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 » Sat Sep 20, 2014 9:03 pm

neurosphere wrote:
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?
Neurosphere
The axiom is that most invested $'s can't beat the market gross, from which it would follow fairly readily that fully publicizing a method which will certainly beat the market by a significant margin would soon lead to it no longer beating the market, since investors would gravitate to it, and the axiom would insure its demise as a successful strategy. IOW the axiom can fairly easily be extended to 'easy to understand and implement strategies which will significantly and certainly beat the market cannot be widely known'. But there's no axiom by which they can't exist, nor that they can't be known if there's uncertainty they'll continue to work, which is virtually always the case for any strategy which has or is claimed to have beaten the market.

An example of a simple mechanical strategy which beat buying and holding the S&P in at least one fairly prolonged period:
http://www.cboe.com/micro/buywrite/Pap- ... eb2012.pdf
Selling a 1 month at-the-money (ATM) put option on a given notional unit of the S&P (say for example a put on 1 ES futures contract instead of being long 1 ES contract, which is in turn approximately equal to being long 500 shares of the SPY ETF) each month, holding the rest of the notional amount of investment in t-bills*, gave a total return of 10.8% with standard deviation of return of 10.2% in period end 1988- end 2011, v 9.1% total return with std deviation of return of 15.0% of the S&P itself, per this study. That's pre-tax, so applicable to tax advantaged accounts, but the option strategy has less favorable tax treatment than index buy/hold in a taxable account.

I'm not actually sure this strategy should even count as 'non Boglehead': it's based on a whole index, does not involve market timing or stock picking, is pretty simple for investors to do themselves with basic options knowledge and execution skill and has relatively low transactions costs, though it requires at least monthly attention.

There's also a plausible answer for this strategy to the question the basic axiom always poses: who is going to lose out relative to the index if said strategy is to win out? And the plausible answer here is that active trading institutions (and perhaps individuals) are too eager to buy puts to cut their exposure particularly in times of turmoil, leaving a volatility risk premium, which this research suggests extends up to ATM strike (it's pretty obvious for significantly below-the-money strikes), which the strategy then harvests. But note that this strategy has strictly less risk than buy and hold index. Both the index holder and ATM put seller lose by the decline of the index in the month, but the put seller's loss is cushioned by the premium received, likewise limited to the month's premium on the upside. So it's expected the std deviation of return would be lower than holding the index. The apparent market anomaly is that the put sell strategy can match (let alone slightly exceed) the index return.

However, like virtually any such strategy, the fact that it worked from 1988-2011 doesn't prove it will work from 2012-2035. The previous success of the strategy could militate against its future success, or conditions could just change. Come to think of it, that's not a lot different than 'small value tilting' in that respect. That doesn't seem to catch much flak around here even from the hardcore, but is arguably also a mechanical system claimed to have often beaten the (whole market) index.

*an individual would get still higher returns, by up to several 10's of bps in today's market, by holding some of the cash in highest paying FDIC insured money market account rather than t-bills, in today's market paying up to 0.95% v a few bps yield on a 1 month t-bill, for basically the same risk.

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

Post by telemark » Sat Sep 20, 2014 9:45 pm

Runalong wrote:From an epistemological standpoint, an unfalsifiable theory is meaningless.
I agree, but the thing to remember is that investing is not a science. You can't do repeatable experiments, studies of the past are highly sensitive to the period chosen, and we can't even be certain that the rules don't change over time. We have to make do with what we have, and as the fellow said, some models are useful.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by Bustoff » Sun Sep 21, 2014 11:23 am

Some evidence proving the Boglehead philosophy right.

Passive Investing: The Evidence - full length film

A remarkable 54 minute film featuring some of the world's top economists and academics and demonstrating:
- how the claims of active fund managers to be able to beat the market are largely a myth
- how costs are the biggest drag on performance - and why active costs more
- how passive investing offers the best experience for the vast majority of investors
- the benefits of a diversified portfolio in guaranteeing consistent returns
- why passive investing is better for your health
- why active investing has held sway for so many years....
- ... but why things may be changing
- and why passive is the rational, mathematically proven route to investing success.

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William4u
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Re: What evidence would prove the Boglehead mentality wrong?

Post by William4u » Sun Sep 21, 2014 4:53 pm

Runalong wrote:From an epistemological standpoint, an unfalsifiable theory is meaningless.
Not quite. This is a paraphrase of Karl Popper's famous dictum. However, it only applies to a range of empirical theories. Plus, many in science disagree with Popper's view.

Also, a true mathematical theory is not falsifiable. For example, 2+2=4 is not meaningless, but it is unfalsifiable. Many of the Boglehead truths are mathematical ones. The mathematical parts need not be falsifiable to be meaningful, even if you accept Popper's view.

http://en.wikipedia.org/wiki/Karl_Poppe ... emarcation

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Re: What evidence would prove the Boglehead mentality wrong?

Post by MnD » Mon Sep 22, 2014 10:53 am

i think the hard core Boglehead mentality expressed by some that "anything besides plain vanilla indexing is wrong" is wrong.
I agree with Jack Bogle that you can do perfectly well with a few active fund mangers.
I also agree with him that the Total Bond market approach to bond index fund construction (biggest debtor) is flawed.

http://www.dailyfinance.com/2014/03/12/ ... ack-bogle/
Tom Gardner: Now, there have to be some that you believe are doing the right thing on the active management side. There have to be some investors that you've encountered over time that you think it's admirable what they're doing, and actually that the results -- insofar as we can draw a conclusion off a single sample of one person's lifetime -- appear to be above average, sustainably.

Jack Bogle: Well, I'm not sure "above average" is quite the standard, and that's a really tough standard to meet -- but you can do a perfectly good job. The managers I like -- and I don't hesitate to say who they are -- you can look at Dodge & Cox, and you can look at Longleaf, and there are probably a number of other small firms.

