RTP, NC Chapter Meeting 2:30 PM Sat February 23, 2013

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RTP, NC Chapter Meeting 2:30 PM Sat February 23, 2013

Postby Steve Thorpe » Tue Nov 20, 2012 3:29 pm

Hello RTP Bogleheads,

Meeting 15 of the Research Triangle Park Bogleheads has been scheduled for 2:30-4:00 PM Saturday February 23, 2013.... see below for directions and a proposed agenda. Please let me know if you have additional items you'd like to discuss, as this is simply a starter agenda. If we don't have time at this meeting to cover all the topics, we'll save them for a future get-together.

Please let me know if you plan to join us so I can plan accordingly for meeting room needs. Hope to see you there!

Location:
Bull City Coworking
112 S. Duke St.
Durham, NC 27701
(My cell number is 919-724-9654 in case you need to call that afternoon)

Directions are here:
http://bullcitycoworking.com/location/

Google Map is here:
http://goo.gl/maps/i0dk


Proposed Agenda

1. Meeting starts promptly at 2:30 PM
The group will likely have light munchies available such as pretzels / chips / soda.

2. Welcome / Introductions

3. Insurance Adventures
Gayle and her husband had some adventures with the medical and insurance industry during the previous few months. Gayle would like to share what they learned with the group.

4. Special Guest Via Skype: Larry Swedroe (starting at 3:00 PM)
The main topic of this meeting is a guest appearance by renowned Boglehead author Larry Swedroe, who has kindly agreed to join us via Skype to answer a list of questions local chapter members have provided Larry in advance. I can promise you this will be a Boglehead highlight of early 2013 - so my RTP Boglehead friends, please do try to make it to this meeting.

5. Planning for our next meeting
• Proposed agenda items?
• Proposed book discussion: Allan S. Roth's "How a Second Grader Beats Wall Street"
• Any suggested special guests?
• Saturday May 18, 2013?
• Where?

6. Meeting adjourns at approximately 4:00 PM ... or perhaps later depending on how our Q&A with Larry goes


Just FYI, after most of the previous meetings I posted a short summary... in case these are of interest, please check towards the end of these topics:

Also FYI for those local 'heads not already on the list, I set up a Yahoo "rtpbogleheads" email list for our local chapter. Please consider joining the list to help our chapter communications (see below for joining details). From the group's description:

Welcome to the yahoo group of the Research Triangle Park, North Carolina Area Bogleheads Chapter. The Bogleheads are an investing and personal finance interest group inspired by the example of Jack Bogle, the founder of the Vanguard mutual fund company.

This list is primarily to foster easy communications among our local chapter members, in particular regarding reminders and logistics on upcoming meetings which we hope to hold approximately quarterly. All are encouraged to continue use the national forum (bogleheads.org) for most postings.

Please stick to the spirit of the national chapter's forum policies and etiquette: basically, keep to investing topics and stay away from politics. Further details on posting etiquette can be found here: http://www.bogleheads.org/forum/viewtopic.php?t=405

Initially this list will be configured to allow through all member postings in an un-moderated fashion, though adjustments may be made later as deemed appropriate by the list manager.

If you're interested to know of other local Boglehead chapters, please see the Google Map maintained by Mel Lindauer at http://www.lostsprings.com/diehards/chapters/

Thank you!

Steve Thorpe
RTP Area Bogleheads Chapter Organizer


rtpbogleheads Yahoo Group Addresses are:
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Subscribe:          rtpbogleheads-subscribe@yahoogroups.com
Post message:       rtpbogleheads@yahoogroups.com
Unsubscribe:        rtpbogleheads-unsubscribe@yahoogroups.com
List owner:         rtpbogleheads-owner@yahoogroups.com
Group home page:    http://groups.yahoo.com/group/rtpbogleheads


Please feel free to PM me if you have questions about yahoo group logistics.

Best wishes.
Steve Thorpe
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Re: RTP, NC Chapter Meeting 2:30 PM Sat February 23, 2013

Postby Steve Thorpe » Mon Feb 18, 2013 5:29 pm

Hello RTP Bogleheads,

Just edited the previous post to update our agenda for Saturday, and wanted to bump up this topic. Hope you can join us for a fun Q&A with Larry Swedroe!
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Re: RTP, NC Chapter Meeting 2:30 PM Sat February 23, 2013

Postby Steve Thorpe » Fri Feb 22, 2013 10:16 pm

Hello RTP Bogleheads,

Just bumping up this notice about tomorrow's meeting. Hope you can join us as we welcome our special guest via Skype: Larry Swedroe, author of 12 investment books and one of the most prolific posters on the Bogleheads forum!

