What evidence would prove the Boglehead mentality wrong?

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

Post by VictoriaF »

postingname wrote:
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."
I don't disagree, but I don't know how to use this information. Economists who follow Neo-classical (Standard) Economics are well aware that people are not rational. However, they assume that irrationalities are random and cancel out. In contrast, Behavioral Economists demonstrate numerous situations in which irrational decisions are predictable and aggregate.

Roughly speaking, Standard Economics relies on average behaviors, and Behavioral Economics anticipates extreme behaviors. In the investing domain, Bogleheads-like investing relies on average performance, and active management anticipates extreme fluctuations. But I am not ready to discard passive investing in favor of active investing due to its analogy to SE rather than BE.

Victoria
Last edited by VictoriaF on Wed Oct 08, 2014 7:18 pm, edited 1 time in total.
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Re: What evidence would prove the Boglehead mentality wrong?

Post by jaab »

Cullen Roche (the blogger) has a point that lots of people going around dissing "active management" do not invest in in a global market cap weighted portfolio and lever it up or down (CAPM like) - what he would call "passive". I think this is a reasonable argument. Most BHs, Jack Bogle himself or Larry or Rick or ... still pick asset classes and US/non-US into a portfolio, i.e. are active "(self-)managers" for their money at a portfolio level.

BUT: there is a huge continuum of "active". Let's take someone choosing a fixed AA of systematic assets/factors once (still alter it when your life changes), with only a very longterm forecast that stocks are likely to return more than bonds or such. Maybe act in 1929, 2000 (high valuations, 20% less stocks?) or buy TIPS/HY in situations like 2008/09 (incredible forward yields). Then you have so called tactical asset allocators (think of global macro hedge funds) and the daytrading stockpicker of single securities (idiosyncratic influences).

The decision to mostly stay at the fixed/systematic indexing end is usually not based on a claim (EMH) but on real empiricial evidence of actual investment probability of success. Mutual fund studys (SPIVA, ...), hedge funds analysis, "alpha" and so on. Global macro hedge funds indexes are an interesting subject to look at, because they basically do what Cullen advocates, though he does not like their high fees and seems to use index funds o ETFs. But aside from top funds retail investors do not have access to, they are not good at delievering alpha, despite less restriction compared to their mutual fund cousins (e.g. shortselling).
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Phineas J. Whoopee
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Re: What evidence would prove the Boglehead mentality wrong?

Post by Phineas J. Whoopee »

postingname wrote:...
I can :) but that's another show, as they say.
...
Let's make it this show. Show us your brokerage statements. All of them. Prove it.

This isn't to single you out. Many posters have made your claim. None have backed it up with evidence.

I'm not callin' you a liar. I'm callin' me a skeptic.

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

Post by postingname »

Phineas J. Whoopee wrote:
postingname wrote:...
I can :) but that's another show, as they say.
...
Let's make it this show. Show us your brokerage statements. All of them. Prove it.

This isn't to single you out. Many posters have made your claim. None have backed it up with evidence.

I'm not callin' you a liar. I'm callin' me a skeptic.

PJW
Phineas,

I't's not my onus to prove anything. Don't misunderstand me... I'm not trying to "convert" anyone. I don't have anything to sell you. Even if I showed you my portfolio, you would just "conclude" that I am an outlier.

It would be OT if I asked next the question I want to ask, but I'll ask it anyway. Maybe it can be the basis for a future thread:

Tell me, why do you PERSONALLY think it's so hard to beat the market? And please don't refer to some "study" because I don't buy into that for an answer. Tell me from your personal experience why you yourself have failed or why you think a certain subset of your peers have failed. I'm curious to see why people have ended up here. I know some people's stories and have concluded they just gave up too early/easily, but maybe there are some other factors as well.

For example, I'm pretty sure than my occupational background has helped in my ability to assimilate and integrate a lot of diverse data...something necessary to understanding the markets. In a diffeerent career or with a different "wiring of the brain", maybe it wouldn't have worked out so well. But I did have to overcome a lot of behavioral errors first. I was basically pretty irrational and perhaps that's why I tilt in that direction in terms of investing. It takes an irrational one to know one. ;)
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Re: What evidence would prove the Boglehead mentality wrong?

Post by Pizzasteve510 »

The reverse case is sadly illustrated by a recent post about Motley Fool recommendations and a architect colleague of my wife that bought their recommendation and had the company go bankrupt. Sadly, this relatively low net worth friend needs to recover from a 100 percent loss on a highly touted stock which was a non trivial percent of their portfolio. It takes a long time to recover for losing 20percent of your portfolio.

So it is not that you can't beat the market. This is very possible. However, the negative scenario may be too painful. Volatility can be a killer, and if your index is down you have much recovery hope, but if your hot stock goes bankrupt you likely will not recover easily.
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Re: What evidence would prove the Boglehead mentality wrong?

Post by Alex Frakt »

postingname wrote:
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.
I do not see the justification for the logical leaps made here, nor what it has to do with index investing. The EMH provides a possible explanation for the superior net returns of low-cost, low-turnover funds like index funds (and many of Vanguard's active funds), but it is not why those funds exist. As Bogle likes to point out, the index fund was the natural consequence of the observations found in his 1950 Princeton senior thesis that "mutual funds can make no claim to superiority over the market averages" and "the investment company has grown up to now by concentrating its sales power on the prospering stratum of the economy, perhaps its future growth can be maximized by concentration on a reduction of sales loads and management fees." The ever-increasing popularity of index investing over the last 3 decades was and is based on observations of real returns compared to equally accessible alternatives, which in practice means actively managed mutual funds.

BTW, have you read Fama's 1970 paper in which he laid out what became the generally accepted description of EMH and described the state of research up to that time? I just re-read it looking for political undertones and simply can not see it. Here it is (in pdf): http://efinance.org.cn/cn/fm/Efficient% ... 20Work.pdf In fact there appears to be a counterexample to your claim that he was biased against government intervention. The following at least suggests he would not oppose regulation to curb monopolistic practices that distort "fair game" pricing.
As noted earlier, the strong-form efficient markets model, in which prices are assumed to fully reflect all available information, is probably best viewed as a benchmark against which deviations from market efficiency (interpreted in its strictest sense) can be judged. Two such deviations have in fact been observed. First, Niederhoffer and Osborne [32] point out that specialists on major security exchanges have monopolistic access to information on unexecuted limit orders and they use this information to generate trading profits. This raises the question of whether the "market making" function of the specialist (if indeed this is a meaningful economic function) could not as effectively be carried out by some other mechanism that did not imply monopolistic access to information. Second, Scholes finds that, not unexpectedly, corporate insiders often have monopolistic access to information about their firms.
Speaking of Fama... If we go back to the original question on this thread, Fama conclusion on his 1965 paper on random walks gives us the answer. Indexing would be proven wrong if either the chartist or the fundamental analyst could demonstrate that they could consistently beat the returns of an appropriately benchmarked index. Oh and once again, I fail to see any political ends to this paper. You can read the whole thing at http://e-m-h.org/Fama1965a.pdf.
In sum the theory of random walks in stock market prices presents important challenges to both the chartist and the proponent of fundamental analysis. For the chartist, the challenge is straightforward. If the random walk model is a valid description of reality, the work of the chartist, like that of the astrologer, is of no real value in stock market analysis. The empirical evidence to date provides strong support for the random walk model. In this light the only way the chartist can vindicate his position is to show that he can consistently use his techniques to make better than chance predictions of stock prices. It is not enough for him to talk mystically about patterns that he sees in the data. He must show that he can consistently use these patterns to make meaningful predictions of future prices.

