Is indexing good?

[BigMoneyJim]

Originally Posted by Apocalypse . . .um . . .SOON

Nords is the judge.

And jury. And executioner.

-----

Personally, I think there is a plot by some board members to have Greg committed so Martha could be single again. I'll get Nords to investigate.

[sgeeeee]

Originally Posted by BigMoneyJim

. . .
Personally, I think there is a plot by some board members to have Greg committed so Martha could be single again. I'll get Nords to investigate.

No plot from me. I'm hoping the two of them will adopt me.

[SteveR]

Originally Posted by REWahoo!

Martha, if you haven't been feeding Greg mind altering substances, then you should be.

There are a number of excellent medications on the market that can help.* Many of us on the forum have grown to admire and respect you and it pains us to know what you are enduring.* We all know that a mind is a terrible thing to waste and Greg's is surely wasted.

And if he won't take the meds, then YOU take them.* One way or the other, you will get some relief.

I think Martha has been giving him way too many beans and the expanding flatulence is putting pressure on his brain.

[greg]

SG: Nords, aka the judge, was right too. “Gimme something I can sink my teeth into—and not chili.” I had to think your question thru, plus do Martha chores until now. Here's the quick answer:

OK, 56% of the holders of GE are institutional holders. A smaller percentage is Vanguard. My bet is that large holders such as Wells Fargo, State Street, etc. are all holders of pension fund accounts. Many ETFs are just sub-sector funds, such as XLE (energy), RTH (retail), and the financial ETF. Magellan Fund pays its managers bonuses based on beating the S&P 500. There’s probably some overlap there, plus they are too big not to include large cap stocks. I’m sure there are many others that use it as a bench mark.

So, the boomers, the big demographic wave rolling thru the economy, started saving for retirement in the ‘80s, about the time the economy started warming up. They are the richest generation ever—ever. They piled huge amounts of money into index funds—following the seemingly logical Bogle-efficient markets model. Each year they continue to add a little more to their retirement pot.

Speculation: What if this year $100,000,000,000 is added to the entire retirement pot by savers. What if half goes into S&P related funds. What if the S&P goes up 10% this year. What if half of that rise doesn’t come from increasing long-term profitability of S&P companies but, instead, simply from adding more money to the index pot so that the real gains are only 5%. What if this has been going on for quite some time. The supply-demand curve says that if you increase the amount of money to the pool it will raise the price of the product you are buying. One of the most basic products of retirement accounts are large cap index funds and other high cap stocks. Can I disentangle the positive feedback from the legitimate value? That takes longer. This is where the misallocation and positive feedback loop is in play. The misallocation is a part of the whole process. And if this misallocation is true, then someday boomers will start pulling the money out. Will the balloon start to shrink at that time? Will the positive feedback loop turn into a negative feedback loop? The first half of Bullseye Investing explains some of these demographic issues surrounding retirement money.

When George W wanted to change Social Security, the most important part, I suspect, was making sure that this new stream of retirement money would be put into an S&P 500 index and government bonds. Was this to keep the party going? Until it couldn’t any longer? Watch where the money goes and keep your eye on M3.

[greg]

Originally Posted by REWahoo!

Martha, if you haven't been feeding Greg mind altering substances, then you should be.

There are a number of excellent medications on the market that can help. Many of us on the forum have grown to admire and respect you and it pains us to know what you are enduring. We all know that a mind is a terrible thing to waste and Greg's is surely wasted.

And if he won't take the meds, then YOU take them. One way or the other, you will get some relief.

If you think I'll listen to anyone who doesn't put beans in their chili. Dang no bean people.

[REWahoo]

Originally Posted by Apocalypse . . .um . . .SOON

If you think I'll listen to anyone who doesn't put beans in their chili. Dang no bean people.

You listen to us because we aren't making those embarassing "bean by-product" noises and you can actually hear what we have to say...

[sgeeeee]

Originally Posted by Apocalypse . . .um . . .SOON

. . .
Speculation:* What if this year $100,000,000,000 is added to the entire retirement pot by savers. What if half goes into S&P related funds.* What if the S&P goes up 10% this year.* What if half of that rise doesn’t come from increasing long-term profitability of S&P companies but, instead, simply from adding more money to the index pot so that the real gains are only 5%.* What if . . .

