Jack Bogle Interview

[sengsational]

The Freakonomics Podcast called "The Stupidest Thing You Can Do With Your Money" interview's Bogle concerning the idea of the index fund. History, not being able to pick stocks that beat the market, etc. All stuff we all know already, but kind of fun to listen to.

The Stupidest Thing You Can Do With Your Money - Freakonomics Freakonomics

It’s not a tax on stupid people who think they’re smart. It’s a tax on smart people who don’t realize their propensity for doing stupid things.

 

[OldShooter]

Thanks for the link. Yeah, all stuff we know already, but one of the best summaries of passive investing including its history. And not just Bogle. Ken French and Gene Fama too!

It's 50 minutes to listen, which far exceeds my average internet attention span, but it's worth the time.

Bogle also points out something that, frankly, many people here apparently do not know. Regarding passively investing in the broad market, he says:

"It diversifies away the risk of individual investments. It diversifies away the risk of picking a hot manager and diversifies away the idea that you can pick market sectors like health care, technology, or wherever it might be."

{sermon}I see a strong tendency here to equate investing in sector indexes with passive investing. It is not the same. Playing sectors using sector indexes does save active manager fees but it does not provide the diversification that is the most important pillar of passive investing. Said another way, what I read in many posts here is a sort of buy-high, sell-low approach with people chasing hot sectors via sector index ETFs. {/sermon}

 

[NW-Bound]

A lot of good things comes with buying the entire market (S&P 500 comes close), and not timing it.

Still, if it is true that the majority of active investors lose money, then it must be easy to make money by doing the reverse of what they do, and taking the other side of the trade. Right?

Similarly, statistics show that 70% of all stock options end up worthless. Now, if you include options that are worth something at expiry, but less than what people pay for them, then it is even more dismal.

So, what do I do? I very very rarely buy options. I sell them, covered calls as well as puts.

 

[OldShooter]

... Still, if it is true that the majority of active investors lose money, then it must be easy to make money by doing the reverse of what they do, and taking the other side of the trade. Right? ...

Nope. If you read Sharpe's original paper (only 3 pages: https://web.stanford.edu/~wfsharpe/art/active/active.htm) what he is observing is that the total market average is the average performance of all active managers. The reason they lose money for customers (relative to the average) is their high costs. The academics (Fama, French, et al) also observe that active management is a zero-sum game before costs. One active manager makes a trade that he wins on, which means that the guy on the other side of the trade lost. So, viewed either way, active managers' trading results in no net gain or loss.

One other point in the podcast (from Ken French, IIRC) was that for an active manager to win, he cannot be diversified. Diversification pushes him toward the market average. Being undiversified tends to amplify his variance to the average. So, if you can figure out who the undiversified losers are, I guess you could trade with them and win!

Edit: Oh, and IIRC the S&P 500 is only about 40% of the cap-weighted world market. So ... not really close.

 

[JoeWras]

Thanks for the link. Yeah, all stuff we know already, but one of the best summaries of passive investing including its history. And not just Bogle. Ken French and Gene Fama too!

It's 50 minutes to listen, which far exceeds my average internet attention span, but it's worth the time.

Bogle also points out something that, frankly, many people here apparently do not know. Regarding passively investing in the broad market, he says:

"It diversifies away the risk of individual investments. It diversifies away the risk of picking a hot manager and diversifies away the idea that you can pick market sectors like health care, technology, or wherever it might be."

{sermon}I see a strong tendency here to equate investing in sector indexes with passive investing. It is not the same. Playing sectors using sector indexes does save active manager fees but it does not provide the diversification that is the most important pillar of passive investing. Said another way, what I read in many posts here is a sort of buy-high, sell-low approach with people chasing hot sectors via sector index ETFs. {/sermon}

In context, it is OK to play with some sectors. I have one sector fund simply for "a mad bet." It is a tiny piece of my portfolio that I decided to raise some risk on. I think in that context, it is fine. I used to do that with individual stocks until a few went to near zero. This sector fund is doing really well and I take the profits and donate to charity. If it goes below basis value, I'll have to figure out another strategy.

But yeah, sermon taken if you are chasing sectors with significant portion of your portfolio. This must be some hot thing, because my cousin was mentioning it to me. He and another guy have a "hot idea" to know which sector is best at the time. Whatever. No thanks!