The challenge of the theory of random walks to the proponent of fundamental analysis, however, is more involved. If the random walk theory is valid and if security exchanges are "efficient" markets, then stock prices at any point in time will represent good estimates of intrinsic or fundamental values. Thus, additional fundamental analysis is of value only when the analyst has new information which was not fully considered in forming current market prices, or has new insights concerning the effects of generally available information which are not already implicit in current prices. If the analyst has neither better insights nor new information, he may as well forget about fundamental analysis and choose securities by some random selection procedure.

In essence, the challenge of the random walk theory to the proponent of fundamental analysis is to show that his more complicated procedures are actually more profitable than a simple random selection policy. As in the case of the chartist, the challenge is an empirical one. The analyst cannot merely protest that he thinks the securities he selects do better than randomly selected securities; he must demonstrate that this is in fact the case.
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Re: What evidence would prove the Boglehead mentality wrong?

Post by IPer »

If you watched the market 2 days ago the Bogleheads were right. If you watched it today, they are wrong again! :oops:
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Phineas J. Whoopee
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Re: What evidence would prove the Boglehead mentality wrong?

Post by Phineas J. Whoopee »

postingname wrote:...
Phineas,

I't's not my onus to prove anything. Don't misunderstand me... I'm not trying to "convert" anyone. I don't have anything to sell you. Even if I showed you my portfolio, you would just "conclude" that I am an outlier.

It would be OT if I asked next the question I want to ask, but I'll ask it anyway. Maybe it can be the basis for a future thread:

Tell me, why do you PERSONALLY think it's so hard to beat the market? ...
I see. You decline to defend assertions you make, and insist I defend ones I've not made.

No, thanks.

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

Post by IPer »

Phineas J. Whoopee wrote:
postingname wrote:...
Phineas,

I't's not my onus to prove anything. Don't misunderstand me... I'm not trying to "convert" anyone. I don't have anything to sell you. Even if I showed you my portfolio, you would just "conclude" that I am an outlier.

It would be OT if I asked next the question I want to ask, but I'll ask it anyway. Maybe it can be the basis for a future thread:

Tell me, why do you PERSONALLY think it's so hard to beat the market? ...
I see. You decline to defend assertions you make, and insist I defend ones I've not made.

No, thanks.

PJW
OK, I'll bite: The Market is not so hard to beat, really, it's just most humans can't do it, and those that can don't seem to be able to do it all the time, perhaps
they just need to concentrate harder?! :oops:
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Re: What evidence would prove the Boglehead mentality wrong?

Post by postingname »

Alex Frakt wrote:
I do not see the justification for the logical leaps made here, nor what it has to do with index investing.
Hi Alex,

I'm just a casual browser of this board and don't read academic studies. The political background that Cullen brought up just leapt out at me because realistically, MANY theories and studies DO have some kind of bias, whether political or otherwise. I merely wanted to hear the full story as Cullen was telling it so I could better understand the points he was making. But Cullen was shut down in short order because in some venues, there is less tolerance for questioning of the underpinnings of Boglehead doctrine.
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Re: What evidence would prove the Boglehead mentality wrong?

Post by postingname »

Phineas J. Whoopee wrote:
Tell me, why do you PERSONALLY think it's so hard to beat the market? ...
I see. You decline to defend assertions you make, and insist I defend ones I've not made.

No, thanks.

PJW
Phinieas,

One of the reasons I post on this board is because I had always thought "Bogleheads" was a cult. When I finally came over to this board, I found that it is full of seemingly normal people who can string together words into sentences (IOW, they're not drugged!), hold down jobs, and even (gasp), occasionally have an independent thought or two. IOW, Bogleheads are just like everyone else. They just have a strange investment doctrine. :mrgreen:

Ever since, I've been curious why people choose to go the Boglehead way. I no longer can say it's because they were brainwashed when they entered or were "forced into" the cult. Obviously, that's not the case. If you don't care to explain why you became a Boglehead, that's fine. But I will continue to assume that it's because people here don't analyze their mistakes and try harder. To the extent anyone wants to disasbuse me of a potentially wrong assumption, that's great. But I don't believe in compulsion in either direction on Internet forums, so we'll just leave it be.
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Re: What evidence would prove the Boglehead mentality wrong?

Post by leonard »

I'm trying to "figure out" the "purpose" of all the extra "quotes". Can you explain who is being quoted.
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Re: What evidence would prove the Boglehead mentality wrong?

Post by VictoriaF »

leonard wrote:I'm trying to "figure out" the "purpose" of all the extra "quotes". Can you explain who is being quoted.
Written communications are notorious for being misinterpreted, even when messages are carefully composed. Quotation marks emphasize words and expressions, sometimes pointing out their ambiguity.

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

Post by leonard »

VictoriaF wrote:
leonard wrote:I'm trying to "figure out" the "purpose" of all the extra "quotes". Can you explain who is being quoted.
Written communications are notorious for being misinterpreted, even when messages are carefully composed. Quotation marks emphasize words and expressions, sometimes pointing out their ambiguity.

Victoria
Or people just throw them in to their posts at random :D
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Re: What evidence would prove the Boglehead mentality wrong?

Post by Johno »

postingname wrote:
Alex Frakt wrote:
I do not see the justification for the logical leaps made here, nor what it has to do with index investing.
Hi Alex,

I'm just a casual browser of this board and don't read academic studies. The political background that Cullen brought up just leapt out at me because realistically, MANY theories and studies DO have some kind of bias, whether political or otherwise. I merely wanted to hear the full story as Cullen was telling it so I could better understand the points he was making. But Cullen was shut down in short order because in some venues, there is less tolerance for questioning of the underpinnings of Boglehead doctrine.
The problem with your point comes back to a problem running through this thread and almost every similar discussion, what exactly is the 'BH mentality' (and please nobody list the commandments again, because that doesn't settle it in the practical terms of most of these discussions).

Again it's axiomatic that all investors (invested $'s that is) in an index earn the index return minus expenses. If expenses of the index fund investors are lower on average than those of active investor, their net return must be higher than average active investor. There is no political component to this and it's not a theory. And as another poster earlier responded, it only requires the existence of a market in order to hold, not any particular level of regulation, within the bounds of what anyone would still call a market.

The corollary of this axiom is the macro question of who is consistently underperforming the index in order to provide the money for others to consistently outperform the index, because there must be a 1:1 dollar relationship there, which again doesn't include the index investor, by definition. So any discussion that focuses on active investor outmaneuvering index investors on a macro basis is off point. Who are the patsies among *active* investors? That's the macro question. I suppose there might be some political dimension to it, in that if a one class of investors consistently makes money off another class, that might be 'unfairness' some would want the the govt to step in and limit...however this tends to be undermined by the existence of index funds which any investor can choose if they want to and not be providing the dollars (or not many, just narrow bid-offer spreads) that comprise the profits of traders.

