Malkiel no longer endorses blind-folded monkeys, likes smart beta

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tadamsmar
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Malkiel no longer endorses blind-folded monkeys, likes smart beta

Post by tadamsmar » Thu Oct 18, 2018 3:10 pm

I thought this NYT article was interesting. Malkiel's smart beta endorsement has gotten little discussion here. The NYT is not your usual industry rag.

But, it still looks like the same debate from the slice and dice days to me. Maybe the ERs are a bit lower, not sure. There is an argument that it should persist since it has persisted in spite of being publicized. But surely the anomaly will go away not that even Malkiel has publicly lost confidence the blind-folded monkeys.

This is interesting to me mainly because I adopted Malkiel's life-cycle plan back in 2000 only to find that he keeps changing course.

And, once you've got some cap gains in taxable, you end up paying expenses to Uncle Sam if you want to change course.

https://www.nytimes.com/2017/06/22/busi ... funds.html

Louis Bachelier (the guy in the picture to the right) must be turning over in his grave.

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Re: Malkiel no longer endorses blind-folded monkeys, likes smart beta

Post by edgeagg » Thu Oct 18, 2018 3:35 pm

:D He is at wealthfront, which is now on it's third pivot afair. Wealthfront :thumbsup smart beta. Perhaps I am being too harsh. Does anyone have lists of WF portfolios that one can compare with VTSAX?

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Re: Malkiel no longer endorses blind-folded monkeys, likes smart beta

Post by tadamsmar » Thu Oct 18, 2018 4:18 pm

edgeagg wrote:
Thu Oct 18, 2018 3:35 pm
:D He is at wealthfront, which is now on it's third pivot afair. Wealthfront :thumbsup smart beta. Perhaps I am being too harsh. Does anyone have lists of WF portfolios that one can compare with VTSAX?
There is the WF thing. Malkiel says that he thought smart beta was expensive beta till WF made it cheap, a mere 0.25 EF.

The pro smart beta evidence in the article is based on 50 years of overperformance. And it is done better recently in spite of the fact that Fama let the cat out of the bag.

Anyway, ever since a sold the farm (literally) and put all the proceeds into taxable, the tiller on my flagship is stuck. Can either stay the TSM course that I allowed Malkiel to set for me, or pay Uncle Sam a bunch of cap gains taxes to tack toward smart beta.

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Re: Malkiel no longer endorses blind-folded monkeys, likes smart beta

Post by JoMoney » Thu Oct 18, 2018 4:31 pm

Interesting that Malkiel co-authored a WSJ OpEd with John Bogle in 2006 casting doubt on these strategies (before the 'Smart Beta' term had been coined).
http://johncbogle.com/wordpress/wp-cont ... 0op-ed.pdf

That perspective has been largely correct since then. The Total Stock Market ETF has not only had higher returns than the RAFI 1000, Wisdom Tree Dividend ETFs, DFA Small-Value fund .... and has done so with lower risk / higher Sharpe.
MStar Chart
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Malkiel no longer endorses blind-folded monkeys, likes smart beta

Post by financeperchance » Thu Oct 18, 2018 5:05 pm

The advantage here is about 70 basis points a year, once you net out the fees compared with just buying and holding VTI.

And that's only an advantage that was there in retrospect; it's impossible to know whether the outperformance from these factors will continue, now that people know about them.

To me it's a lot easier to just hold the total stock market index and not worry about trying to squeeze out a tiny bit more return.

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Re: Malkiel no longer endorses blind-folded monkeys, likes smart beta

Post by Leesbro63 » Thu Oct 18, 2018 5:14 pm

And Jeremy Siegel is selling WisdomTree ETFs (cap weighted or market weighted or whatever the "not usual weighted" is). I guess these guys spend their lives in academia making comfortable incomes but see the guys they study making the megabux and become tempted.

