  I know.  Pretty amazing. 

One thing Lance is too stupid to realize is that you don't want the market to go up during the accumulation phase.  You want it to stay low, so you can buy more stocks.  Intelligent people don't give a shit about maintaining an specific annual return, they realize there will be volatility.  The thing Lance described as a "problem" is actually the best thing that could happen to you.  Frodo spent more than a decade buying stocks at a P/E of 10 or less, but the price didn't go up so Lance views that as a failure.    You want to avoid that?  Really?   That's literally insane.  Frodo should have been doubling down.  Good thing Lance wasn't there to "save" him. 

I'm piling on, but there was layer after layer of stupidity in the article.  It is like an onion.  You peel back one layer of stupid, and there is a stronger, more powerful stupid beneath.   I would be very interested to see Lance's clients' actual returns, after he has extracted his fees and commissions from them.  Everything about that article screams "Scam Artist" in big, red flashing letters.   In a just world, Lance would be in jail instead of being loose on the streets separating good citizens from their hard earned money.

I think you are 100% correct. Frodo in this scenario was a genius. I think the article was trying to state that if you were accumulating you couldn't afford the losses but that is definitely not true. You could have retired with a lower number because you would have accumulated a lot.

[steveo]

Telecaster - I am only adding to this thread to thank you for the incredibly concise and simple way you laid out your explanation.  You just made a switch go off in my head.  Thanks for that.

Just to add to this. Telecaster makes some great points here.

[faramund]

A lot of this Frodo... thread, seems to focus too much on fixed points. Let's say Frodo starts saving in 1960, and retires in 1980, and roughly invests $1000 a year. So his return is

1000*(cagr of shares 1960-1980)^20+1000*(cagr of 1961-1980)^19+1000*(cagr of 1962-1980)^18+.....

so say there's a big crash in 1970. So the years, 1968,69, and 70 leading into the bubble might take 20 years to recover, or have poor cagrs even if there positive, but 1971 will probably have excellent returns, and 72,73 will probably be good.

So if you pick a point at the top of the boom and see what its like 20 years later, who really cares, people don't invest for just one year.

[Grog]

If someone believes that the stock market is overvalued, then instead of betting in low-diversified sectors he could just short the market. If someone is sure a bear market is coming, shorting the market is the best investment choice. If you are not ready to do that, then maybe your conviction are not so strong and you should stick to buy&hold.
Everytime you think you are buying expensive stocks, ask yourself if you are ready to go short because "regression to the mean". Kudos to the ones that can walk the talk.

[Metric Mouse]

If someone believes that the stock market is overvalued, then instead of betting in low-diversified sectors he could just short the market. If someone is sure a bear market is coming, shorting the market is the best investment choice. If you are not ready to do that, then maybe your conviction are not so strong and you should stick to buy&hold.
Everytime you think you are buying expensive stocks, ask yourself if you are ready to go short because "regression to the mean". Kudos to the ones that can walk the talk.

You are misunderstanding the point. It's not that the market is going to crash, it's that there are areas of the market that are better to place your money into than others. By not paying attention, the returns of someone who blindly indexes could lag those that invest in value stocks.

[steveo]

If someone believes that the stock market is overvalued, then instead of betting in low-diversified sectors he could just short the market. If someone is sure a bear market is coming, shorting the market is the best investment choice. If you are not ready to do that, then maybe your conviction are not so strong and you should stick to buy&hold.
Everytime you think you are buying expensive stocks, ask yourself if you are ready to go short because "regression to the mean". Kudos to the ones that can walk the talk.

You are misunderstanding the point. It's not that the market is going to crash, it's that there are areas of the market that are better to place your money into than others. By not paying attention, the returns of someone who blindly indexes could lag those that invest in value stocks.

You have to put this into the proper context. Over your investment life cycle do you really believe that you can consistently beat the market ? This doesn't happen very much at all. Why can you do it when smart educated people don't ?

The index has a lot of advantages. Much less effort and a better chance statistically of beating people who think they can beat the market. Why would you invest against the odds ?

[NoStacheOhio]

You are misunderstanding the point. It's not that the market is going to crash, it's that there are areas of the market that are better to place your money into than others. By not paying attention, the returns of someone who blindly indexes could lag those that invest in value stocks.

You're ignoring the fact that "blindly indexing" is a perfectly valid choice. I WANT average returns. I think average returns would be awesome. There opportunity cost associated with everything. To me, the most acceptable opportunity cost is going broad and buying regularly over the course of years. COULD I miss out on above-average gains by making more targeted choices? Yes. Do I care? No, I don't care if the next person made 7% more than me. It doesn't affect my life.

[Keith123]

Telecaster:  I actually think you proved the point from the value investor's perspective, not the indexer's.  You cleverly pointed out how much of a genius Frodo was for accumulating during an under-valued period ("Frodo spent more than a decade buying stocks at a P/E of 10 or less") and how great the performance was when he stopped investing ("And just as he retires, the market takes off like a rocket!   Frodo sees his portfolio explode with double digit returns year after year after year.")  This a direct result from buying VALUE, not everything all the time.  I'm not quite sure how this helps the "index at all times regardless of valuation" argument.  I don't know how so many people seem to miss this correlation.  The complete opposite was just as likely to happen in the reverse scenario (accumulate during 20 year overvalued period, then retire and the market shoots down like a rocket and stays there and you are screwed).  The market reflects value over time.  It can stay crazy high or crazy low for long periods, but in the end, it always reflects earnings performance.  If you don't believe this, I don't know how you are investing.  You must have some belief that regardless of any fundamentals, stocks just go up because they do.  That is called faith.  It has no place in investing.     

Interest Compounder:  I haven't done that chart thing because it doesn't further the discussion.  Value is not relative.  It is objective.  What you're asking me to do with that chart is pick times when I thought the market was relatively overvalued or undervalued based on historical valuations. 
Here is my answer for the Shiller PE.  I think a Shiller P/E of 15 to 16 is fair right now.  A P/E around there implies a return of around 6% to 7% without dividends.  This is based on earnings, not some relative measure.  You also have to take the interest rate environment into account as well as corporate profit margins and judge within that context.  Typically, I think the average investor should shoot for 4% to 5% above the risk free rate.  Right now the 10 year T-bond is 1.81%.  So I'm looking for a 6% or 7% return right now for stocks, which equates to a Shiller PE of 15 or 16.  Since the Shiller PE is 24.4 right now, it is over-valued, especially with sustained high corporate profit margins.  If corporate profits revert back to the mean, which they have done for the past 65 years, the Shiller PE would likely be in the mid-30's. 
For the Buffet Indicator:  This is total market cap divided by GNP.  Simply put,  it is a measure of the size of the stock market compared to the size of the actual economy.  Right now it is at 109%.  So...the stock market is 9% bigger than the actual economy.  It is overvalued.  You are paying 9% over fair value when most smart investors should be looking for a 25% margin of safety aka a Buffett indicator percentage of 75%.  Don't believe me, here's what Warren Buffet has to say about it, "If the percentage relationship falls to the 70% or 80% area, buying stocks is likely to work very well for you. If the ratio approaches 200% -- as it did in 1999 and a part of 2000 -- you are playing with fire."  So yeah, the world isn't ending, but indexing the whole market is not a great idea right now if you are investing for the long-term.