But down on the micro level there's no axiom that says any particular person who claims to be consistently beating the index, or market in their choice of indices (other than whole global market) must be wrong. That kind of tangent is common in these discussions but that's all it is.

And as far as Fama in particular it's ironic to use that name because his other findings with French are the root of the one of the most accepted deviations from orthodox BH ism accepted on this forum: 'tilting' to stock return factors believed to have delivered superior returns over time. That's trading, even if in slow motion, compared to holding the whole market.

So in summary, whoever 'Cullen' is, he might make interesting points but they are irrelevant to core of a consistent Bogle-ism, which is based on a mathematical axiom as far as average outcome after fees *paying somebody else* to beat the market for you. The 'Costs Matter Hypothesis' IOW is more central than 'Efficient Markets Hypothesis'. And that can be extended by reasonable observation to the conclusion that *most* individual investors will just end up providing the fuel to more successful (and generally professional) traders if they try to beat markets by themselves. It shouldn't be interpreted as claiming that *no* individual investor can beat the market consistently. And some professional entities clearly can, for themselves, not necessarily for customers paying them fees.
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Re: What evidence would prove the Boglehead mentality wrong?

Post by postingname »

VictoriaF wrote:
leonard wrote:I'm trying to "figure out" the "purpose" of all the extra "quotes". Can you explain who is being quoted.
Written communications are notorious for being misinterpreted, even when messages are carefully composed. Quotation marks emphasize words and expressions, sometimes pointing out their ambiguity.

Victoria
Victoria got it right.

The reason, though, that I put quotes around "Bogleheads" in the first sentence is because I was faced with a grammar dilemma:

Bogleheads are a cult.

vs

Bogleheads is a cult.

I wrote the first sentence initially, but thought there was a grammar mismatch because Bogleheads is plural and cult is singular. So I put quotes around Bogleheads to (hopefully) make them a singular unit so my sentence would be grammatically correct.

Edit: Now that I look at my post, I used "was" instead of "is", but the reasoning stands.
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Re: What evidence would prove the Boglehead mentality wrong?

Post by postingname »

Johno wrote:

Again it's axiomatic that all investors (invested $'s that is) in an index earn the index return minus expenses. If expenses of the index fund investors are lower on average than those of active investor, their net return must be higher than average active investor.
There are many assumptions imbedded in your statement. But to address them would get us off point.
Who are the patsies among *active* investors? That's the macro question. I suppose there might be some political dimension to it, in that if a one class of investors consistently makes money off another class, that might be 'unfairness' some would want the the govt to step in and limit...
I don't know where Cullen was going with his political dimension. That's why I was sorry to see the thread truncated.
So in summary, whoever 'Cullen' is, he might make interesting points but they are irrelevant to core of a consistent Bogle-ism, which is based on a mathematical axiom as far as average outcome after fees *paying somebody else* to beat the market for you.
Again, we don't know exactly what he was driving at... he didn't get a chance to fully explain. He's known to be an out-of-the-box thinker, and yet he embrances some principles of passive investing, so that would seem to make him an insightful person to listen to. If he ever comes to this board, I hope he wouldn't be discouraged from posting.
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Re: What evidence would prove the Boglehead mentality wrong?

Post by Johno »

postingname wrote:
Johno wrote:

Again it's axiomatic that all investors (invested $'s that is) in an index earn the index return minus expenses. If expenses of the index fund investors are lower on average than those of active investor, their net return must be higher than average active investor.
1. There are many assumptions imbedded in your statement. But to address them would get us off point.
Who are the patsies among *active* investors? That's the macro question. I suppose there might be some political dimension to it, in that if a one class of investors consistently makes money off another class, that might be 'unfairness' some would want the the govt to step in and limit...
2. I don't know where Cullen was going with his political dimension. That's why I was sorry to see the thread truncated.
So in summary, whoever 'Cullen' is, he might make interesting points but they are irrelevant to core of a consistent Bogle-ism, which is based on a mathematical axiom as far as average outcome after fees *paying somebody else* to beat the market for you.
3. Again, we don't know exactly what he was driving at... he didn't get a chance to fully explain. He's known to be an out-of-the-box thinker, and yet he embrances some principles of passive investing, so that would seem to make him an insightful person to listen to. If he ever comes to this board, I hope he wouldn't be discouraged from posting.
1. Not important ones that would materially change it, and it's the central point of the BH philosophy as I see it, so explaining what you think those embedded assumptions are, and how they might invalidate the axiom in practice, would actually get us back *on* point. :D

2, 3. I don't care where Cullen was going with his political point since it's clear that politics don't have anything directly to do with it. It is a political question how much, and how, markets should be regulated. But market regulation doesn't directly enter into the central axiom about costs, and is only a tangential aspect to the corollary macro question: who is the necessarily existing large and consistent patsy group if one believes large investor groups can beat the market? (and it can't be index investors, by definition). Nor is it directly relevant to whether any particular investor can beat the market. I don't have any problem with your interest in the topic of political bias in financial theory research, it's just not in fact relevant to 'underpinnings of Bogle-ism' as far as I can see.
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Re: What evidence would prove the Boglehead mentality wrong?

Post by postingname »

Johno wrote:
1. Not important ones that would materially change it, and it's the central point of the BH philosophy as I see it,...
Actually, I think this gets at the crux of the issue of the arguments over active vs passive. There are exactly 8,732 types of active investors (more or less ;)). Which type are you addressing? That's my point. I think the passive investors have a certain "strawman" active investor they use when trying to argue their point.

My guess is the strawman is an average, unskilled investor investing in an average-quality, open-ended mutual fund of the Large Blend category who buys the fund at some random (typically bad) time. It dismisses issues of portfolio management skill, investor timing, the fact that many investors don't just invest in the "market" but rather have a diversified set of holdings. It even dismisses the fact that some investors invest in stocks. To make a fair comparison, let's make it the top 10 stocks of the TSM . Active investors have the luxury of waiting to buy these 10 stocks at better valuations, for example, than the index fund does. They can sell these stocks individually when valuations, price points or irrationally exuberant sentiment dictates.

So, to categorize all active investors as unsophisticated folks that buy interior, open-ended funds typically at market highs is painting a caricature of the active investor and results in a faulty comparison. In fact, there really is no way to compare a passive investor without first determining the type of active investor you are talking about. Then you have to examine their portfolio structure and holdings, their timing considerations and their behavioral discipline.
2, 3. I don't care where Cullen was going with his political point since it's clear that politics don't have anything directly to do with it. It is a political question how much markets should be regulated, but market regulation doesn't directly enter into the central axiom about costs...


I don't know that costs are universally agreed upon as the differentiater between Bogleheadism and other investment styles. We're also talking about asset selection, asset allocation, timing vs not timing , etc.. Certainly decisions about asset selection and timing can be directly influenced by politics and economic policy. I'm at a disadvantage here in offering up any more comments since i am not versed in Fama, EMH or MPT. Again, I merely wanted more information from Cullen so I could understand his POV better.
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Re: What evidence would prove the Boglehead mentality wrong?

