12.8% IRR over 30 Years

[unclemick]

My one and only was that hoary old tome - The Battle For Investment Survival by G. M. Loeb. I was too wet behind the ears to understand it. Took my broker's advice back in those days and DCA'd into mutual funds. Trading strikes me as very hard work - ?? but if understanding the principles helps you become a better value investor - well that perhaps is a good thing. Talking about my major investment - balanced index is like watching grass grow - Talking about hobby stocks is another matter - provided everybody understands the amount of talk is inversely related to the amounts invested.

[haha]

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Mikey, what was the last big allocation change you made and what caused you to pull the trigger?

Hi Wabmester,

Basically, I look upon cash as my natural resting place, and invest in long duration securities, either stocks or bonds, only when they seem to be compelling bargains. I usually then keep them until thay are overpriced in my opinion, or maybe forever.

In the above referenced retirement account I have about 60% cash; the remainder in order of committment size is 2 equity special situations that I think will be relatively uncorrelated with the S&P, oil and gas, Japanese equity, a Canadian timber investment and the smallest portion in a couple of gold miners. No mutual funds.

This allocation I have had since about May of this year. Prior to that, I had more US and Japanese equity.

I don't think any of this is necessarily better than other approaches, but it is what I like to do and what I feel comfortable with.

I may not get the highest return, but I don't think I will get badly slammed either. Like many of us, I have evaluated and passed on plenty of stocks that would have made me rich.(Dell, MSFT!) But I am not a visionary. I looked at Dell and all I saw was a store. Big mistake, but I don't feel comfortable with expensive goods.

My overall expectation is a long US equity bear market, interrupted by some good rallies. If I am wrong, I'll still do allright, just not as well as someone who has not trimmed sail.

Mikey

[haha]

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It's not a typical trader's book and it doesn't merit the criticism until AFTER it's been read.*

I would sure like to second this sentiment. Let's not forget, it's a long fight, and this is maybe round 4 or 5 for most of us. Until the investor has either crapped out, or is in the ground, we can't really judge his performance.

An awful lot of what passes for investment knowledge stikes me more as investment catechism. Who made me?-"Bernstein made me." Why did Bernstein make me? "To love and obey him."

It's like reading a book about women, and then telling some guy with a wife and 2 girlfriends what women are like.

Which reminds me of a story. A guy is getting married for the 5th time. His buddy says, "Gosh Bill, after all you've been through, why are you getting married again?" Bill reflects a moment, and then answers, "Well frankly, I miss the cheating."

Mikey

[azanon]

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7000 publicly traded issuers in the country and you think the chance of picking at least one spectacular winner is all that good? Next time you're betting, I'll take some of the other side.

Ive seen more than one credible source that said a portfolio of 8 to 10 stocks provides almost the same level of diversity as a portfolio of 100-200 stocks (aka mutual fund). *So... near same level of diversity, even less expensive, and some chance, albeit small, to have a superstar (as opposed to (effectively, return wise) no chance with your blind monkey index fund).

[wabmester]

Quote:

Like many of us, I have evaluated and passed on plenty of stocks that would have made me rich.(Dell, MSFT!)

I've owned MSFT, INTC, and DELL on and off for 15+ years. I got in at the right time, but never let my positions get/stay large enough to make a huge difference on my net worth. That's the problem I have with stock picking, it's not enough to know which stocks to buy, but you also have to know how big a stake to take, and when to exit.

I still have trouble making large bets and letting winners ride. A submarine would definitely help

Everyone has passed on stocks that would have made them rich, or paid too much when they bought and got too little when they sold. Even with no stocks to worry
about, I spend part of every day working out the details
of what we have and what it's doing for us (now and in
the future). I enjoy it, sort of, but it surely cuts into my fishing time.

John Galt

[ats5g]

azanon,

Two articles:

The Truth About Diversification by the Numbers.

The 15-Stock Diversification Myth

The only real magic behind indexfunds is the low expense ratio, low trading costs, and, if we're talking about an S&P 500 Index or TSM index, tax efficiency (or perhaps even a quant fund like BRLIX for tax efficiency).

btw - if you really want higher returns, why go with growth at all? Why not go with deep value, which has pretty much destroyed growth?

- Alec

[azanon]

Quote:

Even with no stocks to worry about, I spend part of every day working out the details of what we have and what it's doing for us (now and in the future).

Worry/risk in the investment world is a peculiar thing. Personally, i'd worry more about NOT owning any stocks and thus missing out on the superior long-term returns, and inflation protection provided by stocks. Risk (and the associated worry) goes both ways.

Probably when you boil it all down, the wisest position is the one you hear about most: diversification. That being simply because, from a mathematics standpoint, you get the most return relative to the risk you take. Skewing too close to 100% or 0% stock tilts either the risk or return (respectively) to the point that its not a very good tradeoff.

[azanon]

Quote:

btw - if you really want higher returns, why go with growth at all? Why not go with deep value, which has pretty much destroyed growth?

You know.... i bet if this were Dec 99', you'd be asking me "why go with value at all?". *

Re: the 15 stock diversification myth. * I dont think it's really a myth, unless one misunderstood one to mean that 10-15 stock portfolio "provides" the same level of diversification. *Every time ive heard it said, it was "near the same". *Going by that first link of yours, a 15 stock porfolio provides 76% of the diversification. *If you ask me, that's a lot closer to 100 than 0. *As a cherry on top, you get a chance to pick a superstar.

