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Re: SWR should not be constant over a Retirement L
Old 03-12-2004, 12:44 PM   #21
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Re: SWR should not be constant over a Retirement L

Nevermind, I'm feeling industrious today and did it in excel.

I did my base calcs with my existing portfolio %'s, zero for withdrawal, and 4.5% expenses. Report was 100% successful (which it always will be at zero withdrawal).

Drawing down the actual withdrawal amounts in excel showed that except for the naughty years 1929 and 1965 and a couple of others, the withdrawal was in excess of the hard inflation adjusted amount I had previously run with. In the bad years I'd have had to live off of about 2/3 my current expenditure rate. Not horrible.

Making a 10k per year base adjustment and keeping the 4.5% on top of that gave me 100% (not a given in this case) and a usable withdrawal in 100% of the years projected.

What I dont have and am not sure how to calc without drawing in historic inflation tables is whether the last 5-10 years worth of withdrawals would have been high enough to overcome inflation. In other words, would I have descended into eating cat food and washing off plastic wrap. My dad, a depression era child, does rinse off plastic wrap and dries out paper towels and reuses them. Boy I hope we never see those times again.
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Re: SWR should not be constant over a Retirement L
Old 03-12-2004, 04:14 PM   #22
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Re: SWR should not be constant over a Retirement L

For BobSmith:

I cannot answer your questions using FIRECalc. I have to use one of my modified versions of the Retire Early Safe Withdrawal Calculator. The unmodified calculator is available at www.retireearlyhomepage.com . I have posted detailed instructions as to how to make my modifications are among several posts at the SWR Research Group at www.nofeeboards.com . These calculators are similar to FIRECalc, but they also have some important differences, at least using their default settings. Among them is how withdrawals are applied. (Withdrawals are split into two parts, one at the very beginning of the year and the other at the very end of the year. Gains or losses in the market can affect results.) The default expense ratio is 0.20% (instead of 0.18%).

The one thing that might stand out is that I routinely use an initial balance of $100000 with those calculators in contrast to the $650000 that FIRECalc has for its default value.

In addition, I have set things up so as to show balances. I have not set them up to show the amount withdrawn each year. You have to hand-calculate that. On a positive note, I have data summaries similar to FIRECalc both in real dollars and in nominal dollars.

I set conditions up using an initial balance of $100000 and 0.20% expenses for a portfolio of 80% stocks and 20% commercial paper (re-balanced annually at zero cost). I withdrew all dividends (i.e., in terms of the model inputs, I set the dividend reinvestment percentage equal to zero).

The first thing that I did was to identify the maximum withdrawal rate that would have had 100% survival for 30-year retirements. It was 2.3% (plus inflation). At 2.4%, there was a single failure in 1929. I looked at balances after 10 years and selected 1911, 1929, 1937 and 1966 for further examination.

In what follows, I am using real dollars. They are already adjusted for inflation.
1) With a starting balance of $100000 in 1911, the balance after 10 years (or 1921) would have been $28932. After 20 years (in 1931), the balance would have been $38739. After 30 years (in 1941), the balance would have been $11830.
2) With a starting balance of $100000 in 1929, the balance after 10 years (or 1939) would have been $54051. After 20 years (in 1949), the balance would have been $17160. After 30 years (in 1959), the balance would have been $4218. The portfolio would have run out of money by 32 years.
3) With a starting balance of $100000 in 1937, the balance after 10 years (or 1947) would have been $39187. After 20 years (in 1957), the balance would have been $38080. After 30 years (in 1967), the balance would have been $28847.
4)With a starting balance of $100000 in 1966, the balance after 10 years (or 1976) would have been $43634. After 20 years (in 1986), the balance would have been $27647. After 30 years (in 1996), the balance would have been $20336.

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Re: SWR should not be constant over a Retirement L
Old 03-12-2004, 04:18 PM   #23
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Re: SWR should not be constant over a Retirement L

For Bob_Smith (continued):

In all of these cases the withdrawal amount would have been $2300 plus inflation every year plus all of the dividends on the stocks in the portfolio. Withdrawals from dividends are restricted to the 80% part of the portfolio that consists of stocks and they do not include interest from the commercial paper.

1) The dividend yield in 1911 was 5.07%. In 1921 it was 7.11%. In 1931 it was 6.05%. In 1941 it was 6.38%.
2) The dividend yield in 1929 was 3.46%. In 1939 it was 4.11%. In 1949 it was 6.16%. In 1959 it was 3.16%.
3) The dividend yield in 1937 was 4.15%. In 1947 it was 4.69%. In 1957 it was 3.82%. In 1967 it was 3.41%.
4) The dividend yield in 1966 was 2.94%. In 1976 it was 3.80%. In 1986 it was 3.81%. In 1996 it was 2.26%.

