"Index Funds" by Mark Hebner -- A Gem

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"Index Funds" by Mark Hebner -- A Gem

Postby Taylor Larimore » Mon Jun 18, 2012 2:27 pm

Mark Hebner’s updated Index Funds is a beautiful little book full of colorful pictures, complex charts and multi-fund portfolios (not Boglehead simplicity). Mr. Hebner shares my belief in the value of advice from investment experts like himself. These are excerpts from his book:

“Unfortunately, investors pay little attention to academics and Nobel Laureates”

“Market timing or speculating on the next winning stock, fund manager or investment style are all akin to gambling.”

“I know of no one who has consistently outperformed the market by market timing.”

“All one knows about the market is that it will fluctuate” -- J.P Morgan

“A foolish attempt to beat the market and get rich quickly will make one’s broker rich and oneself much less so.”

“I dug into Burton Malkiel’s Random Walk down Wall Street and John Bogle’s Common Sense on Mutual funds among many others. What I discovered in the pages of those books was nothing short of stunning: Managers don’t beat markets.”

“With all of the time, effort and money spent trying to find the next hot stock or mutual fund manager, I would have been far better off had I simply bought, held and rebalanced a portfolio of index funds.”

“In 1999 I launched ifa.com, a free and comprehensive site that contains hundreds of charts, graphs, articles, podcasts, and videocasts to help investors learn about investments that can better enhance their own wealth rather than the wealth of their brokers.”

“The investor’s chief problem, and even his worst enemy, is likely to be himself.” – Benjamin Graham, famed investor

“The financial news media and Wall Street feed the fear, anxiety and other stressful emotions experienced by investors.”

“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” – Paul Samuelson, Nobel Laureate

“The road to financial perdition begins with a call to your broker who claims to be able to beat the markets.” – Daniel Solin, financial author

“Passive investors don’t try to pick stocks, times, managers, or styles. Instead they buy and hold globally diversified portfolios of passively managed funds.”

“Humans are born with what I’ve come to call ‘The prediction addiction.’’’

“Passive investors invest regardless of market conditions. – They know succumbing to gut instincts and emotions undermines long-term wealth accumulation.”

“Passive investors also engage in periodic rebalancing and are rewarded in the long term for their discipline.”

“The Quantitative Analysis of Investor Behavior study concluded: ‘As this report has shown for the 17th time in as many years, mutual fund investors consistently underperform the relevant index.’”

“When taxes and inflation are considered, I estimate that the average mutual fund lost -3.3% annualized return over the 4-year period (1/1/1998-12/31/2001) despite the fact that the average mutual fund reported annualized returns of +1.4%.”

“Properly measured, the average actively manage dollar must underperform the average passively managed dollar, net of costs.” -- William Sharpe, Nobel Laureate

“Eugene Fama concluded equity markets consistently incorporate all available information into their prices, and trends in capital markets cannot be identified in advance.”

“So who believes markets don’t work? Apparently it is only the North Koreans, the Cubans and active managers.” – Rex Sinquefield, author and researcher

“Bogle is widely recognized as a vocal champion of the individual investor, even earning him the moniker of ‘St. Jack.’”

“If there are 10,000 people looking at the stocks trying to pick winners, well, one in 10,000 is going to score, by chance alone, a great coup, and that’s all that’s going on. It’s a game, it’s a chance operation.” – Merton Miller, Nobel Laureate

“Terrance Odean, professor of finance at the University of California, Berkeley, analyzed the activity of 10,000 discount brokerage accounts. – On average, the stocks that investors bought underperformed the stocks they sold.”

“Odean joined Brad Barber to analyze 66,465 individual trading accounts. They found that from 1991 to 1996, investors who traded most earned annualized returns of 11.4%, while in the same period the market earned annualized returns of 17.9%.”

“People assume because certain managers have had good streaks that they are always going to be a step ahead of the market. It never works out that way.” – Russel Kinnel, Morningstar Director of Mutual Fund Research

“No big brokerage house would take out a full-page ad that says: ‘Don’t hire us to trade your portfolio-- just index and relax.’”

“The best way to lose a fortune is to follow Fortune (magazine).”

