Investing idea--what am I missing?

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Null42
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Investing idea--what am I missing?

Post by Null42 » Sat Nov 17, 2018 5:45 pm

Newbie here: I'm an early-middle-age investor (age 40) with a high salary (appx 250K) I don't expect to necessarily be able to maintain forever and am treating as a windfall rather than a reason to upgrade my lifestyle. I have been hoarding my cash for the past few years and now plan to start investing.

I am wondering: Vanguard has a nice selection of ETFs. It occurs to me one could 'surf' the cyclical changes in the various asset classes by regularly buying the ETF with the lowest P/E ratio each month, thus 'buying low' over the entire range of ETF-able asset classes. (Right now the lowest is non-US real estate.)

It is very, very unlikely I have come up with something thousands of other people before me have missed. What am I missing here?

MotoTrojan
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Re: Investing idea--what am I missing?

Post by MotoTrojan » Sat Nov 17, 2018 8:59 pm

Null42 wrote:
Sat Nov 17, 2018 5:45 pm
Newbie here: I'm an early-middle-age investor (age 40) with a high salary (appx 250K) I don't expect to necessarily be able to maintain forever and am treating as a windfall rather than a reason to upgrade my lifestyle. I have been hoarding my cash for the past few years and now plan to start investing.

I am wondering: Vanguard has a nice selection of ETFs. It occurs to me one could 'surf' the cyclical changes in the various asset classes by regularly buying the ETF with the lowest P/E ratio each month, thus 'buying low' over the entire range of ETF-able asset classes. (Right now the lowest is non-US real estate.)

It is very, very unlikely I have come up with something thousands of other people before me have missed. What am I missing here?
So would you let the money ride or move invested money too? You would certainly not want to use the lowest PE outright, as some sectors will naturally be higher/lower on average.

An extreme example of this: Pick the 25 worst performing stocks in the S&P500 and invest only in those. Hmm...

You are correct though; if winning was this simple there would be funds to buy and do it for you.

If I did this I’d want it done in tax-advantaged and I’d try to maintain market weight but allow balance to drift in between my contributions so I could potentially exploit the inefficiencies by buying more of the worst performers but not overexposing to them. I won’t though.

UpperNwGuy
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Re: Investing idea--what am I missing?

Post by UpperNwGuy » Sat Nov 17, 2018 9:02 pm

Why try to beat the market? Few succeed at such an endeavor. Just buy the market. Total Stock index funds are the way to go.

Park
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Re: Investing idea--what am I missing?

Post by Park » Sat Nov 17, 2018 10:51 pm

Null42 wrote:
Sat Nov 17, 2018 5:45 pm
Newbie here: I'm an early-middle-age investor (age 40) with a high salary (appx 250K) I don't expect to necessarily be able to maintain forever and am treating as a windfall rather than a reason to upgrade my lifestyle. I have been hoarding my cash for the past few years and now plan to start investing.

I am wondering: Vanguard has a nice selection of ETFs. It occurs to me one could 'surf' the cyclical changes in the various asset classes by regularly buying the ETF with the lowest P/E ratio each month, thus 'buying low' over the entire range of ETF-able asset classes. (Right now the lowest is non-US real estate.)

It is very, very unlikely I have come up with something thousands of other people before me have missed. What am I missing here?
My advice to a newbie, who aspires to be a DIY investor, is to initially invest in a very orthodox Boglehead manner. The three fund portfolio comes to mind. Then spend a LOT of time reading over the next 5 years. After 5 years of very orthodox Boglehead investing, modify your plan based on what you've learned in the last 5 years.

You mention a salary of $250K, so I assume that you have an occupation that involves a considerable amount of skill. Could someone come in off the street and do your job? If you engage in active investing, are you the equivalent of the person coming off the street to do your job?

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arcticpineapplecorp.
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Re: Investing idea--what am I missing?

