[Are there any exploitable inefficiencies?]

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lumberingc
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[Are there any exploitable inefficiencies?]

Post by lumberingc » Mon Dec 07, 2015 1:32 am

I had a conversation with a friend today who is fairly knowledgeable about investing. He has mostly passive investments but has a small taxable account for active trading (mostly for options)

He is well aware of the extensive academic research suggesting that active managers generally get beaten by indexes long term by the amount of their expenses. He also knows that typical amateur investor gets much less than the market return. However, he argues that there are certain inefficiencies in the market that can be exploited if you have the right knowledge about specific companies. It is impossible to beat professionals with math because they know the price to book ratios and other relevant data better than us. It is impossible to beat professionals with speed because they are constantly doing market research, can trade faster, and have automated trading. However, he argues, if you know a specific company or product better than finance professionals and the average investor, it would be relatively easy to get an advantage.

He happens to work as a software developer and has extensive knowledge about technology products. For instance, he previously short-sold pandora because he knew that superior products were being developed and adopted. He states that he knew about this before it could be reflected in the earnings of pandora, so he essentially was able to act earlier than the market. This was all based on publicly available information.

He uses options mainly because it allows one to trade on volatility rather than value.

He claims that he has as >20% annualized return since 2009. Admittedly, this is in an account that represents a small % of his overall holdings, and 20% isn't that much greater than overall equity market annualized return during that period.

Now don't get me wrong. I'm not about to start pursuing stock options or active management. It isn't worth my time, and I am not an expert in any particular sector. My friend's strategy is extremely high risk, and there is no doubt he will take occasional huge losses by investing a large % of his account in individual companies. However, perhaps we go too far in saying that active management or individual company speculation is a fools game. If you have the right knowledge, perhaps you can obtain the alluring "alpha." I still think it is impractical for the average investor to actively manage his own account, but we should not have such a condescending attitude. After all, my friend is making the market more efficient which helps all of us.

Do any of you make investments based on specific sector or company knowledge? Can you give an example, and what was the result? Both positive and negative experiences would be appreciated.

-lumberingc

By the way, if anyone can guess what my username is from, I will give you $20 through paypal

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Re: Have the Bogleheads gone too far?

Post by White Coat Investor » Mon Dec 07, 2015 1:44 am

Is he rich? If not, why not?

How will you know if he is lucky or good?
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Re: Have the Bogleheads gone too far?

Post by livesoft » Mon Dec 07, 2015 1:50 am

So I am not a diehard. Yes, I do market timing. Yes, I am rich.
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Re: Have the Bogleheads gone too far?

Post by Index Fan » Mon Dec 07, 2015 1:56 am

Those who can beat the market with ease, please post in real time how you do this, not after the fact. It is easy to be a genius after the fact.
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Re: Have the Bogleheads gone too far?

Post by triceratop » Mon Dec 07, 2015 1:59 am

Well, we know he is either lucky or good, for if he was unlucky or bad you wouldn't be hearing from him.

I don't trust my luck and know I have no particular skill in trading, so I'll let the active traders duel it out to find the "correct" price while I am positioned for long-term returns. Is that too far? If so, what's the reliable alternative accessible to retail investors?

P.S. I will guess your username is based on Great Central Lumber in St. Louis.
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Re: Have the Bogleheads gone too far?

Post by lack_ey » Mon Dec 07, 2015 2:10 am

If you have better information than the market, you should trade on it, sure*. But I would be very skeptical in a line of thought that supposes that markets aren't already reacting or are at least aware of the kinds of things that your friend saw with Pandora. If you think that you have an edge on the market based on knowing things that aren't yet reflected in earnings, that is probably wrong in general. It's not like the pros making most of the trades are only looking at financial metrics and statements.

You can maybe argue that the market isn't pricing in the information correctly or maybe not enough people know and are acting on it, or any number of things, but that kind of wording as originally stated makes me nervous.

In any case, it is very hard to distinguish any performance record from luck, especially with the time periods we usually look at, so whatever record your friend has so far isn't indicative of much either way, even if he were behind.

More broadly with the point of dismissing active investing and stock picking, I am less opposed than some others here, who seem to have more of a personal vendetta.


