Bogleheads

[pkcrafter]

Jack Bogle's Pillar 7

The Vanguard Diehards forum has a well-earned reputation as one of the best investment resources on the internet because of its long history of attracting and helping newer, inexperienced investors. The seeds of success have grown from the fundamental teachings of our mentor, Jack Bogle. I feel our mission has been, and continues to be, to pass along the wisdom of Mr. Bogle.

In recent years, the forum has also attracted more knowledgeable investors who enjoy discussing sophisticated ways to reduce risk and/or increase investing returns. This is interesting and educational for knowledgeable and experienced investors. However, our advanced discussions are sometimes confusing and possibly even overwhelming for newbies and less-experienced investors. As a result of these more sophisticated conversations (about which experts often disagree), it is not unusual to see new investors with a few thousand dollars trying to start with complicated slice-and-dice portfolios.

I discussed this problem with Mel and Taylor with the idea that the best way to help new and less sophisticated investors would be to post a series of conversations that will bring us back to Jack Bogle's common sense, easy-to-understand ways to invest successfully. Mel and Taylor agreed and suggested I review each of Jack's "12 Pillars of Wisdom."

The 12 Pillars were originally published in 1994 as an Epilogue in Mr. Bogle's first book, Bogle on Mutual Funds. I will post a series of conversations featuring each of Mr. Bogle's "Twelve Pillars of Wisdom" for the benefit of our new and less-experienced investors. Replies are encouraged, but please keep on topic.

Pillar 7. The Powerful Magnetism of the Mean

In the world of investing, the mean is a powerful magnet that pulls financial market returns toward it, causing returns to deteriorate after they exceed historical norms by substantial margins and to improve after they fall short. Reversion to the mean is a manifestation of the immutable law of averages that prevails, sooner or later, in the financial jungle.
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Reference: Pillar 6

http://www.diehards.org/forum/....ght=pillar


Paul
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[EmergDoc]

Here's one we can quibble over. While I think this is a fair rule-of-thumb (that something that has been doing poorly will likely do better in the future) it is in no way an absolute truth. Just because something does poorly doesn't mean it will soon "revert to the mean." Japanese stocks in the 90s are a good example. Likewise, just because TIPS had a great few years after they were initially introduced, doesn't mean they're in for low returns. Perhaps the great few years were just due to people not understanding/trusting them, and now we'll have normal returns. Sometimes asset classes reach a new plateau, either on the way up or the way down. Just because tech stocks got crushed in 2000-2002 doesn't mean they've done well since then. Need I go on?

I frequently hear people repeat the advice that you want to buy stocks on a day that they go down. This makes the assumption that because they went down today they will likely go up tomorrow. I don't think anyone has ever shown that this is true. Momentum theory would argue they are more likely to continue to go down tomorrow. Random walk theory would argue they are just as likely to go down as up tomorrow.

I don't think reversion to the mean is an investing principle worthy of being one of the "pillars."
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1) Invest you must 2) Time is your friend 3) Impulse is your enemy
4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

[Barry Barnitz]

The Long Term Risks Of Global Markets by Phillipe Jorian

[dcd]

[unclemick]

January 28, 1998 Distinguished Lecture Series MIT in the archives of Bogle Financial Markets Research Center.

Long winded as Mr Bogle is wont to do - but high performance over time, value vs growth, high vs low priced, US vs foreign, etc.

Pssst - the Norwegian widow is known to bet on RTM in individual stocks!

heh heh heh - Dat's a no no for a 'pure' indexer.

[Taylor Larimore]

[unclemick]

[richard]

Unfortunately, the Jorian paper Barry linked earlier in the thread serves to refute Mr. Bogle's paper. The first two pages of Jorian are easy to read.