What if everyone in Minnesota comes over to your house and uses your toilet? . . . It will back up and overflow.

So does that mean that you should stop using your toilet?

Make this a little less abstract. What if everyone listened to (pick your favorite radio or TV investment show) and bought every stock that was mentioned? Does that mean you should never own a stock that gets mentioned on an investment show?

Hypothesizing that some effect could become important and could result in a bad impact is a long way from proving that it is important or that the result you hypothesize is the primary effect. The empirical data shows that indexers still do better than most and that their performance advantage gets larger with increasing time. That pretty much disproves the hypothesis.

[Jarhead*]

Originally Posted by Apocalypse . . .um . . .SOON

SG:* Nords, aka the judge, was right too.*

So, the boomers, the big demographic wave rolling thru the economy, started saving for retirement in the ‘80s, about the time the economy started warming up.* They are the richest generation ever—ever.* They piled huge amounts of money into index funds—following the seemingly logical Bogle-efficient markets model.* Each year they continue to add a little more to their retirement pot.

Apoc Sometime:

Mostly I tend to passover a large share of your posts. (I had a belly-full of Howard Ruff, Harry Browne, Casey, etc. etc. in the 60's and 70's)

However, I spotlighted a quote of yours (above) that I totally agree with, and flys totally contrary to the posts of our "baby-boomers" on board.
Yourself, Cut=Throat, etc. etc.

Most of you baby-boomers were in your early 30's (Prime time to begin investing), when the most explosive market (for both bonds and stocks) began. It's been largely uninturrpted for 25 years.

My generation (came of investing age in the 60's and 70's), were pretty well disenchanted and worn out trying to figure out a way to actually get ahead by "passive investing" by the
beginning of the time the bell rung. (Early 80's).

With that thought in mind, I have heard many posts, (a lot of them from Cut-Throat) insinuating that the "Boomers" will have a hard time retiring. (A statement that doesn't fly with my personal experience in talking with the folks that I have contact with).

Your statement that the "boomers" are the most wealthy generation ever, certainly has the "potential" to be a fact.

I personally agree with your assessment, and
also agree that we will all be in for some interesting times when they start cashing out.

[. . . Yrs to Go]

Originally Posted by ladelfina

I don't understand how hedge funds help with 'efficiency'; I thought their bug/feature was the fact that they were into a lot of obscure and IL-liquid areas.

The term "hedge fund" is used liberally to describe a certain type of unregistered investment fund but says nothing of the investment strategies or tactics. *Although many hedge funds invest in "obscure and illiquid areas" of the market, it is not a requirement. *Several operate simply as long / short funds that buy securities they like and sell short those they don't like - this contrasts with most long-biased mutual funds that may be prohibited from, or strictly limited in, selling short. *This ability to sell short provides a stronger check against "over valued" securities then the traditional mutual fund option of "not buying." *In this way, the expansion of investors able to sell short aids in the efficient pricing of securities.

Beyond this simple example, "hedge funds" have greater flexibility to exploit arbitrage opportunities across many markets and asset classes. *An example would be capital structure arbitrage where a company's debt securities trade out of line with its equity securities. *By arbitraging price discrepancies across markets hedge funds help to improve the pricing of securities generally. *

[. . . Yrs to Go]

Originally Posted by Apocalypse . . .um . . .SOON

I think YTG and I are having definition problems, but currently we are only dealing with side issues.* My guess at this point is that he may think that ALLl markets where a buyer and seller agree on a price (and complete a transaction) is a rational and efficient market.* Inquiring minds need to know, otherwise we end up arguing about nothingnesses.*

I think you are right to point out that we are arguing about nothingness, but as for the rest . . .

As far as market efficiency I believe in the semi-strong form of the efficient market hypothesis with respect to developed financial markets. The strong form is too strong and the weak form is too weak based on my own personal investing experience. I believe prices produced by financial markets generally follow a random walk. I do believe efficient markets are capable of producing bubbles and crashes. I also believe that financial markets rapidly eliminate arbitrage opportunities and other anomalies that produce excess returns (notice the declining profitability of hedge funds).

As far as the residential real estate market goes, I believe several structural impediments keep it from being a reasonably efficient market (no short selling, no ability to arbitrage price differentials, massive illiquidity, etc)

I've thought the residential real estate was "over valued" for years now. But the sheer magnitude of people who think there is a "bubble" kind of suggests otherwise.

