Bogleheads are mind-boggling sometimes.

[Chad]

FWIW, if I were to play video games, and if I gambled, it would be this one....

https://www.youtube.com/watch?v=sdmsRcsl_xA

That is awesome! If that were real it would be the most watched sport on the planet.

[Dragline]

Yes, that video practically made me wet myself I laughed so hard. Thanks.

[bibacula]

Curious, Jacob's earlier comment seemed to imply the Bogleheads are right? Yet, reading some older blog posts it looks like he disagrees quite a bit with index investing.

I agree that it's odd.

Rebalanced index porfolios outperform active investors over long periods of time, and yet indexing is widely despised on this forum.

Personally, I don't look to the ERE forum for investing advice.

[secretwealth]

Curious, Jacob's earlier comment seemed to imply the Bogleheads are right? Yet, reading some older blog posts it looks like he disagrees quite a bit with index investing.

I agree that it's odd.

Rebalanced index porfolios outperform active investors over long periods of time, and yet indexing is widely despised on this forum.

Personally, I don't look to the ERE forum for investing advice.

Rebalanced index portfolios outperform most active investors. But there's a very very small group that outperform indexes, and have done for 10 or 20 years. Most of these people avoid the limelight and are not household names outside of the world of professional finance, but they exist (and are paid enormously as a result).

It seems the Bogleheads dismiss these people as being lucky. It seems more profitable to me to try to figure out what differentiates them from the rest of us.

[jacob]

Curious, Jacob's earlier comment seemed to imply the Bogleheads are right? Yet, reading some older blog posts it looks like he disagrees quite a bit with index investing.

No no no no ... In investing, there's no such thing as a "strategy being right". Every time one person adopts a certain strategy, that strategy becomes part of the aggregate market behavior. The more people adopt the same strategy, the less return that strategy will have for those who come in later, because there are fewer buyers left; the more volatile the market will be, because there's no one to take the other side.

It seems to me that a lot of index investors ignore the market impact of their strategy and live in a world where they take their simplifying assumptions as gospel. Those simplifying assumptions atrophy proportionally with popularity.

So that's point one.

The second point is that index investing is better than "clueless mutual fund investing" for the usual reasons that the Bogleheads point out, i.e. the fees ... if you pick a manager cluelessly, that is randomly, you're more than likely to come out behind due to the fees. However, you don't need to be a top 1% [stock] picker to beat an index. You just need to be a top 49%.

There are four combinations of market participants ..
1) Those who know what they're doing and they know they know. (They outperform. Few people in this group would invest in mutual funds. If they do so they would stick to a handful of known superstars ... e.g. Buffett, Klarman, ...)
2) Those who don't know what they're doing but they think they do. (They overtrade, chase last years winners, etc. They underperform.)
3) Those who know they don't know. (They should be in index funds, focusing on making money on wages instead. This probably goes for 95% of the population. But keep in mind how clueless most people are when it comes to investing. Many of these people are instead in group 2 where they are being rescued by the Bogleheads.)
4) Those who know what they're doing but they don't think they do. (They lack confidence and make the same mistakes as group 2.)

I think the reason for the controversy is that there are two aspects to investing (with outperformance)
1) Knowing the market. (Which stocks are good, which are bad.)
2) Knowing yourself. (What's your pain tolerance.)

And as with every complex issue, the argument always gets gets confused when people are either ignorant about all the facets of the problem or choose to emphasize one facet over another, etc.

In my previous blog posts, I've tried pointing out some problems with the strategy (issue 1, lack of knowledge of the market). Of course, if anyone who doesn't know the market and is psychologically set to run their portfolio on faith&experts (they don't like opposition to their investment ideas, which practically manifest themselves as drawdowns) ... will take offense with the wrong thing .. the strategy critique.. when the problem really is their own psychological barriers that are responding---that experts aren't always right. That's hard for an expert (doctor, lawyer, engineer, ...) to accept. It jars with their reality.

Markets are not just math. They're also humans. You need to understand the "math" (by which I mean businesses or whatever) .. but you always also need to understand "who's taking the other side of my trade.. why do they disagree with me". I think most investors ignore this latter issue at their peril. They pretty much invest without thinking about how their action impact and change the system. Some have it right by thinking of "Mr. Market" but I think it's important to understand that Mr Market is really a mob of individual people.