What's so good about them? They are in the business of investment management, and not in the business of marketing. This has become a great, big marketing business, and they stick to their guns and they manage money.

They slip. They stumble. They err. They make mistakes. This is a business, for all that. But in the long run, I would bet on someone whose business is trying to be a professional investor -- not a trader -- someone whose business is trying to serve you, rather than serve the marketplace.

There aren't a lot of them -- and I don't want to put a curse on them -- because they'll get too big, and they won't be able to do it anymore. That's one of the great secrets of this business -- and that is, if you're really good for a long-enough time, you draw an awful amount of money, and then you can't be good anymore.

Gardner: Too big to succeed.

Bogle: Too big to succeed, or, as Warren Buffett says, "A fat wallet is the enemy of superior returns." And of course it is.

If you can get someone who can give an index a good run for its money, I wouldn't say you're going to do a lot better. I don't think they would say you're going to do a lot better. But it's a good alternative, because you don't know it all; there's an infinite number of choices. I think Longleaf probably runs four or five funds. Dodge & Cox runs five, I think. The rest of us: Fidelity runs 260 funds; Vanguard runs, I think, around 170. I'm not sure anybody really knows, and that's tough on a whole lot of levels.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by nisiprius » Mon Sep 22, 2014 11:53 am

There's one possibility that would certainly cause me to re-think the Boglehead approach. The Boglehead approach assumes the existence of low-cost index funds. Now, suppose the lawsuit against Vanguard were to succeed and that the result was a large increase in Vanguard's costs. Or, suppose that the providers of actively managed funds convinced regulators that indexers are getting a lazy free ride on the coattails of virtuous active managers, and that index funds should be outlawed... or heavily taxed and the taxes used to cross-subside active funds and level the playing field.

I mean, it's possible. Mutual funds are creatures of regulation, and I was very interested in Matthew Fink's book, The Rise of Mutual Funds: An Insider's View that suggests all sorts of ways history could have been different. For example, it was not at all obvious that mutual funds could be legally treated as a conduit for stock dividends (and thus able to pass them through to fund shareholders without the fund's having to pay taxes on them).

If new regulations resulted in index funds being unavailable, or having expense ratios similar to or higher than actively managed funds, then it would certainly cause me to reconsider my strategy.
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Re: What evidence would prove the Boglehead mentality wrong?

Post by Alex Frakt » Mon Sep 22, 2014 2:23 pm

BradMajors wrote: "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.
I know a guy who does exactly that. He owns a company that trades on volatility indexes. Most of it is algorithmic (quant) trading, but he also pays brokerages to forward him information on trades made by individual investors so he can take the opposite position. He claims it is a steady source of profit.

FWIW, even this guy doesn't try to pick stocks. He believes the market is quite efficient on timescales longer than a few hours.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by denovo » Mon Sep 22, 2014 2:29 pm

Alex Frakt wrote:
BradMajors wrote: "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.
I know a guy who does exactly that. He owns a company that trades on volatility indexes. Most of it is algorithmic (quant) trading, but he also pays brokerages to forward him information on trades made by individual investors so he can take the opposite position. He claims it is a steady source of profit.

FWIW, even this guy doesn't try to pick stocks. He believes the market is quite efficient on timescales longer than a few hours.

Cue the Buffett quote.
In the short term, the market is a voting machine. In the long term, it is a weighing machine. (Explanation: The father of value investing, Benjamin Graham, explained this concept by saying that in the short run, the market is like a voting machine–tallying up which firms are popular and unpopular. But in the long run, the market is like a weighing machine–assessing the substance of a company
http://www.howtoentrepreneur.com/2008/0 ... tt-quotes/
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Re: What evidence would prove the Boglehead mentality wrong?

Post by nisiprius » Mon Sep 22, 2014 2:44 pm

denovo wrote:...Cue the Buffett quote.
In the short term, the market is a voting machine. In the long term, it is a weighing machine. (Explanation: The father of value investing, Benjamin Graham, explained this concept by saying that in the short run, the market is like a voting machine–tallying up which firms are popular and unpopular. But in the long run, the market is like a weighing machine–assessing the substance of a company
http://www.howtoentrepreneur.com/2008/0 ... tt-quotes/
It should be noted, however, that while Benjamin Graham did write that in the short term the market was a voting machine, not a weighing machine, according to Jason Zweig there there appears to be no record other than Buffett's memory of his saying that "in the long run the market is like a weighing machine."
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Re: What evidence would prove the Boglehead mentality wrong?

Post by denovo » Mon Sep 22, 2014 4:02 pm

nisiprius wrote:
denovo wrote:...Cue the Buffett quote.
In the short term, the market is a voting machine. In the long term, it is a weighing machine. (Explanation: The father of value investing, Benjamin Graham, explained this concept by saying that in the short run, the market is like a voting machine–tallying up which firms are popular and unpopular. But in the long run, the market is like a weighing machine–assessing the substance of a company
http://www.howtoentrepreneur.com/2008/0 ... tt-quotes/
It should be noted, however, that while Benjamin Graham did write that in the short term the market was a voting machine, not a weighing machine, according to Jason Zweig there there appears to be no record other than Buffett's memory of his saying that "in the long run the market is like a weighing machine."
I just got lawyered. :oops:
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Re: What evidence would prove the Boglehead mentality wrong?

Post by postingname » Sun Oct 05, 2014 8:54 pm

telemark wrote:
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.
It wasn't those particular slogans I was razzing on (despite what I wrote :) ), but rather the whole reducing everything to mindless slogans.

Nah, that's not true. I confess what I was really annoyed about was that Bogleheads don't use "my" slogans, which I think are better. I prefer these:

1. Buy low, sell high
2. Buy when there is blood in the streets,... (okay, not mine, but you get the point)

Once one learns how to APPLY those two slogans, there's really little need for anything else. There are boatloads of people who know the fundamentals and the asset correlations, so one doesn't need to worry about that. Exploiting the emotions of investors is where the individual investor can bring value. Sure it takes some time to figure out what is "high" and what is "low" and what is "fear" and what is "greed", and it needs to be put into an integrated plan that accounts for risk tolerance, etc., but it's a very profitable line of pursuit. Fear and greed don't go out of style.