Post by leonard »

postingname wrote:
VictoriaF wrote:
leonard wrote:I'm trying to "figure out" the "purpose" of all the extra "quotes". Can you explain who is being quoted.
Written communications are notorious for being misinterpreted, even when messages are carefully composed. Quotation marks emphasize words and expressions, sometimes pointing out their ambiguity.

Victoria
Victoria got it right.

The reason, though, that I put quotes around "Bogleheads" in the first sentence is because I was faced with a grammar dilemma:

Bogleheads are a cult.

vs

Bogleheads is a cult.

I wrote the first sentence initially, but thought there was a grammar mismatch because Bogleheads is plural and cult is singular. So I put quotes around Bogleheads to (hopefully) make them a singular unit so my sentence would be grammatically correct.

Edit: Now that I look at my post, I used "was" instead of "is", but the reasoning stands.
Sorry, it wasn't just "bogleheads". It was "forced into", "converted", "Conclude", "study", "wiring of the brain", "In practice" and probably a few others I missed. Again, all these quotes leave me "unsure" about what all the quotes actually mean.
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Re: What evidence would prove the Boglehead mentality wrong?

Post by patrick »

postingname wrote:
Johno wrote:
1. Not important ones that would materially change it, and it's the central point of the BH philosophy as I see it,...
Actually, I think this gets at the crux of the issue of the arguments over active vs passive. There are exactly 8,732 types of active investors (more or less ;)). Which type are you addressing? That's my point. I think the passive investors have a certain "strawman" active investor they use when trying to argue their point.
Although I'm not the previous poster, I can tell you which type. All of them! The cost matters hypothesis is about active investors in the aggregate, not on any particular active investor or subgroup of active investors.

It is of course true that some active investors beat the aggregate of active investors, and a few of them can even do so by a large enough margin to beat the index investors. If markets are perfectly efficient, then no one can do so except by dumb luck. But even without market efficiency, the cost advantage dooms the active investors in the aggregate.
postingname wrote:I don't know that costs are universally agreed upon as the differentiater between Bogleheadism and other investment styles. We're also talking about asset selection, asset allocation, timing vs not timing , etc..
Bogleheads tend to argue back and forth without end on many subjects, however favoring low costs is the one thing we always agree on.
postingname wrote:Certainly decisions about asset selection and timing can be directly influenced by politics and economic policy. I'm at a disadvantage here in offering up any more comments since i am not versed in Fama, EMH or MPT. Again, I merely wanted more information from Cullen so I could understand his POV better.
I doubt you will find many experts in Cullen's apparently unpublished ideas here. But note that plenty of market participants can examine current policies or try to predict future policies. Expecting to gain an advantage with superior policy analysis is simply the idea that markets are not efficient -- in particular that they don't efficiently discount politics and economic policy.
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Re: What evidence would prove the Boglehead mentality wrong?

Post by postingname »

leonard wrote:
Sorry, it wasn't just "bogleheads". It was "forced into", "converted", "Conclude", "study", "wiring of the brain", "In practice" and probably a few others I missed. Again, all these quotes leave me "unsure" about what all the quotes actually mean.
Hi leonard,

That's just my style. But I'll break it down for you in terms of my thinking:

"forced into" - I was being facetious. While I seriously did think Bogleheads were a type of investing cult (based on seeing their writings elsewhere), I wasn't going so far as to say they have kidnappers and enforcers.

"converted" - Convert is not a term usually used in investing -- it's more commonly associated with relgious conversions. But since some investing philosophies have a "doctrine" associated with them, and the adherants hew to their doctrine as if it were a relgion, I introduced a relgious-type term. But I put it into quotes to show that I didn't mean it literally.

"conclude" - I was talking to the point that posting my portfolio wouldn't prove any point (to Phinea's way of thinking) other than I was an outlier. But that's not what my own argument is. My own argument is that there are many active investors out there that routinely beat the market, but I can't "prove" it without posting the portfolios of many other people. So I put the word conclude in quotes to show that I was disparaging the type of conclusion Phineas would come to based on seeing one active investor's portfolio.

"study" - I don't put much faith in academic studies because their methodologies are so often flawed. I was signalling my dismissiveness by putting studies in quotes.

"wiring of the brain" - I could have just as well used hyphens.

"in practice" - I put quotes around that because I couldn't remember exactly what Cullen was saying about the active component of passive investing. The quotes were just my lazy way of saying that I don't remember the particulars, but the overall distinction between in practice and in theory was valid.

Hope that helps. ;)
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Re: What evidence would prove the Boglehead mentality wrong?

Post by postingname »

patrick wrote:
postingname wrote:
Johno wrote:
1. Not important ones that would materially change it, and it's the central point of the BH philosophy as I see it,...
Actually, I think this gets at the crux of the issue of the arguments over active vs passive. There are exactly 8,732 types of active investors (more or less ;)). Which type are you addressing? That's my point. I think the passive investors have a certain "strawman" active investor they use when trying to argue their point.
Although I'm not the previous poster, I can tell you which type. All of them! The cost matters hypothesis is about active investors in the aggregate, not on any particular active investor or subgroup of active investors.
Then how do you account for the fact that many active investors exclusively or primarily use ETFs?
It is of course true that some active investors beat the aggregate of active investors, and a few of them can even do so by a large enough margin to beat the index investors. If markets are perfectly efficient, then no one can do so except by dumb luck. But even without market efficiency, the cost advantage dooms the active investors in the aggregate.
Again, not only is it the fact that ETFs are a popular choice among active investors, but they can use be used in active ways that beat the buy-and-hold market return by a large percentage.
postingname wrote:I don't know that costs are universally agreed upon as the differentiater between Bogleheadism and other investment styles. We're also talking about asset selection, asset allocation, timing vs not timing , etc..
Bogleheads tend to argue back and forth without end on many subjects, however favoring low costs is the one thing we always agree on.
Since I've already addressed the popularity of ETFs/index funds among active investors, I'll add a new twist. Some of the best-managed open-ended mutual funds are advertised as load funds, and yet investors can get them without a load. I doubt academic studies account for that fact and I doubt most Bogleheads are aware of this. It's one of the fun things about being an active investor -- learning the tricks of the trade. It's pretty cool being able to get a high-performing OEF at low cost and ALSO without asset bloat since the low ER isn't well-advertised.

BTW, the one point where I will side with the Bogleheads is that there are probably not that many "superior" actively managed funds in the equity area. In particular, the largecap area. I just don't think stock-picking in the LC area is all that productive, especially when the (typically) large asset base of LC funds are taken into account. I think active management is best for two things: (1) fixed income -- in particular, the more sophisticated types of fixed income, and (2) flexible allocations. Though wrt #2, I don't think much of tactical asset allocation funds. I'm thinking more of the funds that reposition strategically, can hold more than just domestic stocks and bonds, and can hold surplus cash for picking up bargains when warranted.
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Re: What evidence would prove the Boglehead mentality wrong?

Post by BillyG »

I am interested in hearing which actively managed equity funds you believe are "superior"?

Thanks,
Bily
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Re: What evidence would prove the Boglehead mentality wrong?

