Fink/Bogle/Gross spectrum

[nisiprius]

The article, Should I Stay or Should I Go?, is a lovely illustration of the problems of listening to experts. They are always all over the map, and you might as well "Trust thyself: every heart vibrates to that iron string," because whatever it is you can find an expert to agree with you.

To summarize, BlackRock's Larry Fink, Jack Bogle, and PIMCO's Bill Gross "all see tougher times for financial assets... None expects equity returns to rival the 6.6% real return demonstrated over much of the past century and immortalized in Jeremy Siegel's Stocks for the Long Run. None expects bonds to produce returns much in excess of their current coupon, so a return of less than 2% on the Barclays Aggregate Index is probable. All three expect bonds to be significantly more volatile in the future and to be particularly vulnerable to government attempts to manage excess debt through inflation."

And the conclusions they draw? "BlackRock's Larry Fink says be 100% in equities. PIMCO's Bill Gross claims equities are dead. Vanguard's Jack Bogle preaches stay the course with a balanced portfolio."

According to David Freedman, author of Wrong: Why experts* keep failing us--and how to know when not to trust them,

Bad advice tends to be simplistic. It tends to be definite, universal and certain. But, of course, that's the advice we love to hear. The best advice tends to be less certain — those researchers who say, 'I think maybe this is true in certain situations for some people.' We should avoid the kind of advice that tends to resonate the most — it's exciting, it's a breakthrough, it's going to solve your problems — and instead look at the advice that embraces complexity and uncertainty.

Guess which expert I think exemplifies the kind Freedman likes?

[baw703916]

Don't listen to experts unless you can independently derive their conclusions from first principles.

[Browser]

The confirmation bias is our tendency to interpret new evidence in such a way as to corroborate our existing opinion, and to rationalise away or to underweight disconfirming evidence. Like all cognitive biases, this isn't always an error - sometimes we really were right all along - but it can lead us into error, by magnifying our past mistakes.

Who has changed their past opinions as a result of new information? Only one of the three that I can see.

[Simplegift]

Reading the article, it does appear that the three commentators rank the expected returns for the three main asset classes (stocks, bond and cash) in the same order:

Despite the headline that stocks are dead, Gross, like the others, sees stocks offering better returns than bonds. The facile take-away that the Bond King slams stocks wasn't what Gross really said. Indeed, his sharpest warnings were for holders of long bonds in the higher inflationary environment he foresees. He sees stocks as offering double the nominal return of bonds over the next several years. Unfortunately, the rising inflation he predicts would leave stocks with zero real return (and bonds with negative real returns).

Bogle and Fink both have slightly rosier outlooks for stocks, but neither sees double digit annual returns on the horizon. So, while the three differ in degree, all rank stocks, bonds, and cash in the same order, and all three think that each asset class offers more muted returns than investors expect.

I read much more concordance in these three views than disagreement. Beware when experts agree!

[BlueEars]

Nice article ... thanks for the link.

Bogle mentions "speculative returns" in passing here (5 minute interview): http://www.morningstar.com/Cover/videoCenter.aspx?id=571370

Now for the BlueEars theory:
As bonds correct into rising rate territory, we will see some speculative returns in stocks.

Remember you heard this here and this comes with a firm ... maybe.

[555]

[quote="BlueEars"]"Now for the BlueEars theory:
As bonds correct into rising rate territory, we will see some speculative returns in stocks."

Why?

[BlueEars]

"Now for the BlueEars theory:
As bonds correct into rising rate territory, we will see some speculative returns in stocks."

Why?

Because at the margin some bond centric investors will be dismayed by the low (backward looking) bond returns and allocate a larger portion of holdings to stocks. It's momentum at work and the ride is never assured ... particularly the end ... maybe.

[nisiprius]

The confirmation bias is our tendency to interpret new evidence in such a way as to corroborate our existing opinion, and to rationalise away or to underweight disconfirming evidence. Like all cognitive biases, this isn't always an error - sometimes we really were right all along - but it can lead us into error, by magnifying our past mistakes.

Who has changed their past opinions as a result of new information? Only one of the three that I can see.

That's an interesting observation, but I'd like to you to be specific--I tried to figure it out myself and I couldn't. Who changed their opinion, from what to what, when? As far as I know, Bill Gross has always boosted bonds. As far as I know, Jack Bogle has had a consistent message but has never been doctrinaire on details. So by elimination I take it that BlackRock's Larry Fink has revised his recommendation? What did he formerly recommend?

[555]

"Now for the BlueEars theory:
As bonds correct into rising rate territory, we will see some speculative returns in stocks."

Why?

Because at the margin some bond centric investors will be dismayed by the low (backward looking) bond returns and allocate a larger portion of holdings to stocks. It's momentum at work and the ride is never assured ... particularly the end ... maybe.

