This seemed to prompt a reader to post the following comment;
Hi Roger- a co-worker of mine continues to advocate that any forward looking market analysis is purely speculation and that the likes of Peter Bernstein, Bogle, Harry Browne, William Berntein, Mauldin, etc. advocate that forward looking analysis is rather challenging. attached is a link whereby even Barry Ritholtz admits the same.
I have read where you do not believe in broad based passive products and if I interpret your comments correctly do not like to look backward but attempt to look at te macro picture via a top down sector approach. Please clarify how this approach is not speculation?
I gave a short reply and reader Rhianni32 gave a more thoughtful reply. I wanted to delve in a little more this morning.
A question I usually ask truly passive investors is about whether they do any forward looking analysis in their investing--this seemed to be obviously missing from the week long discussion we had here recently about the Permanent Portfolio. The reader's comment goes all over the place but the easy one; a bunch of people "advocate that forward looking analysis is rather challenging." Investing is not a particularly easy endeavor. There are ways to make it a little easier on yourself but I think most people can agree that it is challenging but I would say that buying more stock funds after your equity portfolio has cut in half (IE rebalancing) is also challenging.
As far as looking backward, the reader is not quite right. I describe what I do as taking how things usually work, combine that with what I think is going on now and try to make a forward looking analysis. No market participant can be correct with every decision and knowing that ahead of time is one way to make things a little easier on yourself by not making big bets.
With regard to not preferring broad-based funds, I've written hundreds of posts about using individual stocks and specialty ETFs to manage very specific characteristics of the portfolio. I target things like cap size, style, country weights, sector weights, volatility and yield. It is these decisions where the concept of risk adjusted returns comes into play. Being right about including one country and underweighting one sector can go a long way toward helping returns.
The reader asks how this is not speculation. Well by Bogle's definition it would be. In these sorts of posts I often mention not wanting to be zero weight any sector and not wanting to exceed 20% in any sector. Specifically I tend to be plus or minus a few percent of any sector's weight in the S&P 500. If the industrials currently take up 10% of the S&P 500 would anything between 6% and 14% of a portfolio allocated to that sector be speculation? Again Bogle would say yes. Ok so if this is speculation is it reckless? What would the consequence of being wrong be?
If no more than 5% is in any one stock (I typically don't go more than 3% into one name), and you stray from the index weighting by a couple of percentage points or so is this being reckless (the assumption here is that there is no point in convincing someone it is not speculation)? Any hard core passive investors out there know how Bogle might answer that?
Couldn't an argument be made that holding on to an S&P 500 index fund was reckless when tech grew to 30% of the market nine years ago? In that instance holding an index fund may not have been speculative but it might have been reckless. What is worse, speculation or recklessness?
As I said in my original reply my idea of speculating would be something like whether or not to buy RIMM ahead of an earnings number. This is the sort of thing they talk about on the Fast Money half time report everyday and not my type of trade. That being said I am sure that some people that do trade that way would argue even that is not speculation.
Trying to convince someone else that your idea of investing versus speculating is correct is pointless. What is useful is taking little bits of other peoples' ideas (IE process) on the subject and coming up with your own solution.
31 comments:
"What is useful is taking little bits of other peoples' ideas (IE process) on the subject and coming up with your own solution."
What nonsense. Doing as you suggest could lead to absolute disaster, especially for ignorant investors who listen to other peoples' complete rubbish. If there ever was anyone looking out for the regular Joe investor, offering sound investment advice, and giving the little guy a shot at making decent returns it is Mr. Bogle.
Your standard line of passive investing doesn't work because passive investors are down X% while I managed to avoid most of the downside is disingenious. It completely ignores the fact that most passive investors have an allocation to fixed income too.
I'm not saying your methods are garbage, but on the other hand it involves a sort of seat of the pants approach. Knowing which sectors, countries etc. to be in or out of smacks of clairvoyance, but you convincingly proclaim it art. The problem is it works until it doesn't anymore. I think anyone investing in the style Roger promotes would be well advised to study up on behavioral finance and investor biases. This blog is rife with potential case studies.
I'm just offering an opposing view since most comments with support Roger's. This is not a hostile personal attack, I am only criticizing what you have written.
It completely ignores the fact that most passive investors have an allocation to fixed income too.
I specifically say equity portfolio cut in half.
You must be new. Two bits of context four and half years in the making; people who are interested enough in investing to seek out blog content on the subject are generally not ignorant investors incapable of doing anything beyond three index funds.