Post by Phineas J. Whoopee »

postingname wrote:...
"conclude" - I was talking to the point that posting my portfolio wouldn't prove any point (to Phinea's way of thinking) other than I was an outlier.... [ellipsis original]
...
Um, no, postingname, whatever your nonposting name is, you don't get to put thoughts into my mind or words into my mouth.
postingname wrote:...
.... [ellipsis original] Hope that helps. ;)
Perhaps this will help you.

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

Post by patrick »

postingname wrote:
patrick wrote:Although I'm not the previous poster, I can tell you which type. All of them! The cost matters hypothesis is about active investors in the aggregate, not on any particular active investor or subgroup of active investors.
Then how do you account for the fact that many active investors exclusively or primarily use ETFs?
Since the cost matters hypothesis is about active investors in the aggregate, it doesn't matter unless the use of ETFs brings down the average cost of active investors to the index investor's cost level. Even the active ETF investor will have to pay more trading costs when switching from one ETF to another and more expense ratio if using higher cost sector ETFs. There are still some non-ETF active investors that need to be averaged in, so it doesn't seem like ETF use could bring the average active investment cost down to the index cost.
postingname wrote:
It is of course true that some active investors beat the aggregate of active investors, and a few of them can even do so by a large enough margin to beat the index investors. If markets are perfectly efficient, then no one can do so except by dumb luck. But even without market efficiency, the cost advantage dooms the active investors in the aggregate.

Again, not only is it the fact that ETFs are a popular choice among active investors, but they can use be used in active ways that beat the buy-and-hold market return by a large percentage.
So you mean to say that there is some type of active strategy that you believe has better performance than the index. This is fully consistent with the cost matters hypothesis which deals with active investors in the aggregate. However, if the subgroup of active investors who follow such a strategy really can outperform consistently, then other active investors must underperform consistently by even more than the cost difference (so that the aggregate result underperforms by the cost difference).
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Re: What evidence would prove the Boglehead mentality wrong?

Post by postingname »

BillyG wrote:I am interested in hearing which actively managed equity funds you believe are "superior"?

Thanks,
Bily
There aren't that many in the LC area (that I know of) and for that reason and to avoid asset bloat, it's not really a good idea to have them mentioned on a well-read baord. Sorry to be opaque lke that -- it bugs me too when I get answers like that -- but once you've seen what asset bloat does once a fund becomes well-known, you'd understand.
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Re: What evidence would prove the Boglehead mentality wrong?

Post by Johno »

postingname wrote:
Johno wrote:
1. Not important ones that would materially change it, and it's the central point of the BH philosophy as I see it,...
Actually, I think this gets at the crux of the issue of the arguments over active vs passive. There are exactly 8,732 types of active investors (more or less ;)). Which type are you addressing? That's my point. I think the passive investors have a certain "strawman" active investor they use when trying to argue their point.
2, 3. I don't care where Cullen was going with his political point since it's clear that politics don't have anything directly to do with it. It is a political question how much markets should be regulated, but market regulation doesn't directly enter into the central axiom about costs...

2. I'm at a disadvantage here in offering up any more comments since i am not versed in Fama, EMH or MPT. Again, I merely wanted more information from Cullen so I could understand his POV better.
1. You said there were 'many assumptions embedded' in the axiom (which might not hold in the real world, I took it to imply). But when asked to name them, you've come back with a different, off point answer where you basically say that *some* active investors can beat the market. But the axiom doesn't say *some* can't, just that all can't on average, and acceptance of that basic, and basically irrefutable point (do you now agree, or do you have a counter argument to the axiom as actually stated?) leads to two important corollaries:
a) on a macro level if one claims that some broad categories or types of investors or managers or management styles consistently beat the market, you have to also point to which broad categories you believe consistently under perform the market. For every $ of over performance, there's got to be a $ of under performance.
b) on a micro level and in view of the basic axiom and corollary a), how does one know which of the 8,732 types are the winners and which are the losers? And if one can easily learn and know, why can't everybody?...which circles back around to the axiom itself, and corollary a)

And while it's possible you might now respond that the axiom is obvious if the *ON AVERAGE* part isn't skipped over, but so obvious it's trivial, I don't think so, and I think you just showed why. You point to some 'straw man' of a poor investor who randomly buys and sells a conventional mutual fund. But this description tends to imply it's just up to each side of the argument to imagine or qualitatively describe the type of investors who can or can't beat the market...it ignores the fundamental fact: whoever the under performers are, there have to be a lot of them (lot of $'s again) for there to also be a lot of out performing $'s, whereas no number of indexers, no matter how large, can collectively provide significant profit to the out performers, by definition.

As I already said, the axiom and correct BH'ism doesn't claim that nobody can beat the market consistently. But it's axiomatic that most $'s can't, gross, which has significant negative implications for net return of anyone paying significant costs to have *somebody else* beat the market for them. And IMO it's a reasonable observation that the % of individual investor who can beat the market on their own is small.
If you want to say that some people on this forum claim anyone who posts and says they individually beat the market must wrong (which said overzealous BH's can't know), I might agree with that criticism. But that sort of semi-personal argument when it comes up is not central to the BH mentality, properly understood.

2. You started this tangent mentioning how somebody else said there was a political bias in the findings of people like Fama, ie you brought him up to begin with! :D I guess I will just take your latest twist on this point as implicit agreement that the whole question of whether there's political bias in academic findings on financial theory is basically irrelevant to Bogle-ism, which is fundamentally based on the above axiom and its corollaries, which don't depend on the market being almost purely efficient.: ie. it's not really relevant to the 'BH mentality', in its correct form, if someone believes that financial theory researchers slightly over state market efficiency due to unconscious political bias.

If you want to say that some BH's talk too much about market efficiency, I might agree with that criticism, but Bogle himself has made clear that CMH>>EMH in his philosophy.
Last edited by Johno on Thu Oct 09, 2014 9:07 pm, edited 2 times in total.
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Re: What evidence would prove the Boglehead mentality wrong?

Post by postingname »

patrick wrote:

Even the active ETF investor will have to pay more trading costs when switching from one ETF to another and more expense ratio if using higher cost sector ETFs.
These days there's really no excuse not to get free trades or at least commission-fee ETFs. And as long as one uses limit orders, they avoid the fricton of wide bid/ask spreads. I think a lot of investors have learned to avoid sector funds and in fact, SPY -- which is a close cousin to VTI -- is probably the most popular ETF of all time.
So you mean to say that there is some type of active strategy that you believe has better performance than the index.
I was referring to the fact that a low-cost index fund in the hands of an active investor can be purchased at a better point than just randomly lump-summing in the way Bogleheads are given permission to do. The most stark example would be: Who was the smarter investor? The Boglehead who invested in VTI in 2007 or the active nvestor who invested in VTI in 2009? Aside from the obvious answer that the active investor, of course, wins, I'd argue that the experienced active investor who was paying attention to the market would have had some clues that 2009 was a good time to invest, whereas the Boglehead is advised not to look at the markets or the news, so they would have missed some of those clues.
However, if the subgroup of active investors who follow such a strategy really can outperform consistently, then other active investors must underperform consistently by even more than the cost difference (so that the aggregate result underperforms by the cost difference).
I think we're arguing different things since we're using different language and terminology. But I'm fine with the concept of if a certain number of active investors are outperforming, than a certain number are underperforming. I see no reason why the 20%/80% rule couldn't hold here in the absence of real data. IOW, 20% of all active investors outperform and 80% underperform.
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Re: What evidence would prove the Boglehead mentality wrong?