Think of a group of people in a hotel they've never been in before. They need to find the bar. In that group you'll have all the above kinds of people. Some who don't know where they're going and just follow the group. Some who think they know but don't and lead the group in the wrong direction. Some who know, leading the group in the right direction. You've all experience the "does anyone know where we're going... uh no ... I was just following you.. oh, but _I_ was following you". This is a systems effect. It's very important. Index investors widely seem to refuse that this behavior exists. (Or at least they ignore it enough for other people to trade against them.) If you want to outperform, you have to leave this group! Here's the kicker: Most people in the group are unaware that some people have left it and have already found the bar. Saying that most people in the group beats following a random tour bus organizer doesn't prove that you can't find the bar faster than the group. That's like saying that "The average bus in Chicago doesn't navigate traffic faster than the average driver. Therefore nobody driving a car can navigate faster than a bus."

So in conclusion. There's no one best strategy as handed down from experts from above. There's an appropriate strategy for a specific person. Most people are probably better off in index funds although index investing is not the best strategy. It is by definition the average strategy. It is appropriate for someone with an average understanding of markets.

[George the original one]

> They pretty much invest without thinking about how their action impact and change the system.

This is why I use parimutuel betting as a simile for an active market.

[steveo73]

I don't just think index investing is for the average investor. The low costs associated with it are where it really shines. The low costs + consistent average returns can beat high costs + inconsistent but maybe higher returns over time.

I'd add that no matter how good an investor is and how great his strategy sounds or how mathematical it is you are trying to predict the future. The guys from Long Term Capital Management were brilliant. It is arrogant for most people to believe that they are smarter or better than these guys. They lost money.

I'd add that my father-in-law has been an active trader in the foreign currency markets and has made millions. I've seen him make some big mistakes as well. He retired at about 40 and was loaded. At some point he started his own trading company. He lost money and paid back the investors out of his own funds. The point being that despite being really good he has lost money for periods of time and cannot provide guaranteed consistent returns. I'd add that he is still really wealthy but that some people he worked with are not. He is wealthy because he is basically frugal whereas other guys had to travel first class went they went overseas.

[bibacula]

@stevo73 - Totally agree that low costs are the key. Why can't anti-indexers give any data of superior past performance?

Because the number of people who beat the their respective index are statistically insignificant.

A Warren Buffett Story: If you had 10,000 trained coin-flipping chimpanzees flip coins, roughly 5,000 would flip "correctly" the first time. After many flips, only one super-lucky chimpanzee would have flipped correctly every time.

Statistically, stock pickers who beat their index after expenses over a long period occur as often as the lucky monkey above. See this pdf. (http://gates.comm.virginia.edu/uvafinan ... ermers.pdf)

Theory is unimportant in the end. Can anyone give real-world returns showing skill in stock picking over time? Or do you just need faith, like a religion?

[workathome]

I found Jacob's posts on indexing interesting after reading Bogle's book. They counter the pro-indexing arguments, much as he wrote above. (Now I see why he might refrain from chiming in or updating the blog, probably gets to feel pretty repetitive).

https://www.google.com/search?client=sa ... entextreme

[jacob]

Theory is unimportant in the end. Can anyone give real-world returns showing skill in stock picking over time? Or do you just need faith, like a religion?

Here are two I'm familiar with ...
http://www.gurufocus.com/StockBuy.php?G ... th+Klarman
http://finance.yahoo.com/q/pm?s=FPACX+Performance (Steve Romick)

And there's of course Buffett.

All three of them tend to be able to sit on large amounts of cash for extended periods when they think risk outweighs reward. They tend to buy a wide assortment of securities, not just common stocks. In short, they have large freedoms to go wherever for inefficiencies.

You will find that outperformers either close their funds quickly or get hired into private money because of the inherent limitations of managing a sizeable fund due to slippage. This means it's hard/impossible to identify these guys based on just looking at their 1-3-5 year returns---as most people do when they tick off holdings on their 401k plan. You have to read their annual letters to see what they're doing and crucially WHY they're doing it.

The slippage problem is also why the average of mutual/pension funds don't beat the market... because they are the market.

It is also why Buffett can't get the same returns he could were he only to manage a 1M portfolio.

