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Buy-and-Really-Hold Will Suck Your Portfolio Dry
Old 06-08-2010, 08:52 AM   #1
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Buy-and-Really-Hold Will Suck Your Portfolio Dry

FYI. Found this article very interesting:
Buy-and-Really-Hold Will Suck Your Portfolio Dry
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Old 06-08-2010, 09:07 AM   #2
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Interesting ? Are you being ironic?


He quotes Bernstein from the linked article
Quote:
This may get you thinking: If a small list of securities accounts for the market’s long-term returns, why not avoid all the headaches and losses you’ve suffered recently by carefully choosing these superstocks?
to make his case for a portfolio using "relative strength weighting",



while leaving out the very next paragraph in Bernstein's article.

Quote:
Simple: Because a portfolio of "carefully chosen" equities could easily wind up with none of the best-performing stocks in the market - and thus produce flat or negative returns over many years. Missing out on even a handful of superstocks can leave you short of your target.
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Old 06-08-2010, 09:13 AM   #3
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I found it deceptive and self serving written by an active management advisor.

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Old 06-08-2010, 09:19 AM   #4
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It's rare to find anyone taking a quote out of context any more than this. Good example of how to lie.

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Old 06-08-2010, 10:17 AM   #5
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Wow. If I were Bernstein I'd consider suing this guy for intentionally and blatantly mischaracterizing my remarks as an endorsement of stockpicking and/or active management.
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Old 06-08-2010, 11:25 AM   #6
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"This may get you thinking: If a small list of securities accounts for the market’s long-term returns, why not avoid all the headaches and losses you’ve suffered recently by carefully choosing these superstocks? "

Isn't the author answering the question posed by Bernstein's article, when he states in the very next paragraph:
"That’s exactly what I’m thinking! Why not, indeed! I’d rather own the superstocks. And I will even let Ken French pick the stocks. Instead of buying an index fund, I’m going to let Ken French buy the best recent performers and cast out the stocks that weaken each month. This chart comes from Dr. French’s own website and shows the equity curve for large-cap, high relative strength stocks since 1927." Chart not included. Can't get these quotes/charts in my message.
He does have links to all the articles he is quoting in his story.
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Article Reception
Old 06-08-2010, 11:32 AM   #7
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Article Reception

I'm intrigued by the very hostile reception to this article, and I'm a little concerned that the main points are being missed.

1. buy-and-hold typically loses money, according to both Bernstein/DFA and Blackstar Funds. No controversy there.

2. the reason indexing works better than buy-and-hold is due to active management and index weighting paradigms. No controversy here either; this is why indexes are reconstituted periodically. Lots of literature about this topic exists.

3. buying strong stocks works better than indexing, according to Dr. Kenneth French's own website. Again, not controversial, although Fama and French do refer to it in one of their articles as "an embarrassment to the Efficient Markets Hypothesis." There is also a lot of academic research on this topic, starting with Josef Lakonishok in 1993. In June, Morningstar is incorporating momentum (the academic term for relative strength) as a return factor in their fund ratings. This is consensus opionion, not left field stuff.

In short, I believe all three major contentions are well-supported by the facts.

Blackstar's research showed that buying strong stocks made sense. It was really Bernstein/DFA that recharacterized the research as supporting indexing--Blackstar would not agree. I don't think Mr. Bernstein has grounds to be upset with me; I'm characterizing the research the way it was originally intended.

I apologize if my tone did not make certain readers happy, but I think it would be worthwhile to take the conclusions seriously.

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Old 06-08-2010, 11:41 AM   #8
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Well sure they want you to trust them to pick the 25 percent that are the top performers--you're reading an article from "the official blog" (as opposed to all those unofficial blogs) of "an independent and privately owned registered investment advisory firm." Buying and holding ain't gonna make them much of your money.

Interesting too that the official blog includes a chart from "Dr. French's own website" without sourcing it.
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Old 06-08-2010, 11:56 AM   #9
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Well sure they want you to trust them to pick the 25 percent that are the top performers--you're reading an article from "the official blog" (as opposed to all those unofficial blogs) of "an independent and privately owned registered investment advisory firm." Buying and holding ain't gonna make them much of your money.

Interesting too that the official blog includes a chart from "Dr. French's own website" without sourcing it.
So, he missed one link. Why don't you comment at his "blog" about the oversite. Sure he will provide a link.
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Old 06-08-2010, 12:18 PM   #10
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Originally Posted by mmoody95 View Post
I'm intrigued by the very hostile reception to this article, and I'm a little concerned that the main points are being missed.


Mike Moody
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Interesting first post
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Old 06-08-2010, 12:40 PM   #11
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Quote:
Originally Posted by mmoody95 View Post
I'm intrigued by the very hostile reception to this article, and I'm a little concerned that the main points are being missed.

...........

I apologize if my tone did not make certain readers happy, but I think it would be worthwhile to take the conclusions seriously.