Post by postingname »

Johno, I have a bit of trouble deciphering what you are saying. It's a matter of termnology, posting style, format and so on. Basically, I'm having trouble finding the main points you're making. I'm hoping my 80%/20% guestimate given above helps explain what I think and helps address what you may or may not be saying. ;)
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Re: What evidence would prove the Boglehead mentality wrong?

Post by VictoriaF »

postingname wrote:I was referring to the fact that a low-cost index fund in the hands of an active investor can be purchased at a better point than just randomly lump-summing in the way Bogleheads are given permission to do. The most stark example would be: Who was the smarter investor? The Boglehead who invested in VTI in 2007 or the active nvestor who invested in VTI in 2009? Aside from the obvious answer that the active investor, of course, wins, I'd argue that the experienced active investor who was paying attention to the market would have had some clues that 2009 was a good time to invest, whereas the Boglehead is advised not to look at the markets or the news, so they would have missed some of those clues.
Judging in the year 2014 the decisions made in the years 2007 and 2009 does not count. Let's consider a representative Boglehead investor and a representative active investor on 9 October 2014. The Boglehead investor has lost 2% of his equity assets today and, in conjunction with his previous equity losses, he has hit his re-balancing band. Therefore, after the closing bell, he has moved some money from his bond funds to his stock funds to bring his asset allocation into balance.

What did a savvy active investor do today? Is 9 October the beginning of the end or the end of the beginning? Does the active investor know which one it is?

Victoria

EDIT: The word "representative" crossed out, because I was told that there is no such a thing as a representative active investor.
Last edited by VictoriaF on Sun Oct 12, 2014 9:09 am, edited 1 time in total.
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Re: What evidence would prove the Boglehead mentality wrong?

Post by tadamsmar »

postingname wrote:But I will continue to assume that it's because people here don't analyze their mistakes and try harder.
You're right!

Now, if you can manage to understand that analyzing your mistakes and trying less hard is sometimes the best solution, you will be making progress.
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Re: What evidence would prove the Boglehead mentality wrong?

Post by tadamsmar »

postingname wrote:I was referring to the fact that a low-cost index fund in the hands of an active investor can be purchased at a better point than just randomly lump-summing in the way Bogleheads are given permission to do. The most stark example would be: Who was the smarter investor? The Boglehead who invested in VTI in 2007 or the active nvestor who invested in VTI in 2009? Aside from the obvious answer that the active investor, of course, wins, I'd argue that the experienced active investor who was paying attention to the market would have had some clues that 2009 was a good time to invest, whereas the Boglehead is advised not to look at the markets or the news, so they would have missed some of those clues.
Boy postingname, your insights are 20/20. It's like you can see the past as if it were the future. :P

You are absolutely right that investor A can do things that make more money than investor B. (Let's not mention that fact that this is nowhere near the criterion required to get at the truth.)
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Re: What evidence would prove the Boglehead mentality wrong?

Post by BillyG »

Postigname, your claim to "not reading academic studies" is a dodge. It is as if you consider all studies to be "academic" and therefore not worthy of your attention. Or collaterally, you are not interested in considering factual data, considering others' conclusions, and forming your own educated conclusions.

Now there are real historic studies (not "academic" forecasts) that demonstrate active funds do not consistently beat the returns of index funds, after expenses.

At the same time you say you use active funds that do beat the market, but for various reasons you refuse to mention them here.

It sounds like the Wizard of Oz, hiding behind the curtains. I don't intend this a personal attack but as commentary on your unwillingness to engage the issues after stirring the pot.

All this does for me is highlight that Bogleheads place great emphasis on trying to maintain focus on objective measures as well as one can, and avoiding approaches to investing that are not measured or in some way objective and therefore by default are based on some type of unsupported belief, also known as emotion.

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

Post by postingname »

Thank-you moderators for re-opening the thread. That shows you have respect for intellectual interchange. In return, I'll dial down the language that may make some of the folks here uncomfortable. It was all in fun (for me anyway), but even someone who normally supports me thought I was getting a little out of hand.
BillyG wrote:Postigname, your claim to "not reading academic studies" is a dodge. It is as if you consider all studies to be "academic" and therefore not worthy of your attention. Or collaterally, you are not interested in considering factual data, considering others' conclusions, and forming your own educated conclusions.
BillyG,

Re: data, I go directly to the source -- Ibbotson's data, Simba spreadsheets, historical charts, Federal Reserve documents. I've also participated in numerous trading and investing boards and learned from other people's successes as well as their failures. Overall, I spent several years of intensive study in the markets -- spurred by my own failures. It was a long process, but I eventually integrated the market knowledge with the behavioral stuff and came up with an imvestment plan. This is the kind of real-world knowledge and self-knowledge that makes me comfortable in my own skin as an investor. I also feel I can invest in any market and make good money. This faith comes from direct knowledge and experience, and the flexibiity to adapt if anythng changes. I would not get the same type of confidence from theory, and what few studies I've read, have not given me much actionable knowledge.

More specifically, though, my disdain for academic studies in the investing area -- particularly in the active vs passive area -- is because there is no such thing as a representative acitive investor. Hence my only partly joking comment about the 8,732 types of active investor. I can only imagine these studies are comparing a passive investor with an ordinary investor. Or what I would call the "idiot" strawman. I.e, the investor who blindly nvests in a fund without knowledge of the quality, costs, manager skill, timing, asset base, etc.

What we really want to do is bring in the full range of active investors -- ranging from the dumb/ordinary ones already being studied to the smart ones who exhibit outperformance. The cream-of-the-crop folks demonstrate outperformance that is measurable. One need only to track their real-time purchases/sells in various trading venues to see this. It's just that there is no way a "study" would even know how to find these people. When there are 8,732 types of active investor and they are widely dispersed, they can't be "rounded up" for a study. I put no faith in any of those studies other than that they prove that a passive investor is probably better than a clueless "ordinary" investor.
At the same time you say you use active funds that do beat the market, but for various reasons you refuse to mention them here.
I am primarily invested in fixed-income CEFs. They suit my investing style (the exploitaiton of mispricings) and have been, and are likely to remain in, a sweet spot for some time. I don't currently own much in the way of equity but I am aware of a few large-cap funds that would be direct competitors of SP-500/TSM in terms of style-box. Since one of the reasons some active funds eventually underperform is not because of manager incompetence but because of asset bloat, it's in nobody's best interests to name small, less-well-known funds that would be negatively affected by an influx of investors. (That sort of process starts when a fund gets named on a board). Naming such funds would also give away some of the little tricks and "inefficiencies" as the fact that many funds are miscategorized by Morningstar in terms of style box, expense, minimum requirement and so on. Again, if that knowledge becomes widely known, then "special" funds can become not-so special.

And don't ignore my larger point. I was agreeing with you folks that domestic large cap funds are probably not the best place to find superior active managers. If I wanted LC exposure, I would probably buy an index fund myself. It's when I get outside the domestic equity area, in particular outside of LC, that I would be looking for active managers.
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Re: What evidence would prove the Boglehead mentality wrong?