“So before you trade, ask yourself: 1) Who is on the other side of my trade? 2) Do I think I know more than they do? 3) Am I paying a fair price?”

“Wall Street’s favorite scam is pretending that luck is skill.” Ron Ross, financial author

“When funds go under, their records are stricken from databases, creating a survivorship bias. Out of the 44,888 mutual funds in CRSP’s database from 1962 to 2010, 17,565 of them went under—an astounding 39%.”

“When you buy a box of Corn Flakes, you expect corn flakes in your cereal bowl. – This is not the case with active managers Style Drifting”. Fidelity is an example of a mutual fund company repeatedly charged with changing its investing style.”

“For the 25 years from January 1, 1981 to December 31, 2005, $10,000 invested in the average managed equity fund would have grown to post-tax result of only $71,700. The same amount invested in the S&P 500 Index Fund would have grown to a much larger post-tax sum of $159.000.”

“Remember, it’s not just what you make, it’s what you keep that counts.”

“The annualized returns for the Morningstar categories are upwardly biased due to the impact of survivorship bias.”

“Stocks have grown in value more than bonds over the years and have been the best antidote for inflation.”

“You cannot expect high returns without taking risk. – To obtain greater equity returns, the trade-off is suffering significant short-term volatility, such as investors experienced in 2008.”

“Holding low-volatility bonds provides good diversification and will therefore level out a portfolio’s performance by dampening stock volatility and providing short-term liquidity.”

“Those who are ignorant of investment history are bound to repeat it.” – William Bernstein Ph.D., M.D.

“Investors can use long-term risk and return data for various indexes to construct an asset allocation based on history and the science of investing, not on speculation.”

“Rip Van Winkle would be the ideal stock market investor; Rip could invest in the market before his nap and when he woke up 20 years later, he’d be happy.” – Richard Thaler, Economist

“An individual’s total net worth can provide a cushion against short-term stock market volatility and the uncertainty of future cash needs.”

“Commodities, private equity and technology indexes have failed to historically maximize returns for risks taken.”

“When you buy a commodity, you’re not buying something that generates earnings and profit.”

“The most important question an investor can ask is, ‘What mix of indexes is best for me?”

“Index funds are the only rational alternative for almost all mutual fund investors.” Mark Hulbert, Newsletter Tracker

“Commission-based financial professionals are not fiduciaries. A fiduciary is obligated to act solely in the best interest of the client.”

“An investor is well served by incrementally reducing risk with age.”

“Tax loss harvesting is a way to reduce tax liability either due to rebalancing or capital gains distributions.”

“We should primarily respect the market’s uncanny ability to spontaneously price all known information and to willingly accept that the current price is the best estimate of a fair price.”

“A diversified portfolio which captures the right blend of market indexes reaps the benefit of carrying the systematic risk of the entire market while minimizing exposure to the unsystematic and concentrated risk associated with individual stocks and bonds, countries, industries, or sectors.”


Thank you, Mark Hebner

More Investment Gems.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: "Index Funds" by Mark Hebner -- A Gem

Postby Devil's Advocate » Mon Jun 18, 2012 4:15 pm

Great quotes Taylor.

Thanks!

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Re: "Index Funds" by Mark Hebner -- A Gem

Postby Fallible » Mon Jun 18, 2012 5:17 pm

Thanks, Taylor. I singled out this "gem" because I still remember being "stunned" when I first learned about John Bogle and low-cost indexing and Vanguard in the late '80s. Until then, I knew only what the family stockbroker said about investing - and we all know what that was! :annoyed

Here's the gem:

"I dug into Burton Malkiel’s Random Walk down Wall Street and John Bogle’s Common Sense on Mutual funds among many others. What I discovered in the pages of those books was nothing short of stunning: Managers don’t beat markets.”
"Common sense and a sense of humor are the same thing, moving at different speeds. A sense of humor is just common sense, dancing." -William James
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Re: "Index Funds" by Mark Hebner -- A Gem

Postby pkcrafter » Mon Jun 18, 2012 8:06 pm

Thanks Taylor. This is my favorite: “When you buy a box of Corn Flakes, you expect corn flakes in your cereal bowl."
This is one of the major reasons why I don't like/trust active funds. Many active investors actually look for a so-called go anywhere manager with the idea that the manager will somehow know when to move where. What happens is the major benefit of true diversification is lost, not to mention the additional loss when the manager guesses wrong.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
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Re: "Index Funds" by Mark Hebner -- A Gem

Postby Mrs.Feeley » Tue Jun 19, 2012 2:11 am

“When you buy a box of Corn Flakes, you expect corn flakes in your cereal bowl. – This is not the case with active managers Style Drifting”. Fidelity is an example of a mutual fund company repeatedly charged with changing its investing style.”

