steveo73 wrote: ↑Tue Apr 05, 2022 10:03 pm
You also need to clarify this point. What is the benefit of picking stocks versus investing in an index or picking commodities versus investing in an index or bonds or whatever. If you look at your portfolio how much will your outperform and an even better question is how realistic is it that you will outperform ? I suggest you should be realistic and if you are you will probably under perform.
As someone who thinks value investing is useful, I honestly don't think in terms of performance of a ticker, I think in terms of the value of the business. However, to point to the theory, the standard dev is .8% a year of a portfolio with 40% stocks. I do agree you can value bonds, but for my purposes I was only discussing stocks. Beyond stocks (or equity), bonds, I think commodities, collectibles/art, real estate and monetary "alternatives" (metals, fx, crypto) are also relevant in a portfolio, but other than real estate, I think there is no "performance" valuation metric(*) that one can apply to those assets, as they don't perform anything. Given that is my view, I do agree not all value investors agree to my somewhat more MPT style views.
(*) Before the crypto people descend on me, yes some crypto may provide valuable services, but then the coin may be legally defined as an equity like stocks, which is why I didn't list them separately.
As for the probability to underperform, EMH says that there is no such larger probability of underperformance, just a larger probability of volatility. Now if you are saying I, as a flesh and blood, I will screw it up and exit when down, I think that is a worthwhile question, but a rather personal one. I could say "Nuh-uh!" and you could shout back "Ya-huh!" and frankly that is what gives these discussions a bad name. So unless you have mechanical-oriented (rather than surveys of actual investors), non-fund based (where firing risk is real) evidence to suggest picking 10-30 well diversified stocks will underperform, the entire argument is based upon my character/emotional control. Having looked at a lot of evidence, I suspect you don't have such evidence, but I'm open to new data. I agree statistically we can't all be above average at emotional control, and frankly it seems most humans are poor at it, but I don't think you can claim to evaluate any particular forum member.
steveo73 wrote: ↑Tue Apr 05, 2022 10:03 pm
So today and for the next 5 years you are correct. At that point though that 5 stock portfolio is all out of whack and you need to re-balance. There can be tax implications in that re-balancing. So then you may choose not to re-balance because you are going to lose money. Then another 5 years later and your portfolio is a crazy mess.
The problem is not thinking long term.
While this could change, US federally speaking, the first 40 or 80k of long term capital gains is 0. For someone who believes in ERE(*), if you are exceeding 40-80k in a rebalance, you are doing it wrong. Now there are those who believe in letting your winners ride. These are what some value people call "compounder bros". Those folks think it is best to weed out the losers rather than to "pull the flowers". In such a case, you may be right, there may be tax implications and in 10 years your portfolio will be controlled by 1-2 companies. That is considered normal by those folks and they think that is just how it should be done. I'm not from that camp, but I do understand why you'd be in that camp. Outside the US, rebalancing and tax implications should be part of your investing plan. For that matter, ETFs/indexes might not be nearly as well treated outside the US as they are in the US, so I'm not even sure if the issues you raise applies or not.
(*) 33 years x 25k = 825k * 40% stock = 330k. If that grew 20%, you could rebalance more than the entire growth of that portion of the portfolio.
steveo73 wrote: ↑Tue Apr 05, 2022 10:03 pm
Yep. You are missing the reason why you build a portfolio. The idea is that your portfolio funds your spending for your life and potentially leaves money for your children or anywhere you want to leave money.
Did I? I mean you stated why you or those you imagine build a portfolio and assume I have the same reasons. Buffet does it so he can tap dance to work every day. I think that your assumption is we all look at things the same way and do them for the same reasons.
steveo73 wrote: ↑Tue Apr 05, 2022 10:15 pm
1. You cannot predict the future.
You or someone else will post to this topic after me. See I just made a prediction, we'll see if it comes true.
I think the question isn't if you can predict, but if you can state some level of confidence. For example, the network effect of Google is relatively strong, so earnings are likely to grow overtime. Here is a range of possible outcomes based upon what the market thinks about x, y, z.... It is not just assuming I'm smarter than the market, but that some outcomes are more probable than others. The market balances many possible outcomes, but sometimes the market is clearly crazily obsessed about one aspect, ignoring other possible outcomes. The poster child of this is the GameStop chart. And by making a bunch of those bets, you hope that some of them will work out. Of course the indexer also cannot know if the entire market will work out. See Japan for over 30 years. So to the degree no one can know the future, indexer or value investor, you'll hear no argument from me.
The question is can we ever say anything is more likely than not valuable relative to the alternatives in the future? This applies to you wearing warm clothing in the winter, putting on a safety belt or you deciding to invest in a bike as much as the stock market. If you think you cannot ever predict the value of anything, then choosing whatever the collective decides (e.g. I wear warm clothing because my tribe does) seems fine, but rather anti-ERE (which in general is against consuming without thought of the consequences, which is a form of predicting the future). Still, I hear the objection, I'm not saying you can't predict, I'm claiming you can't do it better than the crowd can. I totally understand the theory, I understand how it works and I do understand the data backing it. Yet, that seems anti-ERE: Why not keep consuming 3 planets worth of resources--the crowd says it is fine? If you conclude there are times the crowd is wrong and you can identify them (otherwise why are you on this site?), then you conclude that indexing is not always the right method. If you do conclude there are possible reasons to not index, then you can start to think through what they are or when they are. I also know times when following the index was a less optimal strategy and I know some of the systemic risks involved in the index. The old refrain that no one can predict is not invalid, but it just isn't the point.
One last question point: Do you believe it is ever rational to start a business? I mean that is the most concentrated equity portfolio you can imagine. If you say no, then why should an index ever exist, since no companies could be formed. If you say yes, then doesn't that imply someone can predict the future? If you say yes, but it is totally luck oriented, does that imply that no matter how badly or smartly I organize the business, no matter my skill, the business success is totally random? So ultimately it seems like to me the only logical conclusion looks a bit like what Marx suggests with the Buffet caveat: A capitalist early in a new industry will gain super-profits until competition can come in, unless a moat exists. Thus an early investor who can identify the moat or the new industry is likely to gain super-profits. Later competitors who can breach the moat will gain normal profits. Then one last question to ask, do you think the market can ever fail and if so, can anyone ever predict that failure? If you say no, I think there is a small band of short sellers you might talk with. If you say yes, then indexing is not always the answer.
steveo73 wrote: ↑Tue Apr 05, 2022 10:15 pm
Are you diversified across different asset classes.
I think I was pretty clear in describing how value investing can be one part of a well diversified set of assets. Does everyone follow that theory? No, but that is what makes a market. Since this is on value investing and not portfolio construction, going into asset picking here seems a bit irrelevant other than to say it should be considered.