Four Pillars of Investing - Efficient Market Theory!?!?

[samclem]

Quote:

Originally Posted by Running_Man Now if there was money to be made by being the best at estimating the number of jelly beans or pennies in a jar, you could be sure I would be studying that and not expecting to count on a group to get it right for me.

Just keep in mind that the stock market has no equivalent of an objective "right" answer for the value of a stock (similar to the number of pennies in the jar example) and won't reward you for estimating this non-existent quantity. You will only be rewarded for successfully estimated what others will believe the stock is worth in the fuure. In effect, you'll be rewarded for being good at guessing what others will guess. Or something like that.

Oh--and it costs you a nickel per guess if you make your own independent estimate of pennies in the jar, but just a penny per guess if you'll go with the average of the previous guessers.

[clifp]

Transparent (I have never seen an opaque guessing contest, but they must exist)

That was a terrific article about the wisedom of the crowds, and I think things like Iowa voting futures, Wikipedia etc further validate the principal.

Here is interested experiment, let us assume that many of the ox weighing participants were experts (farmers or butchers) since the variance among the guesses was very small.

Let's also assume that a few Columbia students had done there homework (the jellybean contest is an annual event) and had calculated the volume of a jellybean and applied math to their guesses.

I believe if you switched the populations and had the Columbia students guess the Ox's weights and had the farmers guess the number of jellybeans the average result in both cases would be worse. (I am quite sure this would be the case for the students guessing an Ox's weight. ). In this situation guessing the average would definitely be the winning strategy.

Finally, lets have the Columbia students guess the ox weights, but also have a couple of butchers participate. Which would be a better strategy averaging all of the guess or picking the same number as one butcher? My money is on the siding with one of the butchers. Now if we increase the number of butcher in the contest to several dozen (similar to the number of analyst and fund manager on big stocks) I think averaging is smarter.

Of course the tricky part is figuring who are the butchers in stock market picking, and are you in contest with only a couple of butchers or with a bunch of butchers.

Still I think you can find the butcher with some searching. So when somebody like Brewer, who clearly knows his stuff about bonds and other income assets, points out opportunities like OSM/ISM to earn better than average returns with lower than average risk, I am going with this butcher guess as opposed to the Vanguard TIPs fund.

[unclemick]

Quote:

Originally Posted by Running_Man Key point of the Four Pillars The market can never be timed it must always be invested in. Bear market losses are unavoidable In one of the most unintentionally hysterical points in the 4 Pillars it quotes John Jacob Rascob who whipped up the frenzy of 1929. He told readers of The Ladies' Home Journal that now everyone could be rich by investing 15 dollars a month. What was not in the Four Pillars of Investing was the fact that as John Jacob Rascob was quoted as saying that, he privately was divesting his portfolio as he thought the market was extremely overvalued.

Ha! Bernstein's a rookie. A more seasoned individual (Ben Graham) pointed out - should an individual had followed the advice they would have by 1949(20 years of DCA) have made 8% on their money - not a bad return for the 1929 - 1949 period. Rascob also waay overexaggerated the expected return - but that's another story.

heh heh heh - even though I done good with Efficient Frontier's 1998 - Falling REIT correlations - still a Boglehead at heart - balanced index lets the computers sell high and buy low. Now if I could just overcome the urge to putz. 8).

[clifp]

Quote:

Originally Posted by samclem Just keep in mind that the stock market has no equivalent of an objective "right" answer for the value of a stock (similar to the number of pennies in the jar example) and won't reward you for estimating this non-existent quantity. You will only be rewarded for successfully estimated what others will believe the stock is worth in the fuure. In effect, you'll be rewarded for being good at guessing what others will guess. Or something like that. Oh--and it costs you a nickel per guess if you make your own independent estimate of pennies in the jar, but just a penny per guess if you'll go with the average of the previous guessers.

All true in the short-run, because in the short-run the stock market is voting machine, but in the long-run to quote Graham it is a weighing machine, and the value of stocks will based on fundamentals earnings and growth rates, compared to a risk free interest rate.
When Warren Buffett made huge bet on American Express in the 60s after a AMEX was involved in Salad oil, he figured that the stock may very well continue to go down in the short-run, but in the long run the Travelers check business was doing fine, and the AMEX credit card was exploding.

You don't have to be Warren Buffett, you just have to have the strength of your convictions. In late 98, and 99 I started shorting AOL, Yahoo, and Amazon. I did this partly as a hedge of my own tech heavy portfolio, but mostly because working in Silicon Valley and being intiminately involved in the internet, I knew we were in a bubble. I deliberately shorted the stocks as opposed to buying puts because I didn't know when the bubble would burst, I also picked the big guys as opposed to the smaller even more outrageously priced Pets.com etc. because I didn't want to take a chance that a small guy would be taken over. I kept my short positions for more than a year. Finally. my BIL convinced me that I was risking my retirement by maintaining the short positions so Jan 2000 I covered my position while dumping most of my tech stocks. Eventhough, it was prudent thing to do, I remember absolutely hating having to buy those overpriced stocks back. Needless to say 6 months later I would have looked like a genius.