Add Janus to that fine example of fund-drifting. Years ago we purchased Janus Twenty, which was supposed to be a large-cap fund of 20 solid-earning S&P stocks. When we finally sold off the last of our holdings in that tumultuous fund it held 50-plus stocks of all stripes, 20 percent foreign, and according to the last prospectus we received dabbled in derivatives and "other unique opportunities we encounter." (Can you say "corner craps game"?)

According to its web site this is Janus 20's current focus:

"Seeking competitive advantages in a focused portfolio
• High-conviction portfolio
• Focus on transformational opportunities
• Seeks undervalued wide-moat businesses"

Someone tell me please, what is a "high-conviction portfolio"? A portfolio the manager believes in, in contrast to one that he does not believe in? And what pray tell is a "transformational opportunity"? Frankly that does not sound like something in which I much care to invest my retirement funds. Prison can be described as a transformational opportunity. So can poverty. And finally, what the heck is a "wide-moat business"? Sounds eerily like something heavily guarded on water.

If you fish further into the Janus 20 PDF files, searching for clues as to what the fund is actually investing in these days, you find this disclaimer: "Janus may exclude any portion of a fund's portfolio holdings from publication on this site when deemed in the best interest of the fund." Hmm....
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Re: "Index Funds" by Mark Hebner -- A Gem

Postby Fallible » Tue Jun 19, 2012 11:14 am

Mrs.Feeley wrote:“When you buy a box of Corn Flakes, you expect corn flakes in your cereal bowl. – This is not the case with active managers Style Drifting”. Fidelity is an example of a mutual fund company repeatedly charged with changing its investing style.”

Add Janus to that fine example of fund-drifting. Years ago we purchased Janus Twenty, which was supposed to be a large-cap fund of 20 solid-earning S&P stocks. When we finally sold off the last of our holdings in that tumultuous fund it held 50-plus stocks of all stripes, 20 percent foreign, and according to the last prospectus we received dabbled in derivatives and "other unique opportunities we encounter." (Can you say "corner craps game"?)

According to its web site this is Janus 20's current focus:

"Seeking competitive advantages in a focused portfolio
• High-conviction portfolio
• Focus on transformational opportunities
• Seeks undervalued wide-moat businesses"


Someone tell me please, what is a "high-conviction portfolio"? A portfolio the manager believes in, in contrast to one that he does not believe in? And what pray tell is a "transformational opportunity"? Frankly that does not sound like something in which I much care to invest my retirement funds. Prison can be described as a transformational opportunity. So can poverty. And finally, what the heck is a "wide-moat business"? Sounds eerily like something heavily guarded on water.

...


I like your healthy skepticism about these. Thing is, they don't mean anything worth knowing and probably aren't meant to be. They sound fancy and lots of people like fancy-sounding stuff. The only good thing about them: they're so silly they're good for a laugh. But they're also sad, because I know if I used these terms on some people, they'd be terribly impressed, think I knew a lot, and probably want to put money into it. If I told them about the wisdom of simple, low-cost indexing, I'd probably get bored looks.
"Common sense and a sense of humor are the same thing, moving at different speeds. A sense of humor is just common sense, dancing." -William James
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Re: "Index Funds" by Mark Hebner -- A Gem

Postby Groundhog » Tue Jun 19, 2012 12:43 pm

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Re: "Index Funds" by Mark Hebner -- A Gem

Postby baw703916 » Wed Jun 20, 2012 11:37 pm

High-conviction portfolio: Many of the fund managers have been found guilty of insider trading. :wink:
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