To help you interpret these numbers, remember that my starting balance is $100000, not the $650000 that FIRECalc has as its default value. This means that 4% of the initial balance is $4000. Since we are always withdrawing $2300 (plus inflation) from the portfolio, dividends must provide $1700 to reach 4% of the initial balance. If the current balance is $40000, stocks amount to $32000 (which is 80% of $40000). If you get $1700 from $32000 of stocks, the dividend yield must be 5.3125% (or 1700 / 32000) or more.

Finally, I went back to the problem that you are interested in.

If you withdraw 1% of the initial balance (plus inflation) and all of the dividends, your portfolio would never have run out of money (or, at least, for 60 years). Your withdrawals would have been $1000 each year (which is 1% of $100000) plus all dividends. If your current balance ever fell to $40000, it would have required a dividend yield of 9.375% (or 3000 / 32000) to bring total withdrawal amount up to $4000. (That is, $1000 from the balance and $3000 from stock dividends.) If your balance were $80000 or more, stocks would total $64000 (or more) and a dividend yield of 4.6875% (or 3000 / 64000) would be sufficient to bring the total withdrawal amount to $4000 (which is 4% of the $100000 initial balance).

These are in real dollars. They are already adjusted for inflation.
1) With a starting balance of $100000 in 1911, the balance after 10 years (or 1921) would have been $37269. After 20 years (in 1931), the balance would have been $78687. After 30 years (in 1941), the balance would have been $60173.
2) With a starting balance of $100000 in 1929, the balance after 10 years (or 1939) would have been $68221. After 20 years (in 1949), the balance would have been $38672. After 30 years (in 1959), the balance would have been $77998.
3)With a starting balance of $100000 in 1937, the balance after 10 years (or 1947) would have been $51034. After 20 years (in 1957), the balance would have been $82632. After 30 years (in 1967), the balance would have been $110175.
4)With a starting balance of $100000 in 1966, the balance after 10 years (or 1976) would have been $60153. After 20 years (in 1986), the balance would have been $55585. After 30 years (in 1996), the balance would have been $91219.

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Re: SWR should not be constant over a Retirement L
Old 03-12-2004, 04:20 PM   #24
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Re: SWR should not be constant over a Retirement L

In terms of my initial remarks, for those years that turned out to have the lowest withdrawal rates historically, you would have been able to withdraw 1% (roughly) above the initial dividend yield and then increased that amount to match inflation for the next 30 years.

Finally, I am not sure what you are asking for in your third question:
Quote:
3. What would have been the minimum stock market exposure required to make this work in the past century?
You would have to specify a withdrawal amount of some kind.

Along similar lines, you might prefer to withdraw a fraction of the dividends (such as 50% or 75%) instead of all of them.

Have fun.

John R.

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Re: SWR should not be constant over a Retirement L
Old 03-12-2004, 06:00 PM   #25
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Re: SWR should not be constant over a Retirement L

Thanks John! It appears would it would have been a rough ride with significant fluctuations in income with an 80% stock portfolio.

I'll probably plan, at least initially, to withdraw around 3.5% in the first year, and the same plus inflation in subsequent years, but I'll also implement Gummy's strategy to some extent ("decide upon some minimum annual withdrawal rate ... just enough to pay the bills ...then only withdraw beyond that if the market is good.."). I haven't determined my bread and water budget yet, but I'm working on it. I would gladly experience significant deprivation if the alternative was a return to work.

At this point I'm hoping to buy a boatload of LT individual TIPS if they get back to 2.5% (about 35%) plus 40% TSM, 5% REITS fund, and the rest in a ST Corp Bond fund, CDs, and cash.

Your "3% SWR for 56 years" has great appeal and is a very helpful article. The switching spooks me, but I may go that route at some point, especially if TIPS get back to around 2.5%. It makes a lot of sense and appeals to my relatively low risk tolerance. I have read only about half of the articles at the SWR Research Group, and some of it exceeds the limits of my math skills, but I continue to learn there and I plan to continue reading. Thanks for all of your research - and your willingness to share it.
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Re: SWR should not be constant over a Retirement L
Old 03-13-2004, 04:48 AM   #26
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Re: SWR should not be constant over a Retirement L

Yes by all means keep up the good work.
We also have day to day budget covered so SWR is the variable option(not withdrawning yet). And yes emotions affect our spending pattern(hopefully not the 50-60% stock/bond split).