Post by VictoriaF »

In support of postingname's position:

Let's assume that there are NOT two types of investors, i.e.,
1. active
2. passive,

BUT three types of investors, i.e.,
1. active-naive, or just "naive"
2. active-expert, or just "expert"
3. passive

I define "naive" investors as those who:
- sell funds after large NAV drops (sell low)
- buy funds that have been heavily advertized (buy high)
- delegate buying and selling to financial professionals thus suffering from the agency problem.

I define an "expert" investor as one who:
- has put in at least 10,000 hours of deliberate practice (DP)
- the DP hours were actually "deliberate," i.e., the investor was always pushing his comfort boundary
- the investor was seeking immediate feedback and analyzing it.

Studies show that passive investors outperform active investors. However, within the "active" group, experts likely display superior performance, which in aggregated studies is obscured by the disastrous performance of naive investors.

In practice, most people are unable to exercise sufficient DP to become experts, and thus the vast majority of people are much better off using Bogleheads-like passive investing approach.

However, claiming that expert performance is impossible by citing studies that are based on the averages is a flawed argument. Many of us would be offended if someone had claimed that it's impossible to accumulate X dollars by the age of Y, because, statistically, most people in the same demographic group don't.

Victoria
Last edited by VictoriaF on Mon Oct 13, 2014 9:20 am, edited 1 time in total.
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Re: What evidence would prove the Boglehead mentality wrong?

Post by tadamsmar »

Not all the arguments against expert are based on averages. There is the argument that expert efforts are just making the market more efficient. If you analyze any market (or any gambling game for that matter) you see this effect. There is room for profit, but the profit margin of the experts get squeezed till they barely justify the effort.
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Re: What evidence would prove the Boglehead mentality wrong?

Post by postingname »

Excellent points, Victoria. I agree with all of them.

Tadamsmar, I don't see experts getting squeezed in the market areas where I reside. There are simply too many active-naive investors around to exploit for their behavioral errors and simple lack of knowledge. Obviously, it's easier in the types of markets I like to play, like CEFs and other markets besides large-cap equties, but the pricing inefficiencies due to irrational behavior are still there. And always will be because even if existing market-players eventually learned to control their emotions, there is always a new crop of active-naive investors entering the market. Human nature just doesn't change and the behavioral errors keep getting replicated with each new generation of investors.
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Re: What evidence would prove the Boglehead mentality wrong?

Post by VictoriaF »

postingname wrote:Excellent points, Victoria. I agree with all of them.
You are not allowed to agree with my points. People will think that we are acting in cahoots.

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

Post by Tanelorn »

This paper cited by Larry showed evidence of persistent and good performance by active day traders in Taiwan. However, it was something like the top 3% that consistently made money, and less than that beat transaction costs. Still, it was pretty clear from the stats that there was a successful active group. However, 97%+ weren't in it.

http://www.bogleheads.org/forum/viewtop ... 6#p2089358
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Re: What evidence would prove the Boglehead mentality wrong?

Post by VictoriaF »

postingname wrote:Tadamsmar, I don't see experts getting squeezed in the market areas where I reside. There are simply too many active-naive investors around to exploit for their behavioral errors and simple lack of knowledge.
Applying the rational-choice theory to the expected investing outcomes:
- active-naive investors have the worst expected outcomes
- passive investors have average expected outcomes
- active-expert investors have the best expected outcomes.

BUT all categories of investors are predictably irrational (allusion to Ariely's first book). When cognitive biases are considered:
- active-naive investors suffer from the recency bias (buy-high, sell-low) and halo effect (choosing flashy funds)
- passive investors can mitigate various biases by unwavering adherence to their investment policy statements (IPS)
- active-expert investors suffer from overconfidence.

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

Post by VictoriaF »

Tanelorn wrote:This paper cited by Larry showed evidence of persistent and good performance by active day traders in Taiwan. However, it was something like the top 3% that consistently made money, and less than that beat transaction costs. Still, it was pretty clear from the stats that there was a successful active group. However, 97%+ weren't in it.

http://www.bogleheads.org/forum/viewtop ... 6#p2089358
Thank you for the reference. I started considering the merits of expert investing after reading John Coates's The Hour Between Dog and Wolf. When one is engrossed in a complex activity, when he frequently achieves the state of Flow while performing this activity, and when he does it for a long time, his neural network is rewired significantly enough to identify relevant patterns, usually subconsciously.

The neural effects were observed even before the recent neuroscience findings. For example:
In the 1995 book Soros on Soros, George Soros wrote:When I was actively running a fund, I suffered from a backache. I used the onset of acute pain as a signal that there was something wrong in my portfolio. The backache did not tell me what was wrong ... but it did prompt me to look for something amiss...
Coates describes physical reactions to external stimuli as follows:
John Coates, in [i]The Hour Between Dog and Wolf[/i], on pp. 6-7 wrote:This afternoon the Federal Reserve is holding a meeting of its Board of Governors...

Most people on the floor do not consciously notice it, but the slight tremor registers nonetheless. Maybe their breathing quickens, maybe muscles tense just a bit, maybe arterial blood pressure increases ever so slightly.
...
One of the brain regions responsible for this early warning system is the locus ceruleus ... When a correlation between events breaks down or a new pattern emerges, when something is just not right, the primitive part of the brain registers the change long before conscious awareness.
Victoria
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Re: What evidence would prove the Boglehead mentality wrong?

Post by EnjoyIt »

I am a naive investor who does not have 1000s of hours of DP.

I have most of my holdings in taxable accounts and therefor can not afford the taxes that accrue on actively managed funds. 23.8% long term capital gains tax and 43.4% short term capital gains tax is too much drag on my performance. I am very confident that there are no consistent actively managed funds that can outperform my tax rates. I am even more confident that I can't either.
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Re: What evidence would prove the Boglehead mentality wrong?

Post by VictoriaF »

EnjoyIt wrote:I am a naive investor who does not have 1000s of hours of DP.

I have most of my holdings in taxable accounts and therefor can not afford the taxes that accrue on actively managed funds. 23.8% long term capital gains tax and 43.4% short term capital gains tax is too much drag on my performance. I am very confident that there are no consistent actively managed funds that can outperform my tax rates. I am even more confident that I can't either.
EnjoyIt,

By my definition you are a passive investor, not a naive investor; and in this context, the designation "passive investor" is a badge of honor. You, and I, and most others do not have the time, ability or motivation to dedicate 10,000 to the deep practice of learning market patterns. And even for those who do, the advantages calculated based on the assumptions of rationality may be canceled by the behavioral and neurological disadvantages.

Victoria
WINNER of the 2015 Boglehead Contest. | Every joke has a bit of a joke. ... The rest is the truth. (Marat F)
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tadamsmar
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Re: What evidence would prove the Boglehead mentality wrong?

Post by tadamsmar »

postingname wrote:Excellent points, Victoria. I agree with all of them.