It's also why this is a very strong edge for people not invested in mutual/pension funds. They can buy and sell without moving the market price for practically all stocks... not just MidCap or larger.

WRT statistics, and this is an important point. I once read a book. Unfortunately I forget the title but it was a value investing book. Maybe it was Security Analysis or the Intelligent Investor or someone belonging to the philosophy (there are about 10 classics or so...could have been any). It did in fact mention the coin flipping example. It did however also mention that out of 20 of Graham's (I believe it was Graham but don't quote me on it) students close to all of them went on to gain spectacular returns. Now if you include such small groups in a big random sample of 25 year old MBA/CPA/CFA managers, with little individual insight and echo chamber thought processes, sure it will drown out statistically and you won't see a signal. So you need to add another dimension to the data. You need to use more than just "recent returns" when datamining. In particular, you need to use something that's unquantifiable by simple statistical analysis. Why? Because anyone (401k investors pretty much do it all the time!) is capable of doing such an analysis and those those funds that answer to such an analysis are quickly maxed out resulting in a subsequent crappy performance. It's inevitable by construction.

Now, if you do this, you will be able to find that certain kinds of people do have an edge. In short, as always, you need to provide actually value to the market in order to profit. It's impossible to gain an edge without working for it. Very important!

Unfortunately, this is not something that can be written down in a single paragraph on the internet. It requires reading at least 50 different investment books, as many as possible really, plowing through prospectuses, thinking very deeply about what makes sense. Thinking about the markets. Most people are not willing to go to such lengths. Not even professionals.

It's a little bit like a high school class. Imagine that instead of just doing homework, which you for the sake of the argument has no interest in, you could just copy the average answer and get a guaranteed C-grade. This beats copying a random classmate, because you might copy a D-student. You could also randomly copy an A-student. What makes it trickier is that D-students don't always get Ds and neither do A-students get As. Were you just to sample you friends statistically you might not learn who is really an A student and who is really a D student before graduation. Hence random sampling is insufficient and a poor strategy compared to just indexing the answer. However, if you put in some effort in getting to know your classmates, you get an idea of whose the smarter student and who is not. So now you can copy who you think will be an A student with more confidence than a random z-score, but ONLY because you put in effort. If you put in even more effort, you can even start doing your own problem solving and get your own answers. After all, with enough diligence, you might be an A+ student. In that case, you'll probably want to stop copying.

This analogy holds almost exactly!

However, because the method (of identifying smart friends vs dumb friends or smart managers .. or how to solve investment problems) can't be demonstrated in three easy steps, it's pretty much impossible to convince anyone who disagree. You see the problem here? Like if I told you my current holdings, you'd still have to wait 5 years to figure out if I was right. And if I show my results over the past 5 years (which are 40% better than the market) you'll say I was just lucky. But what if I had really good reasons back then and those turned out right .. would you trust me more? Dunno ... maybe you would/ Maybe you wouldn't.

There really aren't any special "expert secrets" to the methods that obtain those results. They've been known for over 80 years. It's just that putting in all that work and having to disagree with popular sentiment is tough to stomach, so most simply choose not to. I will readily admit that buying into a downbeaten sector sucks when it falls another 20% ... and it may suck for a year or two until it turns around and doubles. In the meantime there's a lot of worry. I really do, occasionally, consider simply switching to market returns just so I don't have to endure the uncertainty anymore. In the groupings I described above, I consider myself a 1 but sometimes a 4. I know and mostly I know that I know, but sometimes there's fear, doubt, uncertainty.

We may never agree on this but maybe we can agree to disagree. Fact is, index investors do their thing and non-index investors do their thing. Consider that the wide-spread belief that market beating is impossible actually makes it easier. If I was less argumentative (I really try to be), I would just shut up and take advantage of it (like I did in 2008/09... and which I think I'm doing now in 2013).

[jacob]

To demonstrate the "hasn't been proved statistical" fallacy ... imagine that you have a jar with twenty balls in there. Each ball has a number on it and if you plot all the numbers, they will fall on a Bell curve. If you draw random balls out you will statistically conclude, based on the printed number, that performance is completely random.

However, what if I now said that the balls are colored red and green and that balls colored green have a positive mean value and the red ones have a negative mean value.

Well, if you conditioned your statistics on the ball being green, P(number|green), you will now find that green actually does lean positive.