I have a hard core dividend bias(along with balanced index) so studies which include this element make me more comfortable than others-in which the div. is there but 'invisible'.








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Re: SWR should not be constant over a Retirement L
Old 03-13-2004, 07:31 AM   #27
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Re: SWR should not be constant over a Retirement L

I agree with the general theme of this thread. We should not limit our thinking to what is available with the tools that we have. Our tools are limited to the S&P500 index and a very few fixed income investments. This is because of the data that are available.

Now let's look at things from a broader perspective.

My investigations into switching stock allocations in accordance with valuations (as measured with Professor Shiller's P/E10) tell us to be out of stocks at this time. That is, you should allocated 0% to stocks (as represented by the S&P500). But what if prices were cut in half? Would you be as concerned about holding stocks? My research suggests that it is a good idea to hold 30% to 40% in stocks at those prices. What if prices were cut to one quarter? Would you feel comfortable with a high stock allocation? My research suggests that you buy as much as you can (a 100% stock allocation). Don't be overly concerned with the calculated thresholds. The best numbers are likely to be a little bit different in the future. That is, they will be similar, but not identical.

We know that you must include a growth vehicle such as stocks to make a retirement portfolio last. We know that selling stocks at depressed prices kills a retirement portfolio. The most important lesson from my research is that it is OK to wait for prices to get better. It is OK to wait for a decade if necessary.

Now let's look beyond our calculators. I have been a net seller of stocks recently. (This is a radical change in my behavior). But I have bought a few shares of Merck (MRK) as well. It was selling at a P/E around 13 to 14 and it pays a high dividend. Merck is obviously being priced as if all patents are about to expire and nothing at all is in the pipeline. Historically, Merck has commanded a handsome premium to the overall market. If stock prices in general were cut in half, buying Merck at recent prices would still make sense. [Currently, Merck has a P/E of 15.46 and a dividend yield of 3.28%. The S&P500 has a P/E of 29.03 and a dividend yield of 1.80%. The Dow Jones Industrial Average has a P/E of 19.69 and a dividend yield of 2.29%.]

I would expect a stock such as Merck to grow at least as fast as inflation. I do not expect it to go bankrupt. I would expect it to be able to maintain its current dividend amount for a few years. The dividend amounts would remain attractive even if they were not increased in the next few years. For those reasons, I think that stocks such as Merck (and other, similar investments) can help us get through a prolonged waiting period. We do not have to restrict ourselves to TIPS or any other particular investment choice.

I suggest that you look very closely into your desired income stream. It is possible to reach 3.5% in dividends in reasonably safe stocks even today without ever having to sell any shares. The biggest risk would be whether the dividends would increase enough to match inflation. This approach is not identical to Gummy's Sensible Withdrawal Rate strategy, but it is similar.

My experience is that real retirees (who look into the matter) make good choices. Studies that validate their decisions often come later.

Have fun.

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Re: SWR should not be constant over a Retirement L
Old 03-13-2004, 11:38 AM   #28
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Re: SWR should not be constant over a Retirement L

John R

Yep - my side money ( under 20% of total portfolio) is yielding 3.5 - 4% marked to market. Utilities, oils, banks, baby bells, REIT, closed end conv bond fund. Buy Mergent's Handbook of Dividend Achievers every couple years and DRIPs via Moneypaper. Also a net seller of stocks of late AND looking(not buying yet) at drug stocks( like Merck). Still have Lilly from the early 90's when it yielded 4%.
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Re: SWR should not be constant over a Retirement L
Old 03-13-2004, 02:36 PM   #29
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Re: SWR should not be constant over a Retirement L

I am itching to get back into REITS. They have a
very low correlation with the total market and
have zigged when the market zagged the last few
years. Vanguard's fund pays about 5% right now
and I am thinking about DCA to a 10% overall
position over 3 years. At my age I can't afford the
risk of plunging.

I checked the annual report for the Vanguard REIT
fund and found that the dividend amount per share
has been very stable aver the last several years.
This worries me a little as I would like to see some
evidence of dividend growth.

Individual REIT stocks like Washington REIT, New Plan
Excel, Weingarten and National Health Properties were
very good in the past and are growing their dividends
at about 10% per year. If I can't find some evidence
of growth in the Index, I might say to hell with it and
go back to buying individual REITS for my IRA.

