Is indexing good?

[ladelfina]

Thanks ...Yrs to Go for the instruction on hedge funds.

I love ((^+^)) SG's metaphor about everyone in MN using your toilet!

I was thinking some more about this and I can't see how the fears of Apocalypse aren't already somewhat founded. to wit: individual investors are constantly throwing more money into big-name, big-cap companies just because they are exactly that.. On the financial channels, who do the talking heads talk about? Exxon, or Aegean Marine Petroleum (just to pick a name out of a hat)? Wasn't there an adage about nobody getting fired for recommending IBM?

There are thousands of more potentially 'worthwhile' (remunerative) investments that will never cross the radar screen of the average investor. One could argue that indexing actually helps to redistribute investment money back in 'favor' of firms that few folks have heard of and that analysts don't follow. Following the index route, I put money into the Russell 2000 that I never would have dared to on an individual company basis.. for me it would have been like thowing a dart at a dart board.

The case of lemming-like behavior dampening the market via indexing could already be made WRT the S&P 500, no? Does anyone think we are seeing ill effects from that?

Apocalypse, what about 'indexing' that underweights the S&P 500? Is there any reason you think that would be 'bad'?

I'm still a neophyte at this, but to me the core of indexing is that it leaves one free to makes one focus on asset allocation. Just like there's not ONE stock portfolio that will work for everyone, neither is there ONE asset allocation plan that will work for everyone. But, in general, if you are reasonably represented in all segments of the market you will do better than if you are not. Come "the Apocalypse", if ALL segments of the market do badly, well, we're all going to be in rough shape, no doubt about it. But if an index investor with a good asset allocation ends up even 1% ahead of the rest, well, then he's still better off than the next guy.

Kind of garbled thoughts (haven't yet finished my coffee...).

 

[JohnnieRed]

Anyone had experience with Dimensional Fund Advisors(DFA) funds?

...guess I'd call them "designer" index funds where the "gatekeepers" to the funds are financial advisors because the creators of the "designer" funds don't want to deal with retail investors like us ...

Personally I think they have it right but I wish I could avoid the "gatekeeper" fee...typically 50 to 100 basis points  for portfolio construction and management..."management" of index funds is really just rebalancing on a specified frequency, usually annually.

Really have a terrific program for backtesting strategies over time with portfolio returns, standard deviation ( Risk), and diversification return...bull markets, bear markets, some asset classes back to early 1900's...

Anyone found a way to avoid or reduce the "gatekeeper" fee?

 

[JohnnieRed]

Re : Below

Anyone have trouble sleeping?...I did one night!

I read "Population Aging and Financial Markets" by James M. Poterba, August 2004... from MIT and NBER...the paper explores the importance of changing demographic structure for asset returns, asset prices, and the composition of household balance sheets in the US

I believe the paper only finds "modest" empirical support, AT BEST, for the view that asset prices could decline as the share of households over age 65 increases....

SG:  Nords, aka the judge, was right too.  “Gimme something I can sink my teeth into—and not chili.”  I had to think your question thru, plus do Martha chores until now.  Here's the quick answer:

OK, 56% of the holders of GE are institutional holders.  A smaller percentage is Vanguard.  My bet is that large holders such as Wells Fargo, State Street, etc. are all holders of pension fund accounts.  Many ETFs are just sub-sector funds, such as XLE (energy), RTH (retail), and the financial ETF.  Magellan Fund pays its managers bonuses based on beating the S&P 500.  There’s probably some overlap there, plus they are too big not to include large cap stocks.  I’m sure there are many others that use it as a bench mark.

So, the boomers, the big demographic wave rolling thru the economy, started saving for retirement in the ‘80s, about the time the economy started warming up.  They are the richest generation ever—ever.  They piled huge amounts of money into index funds—following the seemingly logical Bogle-efficient markets model.  Each year they continue to add a little more to their retirement pot.

Speculation:  What if this year $100,000,000,000 is added to the entire retirement pot by savers. What if half goes into S&P related funds.  What if the S&P goes up 10% this year.  What if half of that rise doesn’t come from increasing long-term profitability of S&P companies but, instead, simply from adding more money to the index pot so that the real gains are only 5%.  What if this has been going on for quite some time. The supply-demand curve says that if you increase the amount of money to the pool it will raise the price of the product you are buying.  One of the most basic products of retirement accounts are large cap index funds and other high cap stocks.  Can I disentangle the positive feedback from the legitimate value?  That takes longer.  This is where the misallocation and positive feedback loop is in play.  The misallocation is a part of the whole process.  And if this misallocation is true, then someday boomers will start pulling the money out.  Will the balloon start to shrink at that time?  Will the positive feedback loop turn into a negative feedback loop?  The first half of Bullseye Investing explains some of these demographic issues surrounding retirement money. 

