What evidence would prove the Boglehead mentality wrong?

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Johno
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Re: What evidence would prove the Boglehead mentality wrong?

Post by Johno » Wed Sep 17, 2014 10:54 am

Aptenodytes wrote:We don't have to scan the entire universe of beliefs and truisms that have some affinity with Bogleheads. I think the OP is asking a genuine question about the hard core. So my response would be that these two things would prove the approach wrong:

1) Alternatives to indexing can be identified which are reliably better. E.g. it is possible to identify in the current mutual fund market the next Magellan Fund, and also to identify the right time to shift out of this next-Magellan fund into the next-next-Magellan fund.

2) Alternatives to buy-hold-rebalance can be identified with are reliably better. E.g. even if one accepts the proposition that indexing works better than picking winners, it is possible to finally discover a market-timing scheme that works reliably.

I think these are the core -- the other stuff is far less central.
The math says *everyone* can't do either 1 or 2. It doesn't say nobody can do 1 or 2, even now. IOW the central core of the BH mentality is accepting that one isn't far enough above average in evaluating managers (in 1) or determining investment strategies (in 2, timing, stock picking, other) to beat index buy-hold, when investing in that index. The area for debate at the margin is how far above average must one be to succeed at other than buy-hold indexing, and how would one know (ie the additional risk factor of overestimating oneself). There's no axiom saying rebalancing to a fixed (or non-market determined) % allocation among asset classes works best. That's an empirical result subject to debate. Buy/hold v trade (including picking and choosing components) in an index is the only relevant thing subject to an ironclad axiom, and there's no way that axiom can change. But it's only true in the aggregate.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by berntson » Wed Sep 17, 2014 11:28 am

Johno wrote: The central core of the BH mentality is accepting that one isn't far enough above average in evaluating managers (in 1) or determining investment strategies (in 2, timing, stock picking, other) to beat index buy-hold, when investing in that index.
+1 My Bogleheadish views are based on the claim that I'm an average investor. If I got strong evidence that I was the next Warren Buffett, I would dump my index funds and start buying individual companies. But so far, it looks like I'm just me. :D

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Re: What evidence would prove the Boglehead mentality wrong?

Post by Gropes & Ray » Wed Sep 17, 2014 12:06 pm

If index funds beat about 65% of active funds after costs, you're not daring to be average. You're guaranteeing that you're in the 66th percentile of performance, v.s. a one in three chance of doing better than that. Consistently outperforming 65% of funds will put you way ahead of most investors, if being above average is your goal.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by Alex Frakt » Wed Sep 17, 2014 12:11 pm

postingname wrote:The real issue (to me) is more in what kind of investor you want to be. At age 26, you probably haven't had a lot of real experience in the markets and so don't know whether or not you're skilled or capable of being skilled. I think the 80/20 rule probably applies here. 80% of investors are average or lousy, but there is that 20% that beats the market and is more adaptable to changing market conditions. If you lock yourself into a Boglehead approach, you may never know if you're one of the 20%.

Locking yourself into the Boglehead approach also means that you generally "aren't allowed" to follow the markets. That can be intellectually stifling since finance and markets are some of the most interesting things on earth. But here, you will get the advice not to read the news, and you will only be "allowed" to read it when it's packaged into a book and you can then report it in the "Books You Are Currently Reading Thread", because by that time, the news has turned into "history". ;)

As you can see, I personally am not sold on the Boglehead approach because (among other things) I think it stifles human initiative, with the mantra seemingly being "Dare to be average!" But it's hard to argue with the fact that a lot of people seemingly do resonate with this philosophy. You'll have to go outside this board to round out your knowledge and get different opinions.
Your definition of the boglehead approach is unnecessarily narrow. Jack Bogle doesn't invest the way you believe bogleheads must invest. Neither does Larry Swedroe, nor Bill Bernstein, nor Rick Ferri, nor (FWIW) me, nor most of the people I've talked to at the annual and chapter Bogleheads meetings.

I will agree that the bogleheads approach eschews individual stock picking, day trading, and paying someone else a lot of money to manage your assets. But that still leaves the thoughtful investor a large variety of ways to deviate from a total market portfolio and still call him or herself a boglehead. This includes tilting, non-total market asset class allocations, cheap non-indexed funds (like Wellington) and even tactical asset allocation changes in response to market conditions.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by HomerJ » Wed Sep 17, 2014 12:45 pm

bpp wrote:To me, the "Boglehead mentality" says nothing more, or less, than "diversify, and keep costs down." If one does this, one will efficiently get what the markets have to offer. It says nothing about whether what the markets offer will prove to be satisfactory for one's purposes or not.
I agree, there is no real Boglehead "strategy". It's an anti-strategy. We accept that nobody knows nothing... Including us.

We invest in broad low-cost index funds, and take whatever the market gives us. We don't try to beat the market, we take what it gives us...

We live well below our means, saving a lot, NOT counting on large returns from the stock market.

I diversify across domestic stocks, international stocks, and bonds... I am conservative, and plan my AA around the fact the stock market may crash tomorrow and stay down for decades (I'm 50/50 stocks/bonds).

I'm not sure what could happen that would invalidate living below your means and investing in low-cost broad index funds.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by HomerJ » Wed Sep 17, 2014 12:50 pm

postingname wrote:"Dare to be average!"
When "Average" beats 70% of people trying to pick stocks or using active funds (after expenses), "Average" doesn't look too bad. :)

When you try to out-perform the market, there's a chance (a large chance) you will under-perform the market.