Second, the foundation for country selection is based on choosing countries with different economic/fundamental attributes than the US thus offering better diversification.
One other thing your clairvoyance comment implies the same old standard thinking that no one can do forward looking analysis and be right. Staples, healthcare and utilities lead in recession/bear cycles time after time. Is that really so difficult? Then with that knowledge is it so difficult to look at those sectors to see if there is anything seriously wrong this time?
This is hardly rocketscience and promoting the idea that ignorant investors as you describe should never try to learn makes no sense to me.
What nonsense. Doing as you suggest could lead to absolute disaster, especially for ignorant investors who listen to other peoples' complete rubbish. If there ever was anyone looking out for the regular Joe investor, offering sound investment advice, and giving the little guy a shot at making decent returns it is Mr. Bogle.
How are investors not doing the same blindly following the advice of Bogle? I'm not saying that I don't agree with you and Bogle, but his allocation could easily under perform for the next 50 years and leave a lot of folks SoL. Like you, I think there's way too much rubbish out there. I also think Bogle is mostly right, maybe even more so than Roger on many points. I've made it known that I don't like Roger's timing mechanism and at this point, I don't fully understand his analysis to the level of wanting to try it. But I think 'rubbish' is a bit harsh. There are more tactful ways to disagree :)
Bottom line is, Roger has the heart of a teacher. We get the opportunity to 'look over his shoulder'. He's not trying to sell us anything and he's allegedly making 10's of dollars a month on the blog, so I don't think he's in it for the money, either. There's way too many people trying to sell us stuff. Advice, services, timing signals, you name it. If you want misinformation and people performing a disservice to their customers, watch some financial TV for a few minutes.
I just think that there's a hell of a lot to learn and we have a guy that's willing to teach what he knows. Doesn't mean we have to follow or even agree with any of his advice.
Just my two cents so take it for what its worth.
In the meantime, maybe you can share with us some of your philosophies. There are plenty of visitors here that do just that and it really rounds out the offering, I think.
It seems to me that Bogle talks his book, and as I recall he wound up w that book because way back there was come conflict at Wellington that forced him into passively managed funds. But how he got there really isn’t important, the important thing is the historical record shows that investing in the passively managed S&P hasn’t worked for 10 yrs, and that’s forever to a retiree. The historical record over 10 years shows the S&P has been a round trip to nowhere. So we MUST deal w the brave new world of investing, and yes it can be challenging, and yes it can be an art form, and yes what works may change over time - that’s the reality. If you are not happy with reality, good luck. Mitigation techniques, such as those used by Roger, MAY have a place - they appear to have worked. There is a clear distinction in my mind between “ may have worked” and “hasn’t worked for 10+ years”. So you can read Roger, and others, to try to find and assess ideas and process that appear to have worked, and build them into your investing process as you think appropriate, or you can continue the line of passive investing ideological purity as per Bogle. If 10 years ago you stuck with passive investing in the S&P as per Bogle and drew down 4% to 6%per year (orthodoxy 10 years ago), the historical record shows you be much much poorer today (maybe broke), but you will be pure. If you’re retired, 10 years of no net return is forever; if you’re not yet retired it means that about 1/3 of the income you would have set aside for retirement has gone nowhere, it hasn’t even kept pace with inflation - either way, your goose is burned or cooked. I’m not here to tell you what works, but I’ll tell you what hasn’t, and it’s the reason passive investing has been morphing to active decisions like emerging markets/US mix,country selection, etc - the record shows the original passive investing orthodoxy (just buy the S&P), and much of the evolved orthodoxy, haven’t worked.
"What nonsense. Doing as you suggest could lead to absolute disaster, especially for ignorant investors who listen to other peoples' complete rubbish."
Assuming you didn't come into this world with an innate knowledge of the stock market and how to invest, you are learning by listening to other people's rubbish. Every idea, article, book, TV show, blog, etc. you've come in contact with is from someone else.
Whip saw everyone needs to reduce longs
Wow!
I disagree with Roger a lot. I am against individual stocks for most individual investors and prefer ETFs for instance.
But, I never question Roger's sincerity and honest approach to trying to formulate a portfolio. There are never guarantees and Rogers might not be the very best choice. But Roger provides a rational honest explanation to how he invests.
I borrow from that to an extent. People could easily do much, much, much worse than Rogers suggestions. I think the disagreements need to be a little more constructive.
Good points today Roger.
I have a philosophical sense that the concept that investing can be passive is exaggerated or essentially a fallacy. In the same sense, can we ever really not invest? If savings are held at the bank, I think of it as a investment in US dollars.
