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The Investor's Dilemma, by Louis Lowenstein
Old 07-09-2011, 04:14 PM   #1
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The Investor's Dilemma, by Louis Lowenstein

the subtitle is "How Mutual Funds are Betraying Your Trust and What to do About It", and that gives you the book in a nutshell. Much of the information in the early chapters of the book will be old news on E-R: stock mutual funds frequently have high fees and high turnover which drags the fund's return below that of the index. But this author advocates seeking out equity funds that are actively managed on "value investing" principles, and gives advice on how to sort them out from the thousands of more typical stock funds. He gives a nod to indexing—due to low fees and low turnover, an index fund is superior to the typical actively managed equity fund—but in the end asserts that investing in a few selected value funds is better.
Quote:
The bottom line for this author is that, yes, for most investors, indexing provides a low-cost, sensible alternative to walking into the pits of Wall Street. The only winners at that roulette table are the croupiers....Even indexing, however, requires patience (i.e. the average returns of which Bogle writes are available only to those who hang arond long enough to realize the average). The annual redemption rate in th Vanguard 500 Index Fund has averaged 20 percent over the past few years, not much better than the 25 precent rate in stock funds generally. Anyone who trades in and out of an index fund will realize all the pitfalls of market timing and none of the benefits of careful selection. Know who you are. If you are able to use the principles outlined here to find an above average fund, also to be held over a long term, you should see returns greater than you would with an index fund. (italics in original)
The selection criteria suggested by the author are:
  • portfolio size (a few dozen stocks rather than a hundred or more)
  • low turnover
  • track history—performance over the past five and past ten years
  • fund managers who "eat their own cooking"—they have significant amounts of money invested in the fund they manage
  • experience
  • size of the fund (author gives no specific size, but bigger is definitely not better)
  • generalist (i.e. not restricted to a single country, size of company, or sector of the economy)
  • use of Graham-and-Dodd-style analysis to select stocks held by the fund
I didn't see another thread on E-R discussing this book, and I'm curious to know whether other E-R members have read it and/or used it to select funds for their personal portfolios. I'm curious how one of these actively managed value funds compares to a value index mutual fund. The actively managed value fund may outperform the S&P 500, but the extra analysis required after basic screening for things like P/E ratio adds to the fund expenses, and I wonder if they add more than they cost (i.e. if the actively managed value fund outperforms a value index fund, after expenses). If I can find some of the funds mentioned in the book, and figure out how to make a chart comparing them to S&P and a value index fund, I'll post it here.
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Old 07-09-2011, 05:38 PM   #2
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Originally Posted by kyounge1956 View Post
  • portfolio size (a few dozen stocks rather than a hundred or more)
  • low turnover
  • track history—performance over the past five and past ten years
  • fund managers who "eat their own cooking"—they have significant amounts of money invested in the fund they manage
  • experience
  • size of the fund (author gives no specific size, but bigger is definitely not better)
  • generalist (i.e. not restricted to a single country, size of company, or sector of the economy)
  • use of Graham-and-Dodd-style analysis to select stocks held by the fund
I didn't see another thread on E-R discussing this book, and I'm curious to know whether other E-R members have read it and/or used it to select funds for their personal portfolios
I think I've heard of the book but I haven't read it, it does sounds interesting. To me it seems like he is describing Warren Buffett, or Fairholme FAIRX, and Bill Miller LMVTV. At various times I've considered investing with all of them and ended up going with Buffett. One of the obvious problem is identifying these guys before their fund or company gets too big. I haven't figured out a way of doing this. So I try and use Graham methods to identify value stocks especially dividend paying ones and create my own portfolio of a few dozen value stocks.
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Old 07-09-2011, 06:05 PM   #3
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+ 1 on Berk Hatty

VG has some good actively managed value oriented funds. Plus the fees are low.

But they are large funds. Big enough that investing in 10 or 12 companies would mean some of those funds might own a few of the companies.
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Old 07-09-2011, 06:23 PM   #4
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OK, here's the chart, of several actively managed value funds compared to a value index fund and to the S&P 500.

It may be too small to see, but of the funds mentioned by Prof. Lowenstein that I was able to find with a quick search, over the long haul most of them appear to have come out about even with the value index fund (VIVAX--dark blue line). One of them, Oakmark Select vastly out-performed the others (OAKLX--gold line) and the S&P index (light green)—but it wouldn't be possible to know in advance which one that would be. And it matters when you start...looking back 5 or 10 years instead of 15, the performance of the value index fund relative to the S&P is different, and a different fund is the top performer.

(added later) I don't know if this chart shows just the change in price over this time period, or total growth with reinvestment of dividends. I suspect it may be the former in which case this chart doesn't give enough information to come to any conclusions about whether the active value funds are superior to either the value index fund or the S&P. I would guess the dividend yield of the active value funds varies widely both between funds and over time, and possibly there is also a significant difference in dividend yield between S&P and the value index fund.
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Old 07-10-2011, 11:19 AM   #5
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(added later) I don't know if this chart shows just the change in price over this time period, or total growth with reinvestment of dividends. I suspect it may be the former ...
Unfortunately your suspicions are correct, those yahoo charts (and most others) are NAV only - so they give a distorted view if divs are different (and they almost always are). You need a "total performance" type chart, which are usually more limited as far as time frame, comparisons, etc.

-ERD50
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Old 07-10-2011, 06:55 PM   #6
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Morningstar has the option to show total return. E.g. growth of $10K here is a similar chart using this metric

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Old 07-11-2011, 02:11 PM   #7
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Anyone who trades in and out of an index fund will realize all the pitfalls of market timing and none of the benefits of careful selection.
I love the balanced reporting here. Market timing, of course, ONLY has pitfalls. Sheesh.

Good stock selection obviously makes a huge difference in the performance of a fund. The vast majority of funds, however, are merely trying to match their benchmark (often S&P), and make NO EFFORT to find the best-performing Graham/Dodd stocks. Which is why most of them end up under-performing their benchmark.
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