[Keith123]

You are misunderstanding the point. It's not that the market is going to crash, it's that there are areas of the market that are better to place your money into than others. By not paying attention, the returns of someone who blindly indexes could lag those that invest in value stocks.

You're ignoring the fact that "blindly indexing" is a perfectly valid choice. I WANT average returns. I think average returns would be awesome. There opportunity cost associated with everything. To me, the most acceptable opportunity cost is going broad and buying regularly over the course of years. COULD I miss out on above-average gains by making more targeted choices? Yes. Do I care? No, I don't care if the next person made 7% more than me. It doesn't affect my life.

What if the average return is -5% for the next 10 years?  Are you ok with that?  It's not a trick question.  I'm actually curious if you really are ok with whatever the average return is or if you've got an assumption of what average returns will be.

[MrGreen]

I think a Shiller P/E of 15 to 16 is fair right now.  A P/E around there implies a return of around 6% to 7% without dividends.  This is based on earnings, not some relative measure.  You also have to take the interest rate environment into account as well as corporate profit margins and judge within that context.  Typically, I think the average investor should shoot for 4% to 5% above the risk free rate.  Right now the 10 year T-bond is 1.81%.  So I'm looking for a 6% or 7% return right now for stocks, which equates to a Shiller PE of 15 or 16.  Since the Shiller PE is 24.4 right now, it is over-valued, especially with sustained high corporate profit margins.  If corporate profits revert back to the mean, which they have done for the past 65 years, the Shiller PE would likely be in the mid-30's.

If I was a "revert to the mean" guy, one of my biggest fears would be the extended low interest rate environment, and the prospects that it may remain low for decades, could cause the mean to shift, invalidating the notion that a PE 15/16 is relevant for the next 10 or 20 years, which may be a substantial portion of my remaining lifetime. Trends change, and with only 100-130 years of financial data available, a statistician would tell you a sample set of 40 years is could have a high degree of inaccuracy for claiming "standards", based on what history might look like 200 or 400 years from now. Sure looking at history is as best we can do but I try to remember that before putting the "standards" (like a 7% return or the mean PE) up on a pedestal.

[BBub]

A critical component in value investing is attempting to make an assessment of future business conditions.  According to earnings estimates, the forward P/E is 15.6 for the s&p.  Does this play into your decision-making process, or are you always looking backwards?

[Keith123]

I think a Shiller P/E of 15 to 16 is fair right now.  A P/E around there implies a return of around 6% to 7% without dividends.  This is based on earnings, not some relative measure.  You also have to take the interest rate environment into account as well as corporate profit margins and judge within that context.  Typically, I think the average investor should shoot for 4% to 5% above the risk free rate.  Right now the 10 year T-bond is 1.81%.  So I'm looking for a 6% or 7% return right now for stocks, which equates to a Shiller PE of 15 or 16.  Since the Shiller PE is 24.4 right now, it is over-valued, especially with sustained high corporate profit margins.  If corporate profits revert back to the mean, which they have done for the past 65 years, the Shiller PE would likely be in the mid-30's.

If I was a "revert to the mean" guy, one of my biggest fears would be the extended low interest rate environment, and the prospects that it may remain low for decades, could cause the mean to shift, invalidating the notion that a PE 15/16 is relevant for the next 10 or 20 years, which may be a substantial portion of my remaining lifetime. Trends change, and with only 100-130 years of financial data available, a statistician would tell you a sample set of 40 years is could have a high degree of inaccuracy for claiming "standards", based on what history might look like 200 or 400 years from now. Sure looking at history is as best we can do but I try to remember that before putting the "standards" (like a 7% return or the mean PE) up on a pedestal.

I believe you missed the point almost completely.  I am only referring to reversion to the mean for corporate profits.  There has been very strong evidence that corporate profits are not sustainable above 6% to 7% over the long term.  We are at 10% right now.  The reason for this is simple, competition.  From Warren Buffet:  "In my opinion, you have to be wildly optimistic to believe that corporate profits as a percent of GDP can, for any sustained period, hold much above 6%. One thing keeping the percentage down will be competition, which is alive and well. In addition, there's a public-policy point: If corporate investors, in aggregate, are going to eat an ever-growing portion of the American economic pie, some other group will have to settle for a smaller portion. That would justifiably raise political problems—and in my view a major reslicing of the pie just isn't going to happen."

There is no "standard" PE or return.  That is what I am saying.  If the risk-free rate (let's use 10yr T-bonds) was 5%, I'd look for 9% to 10% returns (4% to 5% over the risk free rate), which is a Shiller PE of around 9 or 10.  If the risk free rate was 0%, I'd try to get 4% to 5% in the market, a Shiller PE of 20.  Why would I settle for stock returns that are even close to the risk free rate?  I am taking on risk in the market, I wouldn't be if I was buying T-bonds.  I want to be compensated for the additional risk by at least 4 to 5 percentage points above the risk free rate.  So, for right now, with the risk free rate at 1.8%, I want 6% to 7% return or taking on the additional risk isn't justified.  With the Shiller PE currently at 24.4, the expected return of 4.1% just doesn't compensate me enough for the additional risk.  If the risk free rate was -1% right now (which would be scary as hell by the way), the market would be fairly valued and I'd be indexing.  Does that make sense? 

[Tyler]

Tyler - I think yourself and myself both got out of that article that having some form of asset allocation that you can stick with may be better for you than 100% stocks. I didn't get the impression that the article was stating that market timing works but rather to utilise some form of asset allocation.

Still I think dividends and being in the accumulation phase does change the picture a lot.

Indeed.

While I interpret the article in question very differently, I share Telecaster's general prescription for investors.  In accumulation, just pick a plan you like, stick with it, and save like crazy.  Take all that energy you are wasting trying to time the market, and redirect it towards increasing your savings rate.  As Interest Compound demonstrates (nice charts!), your investment returns may pale in comparison to the money you keep piling in. 

My personal angle mainly comes down to the part about picking the plan you can stick with.  In my experience, different people require different plans. 

[Aphalite]

Here is my answer for the Shiller PE.  I think a Shiller P/E of 15 to 16 is fair right now.  A P/E around there implies a return of around 6% to 7% without dividends.  This is based on earnings, not some relative measure.  You also have to take the interest rate environment into account as well as corporate profit margins and judge within that context.  Typically, I think the average investor should shoot for 4% to 5% above the risk free rate.  Right now the 10 year T-bond is 1.81%.  So I'm looking for a 6% or 7% return right now for stocks, which equates to a Shiller PE of 15 or 16.  Since the Shiller PE is 24.4 right now, it is over-valued, especially with sustained high corporate profit margins.  If corporate profits revert back to the mean, which they have done for the past 65 years, the Shiller PE would likely be in the mid-30's.