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Re: Malkiel no longer endorses blind-folded monkeys, likes smart beta

Post by financeperchance » Thu Oct 18, 2018 5:17 pm

Leesbro63 wrote:
Thu Oct 18, 2018 5:14 pm
And Jeremy Siegel is selling WisdomTree ETFs (cap weighted or market weighted or whatever the "not usual weighted" is). I guess these guys spend their lives in academia making comfortable incomes but see the guys they study making the megabux and become tempted.
Definitely makes you respect Mr. Bogle a lot more.

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Re: Malkiel no longer endorses blind-folded monkeys, likes smart beta

Post by grok87 » Thu Oct 18, 2018 5:21 pm

Leesbro63 wrote:
Thu Oct 18, 2018 5:14 pm
And Jeremy Siegel is selling WisdomTree ETFs (cap weighted or market weighted or whatever the "not usual weighted" is). I guess these guys spend their lives in academia making comfortable incomes but see the guys they study making the megabux and become tempted.
Agree.

I read the article. They keep talking about “passive”. Any time one hears the word passive, hold onto ones wallet.
I trust index funds, I don’t trust “passive” funds
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Re: Malkiel no longer endorses blind-folded monkeys, likes smart beta

Post by Leesbro63 » Thu Oct 18, 2018 5:33 pm

financeperchance wrote:
Thu Oct 18, 2018 5:17 pm
Leesbro63 wrote:
Thu Oct 18, 2018 5:14 pm
And Jeremy Siegel is selling WisdomTree ETFs (cap weighted or market weighted or whatever the "not usual weighted" is). I guess these guys spend their lives in academia making comfortable incomes but see the guys they study making the megabux and become tempted.
Definitely makes you respect Mr. Bogle a lot more.
Fabulous point. Although to be fair, Bogle almost certainly made more than the college Professors. But compared to what he could have made (like the family that owns Fidelity), he took very little.

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Re: Malkiel no longer endorses blind-folded monkeys, likes smart beta

Post by nisiprius » Thu Oct 18, 2018 5:42 pm

It was only four years ago in 2014 that Burton Malkiel trashed smart beta in a paper in the Journal of Portfolio Management, "Is Smart Beta Really Smart," and in 2016 he said
In that [smart beta] does enhance returns, it’s likely because the portfolios have additional risk...It isn’t some smart new way to outperform on a risk-adjusted basis.
He also trashed it in the last edition of A Random Walk Down Wall Street in 2014.

So I don't know what to say except that my respect for Burton Malkiel started to decline about the time he co-authored a book entitled From Wall Street to the Great Wall: How Investors Can Profit from China's Booming Economy. I was really annoyed by his support of Wealthfront's risk parity fund. And now this.
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Re: Malkiel no longer endorses blind-folded monkeys, likes smart beta

Post by betablocker » Thu Oct 18, 2018 5:59 pm

I don’t think Malkiel or anyone on this board who invests in strategies that would fall under the imprecise label of smart beta think that these strategies don’t involve taking more risk. If you use standard deviation many factor strategies are higher. The point that is left out is that mixing the strategies together reduces overall risk through diversification. Every Boglehead who doesn’t own 100% stocks is guilty of the same sin. All factors are based on the same evidence including market beta and duration risk.

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Re: Malkiel no longer endorses blind-folded monkeys, likes smart beta

Post by robertmcd » Thu Oct 18, 2018 6:21 pm

I fall into the camp that agree that multifactor and smart beta funds have historical evidence of outperformance, but I would make darn sure that if buying in a taxable account that I would be comfortable holding them for up to 70 yrs (I am 24). Also, they need to rebalance daily to maintain factor exposure and screen out negative momentum. In my opinion, this rules out the ishares multifactor funds where I don't have faith in a continuously lowering expense ratio, and they don't rebalance to maintain factor exposure daily. Schwab fundamental indices suffer from similar issues (high ER in my opinion, negative momentum, monthly rebalancing).

I would use DFA if I had enough assets to make the flat fee for access (can be had for $1000) come out to around .2% (500k to 1 million). DFA funds have high expense ratios but they make a ton of it back due to securities lending due and more efficient trading because they are market makers) or vanguard multifactor (only etf i know of that rebalances factor exposure daily, tax efficient because of ETF structure, and ER should continue to come down/remain competitive). I like that it is managed by vanguard's quantitative equity group as well and doesn't track an external index (this is what allows daily rebalancing).

