Vanguard's Bogle comments

[NW-Bound]

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Originally Posted by . . . Yrs to Go But the S&P 500 is just one index. The REITs I owned, I owned through and index, ditto small cap stocks, international, etc. Just because you say you believe in indexing, doesn't mean you're confined to the S&P 500.

Again, we may be on the same page here. You are using these indices simply as benchmarks in the sectors of interest. Nowadays, there are ETFs that allow diversification into sectors the same way.

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Originally Posted by . . . Yrs to Go They did. And they valued those stocks based on the information and assumptions that prevailed at the time. Indexers went along for the ride. But if you're smarter than the market is, than you should be able to consistently find those situations where the market is mispricing securities. Bogle, supported by reams of academic research, says you can't.

I suspect that many of them actually can but, being huge mutual funds, can not maneuver fast enough. While the financials were riding high, the MFs couldn't afford to miss their dividends because MFs get compared to their peers. When things went south, they couldn't dump their holdings. Who would be buying?

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Originally Posted by . . . Yrs to Go I guess he defines "substantive value" differently than I do. Try to start, or maintain, a business without the aid of the financial sector and then talk to me about whether they provide a service of "substantive value".

Don't get me wrong. I realize that the modern world needs banks, in constrast with some cultures that forbid loaning with interest. What irks me about the bankers I called stinky are or were the ones who sold CDOs and CDSs and made subprime loans.

[FUEGO]

If you completely avoided financials, then you just missed out on a 100+% return (trough to peak) from that sector in the last 3 months. Sometimes it is good to index.

[samclem]

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Originally Posted by FUEGO If you completely avoided financials, then you just missed out on a 100+% return (trough to peak) from that sector in the last 3 months. Sometimes it is good to index.

Well, I suppose that's one way to look at it.

"If you completely avoided the voyage on the Hindenberg, you missed out on the great free lunch the fire department gave us in Lakehurst, NJ"

[NW-Bound]

There are so many other "innocent" stocks that were taken down in the downdraft, then rebounded even more explosively. I had been watching GT (Goodyear Tire), waiting for an entry point. I was working abroad during the March bottom and did not watch the market at all (they didn't pay me to goof around, and when I got back to the hotel was all tired). So, I missed it, but I did get something else later.

There are many other sectors that interest me more than financials. As I often said, I was hurt bad after the 2000 crash, but I recovered with other sectors, not with the telecoms and semiconductors that nearly sank me.

[Gone4Good]

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Originally Posted by NW-Bound What irks me about the bankers I called stinky are or were the ones who sold CDOs and CDSs and made subprime loans.

But these aren't useless products. Take the much maligned "Credit Default Swap". Real industrial companies do use them to manage their counterparty credit risk. For example, ABC Company hires a contractor to build something under a contract that includes various guarantees. But the guarantees are only as good as the creditworthiness of the contractor. ABC could employ a team of credit analysts to rate the contractor's default risk and try to price that risk themselves, or they could rely on the rating agencies opinions (if the contractor is rated), or they could go to a bank and buy default protection.

The virtue of CDS, as opposed to the rating agencies or in house analysis, is that it is a free market assesment of credit risk (rather than from just a handful of guys in a conference room), it actually prices that risk (so the buyer can adjust contract terms accordingly), and provides a payment if the counterparty defaults.

Subprime lending and CDO's have constructive uses too.

[FUEGO]

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Originally Posted by samclem Well, I suppose that's one way to look at it. "If you completely avoided the voyage on the Hindenberg, you missed out on the great free lunch the fire department gave us in Lakehurst, NJ"

My point is that a 30+% rebound in the SP 500 is only 30+% if one owns the index. If one owns SP500 ex financials, then the return over the last 3 months would have been much less. As of 4/30/2009 the SP500 was around 12% financials. So missing out on 100% return on 12% of the index would take a chunk out of the 30+% return we just experienced.

Unless you used a crystal ball to pick a sector better than financials in the last 3 months. If so, I'd say keep using that crystal ball as long as it is clear!

[Gone4Good]

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Originally Posted by FUEGO Unless you used a crystal ball to pick a sector better than financials in the last 3 months. If so, I'd say keep using that crystal ball as long as it is clear!

That is the entire argument in a nut shell.

Investing rule #1 . . . No one has a crystal ball.
Investing rule #2 . . . If you have a crystal ball, see rule #1.

[NW-Bound]

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Originally Posted by . . . Yrs to Go But these aren't useless products. ... Subprime lending and CDO's have constructive uses too.

True. Again, another clarification on my part is needed. I am not knowledgeable in this business, but have read of many AAA-rated products later turned out to be junks because they were backed by houses that were over-appraised, bought by people who had no income, etc... There was a thread a while back about a home in AZ that, after foreclosure, was condemned by the city and had to be destroyed. The mortgage written on that shack was more than $100K as I remember.