Thousands and thousands of smart people with high IQs and PhDs have tried to beat the market and failed. Postingname may indeed be smarter than all those people...

Me? I'll take the market return (which has been pretty good historically) with basically zero work over doing a bunch of work and research trying to beat the market (and likely failing)

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Re: What evidence would prove the Boglehead mentality wrong?

Post by ogd » Wed Sep 17, 2014 1:06 pm

What would change my mind: sound statistical proof that a manager's outperformance after fees is predictive of future outperformance after fees.

Of course, it's hard to imagine that if this becomes the norm, good managers won't be swamped with new assets and thereafter fight among themselves destroying outperformance (by lifting the skill of the average dollar). Perhaps if it becomes fashionable for managers to retire relatively quickly after a good career, which is one of the reasons I said managers not funds; but in that case there'd be survivorship bias and tax effects (when switching managers) to add to the statistical burden.

I know the OP's question was general and it concerned market timing and asset choices as well, but I think my argument covers that: if managers (with enough freedom) can't make such choices, then neither can you.

I focused on past performance rather than any other conceivable ways of picking a good manager, because those "other ways" would have an obvious credibility problem if they hadn't worked in the past.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by technovelist » Wed Sep 17, 2014 1:14 pm

I can't see any possibility of falsifying the basic idea that it is unreasonable to expect to be able to pick managers who will outperform after fees, as such managers will have tremendous incentive to raise their fees until they no longer outperform after fees.

I certainly can imagine market environments that will make the expectation of real gains after inflation for any particular asset allocation unreasonable. But even in that case, living below your means and saving a significant part of your income is likely to do better than not doing those things, so long as the world doesn't end (financially speaking, at least).

And of course if you bought end-of-the-world insurance, and the world did end, how would you collect? :confused
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Re: What evidence would prove the Boglehead mentality wrong?

Post by Blister » Wed Sep 17, 2014 2:28 pm

The list of Boglehead precepts will remain sound long term. I think many people, myself included, often wonder whether active investing could not outperform passive investing. Someone may develop a metric that would work to outperform indexes over the long term. As long as they did not make their formula known they may make a killing. But I am sure by the time I or the average investor learned of it it would no longer be useful. There is always this reversion to the mean.
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Re: What evidence would prove the Boglehead mentality wrong?

Post by postingname » Wed Sep 17, 2014 7:33 pm

Alex Frakt wrote:
I will agree that the bogleheads approach eschews individual stock picking, day trading, and paying someone else a lot of money to manage your assets. But that still leaves the thoughtful investor a large variety of ways to deviate from a total market portfolio and still call him or herself a boglehead. This includes tilting, non-total market asset class allocations, cheap non-indexed funds (like Wellington) and even tactical asset allocation changes in response to market conditions.
Alex, I guess I just get tired of the one-liner posts that say "Stay the course" or "Tune out the news". Those kind of posts tend to overshadow the more thoughtful posts that do point to more variety in Boglehead investing. So I guess I was just railing against the stereotype, not the more thoughtful variations. Point taken.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by Phineas J. Whoopee » Wed Sep 17, 2014 7:53 pm

postingname wrote:...
Alex, I guess I just get tired of the one-liner posts that say "Stay the course" or "Tune out the news". Those kind of posts tend to overshadow the more thoughtful posts that do point to more variety in Boglehead investing. So I guess I was just railing against the stereotype, not the more thoughtful variations. Point taken.
I'm not Alex, but I'm happy to read what you wrote. With respect to one-liners, it simply isn't possible for everybody to write long, subtly-reasoned essays in response to every question. Short replies which refer to well-established principles are par for the course in the outfield of the Internet forum gridiron.
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Re: What evidence would prove the Boglehead mentality wrong?

Post by heyyou » Thu Sep 18, 2014 1:40 pm

The OP is wise to question the mantra, but that questioning includes looking for certainty in the future, of which there isn't any. If Bogleheadism is imperfect at some later time, so what? Paraphrasing Churchill, it will be better than everything else that we have tried until then. That leaves room for improvement with only the risk of it being eclipsed later. It won't fail in some spectacular way at one point, it will just slowly become less effective than the new way. The OP may have to adapt some day, but that is not risk of failure.

Think of the time spent looking for optimal allocations, when the best way to boost assets is to just save more. My point is BHism is good enough to accomplish the job of retirement saving, with the rest of the necessary effort on each saver.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by docneil88 » Thu Sep 18, 2014 1:55 pm

Lysander wrote:Index funds rely on the price discovery performed by active traders. If no one actively traded and if everyone stopped doing research and due diligence, the index would zombify. At that point active investing would outperform index investing.

Active investors and passive investors are symbiotic. If the pendulum swings too far in one direction, it makes sense to switch sides.
Hi Lysander, Swinging "too far" in the direction of passive investing is very unlikely to happen, because so many people think they are smart enough to outperform (or to hire someone to outperform) the average investor, even the average passive investor. As a group, they're wrong, but, as individuals, some will be right, even if only by chance.