Thanks,

Steve
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Re: RTP, NC Chapter Meeting 2:30 PM Sat February 23, 2013

Postby Steve Thorpe » Sun Feb 24, 2013 9:54 am

Hello Bogleheads,

Yesterday afternoon we had a wonderful meeting here in Durham, NC, with a number of firsts for our local chapter:

  • Our featured guest was renowned Boglehead Larry Swedroe, who was fabulous as you would expect.
  • The meeting lasted 2.5+ hours, longer than any other we'd had.
  • We went high-tech with a geographically distributed meeting enabled by Skype video (Larry joined us remotely from St. Louis, and Lee joined us remotely from Lancaster, VA)
  • Our sponsor was Bull City Coworking, an awesome shared workspace in a gorgeous historic building in the heart of Durham, NC. If you are seeking to get your work done in a quiet, convenient, affordable space with a great vibe then I urge you to check this place out.
  • Our attendance reached well into the double-digits. I believe we had around 20 or close to it, whereas in all of our prior 14 meetings we had at most 10.

I would like to thank everyone who made the meeting such a success:

  • Larry Swedroe kindly shared many words of wisdom for 2+ hours... it was a non-stop flood of information and I recorded 16 pages of handwritten notes!
  • Robert Petrusz graciously donated use of the Bull City Coworking facility.
  • Gayle Johnson shared lessons learned from her and her husband's recent experience with the insurance industry after an accident last fall. Gayle, after your helpful guidance I am definitely going to be reviewing my coverage limits!!! Another shout-out to Gayle: thanks for bringing along the chocolate chip cookies! :D
  • Travis made printouts of our "Larry questions" and distributed them to the group.
  • Dan electronically recorded some excellent notes which I will post shortly to this topic.
  • Everyone contributed to Larry's appreciation gift. The engraved clock plus postage is covered, plus I think there's enough left over to cover another case of PBRs for a future meeting!
    :sharebeer
  • Lee who joined our group without even leaving his home which is ~3 hours up the road. We are lucky to have you participate this way!! I hope at some point, we can meet you in person but this is certainly a great option for when that's not possible.
  • Our first-time attendees Henry, Lee, Reed, Jack (and others? Please excuse me if I am missing anyone). It is always a joy to meet new Bogleheads in-person, and I hope you can join us at a future get-together!

Our next meeting will likely be a more informal affair: a May visit to Durham's Fullsteam Brewery where we can enjoy Boglehead conversation over delicious locally produced micro-brews, on the picnic tables amidst the glorious springtime weather. Stay tuned for further details!

Will post Dan's notes shortly after making a few minor edits.

Thanks!
Last edited by Steve Thorpe on Mon Feb 25, 2013 11:07 am, edited 1 time in total.
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Re: RTP, NC Chapter Meeting 2:30 PM Sat February 23, 2013

Postby Steve Thorpe » Sun Feb 24, 2013 10:05 am

Interview with Larry Swedroe at the 2/23/13 RTP Bogleheads Meeting
Notes by Dan Griffin
Small edits by Steve Thorpe

Treating the unlikely as impossible: There is no way to estimate the likelihood of absolute catastrophes. You want to build a portfolio that protects you from these types of unforeseen events, but there are tradeoffs. Never treat the likely as certain.

Risk: Ability, Willingness, and Need to take
You might have the ability to take 100% equity risk, but that doesn’t mean you should.

Your working capital can be viewed as a bond that pays out over many future years.

You better have the need to take the risk, or you shouldn’t be taking it. Otherwise it is foolish.

First look at marginal utility of wealth. High marginal utility, you can take more risk. Once you have won the game (whether 1 million or whatever), you should take chips off the table. You have to think about the consequences. It doesn’t matter what you think is likely, you want to build protection against any possible occurrence.

Concentrate your equities and the buy the safest possible fixed income to get the highest sharpe ratio.

Risk is when you know (or estimate) the odds. Uncertainty is when you have no idea what the odds are. In “Fooled by Randomness” the author talks about envisioning what’s the worst that can happen. There’s no way to even estimate the odds of something like attacks and the like.

This is one of the reasons that the equity premium exists. Because in order to take risk where you can’t even estimate the odds, you need to be paid well for it. But for a lot of people, they meet their goals without taking those kinds of risk. But they likely need to reduce needs, work longer, etc. Probabilities of outcomes shouldn’t count for much. It is the consequences that should dominate your thinking.

If too many people start indexing, will it become a bad idea? In wise investing made simple, he has a chapter called “what if everyone indexes.” For example, we’re seeing a flood into high yield funds, that is pushing the price up and the yields down. The first sign of a bubble is when credit starts to be loosened. When the bond market is telling you one thing and the stock market tells you the other, listen to the bond market. The stock market is moved much more by emotion.

Junk bonds do well when the bond covenants are strong, but right now we are starting to see rather weak covenants.

The index trend is only moving at about 1% per year. Today 13-14% of individual money and 40% of inst. money is indexed. So it is still a fairly small percent. We have a long way to go before this becomes a problem. However, this may become a problem in the future. The acceleration into indexes is speeding up. Oddly enough, trading volumes have soared in the last decade even though indexing has grown.

What’s your opinion of enhanced index funds (DFA, RAFI, Wisdom Tree, etc.)?
DFA core funds is a brilliant strategy. If you think of a 4 components (large, large value, small, small value) with 25% in each. The problem with this is that you have to rebalance and trigger tax and have trading costs. It is more tax efficient to own 25/25/25/25 in one fund. You also have the same issue if a stock goes out of one category into another. The emerging market has to sell israel, and the developed market fund has to buy it. Much more efficient to hold in one fund.