Yes, we need these financial products. However, they were abused by some if not most of the financial institutions, and the list included more than just banks. As I could not tell who was clean or not, I would avoid them all. I learned that lesson in 2000. AT&T was clean while Worldcom was not. Until the smoke clears, the market punished them all.

[NW-Bound]

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Originally Posted by FUEGO My point is that a 30+% rebound in the SP 500 is only 30+% if one owns the index. If one owns SP500 ex financials, then the return over the last 3 months would have been much less. As of 4/30/2009 the SP500 was around 12% financials. So missing out on 100% return on 12% of the index would take a chunk out of the 30+% return we just experienced. Unless you used a crystal ball to pick a sector better than financials in the last 3 months. If so, I'd say keep using that crystal ball as long as it is clear!

As we come off the bottom, what you said may be true. But I wonder how the S&P 500 ex financial would do, as one measures from Oct 07 to March 09.

Anyway, there are many ways to make money, and to lose it too. It's a nice discussion, as long as we all keep cool under the collar and avoid calling names.

As long as we make money, there's no point to claim that my way is better than your way. Heck, if I can get 4% after inflation, I have more than I usually spend.

[FUEGO]

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Originally Posted by NW-Bound As we come off the bottom, what you said may be true. But I wonder how the S&P 500 ex financial would do, as one measures from Oct 07 to March 09.

I claim "no fair"! You get to pick the disfavored sector AND the time period!!!

I'm not sure how to determine SP500 ex financials, but from 10/31/09 to today, the SP500 including financials is down 39% while financials (as measured by KBE which tracks a large bank index fund) are down 61%. Obviously much worse, but still not the end of the world.

However if I can pick the time period, I'd start at July 11, 2008 when I decided to overweight financials. As of today, I am down 29% in the financials (ignoring dividends) and the SP500 is down 27% (again ignoring dividends). Nearly identical results. Surprising how financials didn't really hurt that much if you are a bottom feeder looking for deep value? So if you missed the initial drop in financials and decided to craft the SP500 index somehow into a SP500 ex financials and carved out the financials on July 11, 2008, you would be in virtually the same position today as you were then, but you couldn't easily implement this strategy with a low low cost tax efficient index fund, could you?

Many smart minds disagreed about prospects for financials through the first half of 2008 and continued to say that the worst damage was done already by mid year 2008. In hindsight, they would go on to drop another 2/3 in value before recovering to be down about 1/3 from their value in July 2008.

[NW-Bound]

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Originally Posted by FUEGO I claim "no fair"! You get to pick the disfavored sector AND the time period!!!

Well, you are the one who first picked the period to show the rebound of the financials over the last 3 months. And this rise of the financials comes from the stronger ones. Some of them ceased to exist like Bear Stearns. Hence, the drop is a lot more severe from 2007 to the bottom. The ones that came out owed their survival to the gummint bailout. In 2000, the telecoms and semis had no bail-outs. Surely, it is not fair.

Talk about bottom fishing, we all like to do it. Darn, it's exciting, particularly when you make money. But again, as I said, I like to bottom fish in "innocent" sectors. It does not mean you cannot make money bottom fishing in the financial sectors. There are so many ways to make money in a bull market. Whether that is going to last is 'nother thing.

Anyway, I like to point back to post #39 of mine, which quoted the review of Bogle's book by William Bernstein, that had an observation about the overweight of financials in the S&P 500 index, when the former was riding high in 2007. Who is the Cassandra now?

I need to go reserve this book from the library to see for myself what else Mr. Bogle had to say.

[FUEGO]

NW-Bound,

So what is your take on the next sector or two that will lag the SP500 over the next couple of years? My crystal ball is a little fuzzy this last year or two. I'm being serious - I like making money too!

Definitely check out Bogle. Common sense on mutual funds is a great book and explains the rationale for buy and hold indexing very well. It's good to see the arguments for it even if you don't adopt it in practice. I found the book (and buy and hold passive investing) very persuasive personally.

And by avoiding financials, you may be missing out on return vs. the market going forward. Or maybe not. I wish I knew for sure.

[ziggy29]

Watch the tanking of long Treasuries. If this persists, the financials could be toast anew as it would kill any chance of a housing recovery in the second half.

[NW-Bound]

Fuego,

Since you ask, I feel obliged to answer although I will disclaim to be an expert stock picker. In fact, I do not even discuss investing with people in my family. The last time I gave a mutual fund recommendation to my mother and it worked out, she later complained that I did not make the recommendation strong enough so that she would buy a whole lot more! I won't tell you what happened the time that my recommendation did not work out.

So, take this with a grain of salt, but I still have no financials. I also have no consumer discretionary stocks and no pharmaceuticals. Currently, I prefer material stocks, energy, and information technology.