I hope to see vanguard's multifactor continue to add assets so they come out with a total international multifactor, or at least individual developed and emerging.

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Re: Malkiel no longer endorses blind-folded monkeys, likes smart beta

Post by All Seasons » Thu Oct 18, 2018 6:23 pm

I'm very interested to see what the next edition of A Random Walk Down Wall Street will look like. :twisted: :twisted: :twisted:
The market portfolio is always a legitimate portfolio.

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Re: Malkiel no longer endorses blind-folded monkeys, likes smart beta

Post by Badger1754 » Thu Oct 18, 2018 6:26 pm

This was one of the factors as to why I left Wealthfront.

As I wrote then:
Badger1754 wrote:
Mon Feb 26, 2018 3:55 pm
Above all, I'm disappointed in Burton Malkiel. That guy was my hero from when I first read his book as a teenager. I studied his papers and research in college and grad school. My decision to invest with Wealthfront was partially influenced by Malkiel's involvement.

The conclusions of his research (see here) was that actively managed funds routinely underperformed passive index funds on a total shareholder return basis once adjusted for (1) management fees, (2) taxes, (3) transaction costs, and (4) survivorship bias.

He now seems to suggest that if #1-3 were lowered enough, you can achieve persistent long-term outperformance (that is, professional managers, if they were free and it cost nothing to trade, could outperform the indices). While that sounds fishy to me, I am of an open mind that Wealthfront's strategies over the long-term can in theory make sense.

However, I no longer believe in Wealthfront's commitment to keep fees low and continue to drive them lower; they structurally can't and still carry out their fiduciary duties. Therefore, Malkiel's premise in the case of Wealthfront no longer holds.

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Re: Malkiel no longer endorses blind-folded monkeys, likes smart beta

Post by tadamsmar » Thu Oct 18, 2018 6:46 pm

All Seasons wrote:
Thu Oct 18, 2018 6:23 pm
I'm very interested to see what the next edition of A Random Walk Down Wall Street will look like. :twisted: :twisted: :twisted:
Me too.

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Re: Malkiel no longer endorses blind-folded monkeys, likes smart beta

Post by garlandwhizzer » Thu Oct 18, 2018 9:34 pm

Siegel is now with Wisdom Tree and Malkiel now is with Wealthfront. Both of these academics used to be enthused by market cap weighted portfolios but are now suggesting factor based approaches. One wonders if they have had an intellectual epiphany about the advantages of factor investing or whether financial interest may have altered their opinions. I don't know, but it's reasonable to consider that question.

There is abundant long term data suggesting that factor based approaches should outperform over long periods of time. One problem is that should is not a certainty. Mr. Market is not a fixed target but instead constantly evolves to reflect investor's collective wisdom or lack of it. The following quote from Arnott, a factor pioneer, included in the NYT piece states the issue well:
Smart beta has its critics, including Mr. Arnott, viewed by many as the godfather of the field. “Smart beta can be smart, and then it can be not so smart,” Mr. Arnott said. “There are tons of strategies being offered now based on nothing but back tests. Anyone can create a brilliant strategy with benefit of hindsight. But does that mean anything for future returns?”

“Pretty much everyone is looking at the same factors, which is a danger,” he added. “It’s a very crowded space. If 10,000 quants are all looking at the same data and trading on it, the chances are that it’s not going to work.”


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Re: Malkiel no longer endorses blind-folded monkeys, likes smart beta

Post by tadamsmar » Fri Oct 19, 2018 7:25 am

All Seasons wrote:
Thu Oct 18, 2018 6:23 pm
I'm very interested to see what the next edition of A Random Walk Down Wall Street will look like. :twisted: :twisted: :twisted:
The subtitle is "The Time-Tested Strategy for Successful Investing" and has been for many editions :twisted: :twisted: :twisted:

You can search the next (12th) edition on Amazon (pub data is 1/1/2019) and "smart beta" is not mentioned, but fama is mentioned many times. (Assuming the search really is the new edition).

https://www.amazon.com/Random-Walk-Down ... all+street

Edit: the search is for the 10th edition. They screwed up, there is a searchable 11th edition and that edition has a section entitled "Smart beta flunks the risk test". That was published 12/19/14.
Last edited by tadamsmar on Fri Oct 19, 2018 7:40 am, edited 4 times in total.