 

[NW-Bound]

Nope. If you read Sharpe's original paper (only 3 pages: https://web.stanford.edu/~wfsharpe/art/active/active.htm) what he is observing is that the total market average is the average performance of all active managers. The reason they lose money for customers (relative to the average) is their high costs. The academics (Fama, French, et al) also observe that active management is a zero-sum game before costs. One active manager makes a trade that he wins on, which means that the guy on the other side of the trade lost. So, viewed either way, active managers' trading results in no net gain or loss...

The above article also says:

It is perfectly possible for some active managers to beat their passive brethren, even after costs. Such managers must, of course, manage a minority share of the actively managed dollars within the market in question.​

I am not even talking about using any manager. I am talking about what a small investor can do. I still kick myself for not shorting the dot coms in March 2000, when their houses of cards started to crumble, the same as Sir John Templeton did. The same happened with the financial sector in 2008, when the news broke out about their shenanigans.

It is not often that one has a chance like the above, but by maintaining the "no can do" attitude, one does not open his eyes and mind to the possibility.

 

[NW-Bound]

Edit: Oh, and IIRC the S&P 500 is only about 40% of the cap-weighted world market. So ... not really close.

Forgot to respond to the above.

Yes, the US stock market is not the only investable thing in the world. Yet, Bogle stated that no foreign stocks were needed. Why this contradiction?

Of course the US market has been leading the last 3 or 4 years (not in 2017 YTD). How long will that last?

 

[OldShooter]

...This must be some hot thing, because my cousin was mentioning it to me. He and another guy have a "hot idea" to know which sector is best at the time. ...

I think I understand this.

Most people, even those with only a casual interest in investing, have by now heard the slightly fallacious statement that "indexing beats active management." So the hucksters, to lure the naive, have created sector funds with the word "index" in them. Wolves in sheeps clothing, basically. How else could there be 800+ "index" ETFs?

So when your cousin buys the "South China Sea Small Cap Index" he thinks that he is in the forefront of investment strategy because he is investing in an index.

IMO the academics and the data say we need only three indexes: total world market/all cap, total US market/all cap, and total international market/all cap. We only need the latter two if we want to manage home country bias by proportioning our portfolios between them.

Agree, too, on small sector bets. We are tilted to the extend of about 15% US small caps.

 

[OldShooter]

The above article also says: It is perfectly possible for some active managers to beat their passive brethren, even after costs. Such managers must, of course, manage a minority share of the actively managed dollars within the market in question.

No contradiction there. Roughly speaking, a bell curve applies. Before costs, close roughly 50% of active managers will beat "their passive brethren." The problems are (1)it is a different 50% every time you measure and (2) no one has figured out how to predict the winners ahead of time. This is 100% consistent with the outperformance being due to luck rather than skill.

Re Bogle, I have no idea why he is out of step with the academics on this one. I have read his arguments several times and I know he is a smart guy, but I will stick with Sharpe and invest in the total market, possibly with a slight home county tilt to recognize the currency risk. I think we are 65/35 right now. But fundamentally, separating the US and the International markets is making a sector bet. It's no news that they don't move together. In fact that is exactly what Harry Markowitz's Modern Portfolio Theory wants to happen.

Re shorting the dot coms, some famous guy once said: "The market can remain irrational longer than you can remain solvent." Not for me, thanks.

 

[NW-Bound]

Perhaps you missed the point that "Such managers must, of course, manage a minority share..."

There are smart people who can beat the market. That happens all the time. But then, as they become known, money flows in and they cannot invest the same way. Even Buffett has recently said that he can only match the S&P or something like that.

About shorting the dot-coms, Sir Templeton waited until they started to fall off their high horse. Others thought that they would eventually recover. Nope. Templeton never had to cover his shorts. They all went bankrupt. Bogle is a smart guy, but Templeton was wiser.

 

[OldShooter]

... There are smart people who can beat the market. ...

Fama, French, and Markowitz would say that while there may be such people, the results produced by active managers as a whole are so random that the existence of such a skill is uncertain at best. Ken French explains here: https://famafrench.dimensional.com/videos/identifying-superior-managers.aspx and here: https://www.jstor.org/stable/40864991?seq=1#page_scan_tab_contents Further, as he explains, no one has figured out how to identify superior managers ahead of time, through the windshield. They are easy to identify only in the rear view mirror. Charles Ellis' argument for the same conclusion is that there are so many smart guys that that they cancel each other out. But, hey, you are entitled to your opinion. It just isn't also held by the top guys in the field.