The problem occurs when a quantitative analysis can't identify qualities (red/green) that aren't quantifiable. Scientifically speaking, you're not really proving that nobody can outperform the market. You're just showing that you haven't found a quantitative way to identify which balls are red and which are green. Yet!

[steveo73]

All three of them tend to be able to sit on large amounts of cash for extended periods when they think risk outweighs reward. They tend to buy a wide assortment of securities, not just common stocks. In short, they have large freedoms to go wherever for inefficiencies.

You will find that outperformers either close their funds quickly or get hired into private money because of the inherent limitations of managing a sizeable fund due to slippage.

There are a couple of good points here but I basically disagree that professional money managers make money based on my limited experience.

Firstly there are very few people that outperform.
Secondly the specifics that are stated as chasing inefficiencies are really hard to find and this is the key point - getting it right at the right time.

My father-in-law was hired into a private money fund by a billionaire. They lost money and the fund was closed down. On the flip side I think the billionaire was too involved and lost more money than my FIL could make. In saying all of that my FIL loses money as well and I think a key reason he is really rich is simply because he didn't spend all his money when he made it. Basically my FIL is an outperformer in that overall he has made money and I still don't really trust him to hold my money. I feel more confident trading for and investing for myself. I feel more confident simple investing predominantly in index funds and trading a bit on the side for fun. I think my fun trades can make me money but I wouldn't rely on it.

[workathome]

http://www.gurufocus.com/StockBuy.php?G ... th+Klarman

It is interesting that Klarman appears to only hold about 15% of the Baupost Group's funds in equity positions, and it appears this is true historically as well. Perhaps another reason to reconsider plans that call for putting 60-100% on a S&P500 ETF.

[bibacula]

I think that we've found one area of agreement. I'm trying not to quote anyone out of context.

Rebalanced index portfolios outperform most active investors. But there's a very very small group that outperform indexes, and have done for 10 or 20 years. Most of these people avoid the limelight and are not household names outside of the world of professional finance, but they exist (and are paid enormously as a result).

Here are two I'm familiar with ...
http://www.gurufocus.com/StockBuy.php?G ... th+Klarman
http://finance.yahoo.com/q/pm?s=FPACX+Performance (Steve Romick)

And there's of course Buffett.

Firstly there are very few people that outperform.

Because I work in a rather big bank, I can show you the opposite. When you look at their list of funds returns history, you'll note that most funds started not too long ago. That's because their policy for keeping funds open depend on their returns. If they have consistent negative returns for some time, the fund is closed. This way, one person that looks at their list of open funds will almost always see some nice returns and not too much losers. Off course they keep the lucky chimpanzees.

Conclusion: Outperforming an index, whether through luck or skill, is extremely rare.

I once read a book. Unfortunately I forget the title but it was a value investing book. Maybe it was Security Analysis or the Intelligent Investor or someone belonging to the philosophy (there are about 10 classics or so...could have been any). It did in fact mention the coin flipping example. It did however also mention that out of 20 of Graham's (I believe it was Graham but don't quote me on it) students close to all of them went on to gain spectacular returns.

The Intelligent Investor reprinted a Warren Buffett speech called "The Superinvestors of Graham and Doddsville". Here's a link for any interested. http://www.tilsonfunds.com/superinvestors.html

We may never agree on this but maybe we can agree to disagree. Fact is, index investors do their thing and non-index investors do their thing.

Agreed. To disagree amiably, that is.

[FrugalFred]

I find these kind of posts highly discouraging. And it's not just Boggleheads. Whenever I post on another forum asking if I can retire in 5 years with say... a paid off condo and $300K, everyone says it can't be done. Gonna need at least three times that. But when I do the math, expenses < 3% safe withdrawal rate. Am I missing something?

If I have to work another 20 years, I might as well just shoot myself now. This isn't a life.

[Farm_or]

Don't shoot yourself. You'll just be broke, overworked, and suffering from a gunshot wound.

There are so many points of view, because there are so many different people. It comes down to what you require for comfort. Some people are very Spartan, healthy and resourceful. They can get by on very little. For others? There's never enough resources in the whole world!

[ether]

To me this thread takes the cake for "Crazy Bogleheads" https://www.bogleheads.org/forum/viewto ... st=3412061