*though probably in a limited capacity. It depends. The likely quality of the information and the edge needs to be weighed against the loss of diversification when concentrating in any stocks or investment themes like value or anything else like that.
Last edited by lack_ey on Mon Dec 07, 2015 2:17 am, edited 1 time in total.

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Re: Have the Bogleheads gone too far?

Post by lumberingc » Mon Dec 07, 2015 2:14 am

EmergDoc wrote:Is he rich? If not, why not?

How will you know if he is lucky or good?
I would estimate he has a net worth of $500,000 at age 33, but he has a high income and got somewhat lucky in terms of appreciation of his home.

Being the skeptic that I am, I suspect that he is at least partly lucky. It would be difficult to know if he is truly extracting alpha from the market. I suppose that if he can beat the market by a margin of 5% annualized or more between now and retirement, I would consider the possibility that he's good.

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Re: Have the Bogleheads gone too far?

Post by lumberingc » Mon Dec 07, 2015 2:15 am

livesoft wrote:So I am not a diehard. Yes, I do market timing. Yes, I am rich.
haha

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Re: Have the Bogleheads gone too far?

Post by lumberingc » Mon Dec 07, 2015 2:16 am

Index Fan wrote:Those who can beat the market with ease, please post in real time how you do this, not after the fact. It is easy to be a genius after the fact.
Indeed. I will ask him to tip me off when he makes his next major play, and I will post it in this thread.

-L

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Re: Have the Bogleheads gone too far?

Post by lumberingc » Mon Dec 07, 2015 2:17 am

triceratop wrote:I don't trust my luck and know I have no particular skill in trading, so I'll let the active traders duel it out to find the "correct" price while I am positioned for long-term returns. Is that too far? If so, what's the reliable alternative accessible to retail investors?
I, of course, hold the same position. I don't think there is a reliable alternative available to retail investors.
P.S. I will guess your username is based on Great Central Lumber in St. Louis.
not even close :)

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Re: Have the Bogleheads gone too far?

Post by lumberingc » Mon Dec 07, 2015 2:22 am

lack_ey wrote:If you have better information than the market, you should trade on it, sure*. But I would be very skeptical in a line of thought that supposes that markets aren't already reacting or are at least aware of the kinds of things that your friend saw with Pandora. If you think that you have an edge on the market based on knowing things that aren't yet reflected in earnings, that is probably wrong in general. It's not like the pros making most of the trades are only looking at financial metrics and statements.
You make a good point. I have seen some incredibly well researched articles written by market analysts that take into account both financial metrics and subjective factors. My friend believes in understanding the technology and talking to people who use it. I suppose this would be very difficult to do if you don't have the right circle of friends.

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Re: Have the Bogleheads gone too far?

Post by Leeraar » Mon Dec 07, 2015 2:33 am

lumberingc wrote:
EmergDoc wrote:Is he rich? If not, why not?

How will you know if he is lucky or good?
I would estimate he has a net worth of $500,000 at age 33, but he has a high income and got somewhat lucky in terms of appreciation of his home.

Being the skeptic that I am, I suspect that he is at least partly lucky. It would be difficult to know if he is truly extracting alpha from the market. I suppose that if he can beat the market by a margin of 5% annualized or more between now and retirement, I would consider the possibility that he's good.
If he has $500,000 at age 33 and can beat the market by 5%, there is no reason for him to be working. Tell him to quit his job now.

Also tell him, his home does not count.

L.
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Re: Have the Bogleheads gone too far?

Post by lumberingc » Mon Dec 07, 2015 2:42 am

Leeraar wrote: If he has $500,000 at age 33 and can beat the market by 5%, there is no reason for him to be working. Tell him to quit his job now.

Also tell him, his home does not count.

L.
That's not quite right. Even if he sells his home and invests everything in 100% equities and beats the S&P 500 by 5%, he may only get a 7% real return if Jack Bogle is right. This would mean living off around $35,000/year.

He probably spends >$100,000/year currently.

-L

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Re: Have the Bogleheads gone too far?

Post by Leeraar » Mon Dec 07, 2015 2:58 am

Yes,

I probably should have said he can stop saving.