When George W wanted to change Social Security, the most important part, I suspect, was making sure that this new stream of retirement money would be put into an S&P 500 index and government bonds.  Was this to keep the party going?  Until it couldn’t any longer?  Watch where the money goes and keep your eye on M3.

 

[retire@40]

The term "hedge fund" is used liberally to describe a certain type of unregistered investment fund but says nothing of the investment strategies or tactics.

Under Rule 203(b)(3)-2, the SEC requires most hedge fund advisors register with it under the Investment Advisors Act of 1940 by February 1.

Also, the SEC limits hedge fund investing to people with at least $1 million in net worth, $200K in income for the past 2 years, and/or $300K joint income (accredited investors), so most people don't qualify.

And, you may have to file extensions every year you own a hedge fund.  Hedge funds are usually set up as a limited partnership.  LPs are notorious for sending K-1 forms after April 15.

And, fees could be a killer.  Typically, not only is there a 1% management fee, but it is usually also coupled with a 20% upside performance fee.  So if the fund makes 10% for the year, you would be paying at total of 3% for that performance of 10%, netting you 7% before taxes.

I suspect that in a few months or years, there will be mutual funds that will try to copy or mirror the same strategies as these hedge funds so as to allow more suckers middle class investors into the pot.  That's when I predict the market will heat up for a while then come crashing down ala dot.com style and many hedge fund advisors will go to jail.

 

[JohnnieRed]

Thank you for your response.

It is my opinion that there are a lot of financial professionals that either truly believe that they can consistently beat index returns or they have a vested interest in making emotional arguments to support their positions and thesis. The article you refer to is by someone with a great vested interest. He even signs the article,

"Your never have liked index funds anyway analyst,"


If "they" can beat the index returns of "asset class" index investors, where is the empirical evidence? Some might argue that Bill Miller has been able to do it for 13 or 14 years now. I think his fund probably has taken more risk than the index he has been benchmarked against and his fund is getting very large, and what about next year. I don't know any hedge fund managers with long term records better the "market" with the same risk level.

I still come down on the side of the logical empirical evidence, i.e. diversified portfolios using "asset class indexing."

 

[eridanus]

Looking for the next Bill Miller
If the Legg Mason Value Trust fails to beat the S&P 500 this year, who will be the new fund champ?

http://money.cnn.com/2005/12/02/funds/winners/index.htm

But what if the Legg Mason Value Trust falters in December and winds up lagging the S&P 500 this year? Who would take Miller's place as the fund manager with the longest track record of outperforming the S&P 500?

Meet Manu Daftary.

Daftary manages the Quaker Strategic Growth fund, a mostly large-cap stock fund that has beaten the S&P 500 for the past seven years straight.

 

[Nords]

Looking for the next Bill Miller
Meet Manu Daftary.

... that has beaten the S&P 500 for the past seven years straight.

Coin flippers, all of 'em.

How many mutual funds are out there-- about 8,000? If you count all the funds that have been incubated/merged/liquidated over the last 10 years, isn't it possible that the actual number of funds rises to ~10,000?

2 raised to the seventh power-- 128.
2 to the 13th power-- 8,192.
2 to the 14th power-- 16,384.
2 to the 15th power-- 32,768.

So after 14 years it's possible that Bill Miller is beginning to show skill over luck. After 15 we can probably declare him the winner.

So who's next? Do we look for managers who have consistently beaten their benchmark-- assuming there is such a thing as a consistent benchmark-- for at least 10 years? And if there's two or three of them, as there are bound to be, which ones will make it to 15 years?

Better to win this game by not losing...

 

[greg]

What if everyone in Minnesota comes over to your house and uses your toilet? . . . It will back up and overflow.

So does that mean that you should stop using your toilet?

Make this a little less abstract. What if everyone listened to (pick your favorite radio or TV investment show) and bought every stock that was mentioned? Does that mean you should never own a stock that gets mentioned on an investment show?

