Justifiable Investment Strategy

[easysurfer]

I believe investors can beat the market, not all investors can beat the market. In the same way I believe college quarterbacks can make it in the NFL. To conclude otherwise doesn't make sense.

But of all the quarterbacks that have been drafted in the NFL, how many of them made it big? The ratio has to be small.

It's possible, and who doesn't want to hear a John Unitas, Peyton Manning or Aaron Rodgers story? But for each of them, many have tried and failed (anyone remember Art Schlichter or Jeff George or Rick Mirer or Ryan Leaf? All of them were supposed to be great coming out of college but ended up being a bust in the NFL).

That's why I'd rather just follow an Index.

Especially in ER. If retirement is a marathon, I'd rather put my dollar following the index to know I'll finish the race than trying to finish first as a sprinter only to burn myself out along the way.

 

[GregLee]

OK, let's try a little logic exercise. ...
Now, mathematically, one of these guys has to lose.

I don't understand where, exactly, the logic and the mathematics enters in to this conclusion. How does it follow?

 

[Marc1962]

If retirement is a marathon, I'd rather put my dollar following the index to know I'll finish the race than trying to finish first as a sprinter only to burn myself out along the way.

I agree with this. Indexing is a simple way for retail investors to avoid making a number of common mistakes that can devastate their portfolios. As long as we avoid currency destruction or some other type of financial Armageddon, I'm confident that my wife and I can retire and stay retired by indexing.

That said, I also believe that it is possible for a motivated retail investor to exploit his/her natural size advantage to outperform institutional investors. I'm interested in this personally and envision doing this by making long-term investments in value microcaps. While I'm confident that it's possible, I'm not at all confident that I'll be successful myself - I'm going to approach it as a hobby and allocate no more than 2% of capital to it.

 

[easysurfer]

I don't understand where, exactly, the logic and the mathematics enters in to this conclusion. How does it follow?

I'll take a stab at the logic and mathematics. Here it goes...

A simple comparison is like if you are a student in a class of 5 students. Grades are weighted A=5, B=4, C=3, D=2, F=1.

One can choose to shoot for an upper grade consistently or just take the performance of the entire class.

Mathematically, if grades come out one of each grade, taking the overall performance gives you (5+4+3+2+1)/5 = 3. (a grade of C)

Mathematically, if say, everyone passed and grades come out 2 A's, 2 B's, 1 C, the overall performance is (5+5+4+4+3)/5 = 4.2 (grade of a low B)

As for investments, can you consistently do better than the overall performance (not as easy as it seems) or do you just simply take the overall performance and move on?

 

[bcinvest]

But of all the quarterbacks that have been drafted in the NFL, how many of them made it big? The ratio has to be small.

It's possible, and who doesn't want to hear a John Unitas, Peyton Manning or Aaron Rodgers story? But for each of them, many have tried and failed (anyone remember Art Schlichter or Jeff George or Rick Mirer or Ryan Leaf? All of them were supposed to be great coming out of college but ended up being a bust in the NFL).

That's why I'd rather just follow an Index.

Especially in ER. If retirement is a marathon, I'd rather put my dollar following the index to know I'll finish the race than trying to finish first as a sprinter only to burn myself out along the way.

Yeah, ultimately you have to do something you are comfortable with. There are constraints to optimal decision making. A good example is in choosing a spouse you could invite Christie Brinkley, Pamela Anderson, and Angelina Jolie to dinner to choose your next spouse. Ultimately you are limited by who will have you. Inviting those three wouldn't be a realistic strategy for most. Even if it was determined one of them would result in your optimal spouse.

Indexing may be the best option for many investors considering constraints.

It has the benefit of leaving plenty of opportunities for investors like me.

 

[easysurfer]

I do agree as to it depends on what you have your sights on. On one hand (indexing), guaranteed, you can't do any better or worse than everyone else who follows that approach and the other hand (active investing)..who knows...there are no guarantees..you might hit it big or fall flat on your face.

I'd take the indexing strategy anytime.

 

[BUM]

 

[yakers]

Indexing is a particularly good approach as you can come closer to actually getting market return. I was a a big Smith Barney 'Client University' last weekend and I can't remember the precise statistic but one of the speakers pointed out that their fund had out performed the benchmark buy over 2% but admitted that their clients had returns under the benchmark because of when the clients moved in and out of the market.
If you are getting true market return your returns are likely to be above average and if you try to beat the market you are likely to have a below average return. This wasn't the message the speaker wanted to convey but its what his data told me.

 

[REWahoo]

If you are getting true market return your returns are likely to be above average and if you try to beat the market you are likely to have a below average return.

You are ignoring the fact that index investing leaves all sorts of opportunities for the small, nimble, hard-working investor to beat the S&P year in and year out. I've been told it's not all that hard to do.

 

[Texas Proud]

I'll take a stab at the logic and mathematics. Here it goes...

A simple comparison is like if you are a student in a class of 5 students. Grades are weighted A=5, B=4, C=3, D=2, F=1.

One can choose to shoot for an upper grade consistently or just take the performance of the entire class.

Mathematically, if grades come out one of each grade, taking the overall performance gives you (5+4+3+2+1)/5 = 3. (a grade of C)

Mathematically, if say, everyone passed and grades come out 2 A's, 2 B's, 1 C, the overall performance is (5+5+4+4+3)/5 = 4.2 (grade of a low B)

As for investments, can you consistently do better than the overall performance (not as easy as it seems) or do you just simply take the overall performance and move on?

Good example, but wrong answer for the above question...

Lets use your last example... the average is 4.2... but there were two 'winners' and three 'losers' in this example..

Now, lets use your first example... the average is 3 and there are two 'winners' and two 'losers' and one that made average... but when the 'losers' worked hard and got their grades up... the average also moved up and they were still 'losers' even though they might have scored a 4 from a previous 2....

SOOO, buy definition... if you take an average, some are above the average and some below... someone 'wins' and someone 'loses'.... there is not other way to do it with the math...

 

[easysurfer]

Yes, if you break down each grade, there are individual good and bad grades.

However, in the example, the big picture is the one who just simply chooses the "average" all the time, in the long run, is the winner because he/she is satisfied with effortlessly just doing average again and again, not better or worse than the entire class no matter what without the effort/risk of being a "winner" or "loser."

By just picking the average each time is like doing what the entire class does without having to study. Not a bad deal.

 

[Nords]

... hard-working...

Whoops, I was onboard until you threw that criterion into the mix...