This to me is WAY more sensible than just throwing up one's hands and saying "I don't know the future, and the past is not prolog (despite the Boglehead obsesion with backtesting!), therefore I will buy and hold through every market that comes along and hope I somehow meet my retirement goals, and hope that holding through long bear markets doesn't mean a future divorce."

I concede that the BH approach would probably work for anyone who starts early, like in their 20s or 30s, but for those who get a later start in investing, and/or don't have a matching company plan, the probability of meeting one's retirement goals is just that much less certain.

JMO, as always.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by tibbitts » Sun Oct 05, 2014 9:34 pm

postingname wrote: Sure it takes some time to figure out what is "high" and what is "low" and what is "fear" and what is "greed", and it needs to be put into an integrated plan that accounts for risk tolerance, etc., but it's a very profitable line of pursuit. Fear and greed don't go out of style.
Ok, please give us the algorithm for determining high and low and "blood in the streets."

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Re: What evidence would prove the Boglehead mentality wrong?

Post by postingname » Sun Oct 05, 2014 9:41 pm

tibbitts wrote:
postingname wrote: Sure it takes some time to figure out what is "high" and what is "low" and what is "fear" and what is "greed", and it needs to be put into an integrated plan that accounts for risk tolerance, etc., but it's a very profitable line of pursuit. Fear and greed don't go out of style.
Ok, please give us the algorithm for determining high and low and "blood in the streets."
Trust me. You don't want an algorithm.

The further you get from math types, especially those with PhDs, the better your chances of beating the market. (Yes, I know a PhD who designs algorithms -- I run everytime see him! No common sense, whatsoever.)

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Re: What evidence would prove the Boglehead mentality wrong?

Post by telemark » Mon Oct 06, 2014 8:20 am

postingname wrote:Nah, that's not true. I confess what I was really annoyed about was that Bogleheads don't use "my" slogans, which I think are better. I prefer these:

1. Buy low, sell high
2. Buy when there is blood in the streets,... (okay, not mine, but you get the point)

Once one learns how to APPLY those two slogans, there's really little need for anything else. There are boatloads of people who know the fundamentals and the asset correlations, so one doesn't need to worry about that. Exploiting the emotions of investors is where the individual investor can bring value. Sure it takes some time to figure out what is "high" and what is "low" and what is "fear" and what is "greed", and it needs to be put into an integrated plan that accounts for risk tolerance, etc., but it's a very profitable line of pursuit. Fear and greed don't go out of style.
I don't mean to single out you or anyone else here, but I don't count anecdotal evidence either.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by HomerJ » Mon Oct 06, 2014 9:46 am

postingname wrote: 1. Buy low, sell high

Once one learns how to APPLY those two slogans, there's really little need for anything else.... Sure it takes some time to figure out what is "high" and what is "low"
LOL.. Yeah, that's pretty easy all right... So are prices high right now or low? Just takes a little time to know the difference, eh? Weird that so many active managers who have ALL DAY long (since it's their job) haven't always got this right.

"You bogleheads are so silly, just sell high, buy low... "
This to me is WAY more sensible than just throwing up one's hands and saying "I don't know the future
No one knows the future (my hands are down)

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Re: What evidence would prove the Boglehead mentality wrong?

Post by stemikger » Mon Oct 06, 2014 9:51 am

I would direct them to Dave Ramsey's ELPs. He is always promoting how his 4 types of equity funds can average 12% per year. They are all managed funds. Other than that, why bother when the S&P is around 10 or 11% for its historical average.
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Re: What evidence would prove the Boglehead mentality wrong?

Post by postingname » Mon Oct 06, 2014 10:36 am

telemark wrote:
postingname wrote:Nah, that's not true. I confess what I was really annoyed about was that Bogleheads don't use "my" slogans, which I think are better. I prefer these:

1. Buy low, sell high
2. Buy when there is blood in the streets,... (okay, not mine, but you get the point)

Once one learns how to APPLY those two slogans, there's really little need for anything else. There are boatloads of people who know the fundamentals and the asset correlations, so one doesn't need to worry about that. Exploiting the emotions of investors is where the individual investor can bring value. Sure it takes some time to figure out what is "high" and what is "low" and what is "fear" and what is "greed", and it needs to be put into an integrated plan that accounts for risk tolerance, etc., but it's a very profitable line of pursuit. Fear and greed don't go out of style.
I don't mean to single out you or anyone else here, but I don't count anecdotal evidence either.
Theory is not evidence. Anecdodtes are not evidence. The only thing a prospector investor can do is to obtain knowledge, and develop a plan that works for them and that allows some flexibility...since neither theory nor anecdotes will paint a picture of the future. I personally prefer a plan that incorporates elements of human nature that never change, i.e, fear and greed, which is why I like my particular slogans. :) I think the predictability of investor sentiment is a "stronger" truth than the supposed truth that "markets are efficient". I have never found markets to be efficient, and yet that is one of the underpinnings of the Boglehead philosophy so one should look first before locking themselves into an unproven theory.

And don't focus too hard on the "unproven" part. I'm not singling out Boglehead theory there. All economic and investing theory is essentially unproven, though there are adherents to every school of thought for certain periods of time until and if they are proven wrong. I would give an example of one theory that is currently being questioned, but that would get us into issues of public policy and therefore politics, so I will abstain from mentioning it. But economics is a social science and that means it is particularly "squishy" and can even, in some cases, be developed and disseminated for political reasons. Some people in other venues have actually raised the point that EMH has a political basis, but I will not expand on that for obvious, self-preservation issues. (I.e., I don't want my post deleted. :) )

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Re: What evidence would prove the Boglehead mentality wrong?