Okay, but some of us will be moving in the other direction, holding more in stocks, and waiting for yields to go up before moving more into bonds.

[abuss368]

Thank you for the article.

[BlueEars]

555, you and I are the smart ones. My theory is we are outnumbered by backward looking investors.

[JRA]

I am not sure it is fair to list Jack Bogle with Fink and Gross. While he has made some predictions of what he expects in terms of equity and fixed income returns in the future, I don't recall him ever advocating radical changes in portfolio allocations (even the recent corporate bond recommendation was not a radical shift from his balanced portfolio). He has always recommended a balanced approach and still does. Even when the whole financial world looked like it was coming apart in 2008-09, I remember his sound advice, "don't just do something; stand there". In my opinion, he is nothing like Fink or Gross. Perhaps I missed something; if so, I apologize.

[Optimistic]

The confirmation bias is our tendency to interpret new evidence in such a way as to corroborate our existing opinion, and to rationalise away or to underweight disconfirming evidence. Like all cognitive biases, this isn't always an error - sometimes we really were right all along - but it can lead us into error, by magnifying our past mistakes.

Who has changed their past opinions as a result of new information? Only one of the three that I can see.

That's an interesting observation, but I'd like to you to be specific--I tried to figure it out myself and I couldn't. Who changed their opinion, from what to what, when? As far as I know, Bill Gross has always boosted bonds. As far as I know, Jack Bogle has had a consistent message but has never been doctrinaire on details. So by elimination I take it that BlackRock's Larry Fink has revised his recommendation? What did he formerly recommend?

I don't know the answer either. I do know that Jack Bogle recently suggested looking at corporate bonds due to depressed yields on treasuries (the horror!). And, of course Bill Gross reversed course a couple of times on treasuries (last year?). So, my elimination process led me to Larry Fink as the only one who did not.

[MarcMyWord]

I follow an assortment of online financial comment and chat sites, and in place after place I keep seeing the claim that "Bill Gross says equities are dead, Bill Gross says equities are dead."

Bill Gross is so quotable, and so sought-after by financial media in search of pithy and colorful sound bites, that it's indeed possible that somewhere he has said that "equities" are "dead." But what he actually said in his August 2012 monthly print commentary on his company's own site was that "the cult of equities is dying." And that's a very different thing from saying "stocks are dead." I take him to mean that the reliance on stocks, the mania for stocks, the easy money to be made from stocks for much but not all of the last three decades, and the notion that future stock returns will look a lot like past stock returns, all of these expectations are in the process of shrinking and expectations should likely remain modest for a long time. And in that sense, he would seem to agree with John Bogle and others, none of whom see sustained high returns in financial assets in the near future.

http://www.pimco.com/EN/insights/pages/ ... gures.aspx

[Optimistic]

From the article nisiprius linked:

It's the "cult" of equities, not equities themselves, that Gross declared dead. He clearly sees merit in equities--he's co-CIO of a shop launching equity funds--but he knows that investor expectations must be reined in if they are to deploy stock funds wisely.

[rr2]

Bogle mentions "speculative returns" in passing here (5 minute interview): http://www.morningstar.com/Cover/videoCenter.aspx?id=571370

Is there somewhere I can find out more about Bogle's ideas on the Speculative portion of the return i.e. change in PE expected? I did read the transcript of the interview but did not fully understand how that is calculated. Current PE (not PE10) is around 16 (from S&P 500 PE). If the expected PE doubles in 10 years to 32 (investors willing to pay more), is that equivalent to a speculative return of roughly 7% per year (Rule of 72).

Thanks.

[555]

Bogle mentions "speculative returns" in passing here (5 minute interview): http://www.morningstar.com/Cover/videoCenter.aspx?id=571370

Is there somewhere I can find out more about Bogle's ideas on the Speculative portion of the return i.e. change in PE expected? I did read the transcript of the interview but did not fully understand how that is calculated. Current PE (not PE10) is around 16 (from S&P 500 PE). If the expected PE doubles in 10 years to 32 (investors willing to pay more), is that equivalent to a speculative return of roughly 7% per year (Rule of 72).

Thanks.

Yes.

[Valuethinker]

It is important to understand what we mean by 'expert' and what an 'expert' is.

If we ask James Hansen 2 questions 1). are you confident in your models? and 2). are you confident in what your models predict? he would say in the strong affirmative to both. Not every other expert in the field would agree with him, although most would to an extent.

If we then ask him 3). are your models based upon the laws of physics and observable scientific information? he would say yes to the first, and then discuss (in detail, in his latest book) the problems of parameterization in the absence of the right orbiting scientific instruments. You can flip open the book (as a non scientist) and see the error bars he gives around his parameter estimates.