Hypothesizing that some effect could become important and could result in a bad impact is a long way from proving that it is important or that the result you hypothesize is the primary effect. The empirical data shows that indexers still do better than most and that their performance advantage gets larger with increasing time. That pretty much disproves the hypothesis.

To the toilet question? Yes, I would stop using it. If others are attracted to an overflowing toilet, I guess they should use it--if it makes them happy. I would look far a better spot or different toilet. An overflowing toilet would be a nasty thing. Why would everyone want to use it?

second question answered: You may at some point realize you are doing momentum investing. That would be good--as long as you were making money at it--and realized what was going on. Go see the Cramer thread for more and better info on that type of investing.

My final hypothetical example (maybe): Let's say that the S&P 500 is up 3% ytd. Let's say that Vanguard's S&P index was worth $50 billion at the beginning of the year. Say it's worth $51 1/2 today. What if $500 million of new money (net of withdrawals) was put into their fund by investors. That new money was put into the underlieing shares immediately as the money came in. To my mind, this new money drove up the prices of stocks in the index. So $500 million/1500 million = 1/3 of the increase in the price of the fund. That--to me--is a large macro-misallocation of retirement money--33% of the gain or 1% of the total value of the fund. I don't think my numbers are too far off, but it's a pure guess on net increases to Vanguard's S&P fund. Ok, does anybody have a 'compounding' calculator?

Thanks SG

 

[greg]

As far as the residential real estate market goes, I believe several structural impediments keep it from being a reasonably efficient market (no short selling, no ability to arbitrage price differentials, massive illiquidity, etc)

I've thought the residential real estate was "over valued" for years now. But the sheer magnitude of people who think there is a "bubble" kind of suggests otherwise.

YTG:
What I read into your first comment on this thread was an absolute trust in "efficient markets." Thanks for the response.

"no short selling" Every renter in America is 'synthetically' short the housing market, i.e. they don't want to own housing right now; they'll just wait it out. Maybe they'll buy when prices drop. They won't lose any money waiting for that to happen though.

Thanks

 

[sgeeeee]

To the toilet question?  Yes, I would stop using it.  . . .

Greg,

If everyone in MN comes to your house to use your toilet, it will backup and overflow. I guess that means you should stop using it now. Do you have a barn you can go behind? I would suggest you dig a deep hole.

If taking that kind of action doesn't make sense to you until you actually witness a parade of Minnesotans knocking on your door and asking to use your bathroom, then you understand how I feel about your arguments and index funds.

By the way, I would ask to see a drivers license if I were you. You want to make sure you don't get some Iowan trying to sneek into your bathroom pretending to be from MN.

 

[Gone4Good]

My final hypothetical example (maybe):  Let's say that the S&P 500 is up 3% ytd.  Let's say that Vanguard's S&P index was worth $50 billion at the beginning of the year.  Say it's worth $51 1/2 today.   What if $500 million of new money (net of withdrawals) was put into their fund by investors.  That new money was put into the underlieing shares immediately as the money came in.   To my mind, this new money drove up the prices of stocks in the index.  So $500  million/1500 million = 1/3 of the increase in the price of the fund.   That--to me--is a large macro-misallocation of retirement money--33% of the gain or 1% of the total value of the fund.  I don't think my numbers are too far off, but it's a pure guess on net increases to Vanguard's S&P fund.  Ok, does anybody have a 'compounding' calculator?

I think your whole argument hinges on the misconception that the market is driven by index fund inflows. There are, however, legions of people and vast sums of money dedicated to exploiting miss-priced securities. Besides, if your example were true, wouldn't the components of the S&P 500 move more or less in lock step as new index money comes into the market?? Try selling that notion to the owners of GM stock! How does your world view account for the fact that individual securities within the index outperform / under perform the average? Clearly there are other forces at work that offset the influences of index fund flows. No?

If you have evidence that index funds are causing a "macro-misallocation" of capital please share it. It appears, however, that you have taken a simple hypothesis that "index investing mindlessly misallocates capital" and extrapolated that hypothesis into an unsupported conclusion that the entire equity market is being driven by some kind of ponzi scheme (hyperbole intended).

 

[greg]

I think your whole argument hinges on the misconception that the market is driven by index fund inflows. There are, however, legions of people and vast sums of money dedicated to exploiting miss-priced securities. Besides, if your example were true, wouldn't the components of the S&P 500 move more or less in lock step as new index money comes into the market?? Try selling that notion to the owners of GM stock! How does your world view account for the fact that individual securities within the index outperform / under perform the average? Clearly there are other forces at work that offset the influences of index fund flows. No?