L.
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Re: Have the Bogleheads gone too far?

Post by JoMoney » Mon Dec 07, 2015 3:00 am

lumberingc wrote:... he argues, if you know a specific company or product better than finance professionals and the average investor, it would be relatively easy to get an advantage ...
I would agree that its certainly possible to have better information than the 'average investor', I would not agree that it's "easy". It would defacto require one to be "above average" among a group that are already in a position that they are betting their beliefs and haven't already lost their money to others that are in a better position than them.
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Re: Have the Bogleheads gone too far?

Post by 2comma » Mon Dec 07, 2015 3:05 am

I am a skeptic as well (in the scientific and critical thinking sense). I've known a few stock pickers and gamblers and they don't seem to keep good records or remember their losses but they do remember their wins! Sitting at home on the computer making money sounds like a good gig but I haven't found a way to do it and I suspect the winners are simply statistical outliers which we should expect. I was able to save over a long period of time and followed the Boglehead's simple investment methods to grow my wealth and it certainly worked for me. Color me skeptical.
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Re: Have the Bogleheads gone too far?

Post by White Coat Investor » Mon Dec 07, 2015 3:07 am

lumberingc wrote:
EmergDoc wrote:Is he rich? If not, why not?

How will you know if he is lucky or good?
I would estimate he has a net worth of $500,000 at age 33, but he has a high income and got somewhat lucky in terms of appreciation of his home.

Being the skeptic that I am, I suspect that he is at least partly lucky. It would be difficult to know if he is truly extracting alpha from the market. I suppose that if he can beat the market by a margin of 5% annualized or more between now and retirement, I would consider the possibility that he's good.
The reason I ask is I generally try to get my financial advice from people wealthier than me. Not that people with less wealth than me can't possibly know something important that I do not, and not that luck can't have something to do with it, but with something like this, well, the proof is in the pudding.

I generally recommend those who think they can beat the market keep careful track of their returns. Within a few years, they should know if they're good or just lucky.
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Re: Have the Bogleheads gone too far?

Post by Leeraar » Mon Dec 07, 2015 3:29 am

Before I retired, I had this fantasy that I would goose my returns by a few percent by actively managing my two-comma IRA. How hard can that be?

I have since concluded it is not possible, and have thrown it all in Vanguard's Life Strategy Moderate, VSMGX.

Even if you do not have inside information, there is the very plausible argument that you have industry knowledge that allows you to see the information in public data that others cannot see. That is another phantom, the "big data" argument. You just have to mine the data.

Now, I agree, many have made fortunes by front-running or by making models and exploiting tiny market inefficiencies. I am too stupid to do that.

One might also ask, why would your friend tell you of his methods? If his tactics become public, surely he is giving his advantage away?

L.
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Re: Have the Bogleheads gone too far?

Post by AlohaJoe » Mon Dec 07, 2015 3:38 am

lumberingc wrote:He happens to work as a software developer and has extensive knowledge about technology products. For instance, he previously short-sold pandora because he knew that superior products were being developed and adopted. He states that he knew about this before it could be reflected in the earnings of pandora, so he essentially was able to act earlier than the market. This was all based on publicly available information
What you describe here is exactly what stock analysts do. Why is he able to act earlier than the market?

In any case, pretending you have superior knowledge of consumer tech products—one of the most well-understood and researched areas possible—seems especially crazy. There are literally thousands of tech blogs out there. If someone told me they had extensive knowledge of, I dunno, heavy-earth excavation equipment, okay, maybe. That's a niche that is not widely reported on so maybe you can exploit market inefficiencies.

But consumer tech? If you google "Pandora" you'll find hundreds of articles from the past year from people arguing that it was doomed because superior products were being developed and adopted. You'll also find articles from people arguing that even with those superior products coming to market, Pandora offered a unique value proposition. e.g. http://www.fool.com/investing/general/2 ... worth.aspx

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Re: Have the Bogleheads gone too far?

Post by warner25 » Mon Dec 07, 2015 8:52 am

lumberingc wrote:...since 2009.
That says a lot. Many investors today have only experienced a market that goes up, with only a few very brief drops like August 2011 and September 2015. Everybody (well, almost everbody) has been a winner. Outperforming the indices on the way up is easy; just buy more volatile stocks (which you could do by just buying at random; see cap-weighting vs. equal-weighting). The problem is what happens to such a portfolio when indices are on the way down. And the evidence shows that anybody who claims that they'll see it coming and get out in time is just fooling themselves.