Post by postingname » Mon Oct 06, 2014 11:03 am

HomerJ wrote:
postingname wrote: 1. Buy low, sell high

Once one learns how to APPLY those two slogans, there's really little need for anything else.... Sure it takes some time to figure out what is "high" and what is "low"
LOL.. Yeah, that's pretty easy all right... So are prices high right now or low? Just takes a little time to know the difference, eh? Weird that so many active managers who have ALL DAY long (since it's their job) haven't always got this right.
Active managers are too busy dealing with growing asset bases. They are not flexible in the way individual investors are. In fact, individual investors are doubly flexible in that they can either buy asset clases (i.e, index funds) OR actively managed funds at a low and sell them at a high. Whereas the portfolio managers of the mutual lfunds are usually fully invested and therefore can't take full advantage of opportunities (i.e., bargains) that come along, and they have to sell at non-optimal times to meet redemptions when markets turn.


This to me is WAY more sensible than just throwing up one's hands and saying "I don't know the future
No one knows the future (my hands are down)


Concentrate on the "throwing up one's hands part". Nobody CAN know the future, but one can develop a flexible plan that accounts for the fact that nobody can know the future. I may be wrong, but this is how I view the difference between myself and (some) Bogleheads in terms of investing evolution:

Boglehead: "I'm a miserable failure. I can't beat the market, therefore NOBODY can beat the market. I' will give up and become a Boglehead, and EVERYONE should become a Boglehead. We should just let the market do whatever it wants to do to us since it's all so impossible."

Okay, here's me:

Me: "I'm a miserable failure. I can't beat the market. But I know this is just temporary frustration talking and I will analyze my mistakes in the morning and try as many times as necessary to figure out a system for beating the market, at least a good percentage of the time, and in a way that minimizes risk and suits my temperment. I know this may be a long journey but I will not give up."

tl;dr: Bogleheads give up too easily and don't analyze their mistakes before throwing in the towel.

Obviously, not all BH investors fit that first model. There are probably some that fit the following two molds:

Boglehead2: "I'm a math geek. Bogleheads are math geeks. The Boglehead approach is based on math. Math is solid. It is never wrong. Statistics prove that Boglehead investing is the best because, well, statistics are never wrong."

Boglehead3: "I'm an academic. Bogleheads are academics. The Boglehead approach is based on academic studies. Academic studies are solid. They are never wrong. Studies authored by academics, especially with a PhD appended to their name are never wrong. There has never been a study by a PhD that was poorly constructed and where the author didn't know his subject from both a practical and theorectical point of view. Therefore, since the Boglehead approach has such an impressive and bullet-proof lienage of PhD's and never-wrong academic studies, I will become a Boglehead!"

Obviously, I'm painting caricatures, but any open-minded person would see the grains of truth. Just like caricatures of active investors have a grain of truth. Heck, I probably roll my eyes more on the active investing boards than I do here since there ae so many ways an active investor can go wrong!

I have strayed from my original point, which was what? (I don't remember :) ) But for the OP, all I can suggest is that he read widely before diving in to any particular philosophy whether active or passive since not only are there known unknowns, but there are unknown unknowns and locking ontself into any particular theory without any Plan B may result in undesired results.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by VictoriaF » Mon Oct 06, 2014 11:11 am

postingname,

First, I acknowledge that you drew caricatures and not true depictions of individual Bogleheads or their composite profiles.

Having acknowledged that, I'll note that forecasts and thus investing approaches, are developed in the environment of uncertainty. Highly uncertain environments have a pesky feature of being difficult to learn from. You can try and fail, try and succeed, try and fail, try and succeed--and you will not know if you were failing and succeeding because of your learning or because the Fortune has chosen you to laugh at.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by technovelist » Mon Oct 06, 2014 11:30 am

VictoriaF wrote:postingname,

First, I acknowledge that you drew caricatures and not true depictions of individual Bogleheads or their composite profiles.

Having acknowledged that, I'll note that forecasts and thus investing approaches, are developed in the environment of uncertainty. Highly uncertain environments have a pesky feature of being difficult to learn from. You can try and fail, try and succeed, try and fail, try and succeed--and you will not know if you were failing and succeeding because of your learning or because the Fortune has chosen you to laugh at.

Victoria
Yes, but it's even worse than that for most people, who will never know whether they have succeeded or failed until they die. :confused
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Re: What evidence would prove the Boglehead mentality wrong?

Post by telemark » Mon Oct 06, 2014 11:32 am

The original post in this thread refers to evidence, proof, and ways in which the Boglehead approach might be falsifiable. This is an excellent question, one that deserves serious discussion, but we seem to be wandering away from that.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by VictoriaF » Mon Oct 06, 2014 11:35 am

technovelist wrote:Yes, but it's even worse than that for most people, who will never know whether they have succeeded or failed until they die. :confused
Right. The best reason to die is to understand if your financial strategy has worked.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by VictoriaF » Mon Oct 06, 2014 11:42 am

telemark wrote:The original post in this thread refers to evidence, proof, and ways in which the Boglehead approach might be falsifiable. This is an excellent question, one that deserves serious discussion, but we seem to be wandering away from that.
How can your falsify something that produces chaotic outcomes?

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Re: What evidence would prove the Boglehead mentality wrong?

Post by Caduceus » Mon Oct 06, 2014 11:59 am

It is possible for someone to hold more than one investment worldview. In particular, I think it's quite possible to hold that some (very few) talented money managers can earn outsized returns through stock selection, but that it is unlikely that the vast majority of people or money managers can do it consistently.

I think the problem with a lot of the discussion in the media is that it is imprecise and suffers from a category problem. What, for instance, do we mean by "active" managers? As a quasi-derogatory word used to tar anyone who doesn't believe in the superiority of index investing, it performs its function quite admirably. And, not surprisingly, if we lump all active managers together and compare them with after-tax, after-fees indexed returns, they can't outperform the indexes over meaningful periods of time. But perhaps if we look at some value investors (e.g. Seth Klarman), we find that they have succeeded. We can attribute the success of these investors to chance (e.g. Burton Malkiel's analogy of how some people will always turn up heads in a coin flip 50 times in a row given a sufficient number of people) or try to understand the roots of their strategy and their temperament.