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Re: Malkiel no longer endorses blind-folded monkeys, likes smart beta

Post by Jags4186 » Fri Oct 19, 2018 7:29 am

Leesbro63 wrote:
Thu Oct 18, 2018 5:33 pm
financeperchance wrote:
Thu Oct 18, 2018 5:17 pm
Leesbro63 wrote:
Thu Oct 18, 2018 5:14 pm
And Jeremy Siegel is selling WisdomTree ETFs (cap weighted or market weighted or whatever the "not usual weighted" is). I guess these guys spend their lives in academia making comfortable incomes but see the guys they study making the megabux and become tempted.
Definitely makes you respect Mr. Bogle a lot more.
Fabulous point. Although to be fair, Bogle almost certainly made more than the college Professors. But compared to what he could have made (like the family that owns Fidelity), he took very little.
If he had gone that route there’s no guarrantee Vanguard would have made it. Everyone complains about Vanguard from poor technology to poor customer service to poor record keeping. The only pro of Vanguard is the ownership structure and brand loyalty as at least as of today other companies have matched or beaten Vanguard at their own game on at least the most commonly used funds..

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Re: Malkiel no longer endorses blind-folded monkeys, likes smart beta

Post by marcopolo » Fri Oct 19, 2018 8:30 am

This is why i like to try to understand basic concepts and seek simple solutions on which to base my investing decisions, rather than follow any "cult of personality", whether that be Malkiel, Shiller, Siegel, Swedroe, etc. or even Bogle.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: Malkiel no longer endorses blind-folded monkeys, likes smart beta

Post by edgeagg » Fri Oct 19, 2018 12:05 pm

marcopolo wrote:
Fri Oct 19, 2018 8:30 am
This is why i like to try to understand basic concepts and seek simple solutions on which to base my investing decisions, rather than follow any "cult of personality", whether that be Malkiel, Shiller, Siegel, Swedroe, etc. or even Bogle.
Well, yes. And tools like Portfolio Visualizer are even better to see for yourself when claims are made.

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Re: Malkiel no longer endorses blind-folded monkeys, likes smart beta

Post by edgeagg » Fri Oct 19, 2018 12:09 pm

nisiprius wrote:
Thu Oct 18, 2018 5:42 pm
It was only four years ago in 2014 that Burton Malkiel trashed smart beta in a paper in the Journal of Portfolio Management, "Is Smart Beta Really Smart," and in 2016 he said
In that [smart beta] does enhance returns, it’s likely because the portfolios have additional risk...It isn’t some smart new way to outperform on a risk-adjusted basis.
He also trashed it in the last edition of A Random Walk Down Wall Street in 2014.

So I don't know what to say except that my respect for Burton Malkiel started to decline about the time he co-authored a book entitled From Wall Street to the Great Wall: How Investors Can Profit from China's Booming Economy. I was really annoyed by his support of Wealthfront's risk parity fund. And now this.
Well, Malkiel certainly seems to suffering from a bit of split brain. For example see the 2013 paper on asset management fees and the growth of the financial industry. Of particular amusement is the section entitled "Why do excessive fees persist?".

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Re: Malkiel no longer endorses blind-folded monkeys, likes smart beta

Post by garlandwhizzer » Fri Oct 19, 2018 12:37 pm

marcopolo wrote:

This is why i like to try to understand basic concepts and seek simple solutions on which to base my investing decisions, rather than follow any "cult of personality", whether that be Malkiel, Shiller, Siegel, Swedroe, etc. or even Bogle.
1+

This is my approach as well.

