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Surprising Results from William J. Bernstein
Old 04-19-2004, 05:04 AM   #1
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Surprising Results from William J. Bernstein

Most of the research I've read seems to indictate that no more than 20% of the people who buy individual stocks beat the S&P500. Imagine my surprise when I read this from Dr. Bernstein's "Efficient Frontier" web site.

The 15 Stock Diversification Myth

http://www.efficientfrontier.com/ef/900/15st.htm

In order to investigate this problem, I looked at the stocks constituting the S&P 500 as of 11/30/99, and formed 98 random equally-weighted 15-stock portfolios for the 12/89-11/99 10-year holding period. Below is a histogram of the annualized portfolio returns:

[see link above to view plot]

The "market return" (all 500 stocks held in equal proportion) was 24.15%. This is considerably higher than the 18.94% return of the actual S&P for two reasons: First, the S&P is a cap-weighted, not an equal-weighted, portfolio. Second, and much more important, many of the stocks in the S&P on 11/30/99 were not in the index at the beginning of the period. The recently-added stocks obviously had much higher returns than the companies they replaced, upwardly biasing the entire series of returns. Nonetheless, these flaws in the methodology do not change the basic conclusion; the TWD of these 15-stock portfolios is staggering—three-quarters of them failed to beat "the market." (Had the study been done with the S&P stocks extant on 12/1/99, it seems certain that the positive kurtoskewness of the present sample would have been replaced with a significant negative kurtoskewness—a much more important descriptor of risk. If anybody wants to give me a survivorship-bias-free S&P database for the past 10 years, my modem and mailbox are in fine working order.) Even so, the scatter of returns was quite high, with more than a few portfolios underperforming "the market" by 5%-10% per annum.

</snip>


Actually, Bernstein's plot doesn't show that "three-quarters of them failed to beat "the market"". Only 29 out of the 98 portfolios he examined failed to equal or beat the 18.94% annualized return for the S&P500 for the 10-year period. Fully 70% of the 15-stock portfolios beat the S&P500 10-year return of 18.94% per annum.

Of course, Bernstein picked his 15 stock portfolios at random while most investors think long and hard about what stocks to buy.

Perhaps "too much thinking" leads to underperformance. <grin>

intercst

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Re: Surprising Results from William J. Bernstein
Old 04-19-2004, 05:22 AM   #2
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Re: Surprising Results from William J. Bernstein

Intercst

Bernstein's article and Warren Buffett's about value (215 orangutans) - appendix I of the fourth ed - Ben Graham's The Intelligent Investor are two of my favorite reread often articles.

Especially when putzing with my hobby stocks.
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Re: Surprising Results from William J. Bernstein
Old 04-19-2004, 05:26 AM   #3
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Re: Surprising Results from William J. Bernstein

Oh yes and I love 'kurtoskewness' - a great pontification word when hanging out and b.s. - ing about stocks.
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Re: Surprising Results from William J. Bernstein
Old 04-19-2004, 08:05 AM   #4
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Re: Surprising Results from William J. Bernstein

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Oh yes and I love 'kurtoskewness' - a great pontification word when hanging out and b.s. - ing about stocks.
I'm not even sure "kurtoskewness" is a word. A quick google search revealed that Bernstein's article is the only place it appears on the whole world wide web.

However "kurtosis" and "skewness" are well known statistical concepts. Here's a link for those that want to read more.

http://www.itl.nist.gov/div898/handb...on3/eda35b.htm

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Re: Surprising Results from William J. Bernstein
Old 04-19-2004, 10:30 AM   #5
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Re: Surprising Results from William J. Bernstein

Kurtoskewness not a word! - except as invented by Bernstein - who'd have thunk it. I wonder what he'd come up with if we gave him knowledge of dryer sheets.

I vaguely remember some ancient studies - ? 60's or 70's? - wherein one bought 100 shares each of X? many DOW stocks and held for ?X? years and you did good. How good, I don't remember and can't find it in my old files. But the results were competitive with cap weight, dollar weight and no mention of rebalancing or dogs of the DOW.
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Re: Surprising Results from William J. Bernstein
Old 04-19-2004, 01:01 PM   #6
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Re: Surprising Results from William J. Bernstein

I'm suspicious of using the period of time when an extremely pitched market and irrational exhuberance were king.