But if the pendulum really were to swing "too far" in the direction of passive investor participation, that would not make switching camps to the active side much more appealing. In that scenario, the dispersion of returns among active investors would be wider, so the chance for wide outperformance on the upside would go up, however, the chance for wide performance on the downside would also go up. What would not change is that "Properly measured, the average actively managed dollar must underperform the average passively managed dollar, net of costs" (this is the conclusion of William Sharpe's argument in "The Arithmetic of Active Investing" at http://www.stanford.edu/~wfsharpe/art/active/active.htm ). And that is because the costs for the average actively managed dollar are higher, even in the pendulum-swing scenario above. Best, Neil

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Re: What evidence would prove the Boglehead mentality wrong?

Post by Lysander » Thu Sep 18, 2014 3:42 pm

And that is because the costs for the average actively managed dollar are higher, even in the pendulum-swing scenario above.
Is this true? If an index is a zombie index, and it's obvious to Joe-on-the-street, Joe doesn't need to do much research, or even rumination, to figure out how to invest more wisely. The situation I'm proposing is one where valuable information about stocks is so cheap, because everyone is being a doofus and blindly investing in index funds without paying attention to returns, that such information is accessible to the casual investor, should he or she seek it out. Unlikely, yes, given human nature, but mass psychology has produced worse outcomes throughout history.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by technovelist » Thu Sep 18, 2014 3:53 pm

Lysander wrote:
And that is because the costs for the average actively managed dollar are higher, even in the pendulum-swing scenario above.
Is this true? If an index is a zombie index, and it's obvious to Joe-on-the-street, Joe doesn't need to do much research, or even rumination, to figure out how to invest more wisely. The situation I'm proposing is one where valuable information about stocks is so cheap, because everyone is being a doofus and blindly investing in index funds without paying attention to returns, that such information is accessible to the casual investor, should he or she seek it out. Unlikely, yes, given human nature, but mass psychology has produced worse outcomes throughout history.
I think given the amount of computing horsepower available today, as well as the returns for even an additional few basis points of return on gigantic amounts of money, that it wouldn't take many investors to gobble up such bargains if they were to appear.
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Re: What evidence would prove the Boglehead mentality wrong?

Post by docneil88 » Thu Sep 18, 2014 3:57 pm

Lysander wrote:
And that is because the costs for the average actively managed dollar are higher, even in the pendulum-swing scenario above.
Is this true? If an index is a zombie index, and it's obvious to Joe-on-the-street, Joe doesn't need to do much research, or even rumination, to figure out how to invest more wisely. The situation I'm proposing is one where valuable information about stocks is so cheap, because everyone is being a doofus and blindly investing in index funds without paying attention to returns, that such information is accessible to the casual investor, should he or she seek it out. Unlikely, yes, given human nature, but mass psychology has produced worse outcomes throughout history.
Hi Lysander, The average passively invested dollar will always require less research than the average actively invested dollar. Research costs time and money. Also, the average passively invested dollar will always require less turnover and thus less trading costs and less tax costs than the average actively managed dollar. Lastly, in the world where almost everyone is a passive investor, index funds would have such huge economies of scale that the average expense ratio of such funds would be significantly lower than it is now.

On the other hand, I grant the point that crowd psychology often does not lead to optimal outcomes. In the world where almost all dollars are passively invested, capital would be allocated less efficiently than it is now, which could have wide and deep societal implications. That is consistent with all my points in this post and my prior post upthread. Best, Neil

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Re: What evidence would prove the Boglehead mentality wrong?

Post by Lysander » Thu Sep 18, 2014 4:11 pm

Doing nothing is not always cheaper than doing something. If you have a leaky roof, and don't fix it to save money, eventually you will have a rotted frame.

Doing no research can lead one to invest in companies that lose money. In this case that is worse than doing research, realizing the company loses money, and staying in cash.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by JoMoney » Thu Sep 18, 2014 4:18 pm

Lysander wrote:Doing nothing is not always cheaper than doing something. If you have a leaky roof, and don't fix it to save money, eventually you will have a rotted frame.

Doing no research can lead one to invest in companies that lose money. In this case that is worse than doing research, realizing the company loses money, and staying in cash.
If you knew which companies or groups were likely to "lose" you could sell them short or buy puts against them.
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Re: What evidence would prove the Boglehead mentality wrong?

Post by Phineas J. Whoopee » Thu Sep 18, 2014 4:27 pm

Lysander wrote:Doing nothing is not always cheaper than doing something. If you have a leaky roof, and don't fix it to save money, eventually you will have a rotted frame.
The analogy you make is true, in that I would never suggest it's better not to fix a leaky roof on a building one wishes to preserve, but I'm not sure I see how it applies to the question at hand. A roof that leaks now, and is causing frame rot now, can reliably be expected to continue doing so in the future.
Lysander wrote:Doing no research can lead one to invest in companies that lose money. In this case that is worse than doing research, realizing the company loses money, and staying in cash.
"Lose" should be lost, "loses" should be will lose. The first is knowable, the second isn't.

Misapplying verb tenses can be hazardous to one's wealth.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by Lysander » Thu Sep 18, 2014 4:35 pm

Misapplying verb tenses can be hazardous to one's wealth.
A publicly traded corporation is not Schrodinger's cat.

If the stock market lost value for 1 year straight, would you throw in the towel? 5? 10? At some point everyone would, because no one can wait forever for stocks to recover.

Index funds make sense because of the cost of novel information, not the inability to predict the future.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by BradMajors » Thu Sep 18, 2014 4:59 pm

I don't believe the typical Boglehead would ever accept any evidence that they are wrong. They have already made up their minds.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by docneil88 » Thu Sep 18, 2014 5:02 pm

Lysander wrote:Doing nothing is not always cheaper than doing something. If you have a leaky roof, and don't fix it to save money, eventually you will have a rotted frame.

