Justifiable Investment Strategy

[easysurfer]

Kombat - I like your explanation. Reminds me of finite math class (Venn Diagrams) back in college and intro to philosophy (if this, then this follows....). That was how things were explained back in the formative years.

But in todays terms....it's explained as, "Hey!..We can't have it both ways..."

[HatePayingTaxes]

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I am convinced investors can beat the market and I don't think it is all that hard. Whether I can do it long term I don't know. I ask the question to myself regularly. If it is one great run of luck I hope in continues.

You have a working investment strategy but you're questioning if it can continue over the long run. For me, I would rather have a strategy that tracks the market, allows me to sleep at night (bonds to reduce volatility) and I don't have to depend on other people at retirement all over the long run. That's my definition of risk and indexing w/ bonds has done that so far.

[bcinvest]

I believe investors can beat the market, not all investors can beat the market. In the same way I believe college quarterbacks can make it in the NFL. To conclude otherwise doesn't make sense.

[Keim]

Some can. Research shows the VAST majority of "investor/fund managers of the month" are simply getting lucky, and can't repeat it over a course of several years. Their performance is hard to predict in advance, and tends to quickly deteriorate.

Or, to use your analogy.

Some college quarterbacks can make it in the NFL. But, 99.9999999999% of the kids joining little league won't be good enough to make the college team, let alone the NFL.

99.9999999999% of people can use low cost indexing as a strategy to beat most active investors. That makes indexing an excellent strategy to utilize.

To conclude otherwise doesn't make any sense.

[brewer12345]

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Originally Posted by bcinvest I believe investors can beat the market, not all investors can beat the market. In the same way I believe college quarterbacks can make it in the NFL. To conclude otherwise doesn't make sense.

I believe the Flying Spaghetti Monster will take me to a land filled with pasta and meatballs, where flying parmesan cheese graters will shower me with His goodness. But only if I stay away from the evil that is the dark side (Atkins diet).

To believe otherwise would not make any sense.

[Keim]

Now I'm hungry, Brewer. Darn you. Darn you to heck!

Perhaps some inspirational music for bcinvest:
YouTube - R Kelly - I Believe I Can Fly

[bcinvest]

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Originally Posted by kombat ALL of them? Now, which actors have the best shot at discovering this strategy and achieving those above-average returns? Is it the educated, experienced, full-time pension fund managers, with billions of dollars at their disposal, access to up-to-the-second market news and quotes, and instantly-executed trades? Or is it the bored hobby investor, sitting at home reading CNN Money and following 20-minute old quotes on his eTrade account? Now, mathematically, one of these guys has to lose. The reality is, we can't all be above average. So if we accept that the market must consist of "winners" and "losers," it seems obvious to me that the former investor has a much better shot at achieving consistent success than the latter. How could you possibly argue otherwise?

What makes it so obvious? Having billions under management severly limits you universe of possible investments. What about the small boutique mutual fund or hedge fund manager. The financially secure independent investor.

[Onward]

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Originally Posted by bcinvest Having billions under management severly limits you universe of possible investments.

You have been listening to Cramer! I recognize his spiel. Peter Lynch's too, if I recall. Don't fall for it.

[NW-Bound]

I for one believe that sometimes, note the word sometimes, a small investor can beat the big guys on Wall Street. Have we all read the recent book The Big Short where Michael Lewis described how some small investors stumbled across the stupid CDOs and CDSs that killed many bankers who were supposed to be masters at that game? These little guys kept asking themselves why nobody else saw it, how these overpaid traders and bankers were so idiotic.

The above said, I would think that if I found a market inefficiency to exploit, I would just keep it to myself, in order to make lots of money just for me, me, me.

PS. Lewis described two guys who invested for just themselves, and turned $110K into $100M. NICE!

[bcinvest]

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Originally Posted by Onward You have been listening to Cramer! I recognize his spiel. Peter Lynch's too, if I recall. Don't fall for it.

I have never watched Cramer. I have read Lynch's book. They were very entertaining from what I remember.

No, I haven't fallen for modern portfolio theory. The establishment has a great deal to lose if people were to discard those ideas. Academics would see a life's work reduced to ashes. See Taleb's call to end the Nobel prize for economics.

[easysurfer]

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Originally Posted by bcinvest I believe investors can beat the market, not all investors can beat the market. In the same way I believe college quarterbacks can make it in the NFL. To conclude otherwise doesn't make sense.

But of all the quarterbacks that have been drafted in the NFL, how many of them made it big? The ratio has to be small.

It's possible, and who doesn't want to hear a John Unitas, Peyton Manning or Aaron Rodgers story? But for each of them, many have tried and failed (anyone remember Art Schlichter or Jeff George or Rick Mirer or Ryan Leaf? All of them were supposed to be great coming out of college but ended up being a bust in the NFL).

That's why I'd rather just follow an Index.

Especially in ER. If retirement is a marathon, I'd rather put my dollar following the index to know I'll finish the race than trying to finish first as a sprinter only to burn myself out along the way.

[GregLee]

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Originally Posted by kombat OK, let's try a little logic exercise. ... Now, mathematically, one of these guys has to lose.