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Re: Malkiel no longer endorses blind-folded monkeys, likes smart beta

Post by 2015 » Fri Oct 19, 2018 12:49 pm

Another day (yet) another pundit with interests diametrically opposed to my own. Yet another reason to listen to lawnmowers cutting grass instead.

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Re: Malkiel no longer endorses blind-folded monkeys, likes smart beta

Post by edgeagg » Fri Oct 19, 2018 5:12 pm

JoMoney wrote:
Thu Oct 18, 2018 4:31 pm
Interesting that Malkiel co-authored a WSJ OpEd with John Bogle in 2006 casting doubt on these strategies (before the 'Smart Beta' term had been coined).
http://johncbogle.com/wordpress/wp-cont ... 0op-ed.pdf

That perspective has been largely correct since then. The Total Stock Market ETF has not only had higher returns than the RAFI 1000, Wisdom Tree Dividend ETFs, DFA Small-Value fund .... and has done so with lower risk / higher Sharpe.
MStar Chart
A nit: Though the argument is correct:
(1) Small Value should perhaps be compared with Small Cap ETF (VB) - VB outperforms over 1993 on.

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Re: Malkiel no longer endorses blind-folded monkeys, likes smart beta

Post by CedarWaxWing » Fri Oct 19, 2018 5:26 pm

edgeagg wrote:
Fri Oct 19, 2018 12:09 pm
nisiprius wrote:
Thu Oct 18, 2018 5:42 pm
It was only four years ago in 2014 that Burton Malkiel trashed smart beta in a paper in the Journal of Portfolio Management, "Is Smart Beta Really Smart," and in 2016 he said
In that [smart beta] does enhance returns, it’s likely because the portfolios have additional risk...It isn’t some smart new way to outperform on a risk-adjusted basis.
He also trashed it in the last edition of A Random Walk Down Wall Street in 2014.

So I don't know what to say except that my respect for Burton Malkiel started to decline about the time he co-authored a book entitled From Wall Street to the Great Wall: How Investors Can Profit from China's Booming Economy. I was really annoyed by his support of Wealthfront's risk parity fund. And now this.
Well, Malkiel certainly seems to suffering from a bit of split brain. For example see the 2013 paper on asset management fees and the growth of the financial industry. Of particular amusement is the section entitled "Why do excessive fees persist?".
For what it's worth, if I remember correctly, Mr. Bogle mentioned "smart beta" briefly only once at the recent meeting... and it was a gently disparaging off the cuff comment. He did not seem impressed by the idea.

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Re: Malkiel no longer endorses blind-folded monkeys, likes smart beta

Post by nisiprius » Fri Oct 19, 2018 8:02 pm

OK, now I have what Burton Malkiel wrote in the 2015 edition of "A Random Walk Down Wall Street." I said "he trashed it" and that's correct. He spends a full chapter on it, chapter 11, pp. 260-288, "Is Smart Beta Really Smart?"

He knocks down everything, listing "the positives" and "the negatives" for each but ultimately ruling for the negatives, starting with individual factors: the ideas that, in his section titles, "Value Wins," "Smaller is Better," "Momentum and Reversion to the Mean," "Low Volatility Can Produce High Returns." He moves on to "Blended Flavors and Strategies," including DFA funds, RAFI "Fundamental Indexes," and "Equal-Weight Indexes." He concludes that "'Smart Beta Funds Flunk the Risk Test." He says flatly
All "smart beta" strategies represent active management... If you believe that a subset of securities will give you superior returns, you are counting on some "dumb" investors to hold portfolios producing poorer returns. Some "smart beta" advocates have been quite explicit in suggesting... that investors in traditional capitalization index funds are the dumb beta investors, since by holding the broad index they will be holding a number of overvalued growth stocks. But that argument must be false.
He goes on to exaine "How Well Have Factor Tilts Worked in Practice?" He uses some of Bogle's "telltale charts" to illustrate mean reversion in the value and size factors, DFA funds, RAFI fundamental indexes, and equal weighting.

He says
"Smart beta" portfolios do not represent a sophisticated better mousetrap for investors. Investors should be wary of getting caught in the riskier mousetrap themselves. "Smart beta" portfolios...are a testament more to smart marketing than smart investing.
An entire section is entitled "Capitalization-Weighted Indexing Remains at the Top of the Class."