Doing no research can lead one to invest in companies that lose money. In this case that is worse than doing research, realizing the company loses money, and staying in cash.
Index funds usually have many money losing companies in their portfolio, yet the average passively managed dollar continues to beat the average actively managed dollar over any time period due to lower costs.

Index fund managers still do research, e.g. research required to keep up with changes in the index they track. Some index fund managers research ways to minimize trading costs and market impact costs. Some research ways to maximize revenue from lending securities to short sellers. Some do research to help decide whether to change the index they track, as Vanguard has done on occasion; there are many criteria for what makes an index worth tracking by an index fund.
Lysander wrote:...the cost of novel information...
Like the 11-year prison sentence that Raj Rajaratnam got.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by Johno » Thu Sep 18, 2014 5:12 pm

Lysander wrote:
And that is because the costs for the average actively managed dollar are higher, even in the pendulum-swing scenario above.
Is this true? If an index is a zombie index, and it's obvious to Joe-on-the-street, Joe doesn't need to do much research, or even rumination, to figure out how to invest more wisely. The situation I'm proposing is one where valuable information about stocks is so cheap, because everyone is being a doofus and blindly investing in index funds without paying attention to returns, that such information is accessible to the casual investor, should he or she seek it out. Unlikely, yes, given human nature, but mass psychology has produced worse outcomes throughout history.
Again the axiom is that all invested $'s in aggregate have to get the index return gross, and index return minus expenses net. Actively invested $'s can't take advantage of $'s which just match the index. They have to take advantage of other actively managed $'s which under perform the index*.

The question therefore with your scenario is: who is the active management loser if 'Average Joe' is the winner? It can't be the passive $'s, by definition.

For BH-ism to become 'generally invalid', there has to be a way to identify a large class of actively managed patsies (on a *gross* basis, ignoring for the moment their costs), and a better active management alternative (*net*) which reasonably well informed investors (say like most BH's) can recognize easily but which the patsies can't easily recognize or otherwise access. It's hard to see how a continued evolution toward easier access to information would ever create such a situation. It arguably was the situation decades ago to some degree: the patsies were individual stock investors advised by poorly qualified glad-hander full service brokers, the more scientific and scale efficient active management alternative was mutual funds. But that was a function of a generally lower state of information (in financial theory state-of-art, transmission of such knowledge, transmission of market information itself, higher transactions costs, etc).

But 'generally invalid' also comes back to some cut off point. BH mentality is as I said an acceptance that one isn't far enough above average as investor to be consistently among the winning active $'s. So where is this cutoff? A post above suggested in one sentence it's 70%-tile, but a couple of sentences later '1000's and 1000's of quant PhD's who can't beat the market v one poster who thinks they can' implied it's above 99%-tile. BH's have varying (and IMHO sometimes exaggerated) opinions of how small a % of investors can beat the market consistently, but generally admit it's non zero. And OTOH it's mathematically impossible for everyone to beat the market. So, 'proving BH mentality wrong' could only ever be a matter of limited degree, moving the % of investors who can consistently beat from already >0% to another level which still must be <100%

*the real world limit on the axiom is that the index changes composition over time. In that context active $'s can feed off passive $'s if they can predict future changes in the index. IOW it's a short cut to assume index=market, a non negligible short cut in some small cap indices for example, but basically negligible distinction wrt 'total market' index.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by docneil88 » Thu Sep 18, 2014 5:30 pm

BradMajors wrote:I don't believe the typical Boglehead would ever accept any evidence that they are wrong. They have already made up their minds.
Hi BradMajors, The paper I referenced above, "The Arithmetic of Active Investing," presents a rather convincing argument to support the claim [believed by practically all Bogleheads] that "Properly measured, the average actively managed dollar must underperform the average passively managed dollar, net of costs." The math in his argument does seem to me to be irrefutable. The only non-mathematical premise I know of in his argument is that the costs for the average actively managed dollar must be higher than for the average passively managed dollar. If you have any reasons to doubt that claim, please share them.

I consider myself a Boglehead. In theory, I believe that low cost, passive investing is the best method, yet, in practice, I can't resist the urge to occasionally try to beat the market with an active approach. The result is a cornucopia of both active and passive investments. Best, Neil

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Re: What evidence would prove the Boglehead mentality wrong?

Post by hoops777 » Thu Sep 18, 2014 6:41 pm

Bogleheads is like choosing to eat a healthy balanced diet,walk everyday and not smoke.It is sensible but not innovative or cutting edge.It is best for the vast majority of people.It is boring but gives most people the best chance for success.
K.I.S.S........so easy to say so difficult to do.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by Phineas J. Whoopee » Thu Sep 18, 2014 7:01 pm

On the off chance any of this is serious (not the thread, just this little sub-exchange):
Lysander wrote:
Misapplying verb tenses can be hazardous to one's wealth.
A publicly traded corporation is not Schrodinger's cat.
Another analogy. I agree corporations and quantum fields share few characteristics. What of it?
Lysander wrote:If the stock market lost value for 1 year straight, would you throw in the towel? 5? 10? At some point everyone would, because no one can wait forever for stocks to recover.
For "everyone" to the economy would have to collapse. That you don't just tell us the future results means you can't predict the future, which is why I think this isn't serious in light of:
Lysander wrote:Index funds make sense because of the cost of novel information, not the inability to predict the future.
Rebut and I'll concede, respond, or say I've made every point I have. I won't bite at yet another analogy.