Still, regardless the route you go on that, its a far less critical decision than simply deciding to save a lot and save often. *That's the real key to ER, i think. *Not whether you chose index over active management. *

Even a paltry 8-10% return over a long period of time with a lot of capital poured into it, will get you wealthy far ahead of the masses.

[wabmester]

Quote:

its a far less critical decision than simply deciding to save a lot and save often. *That's the real key to ER, i think. *Not whether you chose index over active management.

Bingo. Save like crazy and you'll do OK. Stock picking is more fun than index investing, but you can always spice up your index investing life with a little market timing

[platypus19]

Thanks for posting those links, ats5g. I learned something important from "The 15-stock Diversification Myth":

"...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."

I had always thought of diversification strictly in terms of spreading risk and averaging out volatility. I completely missed the other point, which is to own a large enough sample of the market to catch a few of those rare superstocks.

[ats5g]

hey azanon,

Well, we can all believe whatever we want to believe. The problem with the concentrated portfolio method is that there is a much greater chance of getting poor (and getting rich OTOH) than being as diversified as possible. I'm concerned that people think of investing as a game of winning, when most people should be playing the game of trying not to lose.

It seems to mee that the people that are always spouting the "15 stocks is all you need for diversification" are also usually the same people that spout the "only stocks provide inflation protection" and "stocks return 10% a year".

Stocks have provided superior returns in only a couple of time periods. In the 1800's, stocks and long term bonds provided about the same real return. In the 1900's up until the early 1980's stocks did have a higher real return than long term bonds - something like 5% or so more. Post 1980's, stocks and long term bonds have had about the same real return.

Here's an interest article by Robert Arnott and Peter Bernstein, What Risk Premium Is "Normal"?

Stocks do not have any inherent inflation protection. Only TIPS do. Stocks have not done well in times of relatively high inflation. Stocks are not positively correlated w/ inflation.

Stocks have provided high returns and inflation protection, but does that mean that they "will" continue to do so?

Quote:

Still, regardless the route you go on that, its a far less critical decision than simply deciding to save a lot and save often. That's the real key to ER, i think. Not whether you chose index over active management.

I couldn't agree more.

- Alec

[unclemick]

Hummmm - no matter how you get to ER - make sure you take care of the horse you rode in on. Like 'the perfect retirement spot' there seems to be as many varieties as there are ER's. I suppose a stat minded/pollster type might try a grouping to find the most common - but if it works for you and fits your skill set - stick with it.

[azanon]

Quote:

The problem with the concentrated portfolio method is that there is a much greater chance of getting poor (and getting rich OTOH) than being as diversified as possible. I'm concerned that people think of investing as a game of winning, when most people should be playing the game of trying not to lose.

Wow what a misleading statement. The only (reasonable) chance one has of getting poor who invests lots of money in 15 unrelated stocks is if our economy crashes. You meant to say there's a greater chance you'd end up with less money, didnt you?

Anyone who invests in 15 or more stocks (up to 100s) with lots of money is only dealing with the degree to which they will win, not lose. Losing isnt even in the equation, short of our economy collapsing, and under that circumstance, even the indexers wont be immune.

Quote:

Stocks have provided superior returns in only a couple of time periods....... In the 1900's up until the early 1980's stocks did have a higher real return than long term bonds - something like 5% or so more. Post 1980's, stocks and long term bonds have had about the same real return.

What another misleading statement. Stocks destroyed bonds in the 20th century. Even specifically, stocks destroyed bonds from 1980-Jan 1, 2000....... You meant to say the only time bonds have beaten stocks was over a century ago (the 1800s), and just for the past 4 years, didnt you?

Hi azonon! You are absolutely correct about some of those "misleading statements". Unfortunately you are
absolutely wrong about the chances of losing your shirt
in equities. And the economy doesn't have to collapse either. You take someone like me with a short time horizon. I could get killed, no matter how diversified
I was. You sound like indexed stock investing
is a sure thing. It's not.

John Galt

[Nords]

... how many bear markets have you been through?

No fair counting this one, it's not finished yet.

We'll all win in the long term-- until we're dead.

I've been through several bear markets, but I mostly
chose not to participate. Same with the bull markets.
Too many ups and downs. I'd rather have a steady
predictable situation. I no longer need to make a killing,
just avoid a big loss.

John Galt

[unclemick]

Ah the curse of being American.

Bogle has on rare occasions - shown that old original Uncle Sam poster depicting him as Unpatriotic for proposing index funds. Being average sucks or so the poster implies.

Even today - after eleven years of ER, playing good defense as compared to offense - chasing performance sometimes still invades my brain cells(aka hobby stock flyer, Monte Python, etc.).

Bernstein tries to address the mental aspects in Four Pillars and in Efficient Frontier - the guts to depart from 'tracking' for an effective asset allocation. Recency is tough - even when you 'know' better. I've got a litany of past stocks that 'took off' AFTER I gave up and sold.

Bear markets come and go - the recent 2000-02 was a nit and I was working during the minor flat 1966- 1982. So I'm I ready for a real bear - Right! - heh, heh - we'll see.