I know a lot of stock pickers who are complete idiots who made a lot of money during the latter part of that decade, and promptly lost every penny and more over the first part of this one.

I'd opine this is a combination of concentration and insane accelleration, and the randomness aspect doesnt scare me much.
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Re: Surprising Results from William J. Bernstein
Old 04-19-2004, 05:55 PM   #7
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Re: Surprising Results from William J. Bernstein

Indeed, TH. As a psychologist, I am privy to many otherwise-unpublicized thoughts and ideas. One was that God gave signs about what stock to buy/sell now/later etc./etc. This person's ideas (and God's, apparently) involved buying large amounts of tech stocks and getting absurdly rich. You all can guess when.

I don't know what happened when the bubble burst. Did God let on? I was not privy to the outcome and I haven't seen this person for a number of years.

The bulk of the research seems to lead to a few major conclusions: indexing, asset allocation. The finer points I can happily ignore; they are best left to those who can spell kurtoskewness. And define it.

Anne
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Re: Surprising Results from William J. Bernstein
Old 04-19-2004, 08:27 PM   #8
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Re: Surprising Results from William J. Bernstein

I hope that in the future, you will be passing along to us any insights passed by god to your patients.

Thanks in advance.
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Re: Surprising Results from William J. Bernstein
Old 04-19-2004, 11:42 PM   #9
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Re: Surprising Results from William J. Bernstein

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Perhaps "too much thinking" leads to underperformance. <grin>
More likely, large caps lead to underperformance.
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Re: Surprising Results from William J. Bernstein
Old 04-20-2004, 04:56 AM   #10
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Re: Surprising Results from William J. Bernstein

I'm CRUSHED -crushed to hear kurtoskewness is not a real word.
Next you'll tell me dryer sheet recyling is a tall tale and a myth without meaning. To think, I name dropped the kurto word around the house and other places when trying to impress (even before joining this forum). Perhaps keeping a low profile on dryer sheets is in order.

Hobby stocks in the last ten years have never outshined my balanced index and I must confess a bias toward large cap dividend when picking other than utilities and REITS. The stocks were dividends/dividend growth with a low/no cost DRIP - selected from Moody's/Mergent's Handbook of Dividend Achiever's. The plan was to have my age 55 non cola pension plus DRIP dividends equal what would have been a 'full' pension also non cola at 63. Since getting there early at 60, I was ready to start picking some less stodgy stocks and get 'my kurtoskewness and TWD going'. Now - may be forced to go back and do a little fishing while cooling the 'hobby stock jets'.
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Re: Surprising Results from William J. Bernstein
Old 04-20-2004, 08:20 AM   #11
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Re: Surprising Results from William J. Bernstein

IMHO, intercst has proved his point.

William Bernstein misinterpreted the data.

Have fun.

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Re: Surprising Results from William J. Bernstein
Old 04-20-2004, 09:37 AM   #12
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Re: Surprising Results from William J. Bernstein

Bernstein's point seems to be that 75% of 15-stock portfolios didn't beat an equal-weighted holding of all S&P 500 stocks for a given period.

Intercst's point seems to be that 70% of 15-stock portfolios with an equal weighting of some S&P 500 stocks beat the cap-weighted index for the same period.

Both seem to be valid points to me, but I think they're both missing the real point: 1989-1999 was a really good time to own stocks *
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Re: Surprising Results from William J. Bernstein
Old 04-20-2004, 04:46 PM   #13
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Re: Surprising Results from William J. Bernstein

If I'm reading correctly 1935 - 1997 was also a great time to own a fixed set (30) of equal weight stocks - Lexington Corporate Leaders. It can't be compared directly to Bernstein but the idea is similar. november 12,1997 under the speech archives - Bogle financial markets research center at the very end of Parallaxes and Taxes.
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Re: Surprising Results from William J. Bernstein
Old 04-20-2004, 09:00 PM   #14
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Re: Surprising Results from William J. Bernstein

Another interesting quote from Bernstein's article

Quote:
The reason is simple: <b>a grossly disproportionate fraction of the total return came from a very few "superstocks" like Dell Computer, which increased in value over 550 times. If you didn’t have one of the half-dozen or so of these in your portfolio, then you badly lagged the market. (The odds of owing one of the 10 superstocks are approximately one in six.)[b] Of course, by owning only 15 stocks you also increase your chances of becoming fabulously rich. But unfortunately, in investing, it is all too often true that the same things that maximize your chances of getting rich also maximize your chances of getting poor.
If the odds of owning a "superstock" is 1 in 6 (17% chance), and the lack of a "superstock" in your portfolio causes it to underperform, why did 70% of the portfolios Bernstein examined meet or beat the S&P500 index?