So I don't know what to say except to say that only three years ago he was perfectly clear in 29 pages of advocacy for cap-weighted indexed portfolios and against "smart beta" in many different shapes and forms.
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Re: Malkiel no longer endorses blind-folded monkeys, likes smart beta

Post by Valuethinker » Sat Oct 20, 2018 9:06 am

nisiprius wrote:
Fri Oct 19, 2018 8:02 pm
OK, now I have what Burton Malkiel wrote in the 2015 edition of "A Random Walk Down Wall Street." I said "he trashed it" and that's correct. He spends a full chapter on it, chapter 11, pp. 260-288, "Is Smart Beta Really Smart?"

He knocks down everything, listing "the positives" and "the negatives" for each but ultimately ruling for the negatives, starting with individual factors: the ideas that, in his section titles, "Value Wins," "Smaller is Better," "Momentum and Reversion to the Mean," "Low Volatility Can Produce High Returns." He moves on to "Blended Flavors and Strategies," including DFA funds, RAFI "Fundamental Indexes," and "Equal-Weight Indexes." He concludes that "'Smart Beta Funds Flunk the Risk Test." He says flatly
All "smart beta" strategies represent active management... If you believe that a subset of securities will give you superior returns, you are counting on some "dumb" investors to hold portfolios producing poorer returns. Some "smart beta" advocates have been quite explicit in suggesting... that investors in traditional capitalization index funds are the dumb beta investors, since by holding the broad index they will be holding a number of overvalued growth stocks. But that argument must be false.
He goes on to exaine "How Well Have Factor Tilts Worked in Practice?" He uses some of Bogle's "telltale charts" to illustrate mean reversion in the value and size factors, DFA funds, RAFI fundamental indexes, and equal weighting.

He says
"Smart beta" portfolios do not represent a sophisticated better mousetrap for investors. Investors should be wary of getting caught in the riskier mousetrap themselves. "Smart beta" portfolios...are a testament more to smart marketing than smart investing.
An entire section is entitled "Capitalization-Weighted Indexing Remains at the Top of the Class."

So I don't know what to say except to say that only three years ago he was perfectly clear in 29 pages of advocacy for cap-weighted indexed portfolios and against "smart beta" in many different shapes and forms.
2 things

His enthusiasm for China which was boundless huge overweightings even though he of all people should know the issues.

I felt he had fallen in love with China the economic wonderstory and equated it to the Chinese stock market, a clear cognitive error given what we know about stock markets and economic growth.

I remember similar stories about Emerging Markets up to the Mexico Crisis in 1994 and having portfolios at 40 per cent of book cost. Rinse and repeat in Asia Russia etc in 1997 and 98.

Second thought is I wonder if he is suffering from cognitive decline? Reversing a lifelong held view seems ... odd?

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Re: Malkiel no longer endorses blind-folded monkeys, likes smart beta

Post by grok87 » Sun Oct 21, 2018 5:44 am

Valuethinker wrote:
Sat Oct 20, 2018 9:06 am
nisiprius wrote:
Fri Oct 19, 2018 8:02 pm
OK, now I have what Burton Malkiel wrote in the 2015 edition of "A Random Walk Down Wall Street." I said "he trashed it" and that's correct. He spends a full chapter on it, chapter 11, pp. 260-288, "Is Smart Beta Really Smart?"

He knocks down everything, listing "the positives" and "the negatives" for each but ultimately ruling for the negatives, starting with individual factors: the ideas that, in his section titles, "Value Wins," "Smaller is Better," "Momentum and Reversion to the Mean," "Low Volatility Can Produce High Returns." He moves on to "Blended Flavors and Strategies," including DFA funds, RAFI "Fundamental Indexes," and "Equal-Weight Indexes." He concludes that "'Smart Beta Funds Flunk the Risk Test." He says flatly
All "smart beta" strategies represent active management... If you believe that a subset of securities will give you superior returns, you are counting on some "dumb" investors to hold portfolios producing poorer returns. Some "smart beta" advocates have been quite explicit in suggesting... that investors in traditional capitalization index funds are the dumb beta investors, since by holding the broad index they will be holding a number of overvalued growth stocks. But that argument must be false.
He goes on to exaine "How Well Have Factor Tilts Worked in Practice?" He uses some of Bogle's "telltale charts" to illustrate mean reversion in the value and size factors, DFA funds, RAFI fundamental indexes, and equal weighting.