Tadamsmar, I don't see experts getting squeezed in the market areas where I reside. There are simply too many active-naive investors around to exploit for their behavioral errors and simple lack of knowledge. Obviously, it's easier in the types of markets I like to play, like CEFs and other markets besides large-cap equties, but the pricing inefficiencies due to irrational behavior are still there. And always will be because even if existing market-players eventually learned to control their emotions, there is always a new crop of active-naive investors entering the market. Human nature just doesn't change and the behavioral errors keep getting replicated with each new generation of investors.
So, you don't believe that large profits draw in more competition?

Not clear why one would think that the supply of stupid investors exceeds the supply of smart capital to exploit them to the hilt, particularly given the fact that capital will be constantly flowing from stupid to smart in an inefficient market. Unless some magic force is going to slow that flow of capital, it will flow at the highest possible rate till there is no excess profit in any more flow, just like the water in your bathtub levels out.

You are confusing the nature of individual humans with the nature of markets.
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VictoriaF
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Re: What evidence would prove the Boglehead mentality wrong?

Post by VictoriaF »

VictoriaF wrote:...the advantages calculated based on the assumptions of rationality may be canceled by the behavioral and neurological disadvantages.

Victoria
To clarify, John Coates whose book The Hour Between Dog And Wolf (THBDAW) I cited earlier, argues against the Efficient Market Hypothesis (EMH) with references to Kahneman's and Shiller's statements as well as to the neurological evidence. In Thinking, Fast And Slow (TFAS), Kahneman described his adversarial collaboration with Gary Klein (TFAS, pp.234-244). In his book Sources of Power, Klein analyzed how experienced professionals developed intuitive skills. In contrast, Kahneman's experiments demonstrated that people committed cognitive biases even in the areas where they were expert.

After several years of joint work, Kahneman and Klein produced a paper "Conditions for Intuitive Expertise: A Failure to Disagree." In the paper, Kahneman and Klein relied on Herbert Simon's definition of intuition as "nothing more and nothing less than recognition" (TFAS, p.237). While the confidence people have in their intuition is not a reliable guide to the validity of this intuition, some types of intuitive judgement may be valid if they satisfy two conditions for acquiring a skill:
1. an environment is sufficiently regular to be predictable
2. the regularities are learned through prolonged practice (TFAS, p.240).

Kahneman and Klein used the intuition of firefighting teams' commanders as an example of a reliable intuition.

Is the investing field regular enough to build reliable intuition?

Coates refers to Robert Shiller who believes that "investing is like any other occupation, and that intelligence, education, training and hard work can indeed improve your performance" (THBDAW, p.94).

Coates thinks that the logic of the EMH has dissuaded many potential analysts from looking for tradable patterns and thus enhanced the performance of those who have persevered in defiance of the EMH. Coates's data indicate that "the experienced traders who consistently made money, even through the credit crisis, were ones whose Sharpe Ratios had risen over their careers" (THBDAW, p.95). Apparently, there is such a thing as trading skill (p.96).

Coates positions the Somatic Market Hypothesis (SMH) developed by neuroscientists Antonio Damasio and Antoine Bechara as an alternative to the EMH. According to the SMH, each event we store in memory comes marked with bodily sensations we felt at the time of the event. So-called "somatic markers" include subtle tensing of muscles, quickening of breath, a frisson of excitement, etc. These markers combine in the form of intuition that influences our decisions (THBDAW, pp.95-96).

HOWEVER,
Even if the trading skill can be identified and isolated, it is counteracted by other neurological factors, such as those creating the winner effect (THBDAW, pp.27-29). As one wins (in a battlefield or in a market), his confidence rises--eventually leading to overconfidence and reckless behavior.

IN SUMMARY,
I don't have any evidence to prove that the Boglehead mentality is wrong. It is right for most people. However, I have presented some evidence that:
  • (1) trading skill is not a myth; psychologists, behavioral economists, and neuroscientists have explanations and justifications of trading skill
    (2) achieving trading skill is far from trivial; it requires 10,000 hours of deliberate practice, or something like that
    (3) even those with demonstrated trading skills may fail due to various neurological influences.
Victoria
WINNER of the 2015 Boglehead Contest. | Every joke has a bit of a joke. ... The rest is the truth. (Marat F)
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Re: What evidence would prove the Boglehead mentality wrong?

Post by BillyG »

VictoriaF wrote: However, claiming that expert performance is impossible by citing studies that are based on the averages is a flawed argument. Many of us would be offended if someone had claimed that it's impossible to accumulate X dollars by the age of Y, because, statistically, most people in the same demographic group don't.

Victoria
I didn't cite specific studies but the studies I've read are not based on averages. They are based on following specific funds. The percentage of those funds that consistently beat the indices are very small as the time period is extended from one year to two years to five years to ten years. I did not say it is impossible to find those funds but I do believe it is extremely unlikely to find them in advance. Then once these funds are identified and assets pile in it becomes even more unlikely they will beat the indices after expenses and taxes.

But perhaps I am talking about "active investors" as fun[d] managers and you are talking about individuals who are active investors. I think we agree they are different animals.

Billy
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VictoriaF
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Re: What evidence would prove the Boglehead mentality wrong?

Post by VictoriaF »

BillyG wrote:
VictoriaF wrote: However, claiming that expert performance is impossible by citing studies that are based on the averages is a flawed argument. Many of us would be offended if someone had claimed that it's impossible to accumulate X dollars by the age of Y, because, statistically, most people in the same demographic group don't.

Victoria
I didn't cite specific studies but the studies I've read are not based on averages. They are based on following specific funds. The percentage of those funds that consistently beat the indices are very small as the time period is extended from one year to two years to five years to ten years. I did not say it is impossible to find those funds but I do believe it is extremely unlikely to find them in advance. Then once these funds are identified and assets pile in it becomes even more unlikely they will beat the indices after expenses and taxes.

But perhaps I am talking about "active investors" as fun[d] managers and you are talking about individuals who are active investors. I think we agree they are different animals.

Billy
Hi Billy,

There are different types of studies. Some show how active funds rise to prominence and then fade into obscurity. Others demonstrate that the average investor performance is worse than the performance of the funds they invest in. And then there are individual investors who claim that they achieve exceptional performance, with or without using funds. Active investors are so diverse that it's quite impossible to generalize their performance as a group. It's tempting to use the statistical averages, but these averages are influenced by what I call "naive active investors" who buy high, sell low, and use funds selected by their advisers.

You are referring to the first type of studies. My cited comment was about individual active investors, irrespective of their investing approaches.

Victoria
WINNER of the 2015 Boglehead Contest. | Every joke has a bit of a joke. ... The rest is the truth. (Marat F)
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Re: What evidence would prove the Boglehead mentality wrong?

Post by BillyG »

VictoriaF wrote:You are referring to the first type of studies. My cited comment was about individual investors, irrespective of their investing approaches.
I see, that makes sense.

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

Post by postingname »

VictoriaF wrote:

- active-expert investors suffer from overconfidence.
Victoria,

I agreed with your overall breakdown in your earlier ipost. But now that we're examining the details, the definitions need tweaking.

Expert investors are by definition not overconfident. Egos have no place in trading/investing and good traders/investors are eventually forced to realize that. So I would tweak the definition of experts to account for the fact that most expert investors have, or aspire to have, the type of psychology that includes the mastery of ego issues. Otherwise, they won't be consistently successful.
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