About Mr. Bogle, I will say again that I respect his integrity. I have not read any of his books on investing. However, through the media and other indirect sources, I know of his investing philosophy and his work in reforming the financial service sector, as well as pressuring for change in corporate governance. He railed against mutual funds that charged high fees only to trail the S&P500 in the long run. The tendency of long-term nonperformance of active funds has been well documented. Mr. Bogle also warns against churning your portfolio and chasing after investment fads and the latest and hottest mutual funds. How can one argue with this? I did learn some expensive lessons on my own 10 years ago.

However, I read that he told investors that they did not need foreign stock exposures. That might be true 20 years ago, but we know things have changed (and perhaps Mr. Bogle has changed his mind too). About the bubble in financial stocks, he obviously saw it happening and knew it was not right. The problem appeared that he was hamstrung by his own doctrine of sticking with the S&P500.

But then, it appears that his disciples have allowed themselves all kinds of exceptions, as observed in bogleheads forum discussions. They even discuss charts, for crying out loud. I have not been to that site nor any investment forum, so only have second-hand knowledge relayed through postings here. I then wonder that if few of the bogleheads stay "purists", do they form different splinter groups and deviate from Mr. Bogle's doctrine in different directions? Some like to do a bit of dirty market timing, others some slicing-and-dicing, etc...? It is interesting, and different from what I envisioned when I first saw the term "bogleheads", again mentioned in this forum.

In another thread about charting or technical analysis, a poster repeated a commonly accepted observation that if something works and more and more people use it, it would soon stop working. Perish the thought, but how about indexing investing? Note that it worked fairly well in the 1950-1970 time frame, so so in 1970-1980, and very well in 1980-2000. Then all broke loose in 2000 till now. Could it be because too many were using it?

[FinanceDude]

Trying to spot the next bubble in the equity area might be harder than you think, given the govt's increasing control in business.

I currently am pondering three possible areas, municipal bonds (lots of states are broke) junk bonds (greed is rampant with those), and commodities to a lesser extent.

I still am very careful about financial stocks, there will be more bank blowups in the near future.........

[NW-Bound]

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Originally Posted by FinanceDude Trying to spot the next bubble in the equity area might be harder than you think, given the govt's increasing control in business.

Again, people totally misunderstand what I try to do, just for myself of course. I am not looking for the next bubble, but try to avoid areas whose prospects look dim compared to the rest (again according to my view).

Pharmaceuticals while the medical industry is under scrutiny? I avoid that sector, because I don't know how it is going to work. Exactly the same way I got out of financials, AFTER the news broke about Bear Stearns and its subprime monkey business. I don't know which banker was clean and who was not, so I stayed clear.

For being a chicken, I was thought to be loaded with hormones. Far from it !!!

Again, there are so many good and innocent companies out there. I do not see that I need to buy ALL of the S&P 500 to be called "diversified". Come on! How many of us here buy just VFINX, or SPY?

Instead of chest thumping saying that the US will remain forever the dominant economic power, I try to hedge by buying international stocks. Just my way of reacting to my chicken instincts. Hedge is the word!

About buying and hold, any of us here claimed to be courageous to hold Worldcom, Global Crossing, Enron, or Bear Stearns, GM to the bitter end, and felt proud about it?

[ziggy29]

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Originally Posted by NW-Bound I do not see that I need to buy ALL of the S&P 500 to be called "diversified". Come on! How many of us here buy just VFINX, or SPY?

How many *only* buy SPY or VFINX and consider that adequate diversification? Not many, I'd guess.

But how many of us here use something like VFINX or SPY as the U.S. large cap portion of their asset allocation? I'd bet quite a large number.

[NW-Bound]

So, we all add our own additional flavor to the base according to personal taste. A bit more red pepper, a dash more of Worcestershire than the recipe calls for. Perhaps substitute chicken for pork?

I just go a bit further and eliminate some ingredients that I do not feel comfortable with. Like I use anchovies for cooking, but not in my pizza.

[FinanceDude]

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Originally Posted by NW-Bound About buying and hold, any of us here claimed to be courageous to hold Worldcom, Global Crossing, Enron, or Bear Stearns, GM to the bitter end, and felt proud about it?

Well, might as well come clean. Stocks I and some clients took a bath on include:

Tyco
Global Crossing
Cisco
Microsoft
Hewlett Packard
CMGI

Luckily, I got everyone out of GM at $18, noones pissed about that......

[NW-Bound]

FD, note that my original list includes only stocks that went bankrupt.

Back to the earlier discussion on this thread, I was talking about getting out of financials AFTER the sh*t already hit the fan. In late 2007, when the latest news came out about the financial sector being in trouble, a reporter asked Buffet if it was the last shoe to drop, implying that the water was safe for investors to wade in.

Buffet's answer was "No, no. When people talk about shoe dropping, you do not know if it is a one-legged man, or a centipede."

I always like Buffet's humor, and recently bought Berkshire for the first time.

And about holding just VFINX (pure S&P500) for one's equity AA, I believe that has been Bogle's doctrine. Is that true or have I been barking up the wrong tree? In any event, it appears very few of his self-professed disciples really practice that.

PS. I need to log off to go to w*rk.