So, to answer your question more directly, I think one way of challenging the Boglehead mentality is to learn accounting very well and pick apart as many financial statements as you can. If you are one of those people who believe that the language of investment is not so much math but accounting, are born with the right kind of temperament, and find little use for beta and the CAPM and things like that, you might start to think (or not) that it is certainly possible (but not easy) to pick stocks with a superior chance of outperforming the market.

Thought experiment: Is the ability of a value investor to isolate undervalued companies any different from a business owner who knows the value of his business (i.e. how much he is or is not willing to sell his business for), and if given a choice, would choose to re-invest his profits into his own business and undertake the higher idiosyncratic risk in exchange for the prospect of far greater returns?

But I think people look at value investors and fail to realize it's more like training for the Olympics than a walk in the park - just because it's possible doesn't mean you can do it or should try it, especially when it is so "easy" to be financially set for life following the Boglehead path.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by VictoriaF » Mon Oct 06, 2014 12:13 pm

Caduceus wrote:Thought experiment: Is the ability of a value investor to isolate undervalued companies any different from a business owner who knows the value of his business (i.e. how much he is or is not willing to sell his business for)...?
I would argue that a value investor has advantage in evaluating stocks of companies he does not own in comparison to a business owner. Ownership creates a strong endowment effect, which is very difficult to overcome even for those who are familiar with this cognitive bias.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by technovelist » Mon Oct 06, 2014 12:17 pm

VictoriaF wrote:
technovelist wrote:Yes, but it's even worse than that for most people, who will never know whether they have succeeded or failed until they die. :confused
Right. The best reason to die is to understand if your financial strategy has worked.

Victoria
And to be really sure, you have to be single then too. :(
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Re: What evidence would prove the Boglehead mentality wrong?

Post by VictoriaF » Mon Oct 06, 2014 12:21 pm

technovelist wrote:
VictoriaF wrote:
technovelist wrote:Yes, but it's even worse than that for most people, who will never know whether they have succeeded or failed until they die. :confused
Right. The best reason to die is to understand if your financial strategy has worked.

Victoria
And to be really sure, you have to be single then too. :(
A single-focused strategy is pure; a spouse is a confounding factor.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by postingname » Mon Oct 06, 2014 10:05 pm

Back to the OP's question...one thought that comes to mind is what would be the effect on a Boglehead portfolio if the US Dollar was no longer the world's reserve currency? Ideas I've seen over the years is that either a replacement currency could take over, like maybe the Chinese yuan, or there could be multiple currencies, even including gold, that would take the place of a single reserve currency. Would that cause dislocations and a rejiggering of the role of asset classes? Would US Treasuries no longer be a coveted, quality investment? (Yeah, I hear the chuckling at that one.) Would a Boglehead portolio be selectively more vulnerable due to the stay-the-course aspsect and the reliance on only two asset clsses -- stocks and bonds? Would there be a role for gold?

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Re: What evidence would prove the Boglehead mentality wrong?

Post by Tanelorn » Tue Oct 07, 2014 10:58 am

For those citing Sharpe's argument about "arithmetic", remember an index fund trades in the market every day. Who's to say they couldn't be losing money to smarter traders day in and day out? They probably are for all I know, since the smartest traders go work for some high powered hedged fund and not Vanguard execution services as far as I understand.

Are index funds still better than the alternative? Probably, but the alternatives of holding all the stocks yourself with no active trading via your mutual fund or ETF intermediary are getting more feasible.

http://www.bogleheads.org/forum/viewtop ... 0&t=145659

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Re: What evidence would prove the Boglehead mentality wrong?

Post by technovelist » Tue Oct 07, 2014 11:18 am

postingname wrote:Back to the OP's question...one thought that comes to mind is what would be the effect on a Boglehead portfolio if the US Dollar was no longer the world's reserve currency? Ideas I've seen over the years is that either a replacement currency could take over, like maybe the Chinese yuan, or there could be multiple currencies, even including gold, that would take the place of a single reserve currency. Would that cause dislocations and a rejiggering of the role of asset classes? Would US Treasuries no longer be a coveted, quality investment? (Yeah, I hear the chuckling at that one.) Would a Boglehead portolio be selectively more vulnerable due to the stay-the-course aspsect and the reliance on only two asset clsses -- stocks and bonds? Would there be a role for gold?
There would indeed be a role for gold in that case, but of course you would be far better off having some gold BEFORE such an event occurred, as the purchasing power of gold would probably be multiplied by a large factor if it were re-integrated into the world's monetary system in a big way.

That's just another tail risk that gold would help hedge against.
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Re: What evidence would prove the Boglehead mentality wrong?

Post by swaption » Tue Oct 07, 2014 12:00 pm

swaption wrote:Let me ask the question differently, what evidence would convince you that someone could systematically beat the house and make money betting on horse racing or college football?

The mechanism by which betting odds and lines are established is not all that different than the mechanism that sets the prices of securities. You either think that an individual can systematically beat the crowd or you don't.
There you go, look at me, quoting myself (from earlier in this now long thread). Saves me the brain power and the typing. But after all is said and done, this really is in my mind the best mental analogy I can come up with as rationale for passive index funds.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by Clive » Tue Oct 07, 2014 12:19 pm

Back to the OP's question...one thought that comes to mind is what would be the effect on a Boglehead portfolio if the US Dollar was no longer the world's reserve currency?
If the US$ was no longer the Primary reserve currency another would step up to the mark.

2000 US$ was weighted 70.5% reserve currency, 2013 = 60.9%

GB£, which was once the primary, in 2000 was weighted 2.8% (2013 4%). Between the early 1860s and the outbreak of World War I in 1914, some 60 percent of the world’s trade was invoiced in British pounds sterling. By the mid 1930's GB£ lost its primary rating, being replaced by US$.