Mike Moody
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Hey Mike,

If you guarantee to make whole those who invest with you and don't see returns that "beat the market", I promise you will be taken seriously. You do offer a money back guarantee, right?
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Old 06-08-2010, 12:55 PM   #12
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Ken French's data library is here: http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html

You can see that momentum factors outperform. So do some value factors. I apologize for missing the link in the article, but Google is pretty handy.
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Old 06-08-2010, 12:55 PM   #13
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The "commercial" link that was deleted was the link to our blog, from which the original article came. Oops. Didn't realize that would be a problem.
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Old 06-08-2010, 01:01 PM   #14
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As I'm sure you know, an investment advisor is legally prohibited from making guarantees of any kind. Of course, an index fund can probably assure you of NOT beating the market, since, by definition, they will provide the index return minus fees. There are return factors that have demonstrated ability to outperform. Relative strength and deep value are the two most prominent factors. The reason many active managers do not outperform is often related to agency factors and/or lack of execution.
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Old 06-08-2010, 01:16 PM   #15
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As I'm sure you know, an investment advisor is legally prohibited from making guarantees of any kind. Of course, an index fund can probably assure you of NOT beating the market, since, by definition, they will provide the index return minus fees. There are return factors that have demonstrated ability to outperform. Relative strength and deep value are the two most prominent factors. The reason many active managers do not outperform is often related to agency factors and/or lack of execution.


Why would anyone who can beat the market share that knowledge with anyone else rather than use it to make money ?? There is a sucker born every minute to keep "investment adviser" in business. Investment advisors are people who are happy to pay themarket with other peoples money and take a cut.

You invest in index funds if you believe the market beats other investments.

You pay an investment adviser if you want to lose money
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Old 06-08-2010, 01:22 PM   #16
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1. buy-and-hold typically loses money, according to both Bernstein/DFA and Blackstar Funds. No controversy there.
No controversy there? Really? In other words, just about everyone agrees that "buy and hold typically loses money"?

If one believes in the value of market timing, strategic trading and money managers knowing when to make the right moves, you *could* say that buy and hold makes less money than actively managed portfolios. But one only needs to look at the long term chart of the major market averages to see that buy and hold doesn't "typically lose money" over a decades-long time horizon. And those charts usually don't reflect reinvested dividends, either.

And again, that assumes one believes investment advisors and active money managers add value (even after their fees). I suspect you'll find that a very hard sell on this board.
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Old 06-08-2010, 01:30 PM   #17
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As I'm sure you know, an investment advisor is legally prohibited from making guarantees of any kind.
Yes, and what a convenient excuse for not standing behind your claims. Whatever you guys pay your industry lobbyists, you need to give them a raise....

Give it up Mike, you'll do nothing with your sales pitch here other than draw fire from those of us who are or who aspire to FIRE.
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Old 06-08-2010, 01:51 PM   #18
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3. buying strong stocks works better than indexing, according to Dr. Kenneth French's own website.
Sure, exclusively buying super growth stocks beats an index fund. Now all you need to do is pick which stocks are going to be the super growth ones.

Go!

(As Tex said, Good bye and good luck.)
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Old 06-08-2010, 02:17 PM   #19
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It's rare to find anyone taking a quote out of context any more than this. Good example of how to lie.

Steve
I think the NYT columnist Maureen Dowd takes the cake for this. She has been known to leave words out of quotes, changing the meaning of the sentences in the process. She is a "journalist."

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Old 06-08-2010, 02:19 PM   #20
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Quote:
Originally Posted by mmoody95 View Post
1. buy-and-hold typically loses money, according to both Bernstein/DFA and Blackstar Funds. No controversy there.

2. the reason indexing works better than buy-and-hold is due to active management and index weighting paradigms. No controversy here either; this is why indexes are reconstituted periodically. Lots of literature about this topic exists.

3. buying strong stocks works better than indexing, according to Dr. Kenneth French's own website. Again, not controversial, although Fama and French do refer to it in one of their articles as "an embarrassment to the Efficient Markets Hypothesis." There is also a lot of academic research on this topic, starting with Josef Lakonishok in 1993. In June, Morningstar is incorporating momentum (the academic term for relative strength) as a return factor in their fund ratings. This is consensus opionion, not left field stuff.

In short, I believe all three major contentions are well-supported by the facts.
Back to school for you

1. Ah no. Buying and holding the S&P 500 for the last 10 years OK, but why do just that? Buy and hold typically makes money (~ 95% of 10 year periods). Combined with DCA, like most people in 401k, even flat periods like the last 10 years provide a significant return. What you should do is DCA and buy and hold several asset classes (I use ~ 14) and rebalance as the market changes. Buy low and sell high. No magic 8 ball required.

2. Ah no. Buying and holding and indexing are not mutually exclusive. Indexing works better than active management because the fees are lower. Indexing beats the majority of active managers because of fees, churn, and taxes. Some active managers do beat the index, but it is not apparent in advance. You have a 1 in 4 chance of picking someone who will beat the index. Adjusted for risk, this # is smaller. Bill Miller did great until he didn't and his fund blew up. Now he is killing it because of financial stocks. Too risky for my retirement money. Also, actively managed indexes have the same poor performance as regular mutual funds vs. the index.

3. Ah no. There have been studies showing small advantages to buying "value" stocks, momentum stocks, etc. I have not seen any studies that provide a positive risk adjusted return after fees and taxes, but maybe someone has done that now. Anyway, it is doubtful that anyone with less than several million would have access to any manager who is delivering this return and it is unclear what risk they are taking compared to a low probability event like the current Euro collapse or the collapse of Lehman or the "flash crash".

When you are doing timing then you have to be right twice. Many people brag about getting out 2 years ago, but missed the 70% rally last year because they did not get back in.

With buy and hold you set you asset allocation, buy and rebalance. No further decisions required. I believe that works better for the majority of people.
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