Nobody, by the way, has argued at all with my prior post in this thread, in which I examined exactly what evidence, or conditions, there could be to falsify the Bogleheads "mentality" as the subject line calls it. I'm looking at you, too, BradMajors.

PJW

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Re: What evidence would prove the Boglehead mentality wrong?

Post by telemark » Thu Sep 18, 2014 7:20 pm

postingname wrote:Alex, I guess I just get tired of the one-liner posts that say "Stay the course" or "Tune out the news". Those kind of posts tend to overshadow the more thoughtful posts that do point to more variety in Boglehead investing. So I guess I was just railing against the stereotype, not the more thoughtful variations. Point taken.
Those tend to be in response to questions that attempt to time the market, usually starting with something like "Experts say something is about to happen" or perhaps "In the current something-prone environment." Bogleheads strongly believe that no one can forecast the market in an actionably useful way, and that acting on predictions is likely to be an expensive mistake. Evidence to falsify that would be someone who can reliably predict market moves, but Meredith Whitney doesn't count.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by trueblueky » Thu Sep 18, 2014 9:38 pm

Rebalance.
Diversify.


These BH tenets succeed because sometimes one asset class has a better return, but at other times worse. If stocks always outperformed bonds, (or international stocks always beat US), the person who rebalanced would do worse than the person who stayed 100% in the outperforming asset.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by deikel » Fri Sep 19, 2014 1:42 pm

toto238 wrote:
toto238 wrote:The basic laws of mathematics would have to be proven incorrect?
There is a non-zero possibility of this occurring though. It's not that 1+1 would cease to equal 2. But that we may discover that the mathematical construct of "1 + 1" simply doesn't reflect anything in reality as nothing is exactly 1. 1 is a myth that we created based off of our limited understanding of how the world works.
I thought the very basic (and only real thing) in mathematic is actually counting objects...and hence 1 being the closest thing to the truth anyone will ever get...
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Re: What evidence would prove the Boglehead mentality wrong?

Post by Day9 » Fri Sep 19, 2014 1:51 pm

deikel wrote:
toto238 wrote:
toto238 wrote:The basic laws of mathematics would have to be proven incorrect?
There is a non-zero possibility of this occurring though. It's not that 1+1 would cease to equal 2. But that we may discover that the mathematical construct of "1 + 1" simply doesn't reflect anything in reality as nothing is exactly 1. 1 is a myth that we created based off of our limited understanding of how the world works.
I thought the very basic (and only real thing) in mathematic is actually counting objects...and hence 1 being the closest thing to the truth anyone will ever get...
Bertrand Russell and Alfred North Whitehead derived arithmetic and thus all of mathematics from basic logical axioms in the landmark work Principia Mathematica. The fundamental building blocks are 0, the successor function (+1), and a suite of logical axioms like A=A, etc.

It has been definitely proven by Godel that in any formal system that is capable of expressing natural numbers, you can construct a formal sentence that states: "There does not exist an ordered list of formal statements such that each statement is a basic axiom or immediately follows from previous statements in this list and the final statement is this statement". Yes it is self-referential.

This means that there are truths that cannot be proven.
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Re: What evidence would prove the Boglehead mentality wrong?

Post by deikel » Fri Sep 19, 2014 2:05 pm

You would have to define what the 'Boglehead mentality' actually is...because different people have a different opnion of what that would be.

Some say non-managed index funds are the core bogle, others add diversification in stock and bond (or more), others add rebalancing as essential ect. ect.

Underlying all of this is the idea that the market will have increased over a long time period...if that were ever not to happen for say 30yrs in a row - than voila - Boglehead would have failed (with all the rest of them). Unlikely ? The lost decade in Japan was not quite that long, but certainly scary enough...
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Re: What evidence would prove the Boglehead mentality wrong?

Post by technovelist » Fri Sep 19, 2014 2:05 pm

Day9 wrote:
deikel wrote:
toto238 wrote:
toto238 wrote:The basic laws of mathematics would have to be proven incorrect?
There is a non-zero possibility of this occurring though. It's not that 1+1 would cease to equal 2. But that we may discover that the mathematical construct of "1 + 1" simply doesn't reflect anything in reality as nothing is exactly 1. 1 is a myth that we created based off of our limited understanding of how the world works.
I thought the very basic (and only real thing) in mathematic is actually counting objects...and hence 1 being the closest thing to the truth anyone will ever get...
Bertrand Russell and Alfred North Whitehead derived arithmetic and thus all of mathematics from basic logical axioms in the landmark work Principia Mathematica. The fundamental building blocks are 0, the successor function (+1), and a suite of logical axioms like A=A, etc.

It has been definitely proven by Godel that in any formal system that is capable of expressing natural numbers, you can construct a formal sentence that states: "There does not exist an ordered list of formal statements such that each statement is a basic axiom or immediately follows from previous statements in this list and the final statement is this statement". Yes it is self-referential.

This means that there are truths that cannot be proven.
...within any given formal system. And of course a larger system that can prove those truths will have still other such (internally) unprovable truths.
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Re: What evidence would prove the Boglehead mentality wrong?

