Fink/Bogle/Gross spectrum

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.

Fink/Bogle/Gross spectrum

Postby nisiprius » Tue Oct 23, 2012 9:46 am

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?
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
User avatar
nisiprius
Advisory Board
 
Posts: 24281
Joined: 26 Jul 2007
Location: "Citizen of the terrestrial sphere"--O. Henry, "A Cosmopolite in a Cafe"

Re: Fink/Bogle/Gross spectrum

Postby baw703916 » Tue Oct 23, 2012 9:52 am

Don't listen to experts unless you can independently derive their conclusions from first principles. :happy
Most of my posts assume no behavioral errors.
User avatar
baw703916
 
Posts: 5336
Joined: 1 Apr 2007
Location: Northern Virginia

Re: Fink/Bogle/Gross spectrum

Postby Browser » Tue Oct 23, 2012 11:00 am

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.
If we have data, let’s look at data. If all we have are opinions, let’s go with mine. – Jim Barksdale
Browser
 
Posts: 2238
Joined: 5 Sep 2012

Re: Fink/Bogle/Gross spectrum

Postby Simplegift » Tue Oct 23, 2012 11:13 am

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:

Morningstar wrote: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! :wink:
Cordially, Todd
User avatar
Simplegift
 
Posts: 1067
Joined: 8 Feb 2011
Location: Central Oregon

Re: Fink/Bogle/Gross spectrum

Postby BlueEars » Tue Oct 23, 2012 11:55 am

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.
User avatar
BlueEars
 
Posts: 3121
Joined: 10 Mar 2007
Location: West Coast

Re: Fink/Bogle/Gross spectrum

Postby 555 » Tue Oct 23, 2012 12:48 pm

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

Why?
555
 
Posts: 4045
Joined: 24 Dec 2009

Re: Fink/Bogle/Gross spectrum

Postby BlueEars » Tue Oct 23, 2012 1:05 pm

555 wrote:
BlueEars wrote:"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. :happy
Last edited by BlueEars on Tue Oct 23, 2012 1:06 pm, edited 1 time in total.
User avatar
BlueEars
 
Posts: 3121
Joined: 10 Mar 2007
Location: West Coast

Re: Fink/Bogle/Gross spectrum

Postby nisiprius » Tue Oct 23, 2012 1:06 pm

Browser wrote:
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?
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
User avatar
nisiprius
Advisory Board
 
Posts: 24281
Joined: 26 Jul 2007
Location: "Citizen of the terrestrial sphere"--O. Henry, "A Cosmopolite in a Cafe"

Re: Fink/Bogle/Gross spectrum

Postby 555 » Tue Oct 23, 2012 1:10 pm

BlueEars wrote:
555 wrote:
BlueEars wrote:"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. :happy


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.
555
 
Posts: 4045
Joined: 24 Dec 2009

Re: Fink/Bogle/Gross spectrum

Postby abuss368 » Tue Oct 23, 2012 1:22 pm

Thank you for the article.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + REITs
User avatar
abuss368
 
Posts: 5707
Joined: 3 Aug 2009
Location: At the Beach

Re: Fink/Bogle/Gross spectrum

Postby BlueEars » Tue Oct 23, 2012 1:22 pm

555, you and I are the smart ones. My theory is we are outnumbered by backward looking investors.
User avatar
BlueEars
 
Posts: 3121
Joined: 10 Mar 2007
Location: West Coast

Re: Fink/Bogle/Gross spectrum

Postby JRA » Tue Oct 23, 2012 1:54 pm

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.
JRA
 
Posts: 137
Joined: 3 Aug 2007

Re: Fink/Bogle/Gross spectrum

Postby Optimistic » Tue Oct 23, 2012 2:49 pm

nisiprius wrote:
Browser wrote:
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.
User avatar
Optimistic
 
Posts: 266
Joined: 28 Sep 2010

Re: Fink/Bogle/Gross spectrum

Postby beardsworth » Tue Oct 23, 2012 4:08 pm

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
beardsworth
 
Posts: 1521
Joined: 15 Jun 2007

Re: Fink/Bogle/Gross spectrum

Postby Optimistic » Tue Oct 23, 2012 4:18 pm

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.
User avatar
Optimistic
 
Posts: 266
Joined: 28 Sep 2010

Re: Fink/Bogle/Gross spectrum

Postby rr2 » Wed Oct 24, 2012 9:46 pm

BlueEars wrote: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.
rr2
 
Posts: 978
Joined: 19 Nov 2008

Re: Fink/Bogle/Gross spectrum

Postby 555 » Wed Oct 24, 2012 9:48 pm

rr2 wrote:
BlueEars wrote: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.
555
 
Posts: 4045
Joined: 24 Dec 2009

Re: Fink/Bogle/Gross spectrum

Postby Valuethinker » Thu Oct 25, 2012 9:18 am

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.
Valuethinker
 
Posts: 23717
Joined: 11 May 2007

Re: Fink/Bogle/Gross spectrum

Postby Levett » Thu Oct 25, 2012 1:48 pm

"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
Levett
 
Posts: 3190
Joined: 23 Feb 2007

Re: Fink/Bogle/Gross spectrum

Postby Fallible » Thu Oct 25, 2012 3:46 pm

nisiprius wrote: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.
"The first principle is that you must not fool yourself - and you are the easiest person to fool." ~ Richard Feynman
User avatar
Fallible
 
Posts: 3532
Joined: 27 Nov 2009
Location: At home everywhere and nowhere.

Re: Fink/Bogle/Gross spectrum

Postby Rodc » Thu Oct 25, 2012 5:08 pm

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
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
Rodc
 
Posts: 9425
Joined: 26 Jun 2007

Re: Fink/Bogle/Gross spectrum

Postby BlueEars » Thu Oct 25, 2012 5:24 pm

Fallible wrote:...(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. :happy
User avatar
BlueEars
 
Posts: 3121
Joined: 10 Mar 2007
Location: West Coast

Re: Fink/Bogle/Gross spectrum

Postby brad_g » Thu Oct 25, 2012 7:14 pm

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!
brad_g
 
Posts: 76
Joined: 15 May 2011

Re: Fink/Bogle/Gross spectrum

Postby Fallible » Thu Oct 25, 2012 8:03 pm

BlueEars wrote:
Fallible wrote:...(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. :happy


I won't! :(
"The first principle is that you must not fool yourself - and you are the easiest person to fool." ~ Richard Feynman
User avatar
Fallible
 
Posts: 3532
Joined: 27 Nov 2009
Location: At home everywhere and nowhere.


Return to Investing - Theory, News & General

Who is online

Users browsing this forum: 10 percent, BillyG, cfs, Downtown, Exabot [Bot], froggy, gdetore, Google [Bot] and 64 guests