The Tortoise vs. the Hares (the 80% CASH approach)

[Karloff]

As a new member to this forum who has very limited investing experience and keeps almost 100% of his $$$ in hard-cash, I was wondering what the general consensus here was regarding the following story:

The Tortoise vs. the Hares

A key paragraph:

...for more than 20 years Allmon has allocated the bulk of his model portfolio to cash. It currently owns just four stocks that collectively amount to 20% of total portfolio value, for example; the other 80% is parked in a money-market fund...

(Apologies if this subject was discussed here before... I could not find any mention of it)

 

[bbbamI]

I say if it works for him...good deal.

Personally, I don't think I'd ever keep 80% of my funds in one basket.

I'd rather be diversified and tweak my allocation as time goes by.

 

[Runner]

I'm with you. In 2004 (when I was 54), I moved 100% of my government-employer 457 plan into the Nationwide Fixed Account, which pays 3.5% to 3.8% like clockwork. If someone can make two or three times that and still sleep at night, go for it. But I've been sleeping a lot better than most the past few years, and I'm content to build my budget around this sort of return. Of course, the 457 plan interest will only be something like 5% to 7% of my retirement income. If my entire retirement were tied to investments, perhaps I'd be willing (or forced) to be more aggressive.

 

[ERD50]

I'd say that if you want to keep 80% of your portfolio in cash, then that is exactly what you should do. But consider the following:

1) Try running that in FIRECALC, and see how it has worked historically, for your situation.

2) I'd want the other 20% diversified to more than 'just a few' stocks.

3)Don't expect your performance to match what's given in the article. There are some key phrases we can parse out from there:

since for more than 20 years Allmon has allocated the bulk of his model portfolio to cash.

... over those 30 years has been largely in cash for more than a decade.

So he has been doing some market timing, since they use different adjectives (bulk of, largely) for different time frames (20 years, a decade out of 30 years). Can't tell specifically from those general terms.

He may be very good at this, or it is just his time in the spotlight (they would not have featured him in 1999, right?). But either way, how can you take advantage of this in the future? He will likely retire, and is his replacement going to be as good? Will the future be kind to his strategy?

We also can't discount that some of this is just luck. Out of all the advisory services out there, half of them are above average. And a very few will be very far above average. And one will be the 'best'. It could be skill or just the planets aligning - and neither is any assurance for you.

I wish it weren't so.

-ERD50

 

[haha]

He may be very good at this, or it is just his time in the spotlight (they would not have featured him in 1999, right?).
-ERD50

He is very good at this, and has been for many, many years. He would guffaw at the quibble that "they" wouldn't have featured him in 1999. Of course not, in 1999 idiots stood tall in the saddle. You either play the long game according to principles that have stood the test of many years, or you hope for Lady Luck to take care of you.

Ha

 

[samclem]

He is very good at this, and has been for many, many years.

Is there a way to tell that "he's good" vs "he's lucky"?

Is the guy who correctly calls red or black 25 out of 30 times "good at roulette"? If tens of thousands of guys are doing it, is the guy with the best record the best roulette player? Should we even be surprised if scores of these guys have remarkable records?

 

[ERD50]

He is very good at this, and has been for many, many years. He would guffaw at the quibble that "they" wouldn't have featured him in 1999. Of course not, in 1999 idiots stood tall in the saddle. You either play the long game according to principles that have stood the test of many years, or you hope for Lady Luck to take care of you.

Ha

And I didn't mean to infer anything negative when I said they wouldn't have featured him in 1999. You are right, they were probably featuring idiots in 1999. That's the way it goes.

But if being featured at this time is what got the OPs attention, it does put some perspective on it. Is the guy genius (maybe), or is now just the right time for his strategy to shine (could be both)?

I wish I knew

-ERD50

 

[haha]

Is there a way to tell that "he's good" vs "he's lucky"?

Is the guy who correctly calls red or black 25 out of 30 times "good at roulette"? If tens of thousands of guys are doing it, is the guy with the best record the best roulette player? Should we even be surprised if scores of these guys have remarkable records?

This is a common argument. To my mind, Warren Buffet put it to rest in a Columbia Business School adress where he detailed a large number of asset managers who studied under Ben Graham at Columbia, and often worked for or with Graham Newton Corporation. They all were successful, over many years.

Anyway, I am so past that sceptic agnostic posture. Among other things, it can be a way to never learn anything new. The world has no mandate to make every important thing blindingly obvious to even the most slowly convinced holdout.