Post by arcticpineapplecorp. » Sat Nov 17, 2018 11:11 pm

welcome to the group.

few things:

1. P/E isn't predictive.

In other words, if a p/e was all that was needed to beat the market then wouldn't everyone just buy those and nothing else? But sometimes companies that are fully(?) valued continue to rise. And sometimes cheap companies go bankrupt. How would you feel buying stocks just because of a cheap p/e and then watching your money disappear?

2. Why did you settle on p/e? why not p/b? or p/s? or something else?

3. the total international stock market index fund is cheaper by p/e than the total U.S. stock market index fund. Have you looked up any posts here to see how much love people seem to have for the long term (?) performance of the total international stock market index fund compared to the total U.S. stock market index fund?

4. Presumably this would be in a taxable account. How do you feel about completing more difficult tax returns (or paying for someone else to do so) because you're creating capital gains every time the p/e gets too high and you sell to buy some other lower p/e? You are obviously looking for gains (who isn't?) but are you familiar with what tax loss harvesting is?

5. Have you thought about how often you would be looking to see if the p/e of your picks have gone up (to sell) or down (to buy)? Do you want to spend your time looking at ETF P/Es often. Is this the best use of your time?

6. Have you thought about what your benchmark is? That is, what are you trying to do, beat the market? How long will you try before you decide if the strategy works? What if you try it for 10 years, then throw in the towel because it didn't work over 10 years, but would have worked over 12 years? Will you have regret for not having stayed the course with your strategy?

7. Do you think you will keep searching for cute ways to outsmart investors. Like after finding the "p/e proven method of beating the market" doesn't work, you'll move on to the "How to crush the market using the 200 moving day average", or the Dogs of the Dow, Foolish Four, Elliot Wave Theory, or any other technical analysis?

At the home page of bogleheads there's a link on the left column that says "start here". It's a darn good suggestion. Please take it:
https://www.bogleheads.org/wiki/Getting_started

Then come back after you've watched the videos and scoured articles and searched posts. Don't search for the needle, instead own the haystack:
https://www.bogleheads.org/wiki/Three-fund_portfolio
https://www.bogleheads.org/wiki/Lazy_portfolios

William Sharpe once said "In real estate the three most important things are "location, location and location". When it comes to investing the three most important things are "diversification, diversification, diversification" and if you need three more it's "keep costs low. keep costs low. keep costs low."

By cost, he didn't mean p/e, he meant investment costs like expense ratio, low turnover, no load funds, that sort of thing. Those are good places to start. You could do worse.
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

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Watty
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Re: Investing idea--what am I missing?

Post by Watty » Sun Nov 18, 2018 12:31 am

Null42 wrote:
Sat Nov 17, 2018 5:45 pm
What am I missing here?
Over the long term few mutual fund managers can beat a comparable index fund and they have a large staff and can work on managing the portfolio as a full time job, and they likely work a lot more than 40 hours a week managing the portfolio.

Thinking you can do better than they do is a bit naive.

Thinking you can do better than they do while only spending a few hours a week doing research is not realistic.

If you do decide trade like that then you need to track your performance obsessively since it is not uncommon for people to be up 10% and be excited about that without realizing that an index fund would have done even better.

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BL
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Re: Investing idea--what am I missing?

Post by BL » Sun Nov 18, 2018 12:44 am

Suggest you instead put it all in Vanguard Tax-Managed Fund and concentrate on you job and your life. You are an expert at your job but don't assume you can be better that professionals at this, and even they can't succeed long-term.

You could turn it over to Vanguard PAS and let them handle it for you at a relatively low cost: 0.3%/year. They would put it in low-cost index funds and not try to sell you other expensive products.

If you want to read up on the 3-fund portfolio, you could invest is just 3 different funds, assuming you can be satisfied and not keep messing with it. Read Taylor's Gems and a couple investing books suggested in the Wiki.

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willthrill81
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Re: Investing idea--what am I missing?