Post by longinvest » Fri Sep 19, 2014 2:45 pm

deikel wrote:You would have to define what the 'Boglehead mentality' actually is...because different people have a different opnion of what that would be.
The Bogleheads mentality might not be defined, but the OP was probably referring to the Bogleheads investment philosophy, which is defined:
1 Develop a workable plan
2 Invest early and often
3 Never bear too much or too little risk
4 Diversify
5 Never try to time the market
6 Use index funds when possible
7 Keep costs low
8 Minimize taxes
9 Invest with simplicity
10 Stay the course
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VLB/ZRR

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Re: What evidence would prove the Boglehead mentality wrong?

Post by heyyou » Fri Sep 19, 2014 2:49 pm

Not quite Bogleheadism, but those who save will end up with more than those who do not save. The savers who invest may benefit from compounding over long periods. What is the alternative to not saving? My choice is to not live on only Social Security, I've seen that lifestyle.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by Runalong » Sat Sep 20, 2014 2:18 am

Personally, I'm interested in one specific aspect: whether or not active can beat passive.

From my point of view, everything else in the BH mentality is almost self-evident.

On this forum, I've seen two Boglehead approaches: those who believe that no one can beat the index, except by chance or luck; and those who believe that ALMOST no one can. I agree with the latter, not with the former.

The former belief speaks directly to your question in that it is unfalsifiable. There is no evidence you can present to convince them that you are beating the indexes (your active beats their passive) that they cannot explain away. 40 or 50 years is not a long enough time frame to convince them that it isn't just chance- so you flipped heads 6 out of 10 times for the past 40 years; according to random distribution SOMEBODY had to do it.

From an epistemological standpoint, an unfalsifiable theory is meaningless. You might as well try to prove to someone that the Abominable Snowman does NOT exist. How could you?

In another thread- http://www.bogleheads.org/forum/viewtop ... 03&start=0 -

I actually gave my stock picks for the rest of 2014 (bottom of page 1). I've been beating the market for years and believe these five stocks will beat the market for the remainder of this year (I own all of them). But if they do, it won't prove anything, and if they don't it won't prove me wrong. I would admit I was wrong if I couldn't beat the market this way over a 15 year period, but if I DID beat the market for 15 years, there are many on this forum who would not concede that I had anything other than dumb luck on my side (unfalsifiable!).

(At any rate, my five picks are up 1.08% since then, vs 0.38% for VTI, but over such a short time frame it REALLY doesn't prove anything.)

I would suggest to those of you who hold to an unfalsifiable theory that you at least understand that yours is a faith commitment, not a scientifically valid one.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by stemikger » Sat Sep 20, 2014 6:19 am

The Relentless Rules of Humble Arithmetic"

That message is simple: Gross return in the financial markets, minus the costs of financial intermediation, equals the net return actually delivered to investors. While truly staggering amounts of investment literature have been devoted to the EMH—the Efficient Market Hypothesis—precious little has devoted to the CMH—the Cost Matters Hypothesis. However, to explain the dire odds that investors face in their quest to beat the market we don't need the EMH. We need only the CMH. Whether markets are efficient or inefficient, investors as a group must fall short of the market return by precisely the amount of the aggregate costs they incur. It is the central fact of investing.
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!

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Re: What evidence would prove the Boglehead mentality wrong?

Post by ASUGrad » Sat Sep 20, 2014 6:37 am

Aish wrote:
telemark wrote:A large majority of active managers outperforming the index, after fees, would be pretty decisive, but I don't much expect to see that. On the other hand, I already know I'm wrong, in the sense that I'm not 100.00000% correct, and that my portfolio is not optimal. Fortunately I'm content to be satisfied with "probably good enough", and I don't need to claim a certainty that will never exist.
The whole point of Boglehead investing is "getting your fair share." By definition, before costs, only 50% of the money can beat the market. Once we take into consideration index funds cost less than active funds, on average, index funds MUST outperform active funds.
You're right that by definition only 50% of money can beat the market before costs, but technically speaking active funds as a group can beat the index funds as a group. There is a third group in our zero sum game.... individual stock pickers. If the average investor buying stocks does a really horrible job and is on the wrong side of most bets and the active money managers do a really good job and are on the right side of most bets then the active managers as a group could outperform the index funds while the average stock picker underperforms.

When active funds were in their infancy and there were very few of them with a very small % of the market this was actually fairly common. The active funds weren't competing against each other. They were competing against the average Joe who knew very little about investing. Today the active funds beating the index funds is highly unlikely because mutual funds own so much of the market they are competing against each other more than the average Joe stock picker.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by BradMajors » Sat Sep 20, 2014 11:53 am

"If the average investor buying stocks does a really horrible job and is on the wrong side of most bets"

I would like to meet such an investor. I would be able to outperform the market by doing the opposite of what the "horrible" investor does.

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Average Investor's Investment Return Is 1.9% in last 30 year

Post by William4u » Sat Sep 20, 2014 12:03 pm

Why The Average Investor's Investment Return Is So Low (Forbes)
According to the latest 2014 release of Dalbar’s Quantitative Analysis of Investor Behavior (QAIB), the average investor in a blend of equities and fixed-income mutual funds has garnered only a 2.6% net annualized rate of return for the 10-year time period ending Dec. 31, 2013.

The same average investor hasn’t fared any better over longer time frames. The 20-year annualized return comes in at 2.5%, while the 30-year annualized rate is just 1.9%. Wow! ...

