Anyone else FI now but still working for a bit longer?

[steveo73]

So step 1: Acknowledge what might be currently "inconceivable to you" is actually and potentially conceivable with personal effort, e.g. realizing that there's a difference between known-unknowns and unknown-knows. This realization, as far as I've noticed, is absolutely the biggest difference between those who positively impact return/risk ratios compared to the cult of ignorance. Indeed, it's the difference between personal growth and stagnation for all subjects of knowledge.

Jacob - do you believe that you can predict the future ?

If not then you need to take a massive step back and accept reality. You may not outperform in the future. You may even underperform. That is reality. It's also something that some people can't grasp when it comes to investing especially when you are trying to outperform.

The end goal should be to sort yourself (you personally) into one of the following four groups:
1) Those who know that they can beat the market.
2) Those who know that they can't beat the market.
3) Those who don't know yet that they can beat the market.
4) Those who don't know yet that they can't beat the market.

This is a massive concern. You don't know that you can beat the market. That is an irrational belief. You can't learn your way to doing this. It's not a learning thing. Accepting reality means that you accept that you could equally underperform the market as compared to outperforming the market. You can't know that you can beat the market or better put know that you will beat the market consistently. I can beat the market no problems. I also know that I can underperform the market.

[steveo73]

Random. You keep using that word, I do not think it means what you think it means.

I ended up on this forum through a series of coincidences. If I really wanted to I could probably dig up thousands of people in forums and blogs with at least the same knowledge and experience in finance as you who would recommend not trying to beat the market. The problem is that you are taking this too personal. It's quite possible that you are one of the few who are able to do it, but that still doesn't make it good advice for others to try.

People with a lot more knowledge and who have performed a lot lot better will recommend not to bother to try and beat the market. The same people who have proven to have beaten the market will also fail in different scenarios.

Beating the market is hard and in my experience anyone who really knows what they are doing recognises that there is a degree of luck involved. There will also be ups and downs.

[jacob]

@steveo73 - As usual, you're not even wrong.

[FBeyer]

Saying Jacob is a PhD and professional investor is an Appeal To Authority. In the same vein, you can't discount the investing knowledge of someone who is a garbage collector. The truth is in the numbers. Once we have an idea of how well, how often, and in which conditions a market beating investor actually beats the market we can start discussing whether someone is actually skilled enough to beat the market. Investing books on indexing naturally argue from a Position of Ignorance, where it makes a tremendous lot of sense to spend zero time thinking about beating the market.

I'd love to say for sure that I can beat the market, but today I'm absolutely certain that I can't. The advice that no one can beat the market also usually comes into play when selecting funds. The past return is no guarantee because the fund manager could have been lucky, or as it's usually phrased, now that he is successful, there is so much money coming into the fund that the fund now has to deal with completely separate issues, and thus returns less than it used to. That's why the low cost and the right type of fund is advocated above past performance.

Also: define The Market first and we have a much more accurate discussion. The return of the market is the null hypothesis and we can't make inference without it. IMO.
I feel that indexers (that's me) are focusing on a different approach to investing that should not be overly concerned with that The Market does, in the sense of momentum, P/E etc and so it's good advice to tell people to back off of the idea of beating the market with indexes; since from A Position of Ignorance, that is sound advice. I don't claim you cannot make money by hopping funds, but I don't know how one would go about it.

PS: I feel like this discussion is somewhat derailed by the way Jacob in particular communicates. I can understand that he cannot say anything concrete without the 'net harping on the Cult Leader, but the philosophical considerations -albeit less prone to flaming years down the line- go past the intended audience today.

PPS: I have a feeling that defining the market as an arithmetic mean of every investor's performance skews the average downwards. A few people who know what they're doing will consistently be placed above the average, while a new influx of rabid investors who act blindly will massively draw the average down, even if that pool is renewed every 5 years. That then grows the pool of ignorant investors who will complain about investing while the pool of 'over-performers' will be somewhat stagnant.
And again, that brings us back to feature selection: What are the conditions that we're analyzing? CAGR over 10 years? Bear market performance? Portfolio envy in relation to the S&P500?

[steveo73]

@steveo73 - As usual, you're not even wrong.

I don't see this discussion in relation to being right and wrong. It's about taking a step back and just trying to grasp the complexity and reality of the situation that we are dealing with.

[FBeyer]

https://en.wikipedia.org/wiki/Not_even_wrong

[Tyler9000]

Do not believe that people are smarter or know better than you when it comes to investing.

Meh -- Sure there are limits to how far knowledge can take you, but to argue differences do not exist is a step too far.

