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Re: Some Light Reading
Old 11-14-2004, 05:10 PM   #21
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Re: Some Light Reading

Never mind.......
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Re: Some Light Reading
Old 11-14-2004, 05:40 PM   #22
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Re: Some Light Reading

Quote:
Hey, did you hear about the merger of Pillsbury and Vlasic? *They came up with a new product.

It's called Dill Dough! *John Galt
Definitely a LOL
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Re: Some Light Reading
Old 11-14-2004, 06:34 PM   #23
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Re: Some Light Reading

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I did not like the way I made my asset allocation decisions either. Berstein did not really touch on this subject either.
What sort of answer are you looking for? I thought Bernstein was pretty clear on the subject -- he even recommends tools that will help you find the "ideal" allocation:

http://www.effisols.com/

Of course, what he doesn't emphasize is that the "perfect" allocation changes with time as the covariance of the assets change.

If you want to track what the "experts" believe is the perfect stock allocation on any given day, you simply need to own the entire market with a cap-weighted allocation. The cap-weighting is the market's way of telling you what percentage of each stock class is "right."
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Re: Some Light Reading
Old 11-14-2004, 06:43 PM   #24
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Re: Some Light Reading

I've got most of my eggs in the "coffeehouse" basket.
Slice and dice large cap, large cap value, small cap
small cap value, international and reit in equal
weight but dilute with fixed income to suit your own
risk tolerance. Works for me.

Cheers,

Charlie
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Re: Some Light Reading
Old 11-15-2004, 04:44 AM   #25
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Re: Some Light Reading

Cap weight the world - how is the question. Doing it without costing too much(transaction costs) is the question. And like bonds - the utility function escapes my brain - I think I understand when reading - until I stop. Defining different investors mathematically is hard.

I think Sharpe is putting out challenges for new areas of research. Capturing changing co varience(and thus cap weight) on a dynamic basis might be possible in theory but not practical in the real world.








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Re: Some Light Reading
Old 12-01-2004, 07:11 PM   #26
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Re: Some Light Reading

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What sort of answer are you looking for? * I thought Bernstein was pretty clear on the subject -- he even recommends tools that will help you find the "ideal" allocation:

http://www.effisols.com/
I'll go read that section of the book again, but wasn't he just saying that by running long historical returns data from multiple asset classes through the optimizer (constraining to avoid corner solutions which just tell you which asset class 'did best' and aren't practical going forward), that is how he came up with the rough percentages for asset allocations? And remember, we are balancing return and risk (variation in returns, or standard deviation or volatility) so there are multiple solutions based on what we want to accomplish (return at or above a certain level, risk at or below a certain level. ) The Index Investor does all this pretty nicely in arrays of allocations and portfolios and currencies, though it costs $25 a year.

As for value tilts, Fama/French lays it all out pretty well (let me know if you need the paper citations), but it boils down to just looking at the historical data for the returns -- value kicks tail on growth over the long run.

Why? It seems intutitive to me (and therefore may be wrong!), but value stocks (high book -to-market ratio) have low prices vis-a-vis the broad market. Usually they have done something bad like missed a quarter on their earnings. Market punishes them. No portfolio mgr wants to be seen owning them. People over-react, and thus creates the opportunity for the buy-and-hold guy with a system.

Caveat: this is all about playing the odds over large numbers of these stocks over long periods of time, thus the need for a fund. It works often, but not always, thus we need to buy a fund of these things and not individual issues -- you dont want the Enrons, you want the Tycos, the fund will at least make sure you have both. And a fund mgr may do even better at sniffing out the rats at Enron, or buying tyco during the 3 months that it is a value play while the index fund might miss the Tyco completely. Why? The index fund is limited by the fact that it is recalibrated (new stocks chosen) just once a year. A new value stock can only enter the index once a year, at which point much of the price movement may have happened. For this reason, value funds are the one place I can kinda-sorta justify an active mgr, (and Windsor II outperforms VG lg cap value index consistently year in and year out).

Everybody knows growth stocks are great companies to own, because everybody loves their products and everyone knows the company is widely respected and successful. SO the price is already high, and returns are constrained. One slipup and the growth stock gets nailed. Own their products, but not their stocks. "Bad companies make good stocks" is talking about this counterintuitive phenomenon. If the value firm does anything right it will appreciate, sometimes a lot. The growth stock has to do everything right just to stay up there. That is why I hate the Cap-Weighting approach, and the S&P500 in particular. Its full of stocks that everybody knows are winners -- growth stocks. I like indexing, but I want to index more counter-intuitive out of favor sectors. (and sectors that don't move in tandem with each other: that is the Modern Portolio Theory part of the story, for some other post.)

Make sense?

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Re: Some Light Reading
Old 03-04-2005, 11:09 PM   #27
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Re: Some Light Reading

That's some hard plowing for a weak ending! It reads like a prof having fun with his conference buddies.

But I've always felt that if the EMH was really valid then it wouldn't still be a "hypothesis" after all these years...

"If the markets were efficient, then I'd be a bum on the street."
-- Warren Buffett
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Re: Some Light Reading
Old 03-05-2005, 10:26 AM   #28
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Re: Some Light Reading

Quote:
But I've always felt that if the EMH was really valid then it wouldn't still be a "hypothesis" after all these years...
Hmmm, even after almost a hundred years Einstein's theory of relativity is still just a "theory". EMT/EMH is still just a sprat at only ~30 years old.

Quote:
"If the markets were efficient, then I'd be a bum on the street." *
* * * * * -- Warren Buffett
Shortly before his death in the 70's Buffet's mentor Benjamin Graham:
"I am no longer an advocate of elaborate techniques of security analysis in order
to find superior value opportunities. This was a rewarding activity, say, 40 years
ago, when Graham and Dodd was first published; but the situation has changed . . . .
[Today] I doubt whether such extensive efforts will generate sufficiently superior selections
to justify their cost . . . . I'm on the side of the 'efficient market' school of
thought."
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Re: Some Light Reading
Old 03-05-2005, 12:51 PM   #29
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Re: Some Light Reading

Quote:
But I've always felt that if the EMH was really valid then it wouldn't still be a "hypothesis" after all these years...

"If the markets were efficient, then I'd be a bum on the street."
-- Warren Buffett
Its still a hypothesis because people dont want to believe it. Just like the guys who buy 64 bit processors that are slower in real life than their cheaper 32 bit counterparts ;)

I like the story better about Buffett being chased by lions (or whatever) while screaming "I can allocate capital efficiently!"
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Re: Some Light Reading
Old 03-05-2005, 02:37 PM   #30
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Re: Some Light Reading

Hmmm

If we all could be Buffett investors - then the average investor would disappear - we'd all be 'Buffett' or 'better than Buffett'. The bottm half would as usual remain silent and invisible.

I'm with Bogle and CMH - "cost matters hypothesis".

I will conceed the value premium is real and relatively persistent.
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