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Re: Have the Bogleheads gone too far?

Post by livesoft » Mon Dec 07, 2015 9:02 am

From March 2009 to March 2011, total us stock market index fund was up 44% a year. To March 2012 it was up 29% a year. To March 2013 it was 26% a year. To March 2014, it stayed on that pace of 26% per year since March 2009.

And from March 2009 to March 2015, the total US stock market index fund has performed at an annual average rate of about 23.5%.


The Vanguard small-cap value index fund (VBR) did average 27% per year over the 6 years from March 2009 to March 2015.

It is nice to start counting at the bottom in March 2009. :sharebeer It is possible then that a >20% annual return is an underperformance without knowing the exact dates and performance used. :)
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Re: Have the Bogleheads gone too far?

Post by TimeRunner » Mon Dec 07, 2015 9:16 am

lumberingc wrote:By the way, if anyone can guess what my username is from, I will give you $20 through paypal
The C language's multivariable, officially known as the "lumbering structure monster". (Please paypal http://boglecenter.net to support this forum.) :happy

+1 on livesoft's post.
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Re: Have the Bogleheads gone too far?

Post by Elysium » Mon Dec 07, 2015 9:44 am

All it takes is one really bad trade that goes against him and all the profts he built in above the market will be gone, pooof! just like that and he will be trailing the market, then the question becomes should he abandon his strategy or continue with the hope of making up for more. On top of all that he needs to accurtely measure and report truthfully, which in most cases people don't, they only talk so long as they are ahead, the day they lose they will go silent. Finally, anyone can do well when the markets are in a recovery and growth stage, which we were in since 2009 bottom. The problem is people who keep betting will not know when the next major bear market comes around, they will keep raising their bets riding the wave up and then .... it all comes down and they will have no time left to cover their trades.

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Re: Have the Bogleheads gone too far?

Post by Watty » Mon Dec 07, 2015 10:01 am

livesoft wrote:From March 2009 to March 2011, total us stock market index fund was up 44% a year. To March 2012 it was up 29% a year. To March 2013 it was 26% a year. To March 2014, it stayed on that pace of 26% per year since March 2009.

And from March 2009 to March 2015, the total US stock market index fund has performed at an annual average rate of about 23.5%.


The Vanguard small-cap value index fund (VBR) did average 27% per year over the 6 years from March 2009 to March 2015.

It is nice to start counting at the bottom in March 2009. :sharebeer It is possible then that a >20% annual return is an underperformance without knowing the exact dates and performance used. :)
+1 , but since he is using the options for leverage one of the funds that uses leverage might be a better comparison.

In the 1990's there was an investing group, The Beardstown Ladies, of mostly retired ladies that was "beating" the stock market and they wrote books that sold well and were on talk shows but then someone actually audited their returns and it turned out that they had made a big math error and they were actually well behind any comparable index fund.

https://en.wikipedia.org/wiki/Beardstown_Ladies

Like many people I tried dabbling in stocks when I was starting out and once of the biggest lessons I learned the hard way is that often a company with a great product is not a very good investment since everyone likes it and they can stumble.

With companies like Pandora there can be upcoming issues but they could have also been bought out at a premium while he had a short position.

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Re: Have the Bogleheads gone too far?

Post by nisiprius » Mon Dec 07, 2015 10:12 am

What exactly do you mean by "going too far?"

Do you mean that if I were to just put in a little bit of effort to make targeted, high-conviction investments based on a belief that I have specific sector or company knowledge, my chances of success would be near-certain, and my chances of losing important money would be negligible? Are you saying that by refusing to make such investments, I am actually imprudent? I am willfully impoverishing myself and my family? That I will have a miserable retirement when, if I would just man up and buy some stocks I could have a comfortable retirement?

If this were true, then not taking flyers in concentrated investments would be "going too far."

But I don't think it's true and I don't think I am.