The elk doesn't put up placards announcing his route to the hunter; it's up to the hunter to tease it out of the background.

Ha

 

[DblDoc]

Someone had to be at the top of the heap. Was it luck or skill? If the latter will he skillfully navigate the next 30 years? Wanna bet your retirement life?

DD

 

[DblDoc]

This is a common argument. To my mind, Warren Buffet put it to rest in a Columbia Business School adress where he detailed a large number of asset managers wo studies under Ben Graham at Columbia, and often worked for or with Graham Newton. They all were successful, over many years.

Anyway, I am so past that sceptic agnostic posture. Among other things, it can be a way to never learn anything new. The world has no mandate to make every important blindingly obvious to even the most slowly convinced holdout.

The elk doesn't put up placards announcing his route to the hunter; it's up to the hunter to tease it out of the background.

Ha

Ha I can understand your position on the possibility that there are skilled managers out there. It is hard to prove either way. What remains is how do you a) pick them a prior, and b) will their skill remain going forward in an ever changing marketplace.

Without a and b there is nothing actionable...

DD

 

[ERD50]

This is a common argument.

Anyway, I am so past that sceptic agnostic posture. Among other things, it can be a way to never learn anything new.
Ha

I struggle with this one too. If a true market guru stood in front of me, how would I know (maybe it is haha ? ) ?

On one hand, I do need to be skeptical. But as you point out, that might keep me from accepting it.

To my mind, Warren Buffet put it to rest in a Columbia Business School address where he detailed a large number of asset managers who studied under Ben Graham at Columbia, and often worked for or with Graham Newton Corporation. They all were successful, over many years.

I think that is a good acid test. Can it be replicated by others, using some defined process? The skeptic in me would need to known if the followers of Graham were a statistically significant sample, and assign a confidence factor to it and all that other boring stuff.

OTOH, that would not disprove that Graham himself could do it. That would be like saying that if Jeff Beck couldn't teach me how to play great rock guitar, he must not be any good either.

This is both fascinating and frustrating to me.

And if it isn't clear, I'm not trying to argue the point with you. I'm just mentally exploring it and using the forum as a sounding board.

-ERD50

 

[haha]

And if it isn't clear, I'm not trying to argue the point with you. I'm just mentally exploring it and using the forum as a sounding board.

-ERD50

I understand; you don't come off as argumentive. I am not really a debating type, but maybe someone else would take up the challenge.

Ha

 

[samclem]

Anyway, I am so past that sceptic agnostic posture. Among other things, it can be a way to never learn anything new.

I'll admit that's a risk. I'd say that what some see as "skeptic agnosticism" others might view as "evidence-based rationality." And maybe a good way of avoiding the "learning" of something that just ain't so.

But, everyone's gotta know themselves first. For me, piling on the skepticism is the best way to check my strong first natural impulse to dive in to anything that has a logical-sounding premise. I already learned that lesson a couple of times when the tuition was a lot more reasonable, I can't afford the tuition again at this stage.

 

[ERD50]

Without a and b there is nothing actionable...

DD

That captures my personal feelings on it, and I realize that is why I say 'this is both fascinating and frustrating to me.'

I want to believe, but I can't bring myself to act on it. But I don't think that the lack of action is just inertia, or lack of vision - there just have been too many stars that have burned out or faded out. I don't trust my instincts enough to follow any 'guru'.

Outside of selling calls, and an occasional small attempt to profit from some minor 'tulip mania' or 'tulip phobia', I just can't tear myself away from Buy & Hold. How boring.

-ERD50

 

[ERD50]

I already learned that lesson a couple of times when the tuition was a lot more reasonable, I can't afford the tuition again at this stage.

Another point I can relate to. Yes, this definitely changed when retired. It would be tough for me to go back to earning any significant $ (esp in this economy). While I was working, I could (and did) say "well, that mistake means I need to concentrate on keeping my job for another year".

Today, the options are even less attractive.

-ERD50

 

[Stevewc]

I struggle with this one too. If a true market guru stood in front of me, how would I know?

-ERD50

This reminded me of a picture someone sent me years ago.
It was a picture of several long hair slacker looking guys. (nothing wrong with that mind you).
It had a question with the pic. Would you invest in these guys?
I looked at it and thought, no way.
Turned out that the guys were Bill Gates and his crew in the early days.
Steve

 

[Purron]

..

 

[brewer12345]

Just another random data point. I have followed and invested in Bermuda reinsurers for years. IMO, the better companies are run by some extremely smart people who are running insurers as if they are hedge funds. Their investment holdings are inevitably 80 to 90% very high quality bonds and 10 to 20% risk assets (equities, hedge funds, etc.). Their investment returns over many years beat the pants off the indices.