Why does the average investor underperform?

Investors may only have themselves to blame. According to Dalbar’s QAIB, investors make poor investment choices that hurt their investment returns. These decisions, including when to buy and sell, are often driven by emotion...

Fast forward to 2008, just before the “Great Recession” market downturn, and stock prices were falling, but investors refused to sell at a loss. As the market continued to fall, investors held off until they simply couldn’t take it any longer. Many sold their stock near the bottom and missed the following upswing that began March 2009...

Investing your own money is a very difficult thing to do. To properly invest, you need to emotionally detach yourself from your money. This is more than many investors are capable of doing.
http://www.forbes.com/sites/advisor/201 ... is-so-low/

Basically, the "average investor" buys high and sells low. So if one just buys and holds the market by owning a Vanguard Total Index Fund, one is doing much, much better than the average investor.
Last edited by William4u on Sat Sep 20, 2014 12:05 pm, edited 1 time in total.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by bottlecap » Sat Sep 20, 2014 12:04 pm

The signal you wait for is when investing becomes easy and lucrative, but no one else knows the secret so only you can exploit it. Then be assured you should jump ship.

Until this happens, seeking alpha will be difficult, costly and fleeting.

JT

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Re: What evidence would prove the Boglehead mentality wrong?

Post by bottlecap » Sat Sep 20, 2014 12:11 pm

Runalong wrote:I would suggest to those of you who hold to an unfalsifiable theory that you at least understand that yours is a faith commitment, not a scientifically valid one.
You've set up quite the strawman in the attempt to appear correct. The problem is that even if you are right, it is meaningless. You have no reliable way to act on your theory if you are right. And if you are right you have no way of knowing you are. So what's the point? The whole thing is academic.

JT

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Re: Average Investor's Investment Return Is 1.9% in last 30

Post by BradMajors » Sat Sep 20, 2014 12:23 pm

William4u wrote:Why The Average Investor's Investment Return Is So Low (Forbes)
According to the latest 2014 release of Dalbar’s Quantitative Analysis of Investor Behavior (QAIB), the average investor in a blend of equities and fixed-income mutual funds has garnered only a 2.6% net annualized rate of return for the 10-year time period ending Dec. 31, 2013.

The same average investor hasn’t fared any better over longer time frames. The 20-year annualized return comes in at 2.5%, while the 30-year annualized rate is just 1.9%. Wow! ...

Why does the average investor underperform?

Investors may only have themselves to blame. According to Dalbar’s QAIB, investors make poor investment choices that hurt their investment returns. These decisions, including when to buy and sell, are often driven by emotion...

Fast forward to 2008, just before the “Great Recession” market downturn, and stock prices were falling, but investors refused to sell at a loss. As the market continued to fall, investors held off until they simply couldn’t take it any longer. Many sold their stock near the bottom and missed the following upswing that began March 2009...

Investing your own money is a very difficult thing to do. To properly invest, you need to emotionally detach yourself from your money. This is more than many investors are capable of doing.
http://www.forbes.com/sites/advisor/201 ... is-so-low/

Basically, the "average investor" buys high and sells low. So if one just buys and holds the market by owning a Vanguard Total Index Fund, one is doing much, much better than the average investor.
"The Dalbar study points out that as poorly as the average investor does, they still do better than the systematic investor applying the dollar cost averaging approach, 33% better."

http://seekingalpha.com/article/2461815 ... -no-rhythm

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Re: What evidence would prove the Boglehead mentality wrong?

Post by Runalong » Sat Sep 20, 2014 1:40 pm

bottlecap wrote:
Runalong wrote:I would suggest to those of you who hold to an unfalsifiable theory that you at least understand that yours is a faith commitment, not a scientifically valid one.
You've set up quite the strawman in the attempt to appear correct. The problem is that even if you are right, it is meaningless. You have no reliable way to act on your theory if you are right. And if you are right you have no way of knowing you are. So what's the point? The whole thing is academic.

JT
A straw-man argument is where you misstate the opposite viewpoint in order to make it easier to refute. Either the theory is falsifiable or it isn't. If it isn't all you have to do is explain what would disprove it (Remember that I agree that most people can't beat the market, I disagree with the unfalsifiable statement that no one can, except by luck).

As for it being actionable vs academic. I'm retired now because I acted on my beliefs and beat the market by enough, over a long enough time period, to make that possible. Had I indexed, I would still be working. I'm not rich by common standards, but I have all I want and do almost anything I want to do.

As I keep saying, it isn't about being a genius, it's about having the right kind of emotional detachment about one's investments so that one doesn't make dumb moves based on emotion. Few people can do that, therefore most should index. But I think anyone who does have that quality (it probably only takes a few years to figure it out) has the ability to do a lot better than the average indexer and shouldn't be told that it is impossible. There are several approaches that will work if you stay the course, but almost no one sticks with their system when it temporarily (e.g., a couple months or a couple years) isn't working.

So that's my non-academic point.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by docneil88 » Sat Sep 20, 2014 2:03 pm

Runalong wrote:There is no evidence you can present to convince them that you are beating the indexes (your active beats their passive) that they cannot explain away. 40 or 50 years is not a long enough time frame to convince them that it isn't just chance- so you flipped heads 6 out of 10 times for the past 40 years; according to random distribution SOMEBODY had to do it.