P.S. Yes, I think people can make money if they really, truly, do have the equivalent of "legal inside information." Or, if they have illegal inside information and don't get caught. However, I don't think this is often the case. And I think the "inside information" you need has to do with accountant stuff, not software developer stuff. We are all consumers and we all think we have a keen sense of intrinsic product quality, and I know Peter Lynch said scored a ten-bagger on L'Eggs because his wife said it was really good hosiery, etc. but... that's ego.
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Re: Have the Bogleheads gone too far?

Post by arcticpineapplecorp. » Mon Dec 07, 2015 10:19 am

lumberingc wrote:I had a conversation with a friend today who is fairly knowledgeable about investing. He has mostly passive investments but has a small taxable account for active trading (mostly for options)

He is well aware of the extensive academic research suggesting that active managers generally get beaten by indexes long term by the amount of their expenses. He also knows that typical amateur investor gets much less than the market return. However, he argues that there are certain inefficiencies in the market that can be exploited if you have the right knowledge about specific companies. It is impossible to beat professionals with math because they know the price to book ratios and other relevant data better than us. It is impossible to beat professionals with speed because they are constantly doing market research, can trade faster, and have automated trading. However, he argues, if you know a specific company or product better than finance professionals and the average investor, it would be relatively easy to get an advantage.

He happens to work as a software developer and has extensive knowledge about technology products. For instance, he previously short-sold pandora because he knew that superior products were being developed and adopted. He states that he knew about this before it could be reflected in the earnings of pandora, so he essentially was able to act earlier than the market. This was all based on publicly available information.
Take the first two comments in red. Doesn't the first one contradict the second one? I.E., If it's impossible to beat market professionals because they're constantly doing research, then how is it that he can know a product better than the professionals who have done their research? Aren't the professionals and your friend then drawing the same conclusions? And if you/he admit the professionals can place a trade faster than he can, then aren't they acting on that same information (that he thought he was the only one to know) before he is? Isn't his so-called "advantage" arbitraged away?

Now take the next (third) part in red. He "knew". That was in the past. But the important question is, will he "know" again (and again, and again)? This is not a strategy if it's not repeatable. I'm sure he thinks it is, but if that's the case he should be running a hedge fund.

I agree with the previous comments of all posters. I think the Beardstown ladies reference (and the other about not reporting losses and only bragging about gains) is apt. You truly don't know how well he did. You only know how well he "said" he did. That could be a big difference. Unless you dig down and look at the numbers yourself (and he probably didn't either) there's really no way to know if he's telling the truth. I don't mean to say he's intentionally lying, but he could be fooling himself. People are very good at that. And most people think they're above average. Congratulate him on his success, ask him when he's planning on taking early retirement and leave it at that.
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Re: Have the Bogleheads gone too far?

Post by quantAndHold » Mon Dec 07, 2015 10:21 am

It's easy to do well in the market when the market is doing well. It's hard to do well when the market is doing poorly. Did your friend catch any of he FANG companies on the way up, or is he in the doldrums this year like everyone else.

As far as the general question, yes, it's possible for an individual investor to better than the market over the long term. My Dad turned a lower middle class civil servant's salary into a seven figure portfolio by taking concentrated positions in things that were mispriced. Most of his investments went nowhere, but the ones that did made him rich. He nailed MO, long bonds in 1981-2, gold mining stocks during that big run, and an oil well right before the big oil run up. That's all it really took. Four big ones. He worked at it, harder than at his day job. I think his biggest skill was actually in protecting his downside when he wasn't winning. He was mostly in cash in 2007-2008, for example.

And no, I don't believe that the typical individual investor is capable of that. I'm not capable of what he did. I have a different skillset, and different tools available to me. I'm more of a quant. I use my quant skills in parts of the market that the pros either can't or don't play in. I'm not beating my dad, but I'm doing fine.

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Re: Have the Bogleheads gone too far?

Post by JohnFiscal » Mon Dec 07, 2015 10:25 am

I have large positions in VPMAX (Prime Cap) and VGHAX (Health Care) and have maintained these ("stayed the course") for 10+ years. They have done so well that I am reluctant to move the money into my Vanguard Index funds. Maybe I should just "harvest" some of the growth, but not all.

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Re: Have the Bogleheads gone too far?

Post by sport » Mon Dec 07, 2015 10:34 am

lumberingc wrote: He has mostly passive investments but has a small taxable account for active trading (mostly for options)
This friend has little confidence in his ability to beat the market. That's why "he has mostly passive investments". Accordingly, this does not seem to be anything important.