Robert Shiller points out in Irrational Exuberance that this belief is an irrational extension of the Efficient Market Hypothesis. Arguing that intelligence and knowledge are no advantage in investing implies that stupidity and ignorance are no disadvantage. That's a destructive assumption not based in reality that encourages people to avoid financial education.

IMHO, the best argument for indexing is to assume that the guy on the other end of any trade is definitely smarter than you.

[black_son_of_gray]

Never thought I would publicly say this, but "I'm a member of Team Jacob!".

I highly recommend to those who haven't, to really sit down with the Dunning-Kruger papers and mull over them for a bit. They aren't too technical- they are actually pretty easy to read. A few years ago, I spent a few days reading through them and really thinking about 'expertise' ... This coincided with a time in my own education (biology), where I was finally becoming an expert in my own subfield and occasionally would interact with more novice individuals (undergrads, some graduate students in tangential areas, and plenty of lab heads in tangential areas). It was really eye-opening to consider their understanding of my topic of expertise and how confidently they expressed that understanding, knowing pretty well how insightful their understanding really was because I was finally capable of accurately assessing that.

Which isn't to say that I am an expert investor - I am not. But I am an expert in something, and I feel like once I really 'grokked' (as Jacob would say) this idea of accurate assessment of competence, something clicked in me. With that in mind, the arguments that Jacob makes (which I am pretty sure are from the 'competent/expert and actually aware of it' viewpoint - which also the most 'accurate' for assessing true skill level) are resonating with me.

[BRUTE]

I can't do a comparison of outperformance because I can't quantify what you are comparing outperformance too. I personally don't believe that I will outperform with my asset allocation

this is exactly brute's point - what is steveo73 even comparing performance to? if there is no point of comparison (steveo73 has not chosen what "the market" means), how could any portfolio even outperform/underperform it?

it appears to brute that steveo73 is basically rejecting any strategy as "picking" and "trying to beat the market", without defining what "the market" means.

brute would argue that even "picking a market" is a decision, and the "can't predict the future" argument only holds valid when defending a more diversified strategy against a less diversified strategy.

"the market" is NOT a null-hypothesis if the market is not defined. if "the market" is replaced with any concrete market, comparisons could be made, and in the face of uncertainty, brute would probably argue for more diversification. (brute is firmly in the "believes they can't perform their way out of a paper bag" crowd).

believing fully in uncertainty and his own incompetence with regards to predicting the future of securities, brute would then argue that the Global Market Portfolio is the most-diversified portfolio possible/known. any argument for a less-diversified portfolio would in effect be arguing for picking - even one for buying "the market" where "the market" is the domestic stock market, int'l stock market, both those + global bonds..

[frommi]

People with a lot more knowledge and who have performed a lot lot better will recommend not to bother to try and beat the market. The same people who have proven to have beaten the market will also fail in different scenarios.

Beating the market is hard and in my experience anyone who really knows what they are doing recognises that there is a degree of luck involved. There will also be ups and downs.

The people that listen to the advise of someone else will probably never be able to beat the market. By saying "you should not try to beat the market" you reach the audience that is not able to outperform, so you give the perfect advise for the target audience.

[steveo73]

People with a lot more knowledge and who have performed a lot lot better will recommend not to bother to try and beat the market. The same people who have proven to have beaten the market will also fail in different scenarios.

Beating the market is hard and in my experience anyone who really knows what they are doing recognises that there is a degree of luck involved. There will also be ups and downs.

The people that listen to the advise of someone else will probably never be able to beat the market. By saying "you should not try to beat the market" you reach the audience that is not able to outperform, so you give the perfect advise for the target audience.

I don't believe this at all. It's not a semantics game. I have traded myself and I have seen people that are highly successful traders trade. I've seen the outperformers. It's not as simple as what you are trying to make out.

People who outperform will also underperform. The key point is that you are trying to predict the future which is not an easy task. Yes sometimes you will get it right but you will also get it wrong. You could state it's about investing with probabilities but it's not even that simple. You can fool yourself that based on your analysis that you will have positive returns but that doesn't mean that it will play out in the future.

Maybe a better way to phrase it is that there aren't a group of mystical investors that beat the market consistently. Yes you can beat the market next year but you may also underperform the market in that time period. This is where there is a lack of understanding. The belief that there are people that can beat the market consistently is delusional simply because it's like trying to pick a horse race - i.e. you are trying to predict the future.

You could state that over time if you follow approach A your expectation is positive that you will beat the market but even that isn't that simple. The correlation may change.