[ladelfina]

Thanks ...Yrs to Go for the instruction on hedge funds.

I love ((^+^)) SG's metaphor about everyone in MN using your toilet!

I was thinking some more about this and I can't see how the fears of Apocalypse aren't already somewhat founded. to wit: individual investors are constantly throwing more money into big-name, big-cap companies just because they are exactly that.. On the financial channels, who do the talking heads talk about? Exxon, or Aegean Marine Petroleum (just to pick a name out of a hat)? Wasn't there an adage about nobody getting fired for recommending IBM?

There are thousands of more potentially 'worthwhile' (remunerative) investments that will never cross the radar screen of the average investor. One could argue that indexing actually helps to redistribute investment money back in 'favor' of firms that few folks have heard of and that analysts don't follow. Following the index route, I put money into the Russell 2000 that I never would have dared to on an individual company basis.. for me it would have been like thowing a dart at a dart board.

The case of lemming-like behavior dampening the market via indexing could already be made WRT the S&P 500, no? Does anyone think we are seeing ill effects from that?

Apocalypse, what about 'indexing' that underweights the S&P 500? Is there any reason you think that would be 'bad'?

I'm still a neophyte at this, but to me the core of indexing is that it leaves one free to makes one focus on asset allocation. Just like there's not ONE stock portfolio that will work for everyone, neither is there ONE asset allocation plan that will work for everyone. But, in general, if you are reasonably represented in all segments of the market you will do better than if you are not. Come "the Apocalypse", if ALL segments of the market do badly, well, we're all going to be in rough shape, no doubt about it. But if an index investor with a good asset allocation ends up even 1% ahead of the rest, well, then he's still better off than the next guy.

Kind of garbled thoughts (haven't yet finished my coffee...).

[JohnnieRed]

Anyone had experience with Dimensional Fund Advisors(DFA) funds?

...guess I'd call them "designer" index funds where the "gatekeepers" to the funds are financial advisors because the creators of the "designer" funds don't want to deal with retail investors like us ...

Personally I think they have it right but I wish I could avoid the "gatekeeper" fee...typically 50 to 100 basis points* for portfolio construction and management..."management" of index funds is really just rebalancing on a specified frequency, usually annually.

Really have a terrific program for backtesting strategies over time with portfolio returns, standard deviation ( Risk), and diversification return...bull markets, bear markets, some asset classes back to early 1900's...

Anyone found a way to avoid or reduce the "gatekeeper" fee?

[JohnnieRed]

Re : Below

Anyone have trouble sleeping?...I did one night!

I read "Population Aging and Financial Markets" by James M. Poterba, August 2004... from MIT and NBER...the paper explores the importance of changing demographic structure for asset returns, asset prices, and the composition of household balance sheets in the US

I believe the paper only finds "modest" empirical support, AT BEST, for the view that asset prices could decline as the share of households over age 65 increases....

Originally Posted by Apocalypse . . .um . . .SOON

SG:* Nords, aka the judge, was right too.* “Gimme something I can sink my teeth into—and not chili.”* I had to think your question thru, plus do Martha chores until now.* Here's the quick answer:

OK, 56% of the holders of GE are institutional holders.* A smaller percentage is Vanguard.* My bet is that large holders such as Wells Fargo, State Street, etc. are all holders of pension fund accounts.* Many ETFs are just sub-sector funds, such as XLE (energy), RTH (retail), and the financial ETF.* Magellan Fund pays its managers bonuses based on beating the S&P 500.* There’s probably some overlap there, plus they are too big not to include large cap stocks.* I’m sure there are many others that use it as a bench mark.

So, the boomers, the big demographic wave rolling thru the economy, started saving for retirement in the ‘80s, about the time the economy started warming up.* They are the richest generation ever—ever.* They piled huge amounts of money into index funds—following the seemingly logical Bogle-efficient markets model.* Each year they continue to add a little more to their retirement pot.