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Re: Have the Bogleheads gone too far?

Post by ResearchMed » Mon Dec 07, 2015 10:36 am

Aircraft.

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Re: Have the Bogleheads gone too far?

Post by BTDT » Mon Dec 07, 2015 10:37 am

I still don't understand the title "have the Bogleheads gone too far'? " :oops:

I have yet to sign a 'Boglehead contract' that forbids me from dabbling in stocks? From the Wiki; "Bogleheads emphasize starting early, living below one's means, regular saving, broad diversification, and sticking to one's investment plan". If my investment plan included some dabbling in stocks so be it.
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Re: Have the Bogleheads gone too far?

Post by Valuethinker » Mon Dec 07, 2015 10:41 am

lumberingc wrote:
Leeraar wrote: If he has $500,000 at age 33 and can beat the market by 5%, there is no reason for him to be working. Tell him to quit his job now.

Also tell him, his home does not count.

L.
That's not quite right. Even if he sells his home and invests everything in 100% equities and beats the S&P 500 by 5%, he may only get a 7% real return if Jack Bogle is right. This would mean living off around $35,000/year.

He probably spends >$100,000/year currently.

-L
*Before* taxes.

Taxes kill you with active strategies over passive-- total indexation is one of the best ways to minimize taxable returns.

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Re: Have the Bogleheads gone too far?

Post by greg24 » Mon Dec 07, 2015 10:41 am

So, he is taking a small part of his portfolio, making "extremely high risk" bets, and has a return a little better than TSM (>20% compared to ~15% for TSM). He is probably goosing his overall returns by maybe a percent.

Sounds like a poor plan to me.

It is not impossible to outperform the market.

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Re: Have the Bogleheads gone too far?

Post by Valuethinker » Mon Dec 07, 2015 10:43 am

warner25 wrote:
lumberingc wrote:...since 2009.
That says a lot. Many investors today have only experienced a market that goes up, with only a few very brief drops like August 2011 and September 2015. Everybody (well, almost everbody) has been a winner. Outperforming the indices on the way up is easy; just buy more volatile stocks (which you could do by just buying at random; see cap-weighting vs. equal-weighting). The problem is what happens to such a portfolio when indices are on the way down. And the evidence shows that anybody who claims that they'll see it coming and get out in time is just fooling themselves.
Most notably Bernard Baruch, author of the line "when the elevator operator talks about the stocks he has bought, sell".

Turns out Baruch took heavy losses in the Crash of 1929.

Try though I did in 2000 and again in 2008 (early) I could not find an elevator operator to talk to stocks about ;-). So that warning signal looks dead ;-).

In 20 years, we are going to say the same thing about cab drivers ;-).

I already have to explain say "The Rockford Files" in the context of not having mobile phones, to my teenage nieces and nephews ;-).

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Re: Have the Bogleheads gone too far?

Post by siamond » Mon Dec 07, 2015 10:52 am

I shared the following anecdote at our last Metro-Boston Bogleheads meeting. For more than a decade, I was one of the lead strategists at a multi-B$ high-tech company. I knew all the key numbers of the company, became increasingly aware of key strategic initiatives to come (if only because I suggested some of those!) and had a thorough understanding of the underlying technology and applicable markets. I also developed a very broad knowledge of the industry we were in, adjacent markets and emerging players.

You would think that I was in a really good position to make savvy investments like the OP's friend. I did a few and this worked out really well to start with. So I did more (although cautiously, as I didn't fully trust this stock market picking thing). And I crashed and burned on the individual stock-picking (and did poorly on other sector-based decisions). As to the stock of my own company, I just could never be half-right about its trajectory to come. Oh, and our CEO and CFO made complete fools of themselves in this respect in multiple occasions during company meetings.

Was I a sucky strategist? Don't know, but I stayed there for quite a while in a very competing environment, so maybe I wasn't half stupid. Actually, what I noticed over time is that I usually got it reasonably right about a trend unfolding, but pretty much always wrong about the timing. This experience played no small role in making me become a Boglehead once I got the point (slowly and painfully)...