Keith, by your logic, historically, a fair Shiller PE would have been 10 or below, since treasury rates have for the most part been above 5%, and you demand 5% above risk free rate, or 10%. When will you ever find a shiller PE of 10 (besides a brief period in the 70s when risk free rates were 10%+, which means you required a Shiller PE of 7 or less)? Again, you are overly discounting the growth component in stocks. Investing is not a look at a static situation, it's pari-mutuel betting

[Interest Compound]

Interest Compounder:  I haven't done that chart thing because it doesn't further the discussion.  Value is not relative.  It is objective.

I hope the newbies of the thread can see this example for what it is, and I hope it helps them avoid falling into the same trap.

Looking back over the decades, there has always been a compelling reason to deviate from the index. There has always been someone claiming "This time is different", that indexing won't work anymore for this reason or that. Many of these reasons aren't even on our radar anymore, as history has shown them to be losers...but you wouldn't have known that 50 years ago. I've read it was normal for market-timers of decades past to allocate a substantial amount to Gold. Something like 30-50%.

If you aren't willing to go back a few decades, mentally place yourself in their shoes with the information available at the time, and see how your choices would've played out...things likely won't end well for you.

When someone claims they can bowl a perfect game, I don't argue with them about it. I take them bowling. Seriously, from your perspective, if you think you're smarter than everyone else (the market) why would you waste hours arguing about it? Show us. Actions speak louder than words. I look forward to your future live-post on when it's safe to increase market exposure.

[NoStacheOhio]

What if the average return is -5% for the next 10 years?  Are you ok with that?  It's not a trick question.  I'm actually curious if you really are ok with whatever the average return is or if you've got an assumption of what average returns will be.

Yep. Mentally, I consider it "spent" money anyway. I'm not going to be touching it within the next 10 years, and I'll be buying the whole way down (or up).

Note, I'm talking about my retirement accounts here, my taxable has a different purpose and AA.

[Keith123]

Interest Compounder:  I haven't done that chart thing because it doesn't further the discussion.  Value is not relative.  It is objective.

I hope the newbies of the thread can see this example for what it is, and I hope it helps them avoid falling into the same trap.

Looking back over the decades, there has always been a compelling reason to deviate from the index. There has always been someone claiming "This time is different", that indexing won't work anymore for this reason or that. Many of these reasons aren't even on our radar anymore, as history has shown them to be losers...but you wouldn't have known that 50 years ago. I've read it was normal for market-timers of decades past to allocate a substantial amount to Gold. Something like 30-50%.

If you aren't willing to go back a few decades, mentally place yourself in their shoes with the information available at the time, and see how your choices would've played out...things likely won't end well for you.

When someone claims they can bowl a perfect game, I don't argue with them about it. I take them bowling. Seriously, from your perspective, if you think you're smarter than everyone else (the market) why would you waste hours arguing about it? Show us. Actions speak louder than words. I look forward to your future live-post on when it's safe to increase market exposure.

I have no idea how to respond to you.  Why you can't see that there are better times to invest than others just baffles me.  I'm not smarter than anyone else, I can't predict the future, I don't claim supernatural knowledge of the markets.  All I know is that if I want to make a certain return on an investment, I should use math, not faith.  The math isn't always reflected in the market at all times, but it does get reflected over the long term.  You refuse to even look at the numbers.  It's incredible to me.  Maybe I'm overly pessimistic, maybe I'm flat out wrong.  I have never discounted that possibility.  But at least I can explain why I made my decisions.  You can't even do that.  Your investing process is this:  "Buy everything, all the time, because."  I mean seriously, would you still be indexing if the s&p was at 10,000?  There has to be a point where even you won't keep investing.  If there is a point where you stop investing, then you need sit down, because it would then be a matter of where your "over-valued" limit is, not if there is one. 
 

[Telecaster]

Telecaster:  I actually think you proved the point from the value investor's perspective, not the indexer's.  You cleverly pointed out how much of a genius Frodo was for accumulating during an under-valued period ("Frodo spent more than a decade buying stocks at a P/E of 10 or less") and how great the performance was when he stopped investing ("And just as he retires, the market takes off like a rocket!   Frodo sees his portfolio explode with double digit returns year after year after year.")  This a direct result from buying VALUE, not everything all the time.  I'm not quite sure how this helps the "index at all times regardless of valuation" argument.  I don't know how so many people seem to miss this correlation.  The complete opposite was just as likely to happen in the reverse scenario (accumulate during 20 year overvalued period, then retire and the market shoots down like a rocket and stays there and you are screwed).  The market reflects value over time.  It can stay crazy high or crazy low for long periods, but in the end, it always reflects earnings performance.  If you don't believe this, I don't know how you are investing.  You must have some belief that regardless of any fundamentals, stocks just go up because they do.  That is called faith.  It has no place in investing.     

Hold on  :)   There's a lot there.   I'll just response in bullet points to help keep my thoughts organized

1)  I've said a bunch of times in these threads a high P/E implies lower than average returns going forward.   But by definition your returns will be lower than average part of the time.  So I don't see this as particularly worrisome or panic inducing because it is a mathematically unavoidable condition. 

2) Interestingly enough, when Frodo started buying stocks, the P/E was around 22, about what it is right now.  And the P/E was pretty high for about half the 20 year period he was investing.  All he did was blindly index, and he wound up smelling like a rose.   He in fact did buy everything all the time. 

3) As Cycling Stash helpfully points out, during the accumulation phase the savings rate trumps the rate of return.   ROI keeps you FIRE'd.  Savings rate gets you there. 

4) You've mentioned your plan is to rotate into sectors with more attractive valuations.  I've asked you a couple times how that backtested.  The real question being, how much do you expect your strategy to improve your returns?   If you've answered, then I missed and I apologize.  But I'm still curious what the answer is. 

[Interest Compound]

Interest Compounder:  I haven't done that chart thing because it doesn't further the discussion.  Value is not relative.  It is objective.

I hope the newbies of the thread can see this example for what it is, and I hope it helps them avoid falling into the same trap.

Looking back over the decades, there has always been a compelling reason to deviate from the index. There has always been someone claiming "This time is different", that indexing won't work anymore for this reason or that. Many of these reasons aren't even on our radar anymore, as history has shown them to be losers...but you wouldn't have known that 50 years ago. I've read it was normal for market-timers of decades past to allocate a substantial amount to Gold. Something like 30-50%.

If you aren't willing to go back a few decades, mentally place yourself in their shoes with the information available at the time, and see how your choices would've played out...things likely won't end well for you.

When someone claims they can bowl a perfect game, I don't argue with them about it. I take them bowling. Seriously, from your perspective, if you think you're smarter than everyone else (the market) why would you waste hours arguing about it? Show us. Actions speak louder than words. I look forward to your future live-post on when it's safe to increase market exposure.