Speculation:* What if this year $100,000,000,000 is added to the entire retirement pot by savers. What if half goes into S&P related funds.* What if the S&P goes up 10% this year.* What if half of that rise doesn’t come from increasing long-term profitability of S&P companies but, instead, simply from adding more money to the index pot so that the real gains are only 5%.* What if this has been going on for quite some time. The supply-demand curve says that if you increase the amount of money to the pool it will raise the price of the product you are buying.* One of the most basic products of retirement accounts are large cap index funds and other high cap stocks.* Can I disentangle the positive feedback from the legitimate value?* That takes longer.* This is where the misallocation and positive feedback loop is in play.* The misallocation is a part of the whole process.* And if this misallocation is true, then someday boomers will start pulling the money out.* Will the balloon start to shrink at that time?* Will the positive feedback loop turn into a negative feedback loop?* The first half of Bullseye Investing explains some of these demographic issues surrounding retirement money.*

When George W wanted to change Social Security, the most important part, I suspect, was making sure that this new stream of retirement money would be put into an S&P 500 index and government bonds.* Was this to keep the party going?* Until it couldn’t any longer?* Watch where the money goes and keep your eye on M3.

[retire@40]

Originally Posted by . . . Yrs to Go

The term "hedge fund" is used liberally to describe a certain type of unregistered investment fund but says nothing of the investment strategies or tactics.

Under Rule 203(b)(3)-2, the SEC requires most hedge fund advisors register with it under the Investment Advisors Act of 1940 by February 1.

Also, the SEC limits hedge fund investing to people with at least $1 million in net worth, $200K in income for the past 2 years, and/or $300K joint income (accredited investors), so most people don't qualify.

And, you may have to file extensions every year you own a hedge fund.* Hedge funds are usually set up as a limited partnership.* LPs are notorious for sending K-1 forms after April 15.

And, fees could be a killer.* Typically, not only is there a 1% management fee, but it is usually also coupled with a 20% upside performance fee.* So if the fund makes 10% for the year, you would be paying at total of 3% for that performance of 10%, netting you 7% before taxes.

I suspect that in a few months or years, there will be mutual funds that will try to copy or mirror the same strategies as these hedge funds so as to allow more suckers middle class investors into the pot.* That's when I predict the market will heat up for a while then come crashing down ala dot.com style and many hedge fund advisors will go to jail.

[JohnnieRed]

Thank you for your response.

It is my opinion that there are a lot of financial professionals that either truly believe that they can consistently beat index returns or they have a vested interest in making emotional arguments to support their positions and thesis. The article you refer to is by someone with a great vested interest. He even signs the article,

"Your never have liked index funds anyway analyst,"


If "they" can beat the index returns of "asset class" index investors, where is the empirical evidence? Some might argue that Bill Miller has been able to do it for 13 or 14 years now. I think his fund probably has taken more risk than the index he has been benchmarked against and his fund is getting very large, and what about next year. I don't know any hedge fund managers with long term records better the "market" with the same risk level.

I still come down on the side of the logical empirical evidence, i.e. diversified portfolios using "asset class indexing."

[eridanus]

Looking for the next Bill Miller
If the Legg Mason Value Trust fails to beat the S&P 500 this year, who will be the new fund champ?

http://money.cnn.com/2005/12/02/funds/winners/index.htm

But what if the Legg Mason Value Trust falters in December and winds up lagging the S&P 500 this year? Who would take Miller's place as the fund manager with the longest track record of outperforming the S&P 500?

Meet Manu Daftary.

Daftary manages the Quaker Strategic Growth fund, a mostly large-cap stock fund that has beaten the S&P 500 for the past seven years straight.

[Nords]

Originally Posted by eridanus

Looking for the next Bill Miller
Meet Manu Daftary.

... that has beaten the S&P 500 for the past seven years straight.

Coin flippers, all of 'em.

How many mutual funds are out there-- about 8,000? If you count all the funds that have been incubated/merged/liquidated over the last 10 years, isn't it possible that the actual number of funds rises to ~10,000?

2 raised to the seventh power-- 128.
2 to the 13th power-- 8,192.
2 to the 14th power-- 16,384.
2 to the 15th power-- 32,768.

So after 14 years it's possible that Bill Miller is beginning to show skill over luck. After 15 we can probably declare him the winner.

So who's next? Do we look for managers who have consistently beaten their benchmark-- assuming there is such a thing as a consistent benchmark-- for at least 10 years? And if there's two or three of them, as there are bound to be, which ones will make it to 15 years?

Better to win this game by not losing...