Investors in a S&P500 index fund are letting the market determine their allocation. It doesn't mean that they haven't allocated between different companies and sectors. People seem to lose that concept.
Indexing is the best approach for many people, but I don't think that fact justifies framing investment decisions badly. Bogle is a marketer not America's advisor.
Roger,
I have posted about this several times in the past on your blog...And a collective moan is let out from the 200 day MA crowd….There was this guy (on Bloomberg) salivating on Friday about the “golden cross,” that magical moment when the 50 day and 200 day moving average cross to the upside…how bullish it all is….good luck with all that. While we were crossing above that 200d SMA, some of us were pointing out how its prone to plenty of “false breakouts” because it’s an overused indicator by the masses, and that if you wanted to use a moving average, try the 200day EMA or try an average based on a calendar (which intuitively makes more sense), like the 52 week M.A.
It should be noted that the 200day EMA was tested but never taken out and the 52 week MA was “sniffed.”
In terms of EW analysis, in the most bullish case, we’re in the middle of c-wave that targets 874 at a minimum, but it sure does look and feel like a third wave right now….which means we’re looking the strong possibility of 841 in the near term….(1.618*1=3). Puts performed “ok” today….
Hopefully one learns by this how not to use the 200 simple average. Also, by October we will re-test the SP667 low! I would love to hear wht everyone is doing to protect their recent gains?
Surely you caught the whole 50/200 DMA crossover discussion over several days.
some of us were pointing out how its prone to plenty of “false breakouts” because it’s an overused indicator by the masses
This is a common comment about indicators when they don't work. It's because "everyone knows about them". I'd argue that they never worked. To prove this, do a 64 day / 278 crossover system. No one knows about that because I just made it up. Bet it does no better or no worse than the 50/250 cross.
""I am against individual stocks for most individual investors and prefer ETFs for instance." The composition of many sector ETF's is heavily weighted to a few stocks/sectors. Owning the ETF often means that you have a pretty large weighting. RTH has a wtg of 22% for WMT and 12% for HD. So two stocks account for 34% of the ETF.
"To prove this, do a 64 day / 278 crossover system. No one knows about that because I just made it up. Bet it does no better or no worse than the 50/250 cross."
All any crossover system does (and your example is exactly the same sort of thing and yields slightly different timing)is give a heads up that the s-t trend is stalling and falling below the long term trend.
The reality is that mutual funds have to stay in the market--in many respects, they are the market. Mutual funds do not follow technical signals, they ARE the technical signals.
Because we are gnats on the ass of that collective elephant, we needn't be buying when they are raising cash--even though as a % of assets, those cash positions are small, on an absolute base, they are very large.
All any crossover system does (and your example is exactly the same sort of thing and yields slightly different timing)is give a heads up that the s-t trend is stalling and falling below the long term trend.
Yup, but that doesn't necessarily provide an edge.
"Mutual funds do not follow technical signals"
Only because they are not mutual funds that follow technical signals.
The more I think about this the more suprised I am that there aren't
(more) mutual funds that follow technical signals.
"Yup, but that doesn't necessarily provide an edge."
You don't need an edge. You merely need signals (and most people look at the weight of the evidence reflected by a number of indicators--this moving average crossover is a gross simplification) to tell you that flags are waiving and the rip current is out. (And a better look is not the daily but the weekly or monthly moving average--that's how whipsaws are avoided if one were a one indicator sort of person).
There is no requirement to be fully invested in the market when the risk levels are high. I don't swim when their are rip currents or shark sightings. Why in the world would an individual feel like they have to tie up his/her money in the market when risk levels are rising? Oh...they do it because of the siren call of Wall Street.
Also, there are those nonsensical recanting of "if you miss the biggest 'x up days in the market' you give up y. The obverse example is strangely silent--If you miss the big bear markets, and just have mediocre returns you're likely to do fine.
Traders drive short term price moves; institutions drive long term price moves. I prefer to follow the money by watching price and volume patterns.
Mutual funds have such gigantic positions in the market and in particular stocks that they have to take long periods of time to establish their positions in and out. After they are in, the 'analyst' is going to yap about it. S/he is not going to yap before hand and make the position more expensive. Conversely, they are not going to denigrate it before they are out.
Think about how many HMO's were consistently touted (and the rails) before their fall. Rails were getting pricing power from fuel surcharges which comprised 60% of their revenue growth. You'd have to read the fine print on the financial releases to pick that up.