Japanese Yen declined from 6.3% in 2000 to 3.9% in 2013.

Image

I suspect any changes in the primary would also be reflected by share of world trade

Image

Late 1960's US = 75%, late 1980's = 30% (by eye).

Something like 40% of the S&P500 earnings are sourced from foreign. The UK largest 100 stocks only have around 27% of earnings sourced from UK companies, the rest is from something like 30% emerging markets, 19% US, 17% Euro ...etc.

If you weight UK (EUE) 70%, VTI (US) 30% for an overall 50% (close to current US proportion of world market) - combined with a bunch of 'others' then historically that produced similar rewards to the World Index (VT)

Image

So for a Boglehead who held total stock market, total bond market (or variations of), there'd be no change - business as usual.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by tadamsmar » Tue Oct 07, 2014 12:54 pm

Check out this paper:

http://web.mit.edu/alo/www/Papers/physics8.pdf

concerning irreducible uncertainties in quantitative investment strategy relative to theory, empirical analysis, portfolio construction, risks, and more.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by Ki_poorrichard » Tue Oct 07, 2014 3:16 pm

tadamsmar wrote:Check out this paper:

http://web.mit.edu/alo/www/Papers/physics8.pdf

concerning irreducible uncertainties in quantitative investment strategy relative to theory, empirical analysis, portfolio construction, risks, and more.
Thanks for the paper (interesting).

Now about the certainties in investment strategy, here are two timeless and wise quotes on it (in my opinion):

"I know what I do not know." - Socrates

"In this world nothing can be said to be certain, except death and taxes." - Benjamin Franklin

Cheers.
"We are never certain. We are always ignorant to some degree." - Peter L. Bernstein

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Re: What evidence would prove the Boglehead mentality wrong?

Post by tadamsmar » Tue Oct 07, 2014 5:31 pm

Ki_poorrichard wrote: "I know what I do not know." - Socrates
Socrates should have done some experiments. Kahneman did the experiments, read his book Thinking Fast and Slow.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by postingname » Tue Oct 07, 2014 5:56 pm

Former Secretary of Defense Donald Runsfeld got a lot of press with this one:
...there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns -- the ones we don't know we don't know.
I think that's a good framework for thinking about uncertainty and the future. In particular, the bit about the "unknown unknowns".

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Re: What evidence would prove the Boglehead mentality wrong?

Post by Phineas J. Whoopee » Tue Oct 07, 2014 7:17 pm

postingname wrote:Former Secretary of Defense Donald Runsfeld got a lot of press with this one:
...there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns -- the ones we don't know we don't know.
...
He got the press but he didn't make it up. He was merely restating Noel Burch's four stages of competence, which Burch developed while at Gordon Training International in the late 1960s to 1970.

Don't get me wrong. I'm very happy Rumsfeld used a well-established framework to organize his thoughts and his department.

PJW

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Re: What evidence would prove the Boglehead mentality wrong?

Post by sschullo » Tue Oct 07, 2014 7:37 pm

bpp wrote:
3504PIR wrote:
bpp wrote:There is nothing in the "Boglehead mentality" that assumes markets always go up.
A few quotes from this thread:

“Regardless of whether companies can increase profits or not, as long as companies are making profits, it makes sense to own a total stock market index fund.”

“The concept of a rate of return makes no sense without exponential growth. It's not meaningful to discuss one investment style vs. another except in terms of the expected return, which implicitly assumes continued economic growth.”

“The philosophy assumes that
1) there is a publicly traded market
2) there is a long-term return for capital when looking at the entire publicly market
3) the market is regulated so that all of the return cannot be diverted to a small group of people
4) that the capital markets are accessible by the average person.”
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.
Somewhere in Bogle's writing there is one qualitative value, we have to trust that the domestic and international economies will grow, otherwise what is the point of investing? There is no board in the world that doesn't want to grow their company.
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Re: What evidence would prove the Boglehead mentality wrong?

Post by postingname » Tue Oct 07, 2014 8:48 pm

Phineas J. Whoopee wrote:
postingname wrote:Former Secretary of Defense Donald Runsfeld got a lot of press with this one:
...there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns -- the ones we don't know we don't know.
...
He got the press but he didn't make it up. He was merely restating Noel Burch's four stages of competence, which Burch developed while at Gordon Training International in the late 1960s to 1970.

Don't get me wrong. I'm very happy Rumsfeld used a well-established framework to organize his thoughts and his department.

PJW
Thanks! I'm glad to learn the lineage of the framework.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by postingname » Tue Oct 07, 2014 8:59 pm

sschullo wrote:
Somewhere in Bogle's writing there is one qualitative value, we have to trust that the domestic and international economies will grow, otherwise what is the point of investing? There is no board in the world that doesn't want to grow their company.
As an active investor, I find it helps to have a macro view. It doesn't matter if it's right, but it is a framework for organizing one's thoughts.

It sounds like what you're referring to is sort of a "super" macro view. I've heard it expressed differently as "You need to have faith in the US economic system." Which could be expanded to the international system. Again, these don't have to be correct beliefs, but they help organize the way one sees the markets and additionally give the investor the confidence to invest. Once in the market, one can start thinking about Plan B. :)

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Re: What evidence would prove the Boglehead mentality wrong?

Post by snowman9000 » Tue Oct 07, 2014 9:42 pm

If the question is passive indexing versus active selection, I think that's been covered. Mark me down as saying the former is unbeatable, subject to the following caveat.

Bogleheadism rests on a belief that the future will look more or less like the past, in that US stock and bond markets will trend upward, albeit with some downdrafts. Some of which can be quite alarming, but which will always be recovered and then some. So, if the infamous black swan appears and blows up the supposedly dependable stability and prosperity, Bogleheadism could fail. But if the future is like the past century or so, it's all good. What could go wrong?