BTW, I think REITS are a good inflation fighter. Most
lease renewals are indexed to the CPI. They might
even be better than TIPS if you can stand the volatility
and just spend the dividends (like John Galt),

Regards,

Charlie

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Re: SWR should not be constant over a Retirement L
Old 03-13-2004, 03:16 PM   #30
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Re: SWR should not be constant over a Retirement L

Quote:
. . . My investigations into switching stock allocations in accordance with valuations (as measured with Professor Shiller's P/E10) tell us to be out of stocks at this time. That is, you should allocated 0% to stocks (as represented by the S&P500). . .
This is where I have questions, John. Did your investigations tell you the same thing 12 months ago just before a nearly 40% run up in stocks? If stocks fell 25% over the next few days, weeks or months, the person who was in stocks 12 months ago would still be better off.

I have yet to see a method for determining timing that really works. And although you've done well (and/ expect to do well) with Merck, I have yet to see a method for stock picking that really works either.

For a large number of reasons, I don't believe the typical investor can determine -- with any degree of certainty -- what stocks will outperform the index over any specific period of time. After the exposure of the blatent corruption of the 90's, we know that we can't trust the financial reports. And after working for CEOs of two large companies, I can say with absolute certainty that they often are clueless about the markets they serve. Further, it is the unforseeable events that often become the primary drivers for major stock moves.

I don't mean to say that one should never buy individual stocks. But there is a risk associated with that that must be factored into the decision.

What are these indicators that you are telling us to use? How were they determined? How were they tested? What percentage of the time did they actually work and how well?

And on another point, what are the indicators that led you to buy Merck? Can you apply the rules to other stocks? I would have to find a lot of Mercks to replace my total market index fund investments or be extremely vulnerable to unforseen negative forces (like lawsuits, etc.).
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Re: SWR should not be constant over a Retirement L
Old 03-13-2004, 03:42 PM   #31
 
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Re: SWR should not be constant over a Retirement L

JWR,

I agree with SalaryGuru on this one also!

- Having just finished Berstein's 4 pillars of Investing, He lays out a pretty good case of why the most competent money managers in the World Cannot Time the Market, Pick Individual Stocks, and assemble a portfolio that can consistently beat a portfoilo of constantly held index funds of different asset classes.

I'm taking this one to the grave with me - whether it's rich or poor - It's at least a sensible plan.

BTW - Have you read Berstein's - 4 Pillars of Investing? - If so, how come you believe that you are smarter than the market?

If not, I'd suggest reading it!
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Re: SWR should not be constant over a Retirement L
Old 03-13-2004, 04:26 PM   #32
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Re: SWR should not be constant over a Retirement L

I don't know about John R but here's my two cents. Using his calculations the math works but
he also mentions the possiblility of a long(up to a decade?) wait which exceeds my 'emotional' capacity. Hence my balanced index out of the can(70-80%). Even with the S&P 500 above it's 1871 trend channel(overvalued) I'm willing to accept the possible portfolio underperformance long term in the hope (perhaps forlorn) that the overvaluation will persist long enough to be benificial early in ER.

As for my side/hobby money in individual stocks - they were selected using 'retro' valuation methods - Bogle's price to dividend and then Moody's(now Mergents) Handbook of Dividend Achievers for dividend consistency plus dividend growth from the classics - Utilities, oils, telephone, food, drug, etc. Why? - strictly for div. income plus div. growth. It was expected that they would underperform 'the market' but supply cold hard cash div.

Both the P/E10 and Merck(via price to dividend or other method) are ways to value stocks - on a chart might look like timing to a mere Philistine like me - they can coincide.

So my big bet is balanced index and let the computers rebalance.

Small side bet on div. stocks(who cares about performance) if the div.s keep coming. Now to further confuse the issue - will be selling some and shifting more toward div. growth as SS appoaches (1.5-2 yrs.
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Re: SWR should not be constant over a Retirement L
Old 03-13-2004, 06:41 PM   #33
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Re: SWR should not be constant over a Retirement L

Without spending a lot of time evaluating options, its possible that both approaches have some meeting points.

For example, using vanguards large cap value index satisfies the need to hold an index while still providing a good dividend stream from value stocks.

A managed fund like the Wellington fund that keeps 60% in high dividend value stocks and the rest in intermediate bonds, about half of which are corporate, at a fairly reasonable cost.

Even the asset allocation fund, which over its term has delivered similar returns to the s&p500 with lower volatility and frequently higher dividend yields.