I have no idea how to respond to you.

The only valid response, is your future live-post on when it's safe to increase market exposure. Then we can independently verify the results. If you could tell us the exact date you deemed it unsafe to increase market exposure, that would be nice too.

[Jack]

4) You've mentioned your plan is to rotate into sectors with more attractive valuations.  I've asked you a couple times how that backtested.  The real question being, how much do you expect your strategy to improve your returns?   If you've answered, then I missed and I apologize.  But I'm still curious what the answer is. 

The only valid response, is your future live-post on when it's safe to increase market exposure. Then we can independently verify the results. If you could tell us the exact date you deemed it unsafe to increase market exposure, that would be nice too.

In other words, Keith12, theories about value and whether it's low or high are well and good, but they're irrelevant unless you can produce a concrete, actionable strategy from them. And then prove that said strategy is good, and then explain why (given that it's almost certainly been thought of before) everybody hasn't already jumped on the bandwagon causing the market to adjust to eliminate the alpha.

And that's what in my opinion (and apparently the folks I quoted above's opinions) you've so far failed to do.

[Keith123]

Ok.  Let's take a look at the Dogs of the Dow strategy.  It's pretty similar to what I am suggesting in terms of investing in the most under-valued sectors.  The Dogs of the Dow strategy suggests investing in the 10 most undervalued stocks from the Dow each year.  The Small Dogs of the Dow is focused on the 5 most undervalued.

From wikipedia:  O'Higgins and others back-tested the strategy as far back as the 1920s and found that investing in the Dogs consistently outperformed the market as a whole. Since that time, the data shows that the Dogs of the Dow as well as the popular variant, the Small Dogs of the Dow, have performed well. For example, for the 20 years from 1992 to 2011, the Dogs of the Dow matched the average annual total return of the Dow (10.8%) and outperformed the S&P 500 (9.6%) as reported by the Dogs of the Dow website located at dogsofthedow.com. The Small Dogs of the Dow, which are the five lowest priced Dogs of the Dow, outperformed both the Dow and S&P 500 with an average annual total return of 12.6%. When each individual year is reviewed it is clear that both the Dogs of the Dow and Small Dogs of the Dow did not outperform each and every year. In fact, the Dogs of the Dow and Small Dogs of the Dow struggled to keep up with the Dow during latter stages of the dot-com boom (1998 and 1999) as well as during the financial crisis (2007-2009).  This suggests that an investor would be best served by viewing this as a longer-term strategy by giving this portfolio of stocks time to recover in case of a rare but extreme economic event (e.g., dot-com boom, financial crisis). While most any investor can back test an investment system that performed well over the recent past (data mining), what is unique about the Dogs of the Dow in this regard is that it has been forward tested for over two decades which included multiple booms and busts.

Here's more:  http://www.dogsofthedow.com/dogyrs.htm

So, buying the most under-valued stocks leads to market beating returns.  Why can this not be translated into buying the most undervalued sectors leads to similar results?  Here's a back tested, proven strategy for beating the market.  Please tell me again why value doesn't matter.

[Telecaster]

The Dogs of the Dow was all the rage back in the day.   There were even Dogs of the Dow mutual funds.  Here's the problem with the Dogs of the Dow:  It worked fine in the backtest, and stopped working after the discovery period.  Your own wiki says as much: the Dogs matched the performance of the Dow.  One problem was that back then the spreads and commissions were much larger than they are today.  After you included the frictional costs, you were actually behind the index.  Also, there is the non-trivial aspect of taxes.  If you are trading a lot, you are paying capital gains on the increases.    Bottom line is that the Dogs of the Dow went from being all the rage to no one using it because it didn't work. 

Since then there have been a whole bunch of modifications to the Dogs.  Some die out quickly, some sputter along and die out later.  People keep trying,and it keeps not working.  Motley Fool had a similar Dow strategy called the Foolish Four.  TMF flogged it big time, saying basically everyone can beat the market and used it as a centerpiece for their model portfolios.   Same thing happened there.  Worked great in the backtest, stopped working out of the discovery period.  The Foolish Four is now in the dustbin of history and you'll find hardly a mention of it on the TMF site.   It is almost like it didn't happen. 

It is easy to explain what is happening.  If you take a sub-sample of anything (in this case a subsample of the Dow, which is a subsample of the larger market),  each sample will vary from the "true" value part of the time, almost by definition.  Flip a coin 100 times, and repeat the exercise five times in row.  You would expect to get 50 heads and 50 tails each time.  But in reality, you will almost never get exactly 50/50.   And if you flip it 10,000 times, the odds are good you'll be pretty from from 50/50 at various point.  There seems to be outperformance, but it is really just an illusion. 

Before we get too far, I've mentioned a few times on the board that I invest in individual stocks.  Occasionally, I come across a compelling stock that is a good deal and I buy it.   You might call that a value approach or whatever.  But I can't it every month, or even necessarily every year.   I agree there are special cases when there are good deals to be had, but that's really not a general investing kind of topic. 

[steveo]

You are misunderstanding the point. It's not that the market is going to crash, it's that there are areas of the market that are better to place your money into than others. By not paying attention, the returns of someone who blindly indexes could lag those that invest in value stocks.

You're ignoring the fact that "blindly indexing" is a perfectly valid choice. I WANT average returns. I think average returns would be awesome. There opportunity cost associated with everything. To me, the most acceptable opportunity cost is going broad and buying regularly over the course of years. COULD I miss out on above-average gains by making more targeted choices? Yes. Do I care? No, I don't care if the next person made 7% more than me. It doesn't affect my life.

What if the average return is -5% for the next 10 years?  Are you ok with that?  It's not a trick question.  I'm actually curious if you really are ok with whatever the average return is or if you've got an assumption of what average returns will be.

My take is that I'd be better off in the index than in individual stocks. If the market goes down -5% for the next 10 years I could live with it as well because I would be accumulating more and statistically at some point it should take off.

[steveo]

Tyler - I think yourself and myself both got out of that article that having some form of asset allocation that you can stick with may be better for you than 100% stocks. I didn't get the impression that the article was stating that market timing works but rather to utilise some form of asset allocation.

Still I think dividends and being in the accumulation phase does change the picture a lot.

Indeed.

While I interpret the article in question very differently, I share Telecaster's general prescription for investors.  In accumulation, just pick a plan you like, stick with it, and save like crazy.  Take all that energy you are wasting trying to time the market, and redirect it towards increasing your savings rate.  As Interest Compound demonstrates (nice charts!), your investment returns may pale in comparison to the money you keep piling in. 

My personal angle mainly comes down to the part about picking the plan you can stick with.  In my experience, different people require different plans.

I completely agree with investing without worrying about what the market is doing. As you state have a plan and stick to it. I also think forget about trying to cherry pick stocks. For me personally it's not worth the effort.