In fact, this is the reason for the Permanent Portfolio concept, which has been the subject of at least two VERY long and detailed threads here. Worth reading if you want to consider black swan insurance for your portfolio. Although, my stance is and always has been, all of you BH's just keep doing what you're doing, and pay no mind to those of us in the PP. The last thing I want is too many people piling into my little boat and sinking it at the pier.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by carofe » Tue Oct 07, 2014 9:57 pm

If all the funds where indices then the nominal value would be what would dominate the indices and then the market would be less volatile. If company X doesn't give returns its nominal stock value would go down so its portion in the index, so its cash flow from index funds (here is the punishment).
it would be actually awesome no to have such volatility.
That saying that index funds need managed funds it is not actually the case.
US Total Stock Market + Intermediate Term Bond. That's it.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by Tanelorn » Tue Oct 07, 2014 10:29 pm

carofe wrote:...it would be actually awesome no to have such volatility.
if something had no volatility, its return would be the risk free rate, present 0.1% or thereabouts. Be careful what you wish for.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by Phineas J. Whoopee » Tue Oct 07, 2014 10:40 pm

carofe wrote:If all the funds where indices then the nominal value would be what would dominate the indices and then the market would be less volatile. If company X doesn't give returns its nominal stock value would go down so its portion in the index, so its cash flow from index funds (here is the punishment).
it would be actually awesome no to have such volatility.
That saying that index funds need managed funds it is not actually the case.
Hi carofe,

You make an interesting point, but it would require a change in the way we do business with respect to stock ownership. You talk about a nominal stock value based on returns. Right now, stock values are set by buyers and sellers in a market. There is no other method we use today of valuing a stock.

For what you said to work we would have to choose another means of setting values, and stick with it. I'm sure it would be possible if enough of us agreed to do so, but I don't know what that method would be.

Maybe I've misunderstood you. If my reply doesn't make sense, could you tell us more about what you mean when you use the term "nominal stock value"?

The other part I've underlined is a misconception. Corporations get money for their stock when they first issue it. Afterwards it trades on the open market. If I buy a stock from you, at a price we both agree to, the company doesn't get anything.

It is true there are advantages to a corporation when its stock price is higher rather than lower, but they don't get any part of the money from trade in it, once they've finished issuing it.

PJW

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Re: What evidence would prove the Boglehead mentality wrong?

Post by postingname » Tue Oct 07, 2014 11:04 pm

snowman9000 wrote:If the question is passive indexing versus active selection, I think that's been covered. Mark me down as saying the former is unbeatable, subject to the following caveat.

Bogleheadism rests on a belief that the future will look more or less like the past, in that US stock and bond markets will trend upward, albeit with some downdrafts. Some of which can be quite alarming, but which will always be recovered and then some. So, if the infamous black swan appears and blows up the supposedly dependable stability and prosperity, Bogleheadism could fail. But if the future is like the past century or so, it's all good. What could go wrong?

In fact, this is the reason for the Permanent Portfolio concept, which has been the subject of at least two VERY long and detailed threads here. Worth reading if you want to consider black swan insurance for your portfolio. Although, my stance is and always has been, all of you BH's just keep doing what you're doing, and pay no mind to those of us in the PP. The last thing I want is too many people piling into my little boat and sinking it at the pier.
I personally think the Harry Browne Permanent Portfolio is a better "theory" than Bogleheadism as I understand it. But it assumes certain correlations between asset classes and economic conditions. From what I've seen, some of the spokespersons for, and followers of, the Harry Browne Portfolio have had to keep modifying the correlations:

Gold - it's associated with inflation. No, it's associated with HIGH inflation. No, it's associated with UNEXPECTED high inflation. Oh, but actually, we really DON'T know how gold will do in case of unexpected, high inflation because we went off the gold standard in 1971! Oh, and let's skip this inflation stuff for the moment. Gold is also associated with Quantitative Easing, which is the same as "printing money". Oh, but it is NOT associated with Quantitative Easing because Quantitative Easing is NOT printing money....

Bonds - associated with deflation. No, they're also associated with prosperity. But aren't STOCKS the asset associated with prosperity? Yes, but....

And so on.

To actually put long-term money into a pure theory is scary to me.

As mentioned before somewhat obliquely, apparently, some of the theories/hypotheses on which Bogleheadism is based may have a political basis...Efficient Market Hypothesis (apparently) being associated with Free-Market economic policies and so on. [Moderators, please don't delete. I think, if this is true, it deserves discussion; otherwise it will appear to the outside world that Bogleheads have something to hide, and/or they censor opinions they don't believe in.) If investment theories do have a political basis, that could be another cause for concern, especially if the economic policies which formed the basis for the theories change. I personally think the reliance on mere academic theories is uncertain enough without having to think about politics. I'd rather observe markets with my own eyes, without the baggage of a doctrine, and develop my own rules and incorporate some flexibiilty into my thinking.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by Alex Frakt » Wed Oct 08, 2014 1:21 pm

postingname wrote:As mentioned before somewhat obliquely, apparently, some of the theories/hypotheses on which Bogleheadism is based may have a political basis...Efficient Market Hypothesis (apparently) being associated with Free-Market economic policies and so on. [Moderators, please don't delete. I think, if this is true, it deserves discussion; otherwise it will appear to the outside world that Bogleheads have something to hide, and/or they censor opinions they don't believe in.) If investment theories do have a political basis, that could be another cause for concern, especially if the economic policies which formed the basis for the theories change.
This makes no sense. The only connection between EMH and "Free-Market economic policies" is the requirement for stock markets to exist and for prices to be set by individual market participants, as opposed to being dictated by the government.