If you have evidence that index funds are causing a "macro-misallocation" of capital please share it. It appears, however, that you have taken a simple hypothesis that "index investing mindlessly misallocates capital" and extrapolated that hypothesis into an unsupported conclusion that the entire equity market is being driven by some kind of ponzi scheme (hyperbole intended).

YTG: I offered a hypothetical example about the the Vanguard S&P 500 Fund. The only number I was sure about was the 3% ytd gain, which is actually 3.1% according to this week's BusinessWeek. In a very real sense, the market (all financial products), the prices of individual stocks, bonds, etc., after they are aggregated, are driven up or down by money flow into and out of them. When the DOW is up 80 points on the day, then a certain amount of money flowed in--net gain 80 points. And although not mentioned directly before, yes I believe vast sums of money are being added to the system, much of it created out of thin air from the Fed. Start watching the money flow charts in the back of The Economist if you want to see some eye popping numbers.

In housing, the numbers are much easier to see and trace: When the economy tanked a few years back, the Fed did two things. First, it lowered interest rates to stimulate the economy. Then it created digital money and loaned it to the banks at a low rate. Banks of course borrowed at low rates and made mortgages at higher rates, making some of their money on the spread. This newly created money entered the economy as debt--held by mortgagees. This process initiated our current housing bubble as I see it. Mortgage rates are low so people can buy more house for the same amount of money. Sooner of later, this drives up the pricees of housing. Some people liked where they live, but after getting their house appraised at a much higher rate, they take out home equity loans. All this new found money stimulates the economy. Saying "it's a bubble" or a little frothiness is just one way of masking inflation. But it may just be "a short-term inflation if a recession occurs.

Price inflation is always a lagging indicator of true inflation, which is an increase of the money supply greater than the population growth. I believe it's the grease that has made the economy work so well over the past 20-30 years. (I said grease, there are many other major components) Grease when "correctly applied" is almost invisble to the naked eye. My belief is that first, Allen Greenspan, blew the tech bubble of 2000 with overly easy credit to everyone and liberal margin rates. After that fall, he blew the housing bubble. Did he purposely blow a housing bubble? No. He just eased credit and the bubble ended up there--thru market forces. The US$ is worth half of what it was when Greenspan took his current position at the Fed.

I never said that the market was driven by index flows--but it is probably true to a very small degree and maybe I did. I am saying that I believe markets taken in total are driven by money flows. And when driven by macro-misallocation eventually give rise to sector bubbles and a general bubble that everyone together rides up without realizing they are on the bubble. I am saying that the S&P 500 index funds prices are partially driven by misallocated capital coming in, new money that cares not one wit about finding any efficiency of the underlieing stocks--but only follows a black box model . If the numbers in my example were correct, then there is a correlation (maybe 33%, maybe only 1%--I'm not a number cruncher. One would have to call Vanguard for the exact numbers and do the computing and statistical modeling. I've made my decision.

My thoughts on hedge funds (but I offer zero evidence for this idea): I think the early hedge funds did exactly what was originally intended by them--found inefficiencies and took advantage. I believe now that so many of them have piled into that mess, many of the advantages of looking for inefficiencies in the market place have gone away. Finding inefficiencies has become harder and harder as more hedgies pile in to search for ever decreasing possible returns. But, just as in the housing market, where all the houses have risen in price in unison, the true inefficiencies are harder to see. One way of finding inefficiencies is to look at comparables: If all the value stocks now have a PE close to 15, then finding one with a PE of 13 or lower may be the goal--and the way to make money. But if the PE for value stocks has historically been 10, then perhaps a misallocation of resources my be occuring without any of the participants being aware of it. They may see tiny lateral or micro-misallocations between specific products and fail to see any macro-misallocations. I also think many hedge funds have begun doing "the pile on" and are chasing the same things in packs--playing a sort of herd game, lemming-like.

Pile ons, positive feedback loops, macro-misallocations have many different cycles and play small but very important roles in many asset classes to my mind. . It is a ponzi scheme to me. I've drawn a couple of lines from money to bubble. I can explain the lines a little better, but most of it will just be repetition. I can add more lines though if you desire. See Mauldin for better numbers. You say "potato," and I say "potato." Good luck and skill with your investing.