Bottomline: I'm sure the OP's friend is very knowledgeable and very skilled, but I'm ready to bet he's been quite lucky and that won't last...

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Livesoft and Market Timing

Post by EyeDee » Mon Dec 07, 2015 10:59 am

.
Lumberingc,

Why the "haha"? If you spend some time reading livesoft's posts carefully, I think you will find that he means what he posted.
lumberingc wrote:
livesoft wrote:So I am not a diehard. Yes, I do market timing. Yes, I am rich.
haha
Randy

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Re: Have the Bogleheads gone too far?

Post by miles monroe » Mon Dec 07, 2015 11:12 am

ResearchMed wrote:Aircraft.

RM
dang. beat me.

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Re: Have the Bogleheads gone too far?

Post by DaftInvestor » Mon Dec 07, 2015 11:14 am

There are many of us that have technology experience, background, and lots of technology and business information across many technology areas. Unfortunately a great product and a great technology does not guarantee a great outcome. Even following leaders of companies across tech companies that were successful once or twice does not mean they will be successful with their next endeavor. And don't think for a second that their aren't technology experts driving the decisions of the real large buyers (active fund managers and large endowments, etc.) that have access to more data and information than your friend. Your friend may have gotten lucky with his pandora short-sale - but his luck won't last forever. If it does - why is he making a meager software-development salary instead of working at a hedge-fund making real money? Finally - oftentimes - technology usually has nothing to do whether or not a company is successful. Also - Pandora could have bought better technology in an instant - or merged with another company that could have killed your friends short-sale overnight.

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Re: Have the Bogleheads gone too far?

Post by gundlached » Mon Dec 07, 2015 11:24 am

I tried to trade--I really did. I didn't lose money, but despite some big hits, I trailed the SP500 over a 5 year period.

These days, if I am feeling lucky, I check out actively managed products. But I keep no less than 85% in passive index funds at all times. My job is to make sure $ keeps going into the accounts. I don't want to worry about making bad decisions in the accounts themselves. If it ain't broke...

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Re: Have the Bogleheads gone too far?

Post by dmcdona » Mon Dec 07, 2015 11:51 am

Former Biotech Scientist here, who worked on Wall Street for a number of years as an Equity Analyst covering biotech stocks (but a passive investor with my personal funds, with only actively trading a small amount of my assets - <5% which I consider gambling and do it for fun due to my passion for the industry).

I will say with complete confidence that the Sell-Side analysts most likely definitely understand the upcoming technologies and the various market dynamics that you are discussing (likely much better than your friend). Buy-Side investors are much more in the game of managing risk with their investments. Your friend may understand the technologies quite well - but I would be concerned about their understanding of how to manage risk in the pricing of stocks.

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Re: Have the Bogleheads gone too far?

Post by Fallible » Mon Dec 07, 2015 1:36 pm

lumberingc wrote: ... However, perhaps we go too far in saying that active management or individual company speculation is a fools game. If you have the right knowledge, perhaps you can obtain the alluring "alpha." I still think it is impractical for the average investor to actively manage his own account, but we should not have such a condescending attitude. After all, my friend is making the market more efficient which helps all of us. ...
I also don't understand what you mean by "too far," unless it refers to the condescending attitude you mention. If it does, I don't see how anything in the BH philosophy could be construed as condescending. Can you explain how you think it is?
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Buying individual stocks?

Post by Taylor Larimore » Mon Dec 07, 2015 1:58 pm

lumberingc:

Whenever I am tempted to (again) buy individual stocks, I remember this quote from David Swensen, Chief Investment Officer of Yale University:
"There's no way that spending a few hours a week looking at individual securities is going to equip an investor to compete with the incredibly talented, highly qualified, extremely educated individuals who spend their entire professional careers trying to pick stocks."
Best wishes.
Taylor
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Re: Have the Bogleheads gone too far?

Post by Howard Donnelly » Mon Dec 07, 2015 2:00 pm

My guess: "Lumbering Cold"

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Re: Have the Bogleheads gone too far?

Post by saurabh » Mon Dec 07, 2015 2:17 pm

I am really skeptical of techies translating their superior knowledge of the technology into great investment returns. Back in the early 1980s would anyone have thought that MSFT would end up dominating PCs as much as they did? They hardly had the best product back then. The technology industry is replete with examples of companies with supposedly inferior products crushing their competition.