One of the flaws in indexing is that they announce changes to indices and that active traders can trade ahead of the index funds and get an advantage. Vanguard is trying to correct this by going with MSCI.

What he doesn’t like about RAFI and Wisdom Tree is that they reconstitute once a year whereas the more efficient way to do it is to reconstitute every day.

A high dividend strategy is a very bad one. You may get lucky, but the long-term data shows underperformance.

Bonds:

Bill Bernstein has put thought into this. Bill thinks you are making a suckers bet by putting money in long-term bonds at this point. When the economy recovers, if the fed doesn’t remove the stimulus, we will get inflation. But the fed isn’t dumb, they are concerned about the risk. They are thinking of unwinding this sooner.

If you have a high equity allocation, you can have a longer duration bond portfolio because the volatility of the portfolio is going to be dominated by the equity side. Therefore you can earn the ‘term premium’ without affecting the portfolio risk. If you are going to go long, you shouldn’t own corporate bonds. There isn’t evidence that you get rewarded for that. Therefore, he wouldn’t own a total bond market fund ever. The duration of the TBM fund is only estimated -- assuming rates stay where they are. They can’t predict what will happen if rates go up. If no one moves because they don’t want to get a new mortgage, that extends the duration.

So the fix is to buy bonds without calls in them. TIPS, Govt. bonds, CDs. A barbell approach works perfectly well. Dampen the volatility of the portfolio. Low grade, junk, mortgage backs, etc. have no role in your portfolio. They do not add anything to a diversified portfolio. (Bank CDs are sometimes higher than treasuries and have low early redemption penalties.) You can go very simple on the bond side. David Swensen agrees with this.

If you have a high equity allocation, you can go longer. A good idea is 5-year maturity with duration a little lower. Pascal’s Wager.

A fixed rate mortgage also plays a role here. You can take more risk because the mortgage.

If you aren’t willing to write calls on your treasuries, when you own long bonds, you are being inconsistent.

Accept a lower expected return as cost of insurance. Likely 50-75 bps. If you own commodities and have a fixed rate mortgage (with both do well in inflation), you have less of a need for [insurance against unexpected inflation?].

Duration is irrelevant when it comes to tips, because it is a real return asset. You should only care about duration on a nominal return bond.

The higher the TIPS rate goes, the more you want to put them in. Then your need to take risk is lower because you are locking in a return on the tips. You’d be getting equity like returns. The other option is short-term high quality bonds. <3-year duration. You can also buy CDs like 2-3 years or 5 years with low redemption costs.

There are short-term TIPS funds. Or you can buy individual TIPS and save the fund expense.

Alternatives:
Commodities and real estate are his favorites. You don't buy commodities for higher returns, you buy it for portfolio insurance. Correlation is only a tendency -- unless the correlation is 1. The correlation jumps around from year to year.

A good example of correlation:
Assets A and B. Every year for 10 years they reverse order where A earns 12 and B earns 8. Then it flips. When one is above average, the other is below average....so they are negatively correlated. But over a longer period …..?????

If you look at the period we have data for, there is a tendency for commodities to do well when stocks do poorly. But sometimes they go down together.

There are 2 reasons bond/interest rates go up. Inflation or GDP is increasing. In that type of environment, the commodity prices are going up. There are 2 reasons interest rates fall. The economy is weak or inflation is going down. So ideally when bonds do well, commodities do poorly. There is not a year on record where bonds and commodities moved in the same direction. Therefore if you are going to own long term bonds, you need some commodities.

Peer-to-peer lending. You want your fixed income to be super safe. Take your risk on the equity side.

International bonds are fine as long as they are hedged for currency risk. You do get more diversification but you have more costs.

In a year like 2008, peer-to-peer would get crushed. How do you rebalance? He would stay away from all of these things. They are not needed. You can get all of the risk you want/need on equities.

Larry’s biggest investing mistake:
In the very early 1980's, Larry bought shares of a small bank expecting consolidation. Then there was fraud in the bank, and the bank went under. Had he just bought a regional bank fund, he would have done well. But he concentrated on one and lost a lot of money (10% of his net worth!). Just another lesson in putting too many eggs in one basket.
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Re: RTP, NC Chapter Meeting 2:30 PM Sat February 23, 2013

Postby IronHorse1928 » Sun Feb 24, 2013 8:43 pm

Steve, thanks for all the effort putting this excellent meeting together. Thanks to Larry Swedroe for sharing his insight and experience with all of us. A big thank you to Bull City Co-Working for hosting this meeting. It was a perfect venue. Regards to all. Tom
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Re: RTP, NC Chapter Meeting 2:30 PM Sat February 23, 2013

Postby Steve Thorpe » Sun Feb 24, 2013 11:22 pm

Hello RTP Bogleheads,

Our next local chapter meeting will be at noon on Saturday May 4. For the details please see:

http://www.bogleheads.org/forum/viewtopic.php?t=111728

Thanks!
Steve Thorpe
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