He says
"Smart beta" portfolios do not represent a sophisticated better mousetrap for investors. Investors should be wary of getting caught in the riskier mousetrap themselves. "Smart beta" portfolios...are a testament more to smart marketing than smart investing.
An entire section is entitled "Capitalization-Weighted Indexing Remains at the Top of the Class."

So I don't know what to say except to say that only three years ago he was perfectly clear in 29 pages of advocacy for cap-weighted indexed portfolios and against "smart beta" in many different shapes and forms.
2 things

His enthusiasm for China which was boundless huge overweightings even though he of all people should know the issues.

I felt he had fallen in love with China the economic wonderstory and equated it to the Chinese stock market, a clear cognitive error given what we know about stock markets and economic growth.

I remember similar stories about Emerging Markets up to the Mexico Crisis in 1994 and having portfolios at 40 per cent of book cost. Rinse and repeat in Asia Russia etc in 1997 and 98.

Second thought is I wonder if he is suffering from cognitive decline? Reversing a lifelong held view seems ... odd?
agree with all that.
but thirdly there is the money. ie he is financially incentivized to push China etc by the firm he works for.
Last edited by grok87 on Sun Oct 21, 2018 7:56 am, edited 1 time in total.
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Re: Malkiel no longer endorses blind-folded monkeys, likes smart beta

Post by nisiprius » Sun Oct 21, 2018 6:32 am

OK, unkind speculation ahead. Wikipedia says "July 22, 2005, Malkiel retired from 28 years of service as a director of the Vanguard Group and trustee of Vanguard Mutual funds," which would set 1977 as the date of his joining Vanguard (a year after the Vanguard 500 fund was launched).

Recall that the first edition of A Random Walk Down Wall Street was written in 1973. It definitely said
What we need is a no-load, minimum management-fee mutual fund that simply buys the hundreds of stocks making up the broad stock-market averages and does no trading from security to security in an attempt to catch the winners. Whenever below-average performance on the part of any mutual fund is noticed, fund spokesmen are quick to point out "You can't buy the averages." It's time the public could.... [the NYSE ought to] sponsor such a fund and run it on a nonprofit basis...
But that was just a side remark in one chapter. I think he named the "young economist" Eugene Fama and explained the "efficient market hypothesis" and the prediction from EMH that stock prices would follow a random walk.

However, the book is not "about" index funds, it is indeed an eclectic ramble over many investing-related topics. it contained a full chapter on "The Malkiel Method for Selecting Individual Common Stocks."*

I believe every edition has included his self-description as "Having been smitten with the gambling urge since birth..."

So my theory is that Burton Malkiel has simply been a good corporate team player all along, a chameleon who has changed his color according to whoever is paying him. When he was working for Vanguard, he emphasized indexing and the EMH. This very likely could have included a feeling of rivalry with Dimensional Fund Advisors, the other firm famous for "passive" investing, and might have even influenced the sections expressing skepticism about the size and value factors under the heading "Potshots at the Efficient Market Theory and Why They Miss."

I once worked in a company where my boss's boss, the VP of R&D, was a great guy† but he would not depart from the company "line." He always supported whatever upper management said it was doing. Well, I think maybe Burton Malkiel was like that. The "real" Burton Malkiel wasn't necessarily a deeply committed indexer, he just supported what Vanguard was doing, and now he supports what Wealthfront (and Theravance Biopharma presumably, he is also a director that firm).




*The capsule statement of his method was--riffing on a quotation from Ibsen--he looked for "castles in the air--but with a firm foundation."