I don't understand where, exactly, the logic and the mathematics enters in to this conclusion. How does it follow?

[Marc1962]

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Originally Posted by easysurfer If retirement is a marathon, I'd rather put my dollar following the index to know I'll finish the race than trying to finish first as a sprinter only to burn myself out along the way.

I agree with this. Indexing is a simple way for retail investors to avoid making a number of common mistakes that can devastate their portfolios. As long as we avoid currency destruction or some other type of financial Armageddon, I'm confident that my wife and I can retire and stay retired by indexing.

That said, I also believe that it is possible for a motivated retail investor to exploit his/her natural size advantage to outperform institutional investors. I'm interested in this personally and envision doing this by making long-term investments in value microcaps. While I'm confident that it's possible, I'm not at all confident that I'll be successful myself - I'm going to approach it as a hobby and allocate no more than 2% of capital to it.

[easysurfer]

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Originally Posted by GregLee I don't understand where, exactly, the logic and the mathematics enters in to this conclusion. How does it follow?

I'll take a stab at the logic and mathematics. Here it goes...

A simple comparison is like if you are a student in a class of 5 students. Grades are weighted A=5, B=4, C=3, D=2, F=1.

One can choose to shoot for an upper grade consistently or just take the performance of the entire class.

Mathematically, if grades come out one of each grade, taking the overall performance gives you (5+4+3+2+1)/5 = 3. (a grade of C)

Mathematically, if say, everyone passed and grades come out 2 A's, 2 B's, 1 C, the overall performance is (5+5+4+4+3)/5 = 4.2 (grade of a low B)

As for investments, can you consistently do better than the overall performance (not as easy as it seems) or do you just simply take the overall performance and move on?

[bcinvest]

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Originally Posted by easysurfer But of all the quarterbacks that have been drafted in the NFL, how many of them made it big? The ratio has to be small. It's possible, and who doesn't want to hear a John Unitas, Peyton Manning or Aaron Rodgers story? But for each of them, many have tried and failed (anyone remember Art Schlichter or Jeff George or Rick Mirer or Ryan Leaf? All of them were supposed to be great coming out of college but ended up being a bust in the NFL). That's why I'd rather just follow an Index. Especially in ER. If retirement is a marathon, I'd rather put my dollar following the index to know I'll finish the race than trying to finish first as a sprinter only to burn myself out along the way.

Yeah, ultimately you have to do something you are comfortable with. There are constraints to optimal decision making. A good example is in choosing a spouse you could invite Christie Brinkley, Pamela Anderson, and Angelina Jolie to dinner to choose your next spouse. Ultimately you are limited by who will have you. Inviting those three wouldn't be a realistic strategy for most. Even if it was determined one of them would result in your optimal spouse.

Indexing may be the best option for many investors considering constraints.

It has the benefit of leaving plenty of opportunities for investors like me.

[easysurfer]

I do agree as to it depends on what you have your sights on. On one hand (indexing), guaranteed, you can't do any better or worse than everyone else who follows that approach and the other hand (active investing)..who knows...there are no guarantees..you might hit it big or fall flat on your face.

I'd take the indexing strategy anytime.

[BUM]

[yakers]

Indexing is a particularly good approach as you can come closer to actually getting market return. I was a a big Smith Barney 'Client University' last weekend and I can't remember the precise statistic but one of the speakers pointed out that their fund had out performed the benchmark buy over 2% but admitted that their clients had returns under the benchmark because of when the clients moved in and out of the market.
If you are getting true market return your returns are likely to be above average and if you try to beat the market you are likely to have a below average return. This wasn't the message the speaker wanted to convey but its what his data told me.

[REWahoo]

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Originally Posted by yakers If you are getting true market return your returns are likely to be above average and if you try to beat the market you are likely to have a below average return.

You are ignoring the fact that index investing leaves all sorts of opportunities for the small, nimble, hard-working investor to beat the S&P year in and year out. I've been told it's not all that hard to do.

[Texas Proud]

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Originally Posted by easysurfer I'll take a stab at the logic and mathematics. Here it goes... A simple comparison is like if you are a student in a class of 5 students. Grades are weighted A=5, B=4, C=3, D=2, F=1. One can choose to shoot for an upper grade consistently or just take the performance of the entire class. Mathematically, if grades come out one of each grade, taking the overall performance gives you (5+4+3+2+1)/5 = 3. (a grade of C) Mathematically, if say, everyone passed and grades come out 2 A's, 2 B's, 1 C, the overall performance is (5+5+4+4+3)/5 = 4.2 (grade of a low B) As for investments, can you consistently do better than the overall performance (not as easy as it seems) or do you just simply take the overall performance and move on?

Good example, but wrong answer for the above question...

Lets use your last example... the average is 4.2... but there were two 'winners' and three 'losers' in this example..

Now, lets use your first example... the average is 3 and there are two 'winners' and two 'losers' and one that made average... but when the 'losers' worked hard and got their grades up... the average also moved up and they were still 'losers' even though they might have scored a 4 from a previous 2....

SOOO, buy definition... if you take an average, some are above the average and some below... someone 'wins' and someone 'loses'.... there is not other way to do it with the math...