Set your expectations rationally to start with. Then if you choose to beat the market that is cool but I would put it into perspective. You might think you can beat the market and you may even do it over a certain time period but that doesn't mean that you will come out of the whole situation better off than the person who invested into a Vanguard all in one fund.

[steveo73]

I can't do a comparison of outperformance because I can't quantify what you are comparing outperformance too. I personally don't believe that I will outperform with my asset allocation

this is exactly brute's point - what is steveo73 even comparing performance to? if there is no point of comparison (steveo73 has not chosen what "the market" means), how could any portfolio even outperform/underperform it?

Brute - I've stated this multiple times but I'll do it once more. Investing is more complex than beating the market. People that think that beating the market is the key in my experience often have a poor understanding when it comes to managing a portfolio.

I think that you are trying to argue with me but you aren't really doing that.

[jennypenny]

The belief that there are people that can beat the market consistently is delusional simply because it's like trying to pick a horse race - i.e. you are trying to predict the future.

Yes, you are trying to pick a horse race, but the best handicappers are consistently very good at it. They don't go by gut instincts or hunches, or rely on luck. They've learned what traits matter most and what recent activity is the best predictor of future results. They use all of that information to then bet accordingly, including scalping and side bets.

IMHO, the best argument for indexing is to assume that the guy on the other end of any trade is definitely smarter than you.

Yes, it's fair to assume that the person on the other end of the trade--even if they aren't 'smarter' than you-- might have access to better information and/or financing and can influence the trade in ways that you can't can duplicate or even realize are possible.

That doesn't mean indexing is the only way to go or that success in investing is random. I think sometimes when people describe market events as 'random' what they really mean is 'unexpected.' Market events aren't all random, I'd define most as unexpected. But the more an investor learns and the better they get with stat & prob, the fewer unexpected events they'll experience.

[JL13]

I have traded myself and I have seen people that are highly successful traders trade. I've seen the outperformers. It's not as simple as what you are trying to make out.

I think part of the issue is we're not even speaking the same language. The idea that you're picking a horse in a race or something, the idea that the market is just a casino (and the odds are naturally in the investor's favor) is one that only some people subscribe to. Some people are not interested in purchasing from the supermarket of index funds to hopefully gain positive results.

I think the concept of asset allocation adds a layer of opacity that distracts from what the central idea is. The idea is to turn a profit.

If I told you I had the choice of buying two rental properties, one which had monthly expenses of $900 and rental income of $1,000 per month while the other had monthly expenses of $700 and income of $1,200, would you really respond by saying that since I can't predict the future that I should buy an interest in both? Yes it's true that we can't predict the future, and the more profitable one may burn down next year, but that's no excuse to decide to not even look at the numbers and just buy all houses available!

A rental house is a business, a stock investment is a business, you can compare them using the exact same rubric. Why is it OK for a real estate investor to crunch the numbers but a stock investor is dumb for doing so? Just because a few idiots decide to treat investing like gambling (buying/selling stocks the same way you'd place a bet on the roulette wheel) doesn't mean that individual stock selection is gambling. Far from it. It's not any different than buying a franchise or rental house in your neighborhood. It's business.

Why else do you think that stock funds outperformed all the other asset classes over history? Because the underlying businesses earned profits! Why not take a few minutes to look at profits before you buy?

[BRUTE]

for reference, humans predict the future (and act on their predictions) all day long. humans drive cars at 80mph, predicting the wheels will not fall off. or predicting the car in front of them will not suddenly brake sharply. sometimes humans predict wrong, but saying nothing should ever be predicted means a life in the solitary ward, as such humans would not be able to predict that the floor is still there the moment they step out of bed.

in other words, humans have to predict the future to a certain extent with each step they take. the problem is not with predicting the future per se, but with longer time frames and more uncertain endeavors.

also, "random" seems to brute not inherent in reality, but a description in the eye of the beholder. maybe this isn't true on a quantum level, but in a deterministic universe, there is no true randomness. there is only "apparently random", i.e. a black box which produces an outcome that seems random - to someone. to other people, that same output might not seem random.

@steveo73: brute also feels like there is no real argument taking place. the opinions of brute and steveo73 seem slightly phase-shifted so that they don't connect brute will let the issue rest for now, and apologizes for making steveo73 repeat himself.

[steveo73]

@steveo73: brute also feels like there is no real argument taking place. the opinions of brute and steveo73 seem slightly phase-shifted so that they don't connect brute will let the issue rest for now, and apologizes for making steveo73 repeat himself.