[Interest Compound]

Ok.  Let's take a look at the Dogs of the Dow strategy.  It's pretty similar to what I am suggesting in terms of investing in the most under-valued sectors.  The Dogs of the Dow strategy suggests investing in the 10 most undervalued stocks from the Dow each year.  The Small Dogs of the Dow is focused on the 5 most undervalued.

From wikipedia:  O'Higgins and others back-tested the strategy as far back as the 1920s and found that investing in the Dogs consistently outperformed the market as a whole. Since that time, the data shows that the Dogs of the Dow as well as the popular variant, the Small Dogs of the Dow, have performed well. For example, for the 20 years from 1992 to 2011, the Dogs of the Dow matched the average annual total return of the Dow (10.8%) and outperformed the S&P 500 (9.6%) as reported by the Dogs of the Dow website located at dogsofthedow.com. The Small Dogs of the Dow, which are the five lowest priced Dogs of the Dow, outperformed both the Dow and S&P 500 with an average annual total return of 12.6%. When each individual year is reviewed it is clear that both the Dogs of the Dow and Small Dogs of the Dow did not outperform each and every year. In fact, the Dogs of the Dow and Small Dogs of the Dow struggled to keep up with the Dow during latter stages of the dot-com boom (1998 and 1999) as well as during the financial crisis (2007-2009).  This suggests that an investor would be best served by viewing this as a longer-term strategy by giving this portfolio of stocks time to recover in case of a rare but extreme economic event (e.g., dot-com boom, financial crisis). While most any investor can back test an investment system that performed well over the recent past (data mining), what is unique about the Dogs of the Dow in this regard is that it has been forward tested for over two decades which included multiple booms and busts.

Here's more:  http://www.dogsofthedow.com/dogyrs.htm

So, buying the most under-valued stocks leads to market beating returns.  Why can this not be translated into buying the most undervalued sectors leads to similar results?  Here's a back tested, proven strategy for beating the market.  Please tell me again why value doesn't matter.

Another example for the newbies of the forum. If you were following Keith123's posts and nodding along, thinking it's a great idea and you should do it too...simply look at this response.

1. I asked him to mark-up his "Buffet Indicator" chart, indicating when he would've reduced/increased market exposure, and he refused.

2. Telecaster asked for data on how his specific "plan to rotate into sectors with more attractive valuations." backtested, and he responds with Dogs of the Dow. A plan he admits doesn't deal with sectors at all.

3. I asked him for information so we can publicly verify his results, and he has shown no indication of providing it.

This is why it's so hard to stay the course. During your investment horizon, you'll see a thousand and one different "Buffet Indicators", "Dogs of the Dow", and fast-talking people who can't/refuse to publicly verify their claims. Just keep your head down, keep investing, and you'll be mathematically guaranteed to beat or match over half of all dollars invested in the market, and with no worry of ever underperforming.

[steveo]

Interest Compounder:  I haven't done that chart thing because it doesn't further the discussion.  Value is not relative.  It is objective.

I hope the newbies of the thread can see this example for what it is, and I hope it helps them avoid falling into the same trap.

Looking back over the decades, there has always been a compelling reason to deviate from the index. There has always been someone claiming "This time is different", that indexing won't work anymore for this reason or that. Many of these reasons aren't even on our radar anymore, as history has shown them to be losers...but you wouldn't have known that 50 years ago. I've read it was normal for market-timers of decades past to allocate a substantial amount to Gold. Something like 30-50%.

If you aren't willing to go back a few decades, mentally place yourself in their shoes with the information available at the time, and see how your choices would've played out...things likely won't end well for you.

When someone claims they can bowl a perfect game, I don't argue with them about it. I take them bowling. Seriously, from your perspective, if you think you're smarter than everyone else (the market) why would you waste hours arguing about it? Show us. Actions speak louder than words. I look forward to your future live-post on when it's safe to increase market exposure.

I love this thread. I don't get why people think they can pick the market. It's like trying to predict the future.

I also trade foreign currency. Yes I have made one or two great picks but plenty of howlers. I think of it like betting on the horses. It is definitely not something that I would utilise when it comes to managing my retirement funds.

[steveo]

It worked fine in the backtest, and stopped working after the discovery period.

I'll tell you something about my foreign currency trading. I came up with a couple of systems that really looked profitable. I work in databases and got the data and analysed it and came up with something that would work. I could though never trade off these systems.

Eventually I gave that up and realized that winning via trading requires a lot of different attributes rather than some backtested method. In my opinion it requires picking a position and going big when you get it right and not losing that much when you get it wrong. Lots of guru's state to use a stop loss to minimise your loss - the problem with this is that you lose a lot more.

Maybe this is why I love index investing. I just stupidly invest when I have the money. It doesn't require much thought at all. I have 3 ETF's that I buy and rotate between them. I won't beat the market. I will have losses. I will get average returns. Over time though that money will grow so that I can live off it without working so long as I just buy and hold.

[steveo]

This is why it's so hard to stay the course. During your investment horizon, you'll see a thousand and one different "Buffet Indicators", "Dogs of the Dow", and fast-talking people who can't/refuse to publicly verify their claims. Just keep your head down, keep investing, and you'll be mathematically guaranteed to beat or match over half of all dollars invested in the market, and with no worry of ever underperforming.

I think that you are better off not even thinking about it. Just be stupid and focus on other areas of your life. I think mr stupid (me) will end up beating people who try and beat the market.

[Keith123]

Ok.  Let's take a look at the Dogs of the Dow strategy.  It's pretty similar to what I am suggesting in terms of investing in the most under-valued sectors.  The Dogs of the Dow strategy suggests investing in the 10 most undervalued stocks from the Dow each year.  The Small Dogs of the Dow is focused on the 5 most undervalued.

From wikipedia:  O'Higgins and others back-tested the strategy as far back as the 1920s and found that investing in the Dogs consistently outperformed the market as a whole. Since that time, the data shows that the Dogs of the Dow as well as the popular variant, the Small Dogs of the Dow, have performed well. For example, for the 20 years from 1992 to 2011, the Dogs of the Dow matched the average annual total return of the Dow (10.8%) and outperformed the S&P 500 (9.6%) as reported by the Dogs of the Dow website located at dogsofthedow.com. The Small Dogs of the Dow, which are the five lowest priced Dogs of the Dow, outperformed both the Dow and S&P 500 with an average annual total return of 12.6%. When each individual year is reviewed it is clear that both the Dogs of the Dow and Small Dogs of the Dow did not outperform each and every year. In fact, the Dogs of the Dow and Small Dogs of the Dow struggled to keep up with the Dow during latter stages of the dot-com boom (1998 and 1999) as well as during the financial crisis (2007-2009).  This suggests that an investor would be best served by viewing this as a longer-term strategy by giving this portfolio of stocks time to recover in case of a rare but extreme economic event (e.g., dot-com boom, financial crisis). While most any investor can back test an investment system that performed well over the recent past (data mining), what is unique about the Dogs of the Dow in this regard is that it has been forward tested for over two decades which included multiple booms and busts.