Would I invest that way? Not at the moment. But if I had enough capital to not need to stretch, I would move pretty far in that direction.

 

[ESRwannabe]

I wouldn't necessarily put it all into CDs, but putting everything into fixed income is a perfectly reasonable way to save for retirement. Zvi Bodie, as an example, has recommended for a long time that people save for retirement using TIPs. The only reason a person can't be successful with that strategy is if they refuse to save enough money. If you start young and set aside 25% of your income every year in fixed income, you should be fine.

 

[clifp]

I wouldn't necessarily put it all into CDs, but putting everything into fixed income is a perfectly reasonable way to save for retirement. Zvi Bodie, as an example, has recommended for a long time that people save for retirement using TIPs. The only reason a person can't be successful with that strategy is if they refuse to save enough money. If you start young and set aside 25% of your income every year in fixed income, you should be fine.

Putting aside the long going debate about are the money managers who can beat the market (I am with Ha Ha) in this one. Although I am likewise skeptical that I can identify the next Warren Buffett or Ben Graham.

I just question the wisdom of having 80% of your assets in cash. One has to really be horribly pessimistic about the future if you think that sticking your money under that mattress (and that is what money markets pay right now) is the best investment. Why not buy guns, ammo, MREs, and Gasoline instead.

I can understand staying away from equities but also bonds? TIPs despite their sucky interest rate 1% 10 year 1.8% 30 year at least protect form inflation.

BTW Runner, I took at look at the Nationwide Fixed Income. I understand that it pays a guaranteed 3.5% rate which is certainly pretty good right now. However, based on its current portfolio I'd be a little concerned to have 100% of my money in it. In particular more than 1/2 the money is invested in mortgages and 21% is commercial mortgages...

Anybody else have thoughts on fund?

 

[BTravlin]

Interesting. Our family owned business had Allmon as our retirement plan manager from the late 80's until late 2005. Allmon shifted to a defensive stance before the tech bubble burst. Afterward, he shifted to even more cash as he said the market was still overvalued compared to historical values and that the market always returned to the mean. He railed about derivatives and casino type investors distorting the markets. He maintained that the market was due for a huge correction and that he (and those invested with him) would be in the enviable position of sitting on a huge pile of cash when the inevitable fall came and would be able to buy many great companies at huge discounts. Everything he said made perfect sense. We watched and waited and the market kept moving up. Seems as if he'd been making his gloom and doom predictions forever. He was getting well up in years and we wondered if maybe the markets had changed such that he wasn't as in tune with things as he had been. Eventually, we tired of paying his 1% fees to sit in treasuries. Hell, we could buy treasuries ourselves and save the 1%. But we didn't buy treasuries on the switch, we bought a portfolio of diversified mutual funds. Then came 2008 and I'm sure those still invested with him were quite happy being 80% cash. I know I would have been. It doesn't seem as if he pulled the trigger even after the crash though. If that wasn't enough to move him off cash then I'd hate to see what it would take.

I had the pleasure of meeting him a couple of times out in Montana where he has a large ranch on the Yellowstone River. Super intelligent, hard worker, led a really interesting life prior to career in money management, big fan of Buffet, great stock picker himself. The majority of his clients were already retired or near retirement so he preached preservation of capital. He is a market timer but only in the broadest sense. He will make big shifts in his portfolio when he sees the market way out whack.

 

[almost there]

"assume an average annual return of 8%, adjusted for inflation at 3% - a reasonable estimate of average market returns."

There is the joke. Above is what most plans want you to believe.
Maybe its just me, but I would give anything for that average over the past 25 years.

Cash for now. I am not buying this Sep. rally and would not be surprised to see a major crash. S&P ten year return is a negative number.
And things do not look to be improving at all.

Thoughts?

 

[REWahoo]

Thoughts?

You could be right - or you could be wrong.

 

[almost there]

Agree

Either way, I will have - what I have............

 

[Nords]

The only reason a person can't be successful with that strategy is if they refuse to save enough money. If you start young and set aside 25% of your income every year in fixed income, you should be fine.

Reminds me of [-]Suze Orman[/-] Groucho Marx: "You can retire on [-]municipal bonds[/-] Treasuries if you have enough of them!"

I'm not sure that saving assets is a purely voluntary exercise involving only acceptance or refusal. There's a fine line between frugality & deprivation, and most people know only one way to find it.