 

[lswswein]

The Numbers

Interesting discussion guys. Just my couple of cents into it, how about we look at the numbers. I poked around a bunch of good websites. Check out the following:

www.ici.org
http://www.standardandpoors.com/
http://www.nasdaq.com/reference/IndexDescriptions.stm
& also
http://www.ifa.com/

Btw this is the data I collected for S&P 500 since that is the biggest Index - I think this is for 2004.

1.  $626 billion is indexed to the S&P 500.
1a. $255 billion of S&P 500 indexing is by Mutual Funds - the rest is all the Institutional money not in mutual funds by indexed.
2.  Float Adj Market Cap of S&P 500 is $11,000 billion

That's 6% guys not that high.

Also 10% of individual investors hold Index funds & 30% of Institutional Funds do so.

I agree it would be a problem if everyone indexed, but I don't think we are there yet!

-h

 

[sgeeeee]

Re: The Numbers

. . .
I agree it would be a problem if everyone indexed, but I don't think we are there yet!

-h

Kinda like Greg's toilet problem, huh?

 

[lswswein]

Get the mind out of the gutter gentlemen.


-h
I Hope there were enough winks in there

 

[greg]

What if everyone in Minnesota comes over to your house and uses your toilet? . . . It will back up and overflow.

So does that mean that you should stop using your toilet?

Make this a little less abstract. What if everyone listened to (pick your favorite radio or TV investment show) and bought every stock that was mentioned? Does that mean you should never own a stock that gets mentioned on an investment show?

Hypothesizing that some effect could become important and could result in a bad impact is a long way from proving that it is important or that the result you hypothesize is the primary effect. The empirical data shows that indexers still do better than most and that their performance advantage gets larger with increasing time. That pretty much disproves the hypothesis.

SG: I 'honest to God' did not think about your toilet question enough before answering. The thought process went like this: Oh boy, toilet talk! This could never happen in Minnesota. All the Minnesotans, 4 million of them, are nice people. In fact, they would line up in single file and wait their turn. I don't think Minnesotans would go two at a time, so to speak, although a mother might bring her child in with her. Could they stack up, one sitting on the other's lap. Not in Minnesota is my guess. So, how could we get the toilet to overflow if everyone behaved themselves the way Minnesotans always do? I know, I could go down to a bar and offer all the drinkers free liquor if they all piled into my bathroom at once. But they would need EX-Lax to make that work--out. I don't think this is possible without using Non-Minnesotans. I wonder if Texans would do that? Naaa! I'm running out of ways to make my toilet overflow. Oh yeah! If all 4 million Minnesotans were about 1/4 inch tall, I could fit them into the bathroom all at once . . . . But then, I have to worry about the proportions of other things too. Dang! I'm running out of ideas. I just can't get that toilet full using SG's analogy. I'll just tell SG "yes." and move to his other questions So, the real answer is different.

EDIT: Moderator screwed up and hit modify instead of quote...luckily original was open in another window and is now restored as poster wrote it. -BMJ

 

[BigMoneyJim]

CRUD! I messed up again and modified Greg's post instead of quoting it...working on fixing it now as I have the original post in another window...

EDIT: Fixed. Luckily I had his original post in a different window and was able to reconstruct it. Now if I can remember what my reply was....something about Greg not having a sceptic tank and city sewer systems having limits, but it doesn't seem worth the effort now.

 

[greg]

It’s time again . . . .for a longer one.

SG (& Nords): By the middle of the tech bust of ’01, I (we) had lost a significant amount of money, and I knew something had to be done to change the situation, to prevent that from ever happening again. Rather than ask “How can I repair the damage to this retirement portfolio?,” I asked myself “What went wrong here?, How did this happen?, Why?” My thoughts were that if I could find the answers to these questions then the solutions would flow automatically—just don’t do the things that create hell for the portfolio in a down market. In a sense and in a roundabout manner, I went on the quest for the perfect portfolio or, to be a wag about it, the perfect toilet. Just like the discovery of a “unified field theory” would complete science, although not flesh it out, I think I can find it. That is always the goal in the back of my mind. In a weird manner I’m an optimist. I enjoy the walk whether I reach the goal or not.

So, while I don’t really think I’m a bear, I do think that I’m a negativity aggregator, collecting all the data that cause financial instruments to go down so that I can figure things out. When Uncle Mick listed out his retirement portfolio principles, I thought I hit the jackpot: Norwegian Widow, Trust Charles De Gaulle, and be agile, mobile and hostile. He had clarified many of the assumptions that were not previously clear in my mind.