Here's more:  http://www.dogsofthedow.com/dogyrs.htm

So, buying the most under-valued stocks leads to market beating returns.  Why can this not be translated into buying the most undervalued sectors leads to similar results?  Here's a back tested, proven strategy for beating the market.  Please tell me again why value doesn't matter.

Another example for the newbies of the forum. If you were following Keith123's posts and nodding along, thinking it's a great idea and you should do it too...simply look at this response.

1. I asked him to mark-up his "Buffet Indicator" chart, indicating when he would've reduced/increased market exposure, and he refused.

2. Telecaster asked for data on how his specific "plan to rotate into sectors with more attractive valuations." backtested, and he responds with Dogs of the Dow. A plan he admits doesn't deal with sectors at all.

3. I asked him for information so we can publicly verify his results, and he has shown no indication of providing it.

This is why it's so hard to stay the course. During your investment horizon, you'll see a thousand and one different "Buffet Indicators", "Dogs of the Dow", and fast-talking people who can't/refuse to publicly verify their claims. Just keep your head down, keep investing, and you'll be mathematically guaranteed to beat or match over half of all dollars invested in the market, and with no worry of ever underperforming.

You are such a little troll.

1.  I answered you.  Because you don't like my answer doesn't mean I refused.  You're asking me to pick buying periods from 1 chart.  Not possible.  As I have said, you need to know about interest rate environment, corporate profits, etc. to put it all in context.  I'm not going to do something just because you say so.

2.  I'm not going to spend hours and hours back-testing something for you.  I did, however, provide you with the Dogs of the Dow example, which operates on a similar principle and has proven to beat the market over the long term.  Once again, because you don't like it doesn't mean I have avoided the question.

3.  What public information are you even referring to?  Have I said at some point that I have been doing sector indexing for 10, 20, 30 or 40 years and have results to show you?  I'm 32 and have mostly been investing in real estate and doing hard-money lending since 2009 which has been very rewarding.  Let me guess, you want my tax returns too? 

I started thinking about indexing because my available funds for investing right now are around 200k because those hard money loans are coming back and there are very few requests for new loans.  I'm not about to blindly throw 200k at the market index that seems very likely to give low single digit returns.  I've been clocking 12% annually with 2% on origination on those loans.  You can keep investing for the low single digit returns.  I'll keep looking or waiting for better opportunities, like the energy sector right now where I have bought 9k of VDE in the past 2 weeks and will very likely be buying much more over the coming months.  I'll be more than glad to touch base with you in 3 to 5 years and let you know how that went.  I'm pretty confident VDE will beat the market over that period.  If I'm wrong, I'm wrong though.  Since Warren Buffett and David Tepper are also buying in the energy industry right now, I have a feeling my line of thinking has some merit.  The companies they are buying also happen to be in the top ten holdings of VDE. 

Your arrogance and condescension is really irritating.

[Retire-Canada]

You are such a little troll.

IC is not trolling you.

In Internet slang, a troll (/ˈtroʊl/, /ˈtrɒl/) is a person who sows discord on the Internet by starting arguments or upsetting people, by posting inflammatory,[1] extraneous, or off-topic messages in an online community (such as a newsgroup, forum, chat room, or blog) with the deliberate intent of provoking readers into an emotional response[2] or of otherwise disrupting normal on-topic discussion,[3] often for their own amusement.

His comments are on point and reasonable.

[Metric Mouse]

You have to put this into the proper context. Over your investment life cycle do you really believe that you can consistently beat the market ? This doesn't happen very much at all. Why can you do it when smart educated people don't ?

The index has a lot of advantages. Much less effort and a better chance statistically of beating people who think they can beat the market. Why would you invest against the odds ?

Absolutely. Indexing has numerous advantages. It's a very simple system that provides average results. An excellent, safe recommendation for average investors.

However, one does not need to 'consistently beat the market' to have better returns. You can match the market in bad years and beat it in good years (or vice versa, depending upon your definitions of those terms), giving your annualized returns a significant boost.

Tyler - I think yourself and myself both got out of that article that having some form of asset allocation that you can stick with may be better for you than 100% stocks. I didn't get the impression that the article was stating that market timing works but rather to utilise some form of asset allocation.

Still I think dividends and being in the accumulation phase does change the picture a lot.

Indeed.

While I interpret the article in question very differently, I share Telecaster's general prescription for investors.  In accumulation, just pick a plan you like, stick with it, and save like crazy.  Take all that energy you are wasting trying to time the market, and redirect it towards increasing your savings rate.  As Interest Compound demonstrates (nice charts!), your investment returns may pale in comparison to the money you keep piling in. 

My personal angle mainly comes down to the part about picking the plan you can stick with.  In my experience, different people require different plans.

I completely agree with investing without worrying about what the market is doing. As you state have a plan and stick to it. I also think forget about trying to cherry pick stocks. For me personally it's not worth the effort.

Sticking to the plan is another very important piece of any investing strategy. I totally agree with everyone who suggests that.

As it was pointed out - investing takes work. Not everyone is willing or able to search for values in the market, take the risk or to properly deal with the consequences of their choices. For these people, indexing is a fine choice. I am merely supporting the assertions that indexing, while a fine strategy for many, is not the end-all, be-all of investing. 

Obviously I am not advocating any particular "strategy" or mathematical model; my risks, timeline, choices and results were my own. I've bet big and won big; I would never recommend it to anyone who was not willing or able to do the research, run the numbers and stick with their plan.  Since retiring I use index funds as part of my asset allocation for all the reasons mentioned; they're simple, they are very likely continue to provide acceptable growth and I can see few areas in the market that are values to buy into.

As an aside, for further research for interested parties, I have found Wieners/DeMaso's 'Model Portfolio' an interesting blend of active/passive investing strategies - and with a 25 year track record of +2% over the market benchmarks. Also, cuz Vanguard :D

[Eric]

Absolutely. Indexing has numerous advantages. It's a very simple system that provides average results. An excellent, safe recommendation for average investors.

I take issue with your adjectives.  Yes, indexing allows you to acheive average returns.  However, over the long run, average returns equal WAY above average results because you're never going to have a below average year.  You're going to be in the 80-90th percentile with practically zero effort.  This is thanks to those that think that they're better than "average investors" but somehow achieve lower returns.

However, one does not need to 'consistently beat the market' to have better returns. You can match the market in bad years and beat it in good years (or vice versa, depending upon your definitions of those terms), giving your annualized returns a significant boost.

Why not just beat the market every year then?  I find it hard to belive that anyone can limit their low end return to the average return.

[Metric Mouse]

Absolutely. Indexing has numerous advantages. It's a very simple system that provides average results. An excellent, safe recommendation for average investors.