Finance is on a completely different level of tendentiousness.

We can't define market efficiency in a rigorous and mathematical way, and we certainly don't have any 'laws' of financial markets that we can equate to the 'laws' of physics. Do x, markets do not inevitably do y.

Sciences like medicine there is more ambiguity because there aren't deterministic laws to the same extent.

When we get to financial economics, what we have is a set of hypotheses and quantitative evidence (of varying quality and length) that supports those hypotheses.

We also know the behaviour of financial markets has feedback. In other words, what we know about financial markets changes their behaviour.

That's completely different from physics-- particles or atmospheres don't know we exist.

Financial markets are inherently chaotic and thus unpredictable.

So when we say 'expert' we have to say:

- in what field?

- on what basis? Because efficient market theory tells us that many of the so called 'successful' investors were, in fact, simply lucky. Given long enough, their performance will mean revert.

My own view is there is 'talent' in investment management. But it's incredibly rare, and singular (Warren Buffett). So the rest of us cannot really rely on finding it and using it.

[Levett]

"Because efficient market theory tells us that many of the so called 'successful' investors were, in fact, simply lucky. Given long enough, their performance will mean revert.

My own view is there is 'talent' in investment management. But it's incredibly rare, and singular (Warren Buffett). So the rest of us cannot really rely on finding it and using it."

Very well said.

Lev

[Fallible]

The article, Should I Stay or Should I Go?, is a lovely illustration of the problems of listening to experts. ...
...

It's an excellent article that I read as less an illustration of the problems of listening to experts than a lesson in knowing how to read overall what they say - in this case of taking into account all three and finding the similarities, which Phillips does in writing that their forecasts are more alike than different:

"The shared message of these three veteran market observers is that current conditions warrant sober expectations for returns from both stocks and bonds. None expects equity returns to rival the 6.6% real return demonstrated over much of the past century and immortalized in Jeremy Siegel's Stocks for the Long Run. None expects bonds to produce returns much in excess of their current coupon, so a return of less than 2% on the Barclays Aggregate Index is probable. All three expect bonds to be significantly more volatile in the future and to be particularly vulnerable to government attempts to manage excess debt through inflation."

And he then goes on to say how investors should deal with the shared message:

"In short, all see tougher times for financial assets. The easy days of the bull market of the 1980s and 1990s are gone. The markets won't do the heavy lifting to grow investors' portfolios. Instead, investors will need to work longer, save more, and invest smarter (and more cost efficiently, Bogle would hasten add) in order to meet their goals. It's a sobering and valuable message, one echoed by Jeremy Grantham and many other astute investors."

And, really, haven't many financial veterans, including Buffett, been saying for years now that we should expect no more double-digit returns? (Or have only Bogleheads been listening and responding?) Whatever, we need more articles like this one from Phillips to better understand the overall, or underlying, meaning of "expert" forecasts.

[Rodc]

That's completely different from physics-- particles or atmospheres don't know we exist.

Don't forget about quantum mechanics and the effects of the Heisenberg Uncertainty Principle. Particles do "know" we exist when we take a peek at them.

http://www.aip.org/history/heisenberg/p08.htm

[BlueEars]

...(snip)...
And, really, haven't many financial veterans, including Buffett, been saying for years now that we should expect no more double-digit returns? (Or have only Bogleheads been listening and responding?) Whatever, we need more articles like this one from Phillips to better understand the overall, or underlying, meaning of "expert" forecasts.

I agree with what you are saying in general.

Just have to point out that we could get double digit returns over some reasonably long periods. Recent example for Total Stock Market:
1 year return = 14.3%
3 year return = 11.8%

... just don't look at the 5 year return.

[brad_g]

Not much of a "spectrum" really. They all exist on one side: those who would dare to make market predictions vs those who have accepted the overwhelming evidence that financial "experts" have never shown any useful predictive ability. I thought that was a tenet of Bogleheadism?

What were the experts saying in 1979? In 2007? Etc. Whether Bogle or Gross, what conclusion can there be other than, it doesn't matter? Is it "different this time"? Have equities died, again?

Please!

[Fallible]

...(snip)...
And, really, haven't many financial veterans, including Buffett, been saying for years now that we should expect no more double-digit returns? (Or have only Bogleheads been listening and responding?) Whatever, we need more articles like this one from Phillips to better understand the overall, or underlying, meaning of "expert" forecasts.

I agree with what you are saying in general.

Just have to point out that we could get double digit returns over some reasonably long periods. Recent example for Total Stock Market:
1 year return = 14.3%
3 year return = 11.8%

... just don't look at the 5 year return.

I won't!