†the only person I've ever worked for who used project management tools fairly--i.e. if the critical path was falling behind, instead of yelling that the engineers that they weren't meeting their estimate, he'd say "hmmm, can we order that lens as a rush order?" And the optical engineer would say tentatively--"it's awfully expensive--that would cost $25,000 instead of $6,000." "But it would get it to us two weeks earlier?" "Yes." "Well, I think we need to do that, then."
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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nisiprius
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Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Malkiel no longer endorses blind-folded monkeys, likes smart beta

Post by nisiprius » Sun Oct 21, 2018 6:39 am

Robert Browning, referring to William Wordsworth wrote:Just for a handful of silver he left us,
Just for a riband to stick in his coat—
Found the one gift of which fortune bereft us,
Lost all the others she lets us devote;
They, with the gold to give, doled him out silver,
So much was theirs who so little allowed:
How all our copper had gone for his service!
Rags—were they purple, his heart had been proud!
We that had loved him so, followed him, honoured him,
Lived in his mild and magnificent eye,
Learned his great language, caught his clear accents,
Made him our pattern to live and to die!
Shakespeare was of us, Milton was for us,
Burns, Shelley, were with us,—they watch from their graves!
He alone breaks from the van and the freemen,
—He alone sinks to the rear and the slaves!

We shall march prospering,—not thro' his presence;
Songs may inspirit us,—not from his lyre;
Deeds will be done,—while he boasts his quiescence,
Still bidding crouch whom the rest bade aspire:
Blot out his name, then, record one lost soul more,
One task more declined, one more footpath untrod,
One more devils'-triumph and sorrow for angels,
One wrong more to man, one more insult to God!
Life's night begins: let him never come back to us!
There would be doubt, hesitation and pain,
Forced praise on our part—the glimmer of twilight,
Never glad confident morning again!
Best fight on well, for we taught him—strike gallantly,
Menace our heart ere we master his own;
Then let him receive the new knowledge and wait us,
Pardoned in heaven, the first by the throne!
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

afan
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Re: Malkiel no longer endorses blind-folded monkeys, likes smart beta

Post by afan » Sun Oct 21, 2018 9:40 am

Agree that there is an obsession with following the statements of gurus rather than looking at the data. I don't care what a guru says. I might be interested in in a proper academic study, reviewing carefully collected data and published in Journal of Finance, or a comparable high level academic journal.

The data on smart beta, like small value and other factors before they cooked up the catchy name, indicate that SB is another way to get market risk adjusted returns with somewhat different return distributions. At higher cost, of course. It does not improve risk adjusted returns when considering higher moments of the return distributions. No free lunch.

The rest is marketing.

Wealthfront has been a marketing scheme from the start. Every few years it comes out with the newest world beating investment approach. Better than all the others! Available exclusively here! Buy now before we run out of genius!

I gather they milk each round until AUM growth slackens and the marketing department demands a new brilliant idea.

Never having let Wealthfront get within a 1,000 foot pole of my money, I have long wondered what happened to investors who liked one of the earlier versions of genius? Do they get legacy status and Wealthfront will manage their money as they promised when that was what they were selling? Or does everyone get switched to the newest shiny pebble?
If they liked the older shiny pebble do they have to pay to get out? Do they have to cash out and realize capital gains? Or can they get out in kind?

If factor investing is such a great idea (it isn't, but let's play this out) one can get some popular factors and even the Holy Grail of a multi factor fund from Vanguard at a lot less than Wealthfront.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

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tadamsmar
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Re: Malkiel no longer endorses blind-folded monkeys, likes smart beta

Post by tadamsmar » Sun Oct 21, 2018 10:23 am

Earlier I said that I was somewhat locked into Malkiel's life-cycle investing plan from earlier editions of Random Walk Down Wall Street due to capital gains.

It occurred to me that I am locked in because it worked! You don't get cap gains without growth. The plan is pretty much a cap-weighted approach with a sizable REIT allocation in the mix.

Anyway, cap gains in taxable tends to put the kabish on making big changes in your investment approach. They can even make rebalancing costly. Choose your plan wisely

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