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Re: Have the Bogleheads gone too far?

Post by SmallSaver » Mon Dec 07, 2015 2:52 pm

lumberingc wrote: He claims that he has as >20% annualized return since 2009. Admittedly, this is in an account that represents a small % of his overall holdings, and 20% isn't that much greater than overall equity market annualized return during that period.
By his own admission, he has barely beat the index despite considerable additional effort and risk. If this is the best case scenario, is it worth it?

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Re: Have the Bogleheads gone too far?

Post by HomerJ » Mon Dec 07, 2015 3:00 pm

lumberingc wrote:He claims that he has as >20% annualized return since 2009. Admittedly, this is in an account that represents a small % of his overall holdings, and 20% isn't that much greater than overall equity market annualized return during that period.
VTSAX (Total Stock Market Index) has returned 21% a year since the bottom of 2009.

So what exactly is he bragging about?

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Re: Have the Bogleheads gone too far?

Post by David Jay » Mon Dec 07, 2015 3:14 pm

lumberingc wrote:I still think it is impractical for the average investor to actively manage his own account, but we should not have such a condescending attitude.
I don't think we are condescending, I think we just provide consistent advice for newcomers.

In our personal portfolios, I would not be surprised if a plurality of Bogleheads are doing at least one unique thing: some have real estate, others are doing CD ladders, still others have annuities (typically SPIA). A good number of us have a few individual stocks. Some hold actively managed funds.

None of these things prevent us from making the same recommendations as the WIKI (Table of Contents, 1-10): https://www.bogleheads.org/wiki/Boglehe ... philosophy
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Re: Have the Bogleheads gone too far?

Post by livesoft » Mon Dec 07, 2015 3:20 pm

HomerJ wrote:
lumberingc wrote:He claims that he has as >20% annualized return since 2009. Admittedly, this is in an account that represents a small % of his overall holdings, and 20% isn't that much greater than overall equity market annualized return during that period.
VTSAX (Total Stock Market Index) has returned 21% a year since the bottom of 2009.

So what exactly is he bragging about?
I didn't see any bragging. I read a report on a conversation that the OP had with a colleague. And there was this, too (which you quoted):
Admittedly, this is in an account that represents a small % of his overall holdings, and 20% isn't that much greater than overall equity market annualized return during that period.
Last edited by livesoft on Mon Dec 07, 2015 3:21 pm, edited 1 time in total.
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Re: Have the Bogleheads gone too far?

Post by pkcrafter » Mon Dec 07, 2015 3:21 pm

Yeah, I heard he same song a few days ago, but this person was retired, so didn't have your friends inside information. Let's not forget, average investors can get lucky and professionals can be unlucky. My response to these stories is zzzzzzzzzzzz.

I'm not going to recommend an average retail investor use some money to play, but I know some do it. My suggestion is to put your money into investment vehicles that give you the best long term chance of generating market returns. Use strategies that are low cost and lower chance of behavioral losses. Is that going too far?



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Re: Have the Bogleheads gone too far?

Post by ogd » Mon Dec 07, 2015 3:26 pm

lumberingc wrote:He happens to work as a software developer and has extensive knowledge about technology products. For instance, he previously short-sold pandora because he knew that superior products were being developed and adopted. He states that he knew about this before it could be reflected in the earnings of pandora, so he essentially was able to act earlier than the market. This was all based on publicly available information.
Your friend might know about Pandora and superior products etc, but he does not work full time on this. His market counterparts have people that are all of the above, but do work full time. There is no way he can compete, once you count the cost of personal time and the economies of scale.

The short was a very boneheaded decision that could have cost him badly; I did something just as boneheaded a couple of decades ago, based on similar rationale about "stuff I knew", and only narrowly avoided a big disaster. He doesn't know what he's doing.

Do not be swayed by this success story, which is really him getting lucky once. If you saw someone putting a large chunk of money on red in Vegas and winning, you wouldn't think it was a prudent decision either.

The reason we're a bit condescending (at least I am) towards such views ("knowing a market segment" as an amateur) is that they don't stand up to a bit of logic; they are myths that are detrimental to the portfolios of most people that act on them.

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