I take issue with your adjectives.  Yes, indexing allows you to acheive average returns.  However, over the long run, average returns equal WAY above average results because you're never going to have a below average year.  You're going to be in the 80-90th percentile with practically zero effort.  This is thanks to those that think that they're better than "average investors" but somehow achieve lower returns.

However, one does not need to 'consistently beat the market' to have better returns. You can match the market in bad years and beat it in good years (or vice versa, depending upon your definitions of those terms), giving your annualized returns a significant boost.

Why not just beat the market every year then?  I find it hard to belive that anyone can limit their low end return to the average return.

You are by all means free to take issue. I would simply argue that indexing gives, by definition, average returns. It's the average of the market. Perhaps you meant to say you take issue with the connotation of 'average'?

My example was not to be an all-encompassing example of how to have higher than average annualized returns. There are an infinite number of possible mathematical examples that would allow an investor to have greater annualized returns than their market benchmark. I did not mean to imply otherwise, and am sorry if I was vague.

If one wanted to absolutely limit the lower bounds of their returns to the market average, they could always index? (Though I know this may not be what you meant.)

[steveo]

You are by all means free to take issue. I would simply argue that indexing gives, by definition, average returns. It's the average of the market. Perhaps you meant to say you take issue with the connotation of 'average'?

I would rephrase this a little. Indexing should lead to returns that correlate to market returns.

There are an infinite number of possible mathematical examples that would allow an investor to have greater annualized returns than their market benchmark. I did not mean to imply otherwise, and am sorry if I was vague.

If one wanted to absolutely limit the lower bounds of their returns to the market average, they could always index? (Though I know this may not be what you meant.)

My take of what you are stating is that market returns are average. I don't believe that this is the case. My take is that market returns are actually above average. The average investor that tries and beats the market doesn't beat the market but receives below average returns.

So I would rephrase your points to something like this:-

1. If you want to be an above average investor utilise indexing because you will match the market returns of your asset allocation.
2. If you are looking for below average returns you can try and beat the market. Statistically people that try and beat the market typically underperform the benchmark market return.

[josstache]

For the Buffet Indicator:  This is total market cap divided by GNP.  Simply put,  it is a measure of the size of the stock market compared to the size of the actual economy.  Right now it is at 109%.  So...the stock market is 9% bigger than the actual economy.  It is overvalued.  You are paying 9% over fair value when most smart investors should be looking for a 25% margin of safety aka a Buffett indicator percentage of 75%. 

This is the danger of looking at a single number without context.  Here is a fuller description of the Buffet indicator.

Numerator: The market capitalization of all companies listed on US stock exchanges
Denominator: The value of all goods and services produced in the US during one year

There is no particular reason these two numbers should correlate closely over long periods of time. Companies listed on US stock exchanges do not produce all of their goods and services within the US, and this has become increasingly true as globalization has continued.  Accordingly, one would expect the Buffet indicator for the US to rise over time.  For one data point, consider Alibaba's IPO in 2014.  There's a company listed on the NYSE with a market cap of over $150 billion that does nearly all of its business outside the US.

The general principle can also be shown by imagining a Buffet indicator for the United Kingdom. I found a market cap of about $6 trillion for the London Stock Exchange as of 2014, and a GDP for the UK of $3 trillion as of 2014.  That means the Buffet indicator was at 200%, 100% more than the value of the entire economy! Of course, stocks listed on the LSE might have been grossly overvalued, but it also seems likely that many of these companies are not tied solely to the UK economy.

[mrpercentage]

Keith. I like your thinking but find playing with sectors dangerous. The more variables that present themselves in a problem, the more likely you are to miss something. Its hard to predict the movement of 30 holdings but much easier to tell if one company will have good business opportunities.

I would rather sit in one Procter & Gamble than five Teslas. I'm pretty sure I will be using deodorant this year. I am not sure if people will buy enough electric cars in this gas environment to justify Tesla's multiple.

The issue with finding something that works is people will want you to prove it. If you indeed prove it they will use it until they break it. I think this is how most things become wrongly valued. People are sticking to what they know works and repeating it until they get burned. Perhaps several times.

Momentum works chase it--- oh it stopped
Hey value is working chase it--- oh they are all fairly priced
Dividends work chase it--- oh they are all yielding too low because they are over bought
Hey growth is working chase it--- oh their multiples are nuts and they are losing 30% in a day

Repeat forever

I think you have to be willing to adapt. That it is really difficult to prove how that would work. Therefore take heart because people will always chase what they know. Average into a index because it works. Meanwhile I am looking for something I want to own. I cant prove it will work but am sure it will.

Real money:
Got one position up 21%
Another up 5%
Another up 17%
Another up 15%
and one down 25%

Maybe its luck in a market down 10%. What are the odds of me picking that out of 500 holdings averaging down? The Oracle has always been one to secretly acquire. If you have a system-- keep it. The proof will be in your account.

[frugalnacho]

I'm 32 and have mostly been investing in real estate and doing hard-money lending since 2009 which has been very rewarding.

Every investing strategy has been successful since 2009.  Very hard to lose money during that time period, so your apparent success is not surprising or impressive.

[GuitarStv]

Interest Compounder:  I haven't done that chart thing because it doesn't further the discussion.  Value is not relative.  It is objective.

I hope the newbies of the thread can see this example for what it is, and I hope it helps them avoid falling into the same trap.

Looking back over the decades, there has always been a compelling reason to deviate from the index. There has always been someone claiming "This time is different", that indexing won't work anymore for this reason or that. Many of these reasons aren't even on our radar anymore, as history has shown them to be losers...but you wouldn't have known that 50 years ago. I've read it was normal for market-timers of decades past to allocate a substantial amount to Gold. Something like 30-50%.

If you aren't willing to go back a few decades, mentally place yourself in their shoes with the information available at the time, and see how your choices would've played out...things likely won't end well for you.

When someone claims they can bowl a perfect game, I don't argue with them about it. I take them bowling. Seriously, from your perspective, if you think you're smarter than everyone else (the market) why would you waste hours arguing about it? Show us. Actions speak louder than words. I look forward to your future live-post on when it's safe to increase market exposure.

I have no idea how to respond to you.  Why you can't see that there are better times to invest than others just baffles me.

That's not at all what he's saying.

Of course there are better times than others to invest.  It's just that it's really hard/nearly impossible to consistently pick those times accurately.

I'm not smarter than anyone else, I can't predict the future, I don't claim supernatural knowledge of the markets.  All I know is that if I want to make a certain return on an investment, I should use math, not faith.  The math isn't always reflected in the market at all times, but it does get reflected over the long term.

This is why several people have asked to see your math.  It's difficult to take your claims seriously when you're unwilling to provide the mathematical method that you're using to beat everyone else and predict what the market will do.

[yoda34]

So much I want to say in this thread, I could literally write 10 pages worth. I'll keep it to myself. The active folks on this thread don't want to hear it, and the index folks don't want to hear it either. So instead of making everyone mad, I'll just post this.