[Running_Man]

Yes and Bernstein made the same point about dollar cost averaging throught the period in Four Pillars. But the fact is very few people had 15 dollars per week to invest in the stock market during that period, which is why the stock market volume was so low.

That this is used as a reason to dollar cost average is why it is so funny!

Rascob is used as a point to show out the wisdom of dollar cost averaging and never being out of the market. He himself though was getting out of the way of the market decline. The average person who would have been following the Four Pillars Advice of dollar cost averaging most likely had invested with trust funds and was almost surely left with no savings as most trust funds were leveraged and bancrupted. That is why you do not see a lot of firm's names attached charts showing investment returns in the stock market from 1926 to present.

[Nords]

Quote:

Originally Posted by clifp Eventhough, it was prudent thing to do, I remember absolutely hating having to buy those overpriced stocks back. Needless to say 6 months later I would have looked like a genius.

Don't beat yourself up so badly. One of my wife's uncles ER'd back in the late '80s on his stock market gains, but in 1997-99 he shorted himself right back into the workforce and ended up teaching high school English in East LA.

He was rational-- not solvent.

[clifp]

<i>
Don't beat yourself up so badly. One of my wife's uncles ER'd back in the late '80s on his stock market gains, but in 1997-99 he shorted himself right back into the workforce and ended up teaching high school English in East LA.
</i>

Ouch! No offense to any teachers, but I think being retired in Hawaii beats teaching in East LA. Although, I wll say that Rafeesquith who teaches Shakespeare to 5th graders, in East LA has a fullfilling job.

[Nords]

Quote:

Originally Posted by clifp Ouch! No offense to any teachers, but I think being retired in Hawaii beats teaching in East LA.

He thinks so too-- he managed to re-retire a couple years ago and he spends a lot of time here. He's friends with a lot of the soveriegnty people and every time his girlfriend has to travel here, he carries her luggage.

We get along fine. I think he's in his high 60s now but mentally we're both in our 20s. Hard to believe that his older brother is my FIL.

[Texas Proud]

I have not read the article... (will wait until I am at work )

BUT, from my small sampling, taking the average will not 'win'.. I am in a group of about 50 people who go into various sport pools (such as the NCAA, college football etc).. we do 4 a year...

I have been doing the updating for the last 4 years.. so 16 sample size... if you picked the 'consenses' pick for each and every team/game etc. YOU WOULD WIND UP IN THE MIDDLE!!!.. yes, it was surprising that the average was almost always in the middle of the bell curve.. and sport betting is kind of like stock picking in the short term.. who will 'win' this weekend...

So, you example of guessing the jellybeans does not seem to be the perfect example in my view... but I will read the article and see..

[chinaco]

The market may be efficient at valuing companies... But I am not. I have found that investing in a long-term diversified protfolio of indexed funds (buy/hold/rebalance) is my surest way of growing my wealth. Slow and steady!

Any time I have tried to get fancy... I wind up being the sucker that funded the wealth of someone else that is smarter than me

[Running_Man]

Don't forget the Wisdom of the crowd gave us Sanjaya

[fluffy]

http://en.wikipedia.org/wiki/Godwin's_law

[unclemick]

Quote:

Originally Posted by fluffy http://en.wikipedia.org/wiki/Godwin's_law

Sooooo - Hitler recycled dryer sheets and owned a kayak?

heh heh heh heh heh heh heh , , , - heh heh heh heh heh heh , , ,

8).

[heyyou]

Quote:

Originally Posted by chinaco The market may be efficient at valuing companies... But I am not. I have found that investing in a long-term diversified protfolio of indexed funds (buy/hold/rebalance) is my surest way of growing my wealth. Slow and steady! Any time I have tried to get fancy... I wind up being the sucker that funded the wealth of someone else that is smarter than me

That works for me, too.
Bernstein is offering investment advice to the public. If some of his views are incorrect, what is the alternative investing advice? Disagreeing with one assumption is not the same as refuting his advice. Average returns minus low costs is good advice for the public. No one is required to follow that advice.
As others mentioned about risk-adjusted returns, indexing is not special in itself, it is just a cheaper and less risky path to retirement than the alternatives. This discussion seems to focus on the differences of the trees in the forest.

[fluffy]

Quote:

Originally Posted by unclemick2 Sooooo - Hitler recycled dryer sheets and owned a kayak? heh heh heh heh heh heh heh , , , - heh heh heh heh heh heh , , , 8).

Hitler unexpectedly turned into Sanjaya in the post above mine so Godwin's Law no longer applies