HMO's are NOT recession resistant (though every analyst said they were). In recessions companies cut back on their benefit offerings AND when they lay off people, not too many can afford the COBRA payment. It's a simple fact, that is not uttered.
So what is often passed along as 'fact' in the marketplace is nothing more than a circus barker selling something to you (and me and Bobby McGee).
I believe it is likely the second oldest profession.
I'm glad for Roger's honest voice and his generous sharing of his process. His process is not my process, but I'm certainly informed by it and his measured counsel over the years that I've read his blog has made me a better investor.
URL for Irrational Optimism
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=476981
It really is worth reading.
I don't mean any of that to sound as emphatic as it comes across (and oh...the grammar and spelling issues!)
Re Irrational Optimism: Sort of blows the case for stocks, especialy if you diversify overseas.
Re Irrational Optimism: Sort of blows the case for stocks, especialy if you diversify overseas.
"Couldn't an argument be made that holding on to an S&P 500 index fund was reckless when tech grew to 30% of the market nine years ago? In that instance holding an index fund may not have been speculative but it might have been reckless. What is worse, speculation or recklessness?"
Holding and not rebalancing would have been reckless speculation. Someone sticking to their investment plan would have been selling the SP500 on the way up and purchasing fixed income to maintain the desired allocation.
"Staples, healthcare and utilities lead in recession/bear cycles time after time. Is that really so difficult? Then with that knowledge is it so difficult to look at those sectors to see if there is anything seriously wrong this time? "
Reminds me of the old saw, what everybody else knows is not worth knowing.
"How are investors not doing the same blindly following the advice of Bogle?"
Following Mr. Bogle is not following someone blindly. The preponderance of academic research supports his teaching. Heck, even Buffet and Swenson say that virtually everyone should be in passive investments. Today's WSJ has an article dealing with active managers getting the boot.
I agree, ETFs are a scam, for speculators (gamblers) only.
Rodger fails to understand that his kind of "active" investing is in fact speculation.
"Bogle is a marketer not America's advisor."
What then is Bogle selling, his books? Since receiving his heart transplant, Mr. Bogle has dedicated his professional career to helping the small investor get a fair shake. Mr. Bogle is not running Vanguard anymore. Vanguard's ownership structure doesn't benefit anyone other than the fund owners themselves. To the extent he is an owner in Vanguard it is through the funds he holds just like anyone else.
He might not be America's advisor, but he has done more for the American investor through his innovative index funds than anybody else. Why is Vanguard so wildly successful?
"Re Irrational Optimism: Sort of blows the case for stocks, especialy if you diversify overseas."
It is also illustrating the risks in our own market and the fallacy of what many of the purported studies on asset allocation and long term performance (beyond the narrower slice that serves to keep folks in the market).
Much of what passes for investment advice and long term performance is based on a specious argument that over the long term, the market is safe so long as you have enough time. The paper points to longer time frames and other venues to show how this can be a dangerous mental model.
Investors should treat their money in the market as they do their body in the water. Understand the risks, enter/increase exposure when the investing climate is hospitable and exit/reduce positions when conditions deteriorate.
Calling some methods gambling v. investing v. speculation is misleading and introduces pejorative terminology that is both unnecessary and inaccurate.
It is all about taking risk against an expected outcome. Some folks allocate some part of their portfolio to be speculative--to take the flier. I don't see that as being any more risky than allocating a large part of my portfolio to something that has a high risk of going down 30-50% after the economic cycle has peaked.
There are many successful investment models. ONe can dig up quite bit of information from opponents/proponents of this one or that one. Ultimately, you have to make a decision for yourself.
I've found that I'm a less efficient at losing money and a better conservator of my assets than most money managers. If I make a mistake, it is my own, and I'm happy with accepting that responsibility.
You don't need an edge. You merely need signals
Then I guess I don't understand your point.
So if a signal isn't an edge, what good is a signal?
For those so inclined, marketsci.wordpress.com has a couple of recent posts, with charts and data, on golden crosses, the 200 dsma, and 200 dema.
Am I the only one who checks into this blog who is interested in the tax-efficient income a portfolio generates rather than avoiding market flucuations?
Couldn't of said it better myself BillB!
Anon 5:21. You are not the only one interested in tax-efficient income, I am too.
However I don't think market fluctuations and tax efficiency are seperate from each other.
Every entry here from Roger and the commentors gives us something new to think about to mix in with whatever strategy each of us works on.
Wouldn't a tax efficient income portfolio with some built in market fluctuation protection be better then without?
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