Coming at the problem a completely different way: If there were such beings who could beat the market, why would they be writing newsletters or slaving away for some investment management company? I don't think they would be. I think they would be on a nice beach somewhere being hand-fed peeled grapes and drinking from a glass with an orchid garnish. So for us it really doesn't matter whether they exist or not.

 

[NW-Bound]

I have read the above arguments all before. And we have had many discussions on this on this forum.

Yes, the arguments are all valid. What I say is: don't listen to any manager, hoping he will beat the market for you. If you want to do better, learn and try to do it yourself.

Yes, it is hard to beat the market. But every so often, a cataclysmic event comes along. We have had the dot-com and tech bubbles, then the housing market bubble, and the subprime implosion.

We cannot predict when the next one will happen. But as events unfold, instead of saying "the market is what it is, and it is all rational and efficient", if one can use subjective judgement like Templeton, he can beat the market.

Yes, hard to do, and one must be very careful. But if one keeps saying the market is always right, he will not open his eyes to opportunities.

I shall retell a paradox repeated by Malkiel, who believes in the softened form of EMH.

Two economists were discussing economic issues while walking down the street. One happened to see a $20 bill on the sidewalk and pointed to it. The other guy said "Don't bother to try to pick it up. It's a mirage. If it were real, someone else would have picked it up already".

 

[OldShooter]

... if one keeps saying the market is always right ... EMH ...

I don't recall saying anything about the market being right nor have I mentioned EMH or argued that the market is rational and efficient. And I for sure never said that it is impossible for a manager to beat the market. That happens all the time. But the statistical reality, supported by decades of data, is exactly what Sharpe's analytical argument proves. On average, active managers underperform by the amount of their extra costs. Further, the S&P Manager Persistence report cards and the academic research by guys like Fama and French support the conclusion that it is not possible to identify winners ahead of time.

Actually I would love it if the decades of data and decades of research on this subject were wrong. Just as I would love it if Santa Claus were real. I'm just as greedy as the next guy. I would even settle for small change from the Tooth Fairy.

But your simply stating your opinion repeatedly without any statistical data or academic research to support it is not convincing. Sorry.

(Re EMH, remember it is not necessary to understand how the clock works in order to know what time it is. It's passive investing time and probably always has been, EMH debates notwithstanding.)

 

[NW-Bound]

OK. Perhaps we are not understanding each other, and are talking about two different things altogether.

You keep saying that MF managers cannot beat the market and I did not disagree.

Then, I talk about rational market and EMH, but you are not talking about that.

I think we were both attacking our own strawmen, so I am stopping now. Peace.

 

[unclemick]

Male hormones. As long as I'm still kicking - football and a few good stocks.

That said I never (all in ) could beat my 401k 'Bogle's Folly' over the long term (since 1977). Like the Cubs the Saint's (since 1974) took a long time to get to the Superbowl.

Heh heh heh - Index via Target Retirement for real money and then well you just gotta play with mad money - I just don't take myself as serious anymore and remember the horse I rode in on.

 

[Ted_Shepherd]

Sentimental Investing and Dying to Avoid Capital Gains Taxes

I generally hold no individual stocks, but only S&P 500 index funds and Total Stock Market index funds. I went broke chasing performance and managers who might beat the market for me. That was 37 years ago. Never again. An exception to my dedication to index funds is two stocks that I inherited. For sentimental reasons, not for rational reasons, I have held them. Now, my unrealized capital gains in the stocks makes the tax considerations decisive. I won't sell. Don't want to pay the capital gains tax. As luck would have it, though, these two stocks have both outperformed the S&P 500 substantially over the last five years. The dividend has been a little better than the S&P 500 pays, too. As the saying goes, even a blind sow will find an acorn from time to time. I do not recommend sentimental investing, but it sometimes pays off. (So, will the capital gains just ride untaxed forever? No, I plan to bequeath those stocks to my spouse, much younger than I am. He can sell them then using the value when he inherits them to compute capital gains or losses, rather than my basis acquiring the stocks years ago. Of course, there are those who cordially despise this "loophole". They might close it. Who knows?)

 

[JoeWras]

(So, will the capital gains just ride untaxed forever? No, I plan to bequeath those stocks to my spouse, much younger than I am. He can sell them then using the value when he inherits them to compute capital gains or losses, rather than my basis acquiring the stocks years ago. Of course, there are those who cordially despise this "loophole". They might close it. Who knows?)

You're good as long as they don't go private. A public-to-private event that you have no control over is one of those tax planning events that can really upset the apple cart.