Maybe there's more than 10 superstocks?

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Re: Surprising Results from William J. Bernstein
Old 04-21-2004, 05:37 AM   #15
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Re: Surprising Results from William J. Bernstein

I have been unable to pick superstocks even though watching old Monty Python movie reruns several times over the last ten years.

But my apples(DRIPs) with dividend compounding have done the job of developing a supplement to a meager non cola defined pension. Bernstein's oranges(S&P) are probably not comparable to my portfolio. I.e. my superstars are Fleetboston, Eli Lilly, New Plan Reality, Con Ed, etc. - 21% to 12% dividend yields on original investment due to raises and compounding over ten years plus adding money oon dips in price.

With SS looming in under two years and the 'core' budget covered - 1 in 6 odds of finding 'the holy grail' ala Monty Python are fine - I've done worst back in when fishing,
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Old 04-21-2004, 08:24 AM   #16
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waRe: Surprising Results from William J. Bernstein

wabmester
Quote:
Bernstein's point seems to be that 75% of 15-stock portfolios didn't beat an equal-weighted holding of all S&P 500 stocks for a given period.

Intercst's point seems to be that 70% of 15-stock portfolios with an equal weighting of some S&P 500 stocks beat the cap-weighted index for the same period.

Both seem to be valid points to me, but I think they're both missing the real point: 1989-1999 was a really good time to own stocks
IMHO, it is Bernstein who needs to be faulted here. He constructed an artificial index that was far from representative of the market as a whole. He selected a time frame that was atypical. He drew strong conclusions relative to the market.

There are major problems in reaching strong conclusions based upon what Bernstein has presented. It is Bernstein who needs to be faulted. It was Bernstein who claimed what his data do not support.

Have fun.

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Re: Surprising Results from William J. Bernstein
Old 04-21-2004, 08:27 AM   #17
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Re: Surprising Results from William J. Bernstein

The argument that superstocks are essential for good returns is similar to an argument I've heard against market timing. It goes something like this: 1% of market days (in the form of strong rallys) are responsibile for 90% of stock market returns (I don't remember the actual percentages, but that's the gist). So, your timing moves need to capture those short runs or you'll get dismal returns.
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Re: Surprising Results from William J. Bernstein
Old 04-21-2004, 08:33 AM   #18
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Re: Surprising Results from William J. Bernstein

Check out the (free) stock articles at Crestmont Research.
www.crestmontresearch.com

The big swings up and down pretty well cancel each other out. It is the number of up days versus down days that separates a bull from a bear.

Have fun.

John R.
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Re: Surprising Results from William J. Bernstein
Old 04-21-2004, 08:36 AM   #19
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Re: Surprising Results from William J. Bernstein

Here is the specific article that I had in mind.
http://www.crestmontresearch.com/pdf...20Invested.pdf

Have fun.

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Re: Surprising Results from William J. Bernstein
Old 04-21-2004, 12:15 PM   #20
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Re: Surprising Results from William J. Bernstein

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why did 70% of the portfolios Bernstein examined meet or beat the S&P500 index?
Simply stated, selection bias.

More complexly stated. His study took random portfolios from the current (or current at the time of the study) S&P 500 stocks. Many of those were not in the S&P500 for the entire past time period examined. Those stocks that went from not being in the S&P 500 to being in the index had to have grown faster than the growth rate of the index to gain admittance. This almost assuredly brought greater returns than the index for those stocks. Thus any random portfolio which contained one or more of them would have had improved performance.

How to use this? Provide me with the list of S&P 500 stocks ten years hence and I can probably construct portfolios that have a 70% chance of beating said index.
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