This is what I think is happening. For some reason it turns into a debate with a winner and a loser. That isn't what I see. The whole thing is fairly complicated.

Interestingly I like simple solutions to complex issues.

[7Wannabe5]

I think it's like if you are a busy Mom with 10 kids and you take them all to the mega-market to buy groceries. There are 20 checkout lines at the mega-market, so you send each kid off on his own to find the fastest line while you sit on the bench on the other side of the cash registers and drink your coffee and leaf through a magazine you don't intend to buy. Then you have to buy each kid a gumball for trying his best, no matter what order he arrived with bags and receipt at your bench.

A similar, but more complex model might involve X men bringing labor and resources to your permaculture project. There are at least 3 players to consider in every model. Those who can't wait to eat the marshmallow. Those who can wait to eat the marshmallow, if second marshmallow or trophy is the prize. And, she who holds the marshmallow bag (ultimately Mother Nature.)

[vezkor]

@steveo73 - As usual, you're not even wrong.

I don't see this discussion in relation to being right and wrong. It's about taking a step back and just trying to grasp the complexity and reality of the situation that we are dealing with.

This was linked earlier in the post, and I think steveo73 would be very well served to read it... and maybe even read it a second-time for good measure: http://www8.gsb.columbia.edu/rtfiles/cb ... tt1984.pdf

I know anecdotes are, generally, useless in the grand scheme of things but I'm going to share mine for the sake of context.

I started picking stocks back in 2008 when I was very dumb and knew very little about finance. The only piece of financial advise that ever stuck was "be greedy when others are fearful and fearful when others are greedy" (I was 18 years old at the time). I had some money from graduation, so I bought some stocks. Needless to say, I watched my holdings go on a roller-coaster ride and it got very VERY emotional! I kind of liked it, though... so I sought out everything ever written by, or about Warren Buffett. I also spent about 4 hours per day on investopedia.com until I understood every single piece of jargon about investing and finance. When Warren Buffett recommended a book: I went out and bought it and read it.

Once I read "The Intelligent Investor" all of my excitement vanished, in a good way. I learned, and knew beyond any doubt, that value investing was a tried-and-true-(and-boring) way to get rich with equity investments. Now all of my excitement and joy comes around once a year (per investment, or potential investment) when the 10-K gets released, so I can pour through the numbers and update my spreadsheets.

On this forum I notice that the people are generally VERY smart. Often, much smarter than me. This community also has the tendancy to take a concept and extrapolate it to the extremes. It's especially interesting to the topic of finance and investing, because ANY strategy breaks down completely if it is copied by a critical mass of independent actors.

So it is true that value investing would not work if the market were efficient. It is also true that value investing would not work if people were purely rational with their investing decisions. Thankfully for me, markets are not efficient and people continue (in 2016) to act more emotionally about investing than rationally. In this landscape, the linked strategy still works beautifully. It would not work if everybody tried to do it... but that is a different landscape that we are not currently a part of. If the future changes, in this regard, I will change with it.

For the past 8 years I've beaten the S&P 500 by at least 2% each year, and as much as 33% in one year. I've never been "below average". If the day comes that I cannot sustain this performance, I'll probably switch to index funds. Since I know I am capable of beating the S&P 500, I will continue to do so even though people constantly remind me that I cannot do so reliably. I wonder how many years I need to keep beating it before my performance is considered reliable?

10-K's aren't hard to read... they're just boring. Putting your emotion away before clicking "trade" is hard, in my experience, though.

edit: formatting

[steveo73]

@vazkor - there are different perspectives in relation to what you are stating. If you choose to try and beat the market that is great. If you do it good on you. The thing is I personally don't see what you are doing as being all that important to managing your portfolio in relation to retirement. I also think that although you've done well it's basically meaningless because you need to factor in the risk, effort and the stuff that you aren't seeing of what you are doing.

The risk is that although you've done well you will also have down years and you may be more exposed to some factor really hurting you portfolio. You may buy a dud company. It might be good today but gone tomorrow. Basically you end up less diversified within your stock allocation and that may have some implications.

The stuff you are missing is portfolio theory. This is potentially a biggie.

The effort is something for you to judge but based on the factors above I personally don't think it's worth the effort. That is your personal call though. Just don't delude yourself into thinking that you are the next Warren Buffet. It probably won't work out that way for you and Jimmy down the street who used a Vanguard all in one fund will probably do just as well or better than you will.

[JL13]

@steveo73
Assuming someone has read many books/articles and taken college courses about MPT, and that they understand the model, are they allowed to disagree with it?