From an epistemological standpoint, an unfalsifiable theory is meaningless. You might as well try to prove to someone that the Abominable Snowman does NOT exist. How could you?
Hi Runalong, Some Bogleheads believe there is such a thing as long-term investing skill and some don't. But generally the ones who do believe such skill exists also believe it's most prudent to not bet that investing skill or luck will be great enough in the long run to significantly exceed the extra (management, trading, and tax) costs borne by active investing.

The thesis that there is no such thing as investing skill is falsifiable, or at least a preponderance of evidence could accumulate for or against the thesis. For example, suppose all active investors long term returns dispersed in pretty much a barbell formation, where nearly every active investor's performance was either greatly higher than the market or greatly lower than the market. And suppose that the group of active investors who outperformed did not have access to any more information than the group who underperformed. In this scenario, it is extremely unlikely such a dispersion of long term returns would be due to chance. In that world the preponderance of the evidence would be in favor of the the idea that investing skill exists (and that it comes at the expense of those that are less skillful, not at the expense of passive investors, who as a group, will always match the market minus their very low costs, regardless of whether there is a contingent of very skillful active investors). Best, Neil
Last edited by docneil88 on Sat Sep 20, 2014 2:18 pm, edited 1 time in total.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by bottlecap » Sat Sep 20, 2014 2:17 pm

Runalong wrote:
bottlecap wrote:
Runalong wrote: A straw-man argument is where you misstate the opposite viewpoint in order to make it easier to refute.
Well, that's just what you've done, even if you don't realize it. You not only have the Boglehead point of view incorrect, but you have boiled it down to one point of view that is rarely so unequivocally expressed here.

The fact that soemthing worked for you could be due either to luck or skill, but it is impossible for me to tell. It's even more impossible for you to objectively evaluate. It's probably even unfalsifiable. More importantly, you had to wait your entire investing lifetime to know how it would work out, which, for all you knew when you started out, it would not.

Regardless, if emotional detachment was all it took, we'd see a lot more successful active managers out there. This suggests that it's not so easy, even if one is emotionally detached. That is objectively falsifiable.

JT

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Re: What evidence would prove the Boglehead mentality wrong?

Post by Runalong » Sat Sep 20, 2014 2:54 pm

I think I made it clear both times that I was only disagreeing with the subset who said that it's impossible to beat the market. In effect they believe that the market is so efficient that at any given moment every stock is priced correctly relative to its prospects, as opposed to those who believe that there may be inefficiencies that can be exploited even if doing so is such a rare feat that it really isn't worth the bother. The former are a minority here and that viewpoint is not enshrined as official BH "mentality", but they are vocal enough that not every peruser of this forum would realize that most BH's probably believe it is rare, not impossible to beat the market. I agree with BH philosophy and believe that most people should not try to beat indexing.

I'm pretty sure that if I ever tried to market my "skill", whether by managing a fund or starting a newsletter or whatever, it would totally screw up my emotional detachment and I would fail.

On a personal level, sound quantitative analysis can (and has and does) effectively outperform if tied to a mechanical system that excludes emotions, such as "hold for exactly one year (or x # of months) no matter what then sell (unless it still qualifies on that date)".

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Re: What evidence would prove the Boglehead mentality wrong?

Post by neurosphere » Sat Sep 20, 2014 3:12 pm

Runalong wrote:On a personal level, sound quantitative analysis can (and has and does) effectively outperform if tied to a mechanical system that excludes emotions, such as "hold for exactly one year (or x # of months) no matter what then sell (unless it still qualifies on that date)".
I haven't read the whole thread, so forgive me if this has been answered. But can you show me which mechanical system has been shown to outperform the market?

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Re: What evidence would prove the Boglehead mentality wrong?

Post by jaab » Sat Sep 20, 2014 3:45 pm

neurosphere wrote:I haven't read the whole thread, so forgive me if this has been answered. But can you show me which mechanical system has been shown to outperform the market?
HmL :mrgreen:

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Re: What evidence would prove the Boglehead mentality wrong?

Post by Runalong » Sat Sep 20, 2014 3:56 pm

Mine works for me, but I prefer not to share. Joel Greenblatt's Magic Formula and Piotroski have solid track records or check out Sabrient System's (nfi) annual "Baker's Dozen" just to name three of many. Last five year's performance @ http://bakersdozen.sabrient.com/2014-landing-page (plus 17.5% ytd 2014).

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Re: What evidence would prove the Boglehead mentality wrong?

Post by tibbitts » Sat Sep 20, 2014 4:12 pm

What would prove the philosophy wrong would be the default economic result changing from success to failure for a long enough period.

Everything we do is based on positive returns from various markets over 20, 30, 50... some number of years. Let's say markets give 7% over an investing lifetime. The arguments center around active management overcoming fees of maybe 1% or not, or active management adding 1-2% or detracting 1-2% over long periods. But either way, with a 7% base, essentially everybody wins. Now change the 7% to -1%. Now almost everybody loses. It's one thing to settle for average when average wins; another thing to settle for average when average loses. Even when average loses, there will be individuals who succeed. Gradually, as multiple generations go by and average keeps losing, people would abandon the BH philosophy, seeking to become one of the admittedly few people who succeed, or at least seeking to avoid what becomes perceived as guaranteed failure. Of course most people would simply abandon investing entirely, not just the BH philosophy specifically, but it would be a gradual evolution.

So it would not be so much a matter of mathematical rules being proven wrong, but of prolong economic failure.

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