The entire point of the EMH is that market participants take all factors affecting future earnings into account when deciding the price at which they will buy or sell. The effect of existing or proposed government regulations and government economic and monetary policies all gets baked into the price of each stock along with everything else. This isn't just academic, look at how quickly bond prices adjust to Fed actions or how healthcare sector funds fared during the years during and after the lengthy debate on universal healthcare during the Clinton administration or the relatively low growth and high yields of utility stocks prior to deregulation in the early '90s.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by technovelist » Wed Oct 08, 2014 1:32 pm

snowman9000 wrote:If the question is passive indexing versus active selection, I think that's been covered. Mark me down as saying the former is unbeatable, subject to the following caveat.

Bogleheadism rests on a belief that the future will look more or less like the past, in that US stock and bond markets will trend upward, albeit with some downdrafts. Some of which can be quite alarming, but which will always be recovered and then some. So, if the infamous black swan appears and blows up the supposedly dependable stability and prosperity, Bogleheadism could fail. But if the future is like the past century or so, it's all good. What could go wrong?

In fact, this is the reason for the Permanent Portfolio concept, which has been the subject of at least two VERY long and detailed threads here. Worth reading if you want to consider black swan insurance for your portfolio. Although, my stance is and always has been, all of you BH's just keep doing what you're doing, and pay no mind to those of us in the PP. The last thing I want is too many people piling into my little boat and sinking it at the pier.
Actually I don't think it would do PP adherents any harm if a lot of new people piled in; certainly the gold component would benefit from more public participation. The problem is that, as William Bernstein (IIRC) noted, a lot of people tend to join the PP bandwagon after a big runup in gold and then bail out when the stock market starts to outperform gold.
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Re: What evidence would prove the Boglehead mentality wrong?

Post by postingname » Wed Oct 08, 2014 6:19 pm

Alex Frakt wrote:
postingname wrote:As mentioned before somewhat obliquely, apparently, some of the theories/hypotheses on which Bogleheadism is based may have a political basis...Efficient Market Hypothesis (apparently) being associated with Free-Market economic policies and so on. [Moderators, please don't delete. I think, if this is true, it deserves discussion; otherwise it will appear to the outside world that Bogleheads have something to hide, and/or they censor opinions they don't believe in.) If investment theories do have a political basis, that could be another cause for concern, especially if the economic policies which formed the basis for the theories change.
This makes no sense. The only connection between EMH and "Free-Market economic policies" is the requirement for stock markets to exist and for prices to be set by individual market participants, as opposed to being dictated by the government.
Hi Alex,

There was a discussion on another board that got prematurely truncated, so observers like myself were not able to get the whole story. But this is the sort of thing I'm talking about, from the blogger Cullen Roche:
In my opinion, Fama's views are highly politicized and based on false theories like rational expectations. These are ideas grounded in Chicago School Economics that have weak empirical foundations and are instead formed in order to create an anti government perspective of the "free market". The conclusion essentially boils down to "the market is smarter than everyone so don't interfere in it". This economic microfoundation is translated directly into Fama's finance work. The idea of "passive indexing" is built on this same thinking. The fact that many people don't understand how the economics translates to the finance doesn't mean anything in my opinion. It just means they're using an approach that they don't completely understand. That doesn't mean it can't work for them to some degree, but it certainly doesn't mean it's optimal either.
My quick take of this was that free-market sentiment was in vogue at the time that Fama's theories were being developed. The underlying bias to his academic work was to justify non-intervention by the Government by claiming that markets were efficient. My immediate thought was that if the markets suddenly became more regulated, the premises on which EMH and ultimately Bogleheadism were founded could evaporate.

An alternate interpretation is that Fama made the markets out to be more efficient than they really are, so regardless of what the Government may or may not do, the market isn't as efficient as Bogleheads believe it is and so there may be a false sense of security there.

Obviously, this is just one guy's opinion, which doesn't mean he's right. And I may be taking the wrong conclusion away from it. But it was a reminder to me that it is worthwhile to understand the environment in which a theory or philosophy is born, particularly if polltics are involved.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by VictoriaF » Wed Oct 08, 2014 6:38 pm

postingname wrote:My quick take of this was that free-market sentiment was in vogue at the time that Fama's theories were being developed. That underlying bias to his academic work was to justify non-intervention by the Government by claiming that markets were efficient. My immediate thought was that if the markets suddenly became more regulated, the premises on which EMH and ultimately Bogleheadism were founded could evaporate.
Is index investing rooted in Fama's work? I thought that it was proposed well before Fama became famous.

Behavioral Economics is the most interesting branch of the modern economics, and still some economists, notably of the Chicago school, object to BE and continue practicing Standard Economics that are based on the rational decision theory. The rational decision theory relies on rational actors and trusts the markets to do the right thing. In contrast, BE indicates that some government intervention may be required. As a strong proponent of BE I am in the latter camp.

But I am also in the Bogleheads-type investment camp. Even though people, decisions and markets are not rational, and even though the government occasionally intervenes in the markets--I still can't do better than investing in broad-based low-cost index funds.

If your point is that using index funds is fine but buying-and-holding can be dangerous, I'd respond that predicting the government action is no less uncertain than predicting the market activity (unless you are an insider). And if there is correlation, I'd suggest that the government intervention aims to dampen the market fluctuations and thus is favorable to indexing.

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

Post by postingname » Wed Oct 08, 2014 7:01 pm

VictoriaF wrote:Is index investing rooted in Fama's work?
This is what Cullen says:

"Actually, my issue with much of the foundation of "passive indexing" is that it is based on general equilibrium and Chicago School economics."
Behavioral Economics is the most interesting branch of the modern economics
I agree. I suppose my predilection to exploit investor sentiment is related to my interest in the irrationality of human behavior.
Even though people, decisions and markets are not rational, and even though the government occasionally intervenes in the markets--I still can't do better than investing in broad-based low-cost index funds.
I can :) but that's another show, as they say.

Additionally, I believe Cullen had some ideas on "improving" the passive approach through active repositioning from time to time. In fact, he apparently claims that much passive investing "in practice" has an active component to it. I didn't read closely his thoughts on this other than the fact that I did resonate with his stratrgic repositioning argument because it seemed like common sense to me.

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