In one very broad sense (pun intended), the Norwegian Widow principle is a distilled value investor’s guide to investing, especially as detailed by Graham & Dodd. I don’t see how anyone can seriously invest with out understanding the components of “value.” When the talking heads of CNBC or financial planners tell you that things have changed and PEs of 20 are an opportunity, you have something to weigh that against, a set of timeless tools that help you make a better judgement.

Value investors are essentially always looking for low PE ratios that also have a sustainability to provide long-term dividends. Providing steady, secure dividends is the ultimate guide that every business buyer also looks for when they are making a purchase decision. Almost everything revolves around this steady generation of income. Where are the bucks and how quickly can I get’em? This is as close as I can get to security and stability without running a hands-on business myself. It is the most important principle of all and will always remain at the foundation of my portfolio. So I seek out the highest, safest, and immediate return for the bulk of the portfolio.

Growth investments are a subset of value investments to my mind. Investors decide that they are willing to forgo immediate returns so that reinvestment can enhance the future E of P/E. To me, growth investing sets up too many possibilities of misallocation and manipulation. It is hard to judge, although Warren Buffet has done an excellent job of growing the price of Berkshire Hathaway with value investments. Lots of possibilities out there. But show me the money.

An historical/political aside related to Ponzi: Throughout history (and I know I’m simplifying here), retirement portfolios primarily consisted of children, sons and daughters, and/or some small means of production such as a farm, shop, or trade. Some settler would come in staking out his or her claim to some land. The building and shaping began. The first generation cleared rocks, built fences, bought cows, etc. When the second generation matured they were handed an improved property with value pre- added, with known instructions that they were to provide for the care of the elders with what they were given. This process was to be repeated until it couldn’t be any more, with each generation improving things a little more for each succeeding generation, adding value to the means of earning. Today, this process has been turned on its ear. It’s become the opposite of itself. Not only do we run a deficit during bad times, we now run them during good times also. Businesses pony up to the debt trough so that, oftentimes, increasing amounts of earnings simply go to repaying debt. Leverage rules. We run a balance of payments deficit so that we can consume now, expecting our children to pay it off. Much of this current behavior is rationalized away or trivialized. But, right now, it’s like we are getting ready to hand our children and grandchildren a farm with so much debt attached that it may be impossible to even feed themselves with the earnings—all because of the debt service presently attaching itself to our retirement income sources.

It gets worse when you look at the new first world-emerging market problem. We see the Asian counties spending huge amounts of money on education and means of production assets. We cut back on merit scholarships and loans. We focus on zero interest loans to entice buyers. We have major industries that are in serious decline and have been for thirty years. The American car companies provided all the technology and methodologies for the Japanese. They followed our advice; we didn’t. These types of American-run companies can’t see the future. They can only manage from one crisis to the next. These are the types of companies that need to support our retirement, pay off the bonds owned by retirement portfolios with taxes on wages or profits, etc. But there are lots of good companies around too, but I don’t think there are as many as CNBC thinks or W. thinks. I see a weird type of corrosive manipulation going on, mainly surrounding debts and real, sustainable profits.

The Ponzi scheme has worked well for thousands of years, a couple hundred in our country. It’s a good thing when used properly—smoothing out and building great civilizations. It works as long as each generation adds some extra value to what they started with and not actually drained it. GM is a drain at this point in its cycle.

Agile, mobile and hostile: You shouldn’t hang around something that has a high likelihood of going down in value. Agile to me means being alert to both dangers and opportunities. It means studying what is going on and being ready to move. Agile means being able to turn one’s head in a different direction if there is a forboding or menacing sound—maybe a big bust or boom coming. It’s the most mental part of the investment game. Mobile means the ability to get there, having readily accessible cash is the first step, a reserve of funds that can be at the ready if the opportunity arises—if real value shows its face. Complacency is not a good mental characteristic for safe investing. Because when market conditions change, you need to change and move on that new knowledge. Hostile coming in with guns blazing, it means you know what to do and when to do it. It mean you have gathered enough information, that your skills are developed and usable, that you are confident of it. Then you go for it. If it’s a contrarian play, you need to understand the flows of the other bodies; if it’s a dividend play, you need to understand and have used value investment skills under stress before so that you behave correctly at the correct times. Timid aggression that comes from a lack of knowledge and courage breeds panic and confusion. This is my understanding of Uncle Mick’s principle.