It's a very simple explanation of why the average weighted returns of all active investors minus costs will always trail the average return of passive investors.

http://web.stanford.edu/~wfsharpe/art/active/active.htm

One thing to note. Passive index investing with proper diversification will net you the average market return (not above market, but average). The average market return will be equal to the weighted average return of all active investors (not counting costs). This is important. It means that there is a group of active investors that beat the market and that there are a group of active investors that under perform the market. The weighted average return is equivalent to the market return which is equivalent to a passive investors return. The median return of all active investors is often below the market return.

Also, on the valuation metrics a few thoughts so everyone doesn't lose sleep at night.

1. Baltic Dry Index includes fuel costs. Oil has had a historic plunge, so it's not surprising to me that the Baltic Dry has also had a historic plunge
2. Shiller's CAPE does NOT account for accounting changes in recent years, specifically the treatment of goodwill on balance sheets. Because of this, today's earnings are counted at .85-.9 cents for every dollar that USED to be counted as earnings in a GAAP compliant statement. This will force the CAPE to be higher than historically counted by quite a lot
3. Buffet's indicator doesn't take into account foreign stocks market cap listed on our exchanges contribution to GDP AND it also doesn't take into account the prevailing interest rate environment. We are at historic interest rates which should cause a rise in the market compared to GDP

For the 3 points above, I have no idea what that means for the market moving forward, just some observations.

One final note - after buffet gave his speech at Sun Valley in 1999 he did not exit the market. He stayed in and continued investing. He simply lowered his expectations of his returns for the next few years.

Andy

[frugledoc]

I think you have to be willing to adapt. That it is really difficult to prove how that

Real money:
Got one position up 21%
Another up 5%
Another up 17%
Another up 15%
and one down 25%

Maybe its luck in a market down 10%. What are the odds of me picking that out of 500 holdings averaging down? The Oracle has always been one to secretly acquire. If you have a system-- keep it. The proof will be in your account.

No offence, but given your previous lol ford thread it became apparent to me that you are investing very small sums of money.  I don't like the way you pretend to be a sophisticated investor.

How about you put the nominal returns next to those percentages?  I'm not trying to put you down for not having large sums invested, but please stop acting like you are some kind of legend.

The most dangerous phase in the learning curve is "you don't know what you don't know"

[mrpercentage]

Thank you. My method is simple. And you all say I can't beat the index. Well I have an index, have a fund, watch the index, and my picks do beat the index and my funds.

I never claimed to be sophisticated. In fact, I have repeatedly said "A JANITOR MADE 8.5 MILLION HAND PICKING STOCKS THAT HE HELD"

It usually comes down to "what is your education" or "how much do you invest" or "show me your method and mathematically prove it". This is the elitist crap I hate with a passion.
Im not going to prove anything. I have sold Ford to buy one. We are talking in thousands. If that is little for you great.

You don't have to be sophisticated is my point. Thats a bunch of smoke and mirrors from people that want to charge you for what a janitor can do himself. Mr Ronald Read is worth ten Bernsteins. I bet on the Davids. You keep betting Goliath

[sol]

"show me your method and mathematically prove it". This is the elitist crap I hate with a passion.
Im not going to prove anything.

How, exactly, is it "elitist" to ask you to substantiate extraordinary claims?

I could say "I'm an investment genius who has made ten billion dollars" but if I follow that up with "why no, I don't have any proof at all" then people probably aren't going to believe me either.

[mrpercentage]

"show me your method and mathematically prove it". This is the elitist crap I hate with a passion.
Im not going to prove anything.

How, exactly, is it "elitist" to ask you to substantiate extraordinary claims?

I could say "I'm an investment genius who has made ten billion dollars" but if I follow that up with "why no, I don't have any proof at all" then people probably aren't going to believe me either.

I haven't made ten billion. I quoted one example of someone who made 8.5 million. His method isn't hard to replicate "buy what you know that pays a dividend and hold it forever." He had 8.5 million despite holding Lehmon Brothers and Bear Sterns. He started in his 30's throwing 30 grand into a utility company I believe and went from there. 85 positions in total with approximately 20k a month in dividends.

Ultimately do what you are comfortable with. If you can't take a 50% hit without crying then stay in an index. That is the best general advice. Just like when the general public asks what they should do for self protection the response should be "buy mace"

[iamlindoro]

His method isn't hard to replicate "buy what you know that pays a dividend and hold it forever."

This.

Is not.

A method.

"Buy what you know that pays a dividend and hold it forever" is a meaningless turn of phrase.  Methods are mechanisms and metrics which can be objectively evaluated and tested.  They are actionable. I and countless others mostly gloss over everything you say (except when you start dishing out actively harmful advice, which is often) precisely because you dispense unquantifiable, inarticulable bullshit.

[MrDelane]

I quoted one example of someone who made 8.5 million. His method isn't hard to replicate "buy what you know that pays a dividend and hold it forever." He had 8.5 million despite holding Lehmon Brothers and Bear Sterns. He started in his 30's throwing 30 grand into a utility company I believe and went from there. 85 positions in total with approximately 20k a month in dividends.

Just did some quick math out of curiosity.

I'm not saying Ronald Read's story isn't cool - but if you started in your 30's with a 30K lump sum and could have thrown it into an index fund for the last 62 years (the amount of time he invested) you would have only had to invest an additional $500 a month to wind up with roughly 8.5 million.

(assuming dividends reinvested, and a 6.8% average rate of return)

[mrpercentage]

His method isn't hard to replicate "buy what you know that pays a dividend and hold it forever."

This.

Is not.

A method.

Exactly.

Neither

Is

Just

Buy

the index

I quoted one example of someone who made 8.5 million. His method isn't hard to replicate "buy what you know that pays a dividend and hold it forever." He had 8.5 million despite holding Lehmon Brothers and Bear Sterns. He started in his 30's throwing 30 grand into a utility company I believe and went from there. 85 positions in total with approximately 20k a month in dividends.

Just did some quick math out of curiosity.

I'm not saying Ronald Read's story isn't cool - but if you started in your 30's with a 30K lump sum and could have thrown it into an index fund for the last 62 years (the amount of time he invested) you would have only had to invest an additional $500 a month to wind up with roughly 8.5 million.

(assuming dividends reinvested, and a 6.8% average rate of return)

That is a lot of money for a janitor that never made more the $14 an hour at JC Penny.

Maybe he did invest $500 a month. Im going to guess that will Murphy involved-- he invested less than that. That is a guess. Not exactly science. Although all his dividends were set to pay out in cash and he frequently used direct stock purchases.

Warren Buffett is a financial genius that is a lot more complicated, but I was just showing you that you don't have to be Warren. You can be a janitor from JC Penny's and never sell a thing. He wasn't even a dividend growth investor. He bought what he knew but it had to pay a dividend. He didn't care if they cut the dividend. He didn't care if the journal said his stock was going to zero. He held it.