I'll think on it some more (after a good nights sleep), and perhaps have some more constructive ideas, but combining some aspects of value indexing or actively managed value stocks/bonds and some selective stock picks (perhaps only 3-5) that are producing a high yield in a blue chip framework...rather than trying to make it a pure or black and white solution??
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Old 03-13-2004, 08:33 PM   #34
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Re: SWR should not be constant over a Retirement L

Quote:
I have yet to see a method for determining timing that really works.
Sure you have. *I posted a link to one a while back:

http://www.kc.frb.org/publicat/reswk...F/rwp02-01.pdf

I actually pay attention to this method because it makes some intuitive sense. *P/E doesn't tell you the whole story because stock values don't exist in a vacuum -- stocks compete with other investments for cash, so the method above (written by a fed economist) looks at the spread between E/P (i.e., earnings yield-equivalent) and treasury yields (which tend to track other bond yields as well).

Even though stocks are overvalued by just about every metric out there, bond yields are so low that stocks look like they're still a safe bet. * *Personally, I will probably reduce my stock exposure if/when interest rates rise (or as the spread narrows to the threshold mentioned in the above paper).
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Old 03-14-2004, 03:41 AM   #35
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Re: SWR should not be constant over a Retirement L

Bogle financial markets research center, june 5,2003 -'policy portfolio' speech pretty well sums it up for me. My favorite financial guru remains Charles DeGaul although Yogi Barra is coming on strong.
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Old 03-14-2004, 03:51 AM   #36
 
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Quote:
I have yet to see a method for determining timing that really works. Sure you have. I posted a link to one a while back
Wab,

Well, how come there has never been a money manager that has beaten the Indexes year in and year out?
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Old 03-14-2004, 04:02 AM   #37
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Re: SWR should not be constant over a Retirement L

Cut_Throat

That's what keeps the debate going - the small group of managers that beat the market exist. The rub is determining who is based on 'past performance'. Various studies on persistance of managers/funds indicate the difficulty of - picking ahead of time - also the drag of increasing size (ie success). The odds are daunting even over very short(ten yr) periods.
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Old 03-14-2004, 06:03 AM   #38
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Re: SWR should not be constant over a Retirement L

Quote:
Well, how come there has never been a money manager that has beaten the Indexes year in and year out?
If you read Bernstein, you'll remember that there are managers who consistently beat the market. * The efficient market types tend to attribute their success to random chance (akin to a coin landing on heads many times in a row -- it's going to happen for somebody).

A couple of points, though:

The more money you need to manage, the harder it is to beat the market. * Both from an efficient market "odds" standpoint, and from a standpoint of finding enough good bets that you can believe in. * That's one reason Buffet says not to expect great forward returns from him -- he has too much money.

I don't really care about beating the market consistently, nor do I think I can do it. * I don't even think there's a single method (such as the one I linked to) that works. * But I do fervently believe that the market isn't that smart. *I think the market has short term memory and tends to overreact to recent news, for example.

I'm perfectly happy exploiting the few things I think I know, and even when I'm wrong, it provides me with considerable entertainment value *
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Old 03-14-2004, 07:38 AM   #39
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Re: SWR should not be constant over a Retirement L

Tobias (I think) gave a great example about fund managers who beat the market many years in a row, as Wabmester mentioned:

Take 512 pennies and throw them onto the floor. The roughly 256 that come up tails can be spent for dryer sheets.

The other ~256 get tossed again. The roughly 128 that come up tails get removed.

The remaining ~128 get tossed; you keep the ~64 heads.

Repeat, and keep the ~32 heads. (Why didn't I start here so I wouldn't have to type so much?)

Repeat and keep the ~16 heads.

Repeat and keep the ~8 heads.

Repeat, and keep the ~4 heads.

Repeat, and keep the ~2 heads.

Now you have finally weeded out the losers, so it is time to make your investment. *Put half your portfolio as a bet that penny #1 will come up heads on the next toss, and half as the same bet on penny #2 (gotta diversify, you know!), because they have consistently outperformed the other pennies, and are obviously just plain good at coming up heads. *
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Old 03-14-2004, 07:59 AM   #40
 
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Quote:
If you read Bernstein, you'll remember that there are managers who consistently beat the market. * The efficient market types tend to attribute their success to random chance (akin to a coin landing on heads many times in a row -- it's going to happen for somebody).
Wab,

I did read Bernstein (have you?) and he cannot name 1 money manager that has beat the indexes for the long haul - *A 30 year time period. Yes there are money managers that beat the market for 5-10 years. So what? They usually fail miserably after a run of success.

(Buffett is not a money manager - He is a business manager and actively participates in the Businesses of the companys that he buys.)



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