De Gaulle? Uncle Mick is an optimist about this country. I’m not (at this point), and I won’t be until this current administration is gone—if then. Strong property rights are a founding principle of this country, deeply imbedded in the culture. When Dick Cheney said “Deficits don’t matter,” that the debt owed by this country is unimportant (because I think this really is his attitude), I knew the jig was up. I watch debt because I think Cheney is wrong and that is where the fall will be coming from. I currently see this as a true contrarian play. The rest of the portfolio money is playing the government’s stupidities—I think it’s easy money. But sometimes my timing is off.

--Greg

 

[Gone4Good]

Hostile coming in with guns blazing, it means you know what to do and when to do it. 

Okay. So where exactly is your money these days, Greg? Sounds like cash and gold bullion. These "safe" investments have there own risks too.

Value investors are essentially always looking for low PE ratios that also have a sustainability to provide long-term dividends.

To my mind value investing isn't necessarily about low PEs or any other specific metric. Investing, in general, is an exercise in "relative value" where the expected risks and returns of one investment choice are weighed against all of its competing alternatives (including holding cash and gold bullion). At 4.5% interest rates treasuries have a PE of 22 with a zero % growth rate. Given that alternative, one might think a 20 PE for a fairly-stable, slow but positive growth, dividend-paying company looks like a pretty good, if not a very good, value.

Cash at negative real rates of returns is an expensive "safe" investment alternative.

 

[lswswein]

Don' ever become a pessimist, Ira; a pessimist is correct oftener than an optimist, but an optimist has more fun--and neither can stop the march of events.

-Lazarus Long
-- Robert Heinlein

I think that says it all .........

 

[greg]

YTG:

58% is burrowed in mostly short-term AAA. 38% is running wild. RE estate, my former safe money, is now in the wild catagory, but it pays dividends. Here's another active managers take on things:

http://www.hussmanfunds.com/wmc/wmc051205.htm

 

[wildcat]

Rather than ask “How can I repair the damage to this retirement portfolio?,” I asked myself “What went wrong here?,  How did this happen?, Why?”  My thoughts were that if I could find the answers to these questions then the solutions would flow automatically—just don’t do the things that create hell for the portfolio in a down market.  In a sense and in a roundabout manner, I went on the quest for the perfect portfolio or, to be a wag about it, the perfect toilet.  Just like the discovery of a “unified field theory” would complete science, although not flesh it out, I think I can find it.  That is always the goal in the back of my mind.

Greg,

Don't you think a broadly diversified portfolio is about as close to the "perfect" portfolio?  I know it is difficult to make an accurate observation but it seems like you torment yourself over the "quest" and become your own worst enemy.  Set something up and let it ride.  It is nice to be well informed but it can also work against you.

As Yrs said, a portfolio invested in gold/cash/TIPs comes with plenty risk, possibly even more than a broadly diversified portfolio including equities.  If things really go to crap it won't matter what you have, it will drop in value or become a victim to inflation - eats away at those stable, low return assets.

 

[greg]

Greg,

Don't you think a broadly diversified portfolio is about as close to the "perfect" portfolio? I know it is difficult to make an accurate observation but it seems like you torment yourself over the "quest" and become your own worst enemy. Set something up and let it ride. It is nice to be well informed but it can also work against you.

As Yrs said, a portfolio invested in gold/cash/TIPs comes with plenty risk, possibly even more than a broadly diversified portfolio including equities. If things really go to crap it won't matter what you have, it will drop in value or become a victim to inflation - eats away at those stable, low return assets.

I guess we see risk pretty differently.

 

[wildcat]

Yeah I see it in risk adjusted returns as I think many investors would - I guess I would go for the highest as some would be happy with the lowest

 

[greg]

CRUD! I messed up again and modified Greg's post instead of quoting it...working on fixing it now as I have the original post in another window...

EDIT: Fixed. Luckily I had his original post in a different window and was able to reconstruct it. Now if I can remember what my reply was....something about Greg not having a sceptic tank and city sewer systems having limits, but it doesn't seem worth the effort now.

I saw our sewer pipe a few years back. It's about two feet in diameter. It also drops about 500 feet in elevation Man oh man, I figure if you put about a hundred thousand non-bean eating Texans in all, you know the skinny ones, on top of every toilet in the city and flushed simultaniously, the suction would take them all down. Still wouldn't plug the system.