Post by willthrill81 » Sun Nov 18, 2018 1:17 am

arcticpineapplecorp. wrote:
Sat Nov 17, 2018 11:11 pm
1. P/E isn't predictive.
At a bare minimum, valuations are not reliably mean reverting. Valuations can stay low or high for a long time.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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ClosetIndexer
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Re: Investing idea--what am I missing?

Post by ClosetIndexer » Sun Nov 18, 2018 3:17 am

Basically what you'll be doing is giving your portfolio a value tilt (which does slightly indeed increase expected return, but also risk), while at the same time adding a great deal of concentration risk. If you're interested in potentially beating the market by 'buying low' while avoiding the risk of concentrating your investments in individual sectors or small numbers of stocks, you might want to do some research on factor investing (specifically the value factor), and consider low-cost ETFs like Vanguard's VTV and VBR, or similar offerings from others. (I have a slight preference for SLYV over VTV.) Also consider diversifying globally to further decrease concentration risk, although the options for value tilting there aren't quite as good.

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JoMoney
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Re: Investing idea--what am I missing?

Post by JoMoney » Sun Nov 18, 2018 5:49 am

Null42 wrote:
Sat Nov 17, 2018 5:45 pm
... It is very, very unlikely I have come up with something thousands of other people before me have missed. What am I missing here?
Yes, it is unlikely you've found something others have missed.
If securities are being priced lower, it's likely that they have lower growth expectations, higher risks, and/or possibly the metric you're looking at isn't measuring what you think it is. International accounting standards aren't equivalent of U.S. accounting standards, that's not to say they are better or worse, but they may not be measuring things the same way. In addition, in a portfolio of securities like an index or a mutual fund, there are different ways to calculate the P/E for the portfolio. If there are companies with extremely low or negative earnings they may be discarded or set to some max number to keep from skewing the math.
It might be that you've stumbled onto something being mispriced, but if we're talking about a broad average of a sector, I would doubt that's the case. If you can't tell whether it's mispriced or not, I would assume the market knows more than you do about it.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

JustinR
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Re: Investing idea--what am I missing?

Post by JustinR » Sun Nov 18, 2018 6:27 am

Null42 wrote:
Sat Nov 17, 2018 5:45 pm
It is very, very unlikely I have come up with something thousands of other people before me have missed.
You answered your own question.

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Cycle
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Re: Investing idea--what am I missing?

Post by Cycle » Sun Nov 18, 2018 9:40 am

Just pick an AA, dont change your AA, automatically buy, don't hoard cash and try to market time, rebalance regularly, max out your tax advantaged accounts including backdoor roth, tax loss harvest.

Don't try to be a day trader. The market is efficient and has all the information you have and more.

There, I saved you a few hundred $K and decreased your stress levels.

GrowthSeeker
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Re: Investing idea--what am I missing?

Post by GrowthSeeker » Sun Nov 18, 2018 10:21 am

Park wrote:
Sat Nov 17, 2018 10:51 pm
Null42 wrote:
Sat Nov 17, 2018 5:45 pm
I am wondering: Vanguard has a nice selection of ETFs. It occurs to me one could 'surf' the cyclical changes in the various asset classes by regularly buying the ETF with the lowest P/E ratio each month, thus 'buying low' over the entire range of ETF-able asset classes. (Right now the lowest is non-US real estate.)
My advice to a newbie, who aspires to be a DIY investor, is to initially invest in a very orthodox Boglehead manner. The three fund portfolio comes to mind. Then spend a LOT of time reading over the next 5 years. After 5 years of very orthodox Boglehead investing, modify your plan based on what you've learned in the last 5 years.
+1

If it was easy, everyone would be doing it.
A successful, consistent, profitable trading system is the holy grail to which many active traders aspire. Suppose for a moment you could find a system that works. One problem is, systems that work (or appear to work) don't last forever. Market conditions change so your system would work for a while (or appear to work) but then stop working. And how do you know when it stops working? After you've lost a lot of money? Maybe, but maybe that's just a blip and it will go back up. You don't know because there is no way to be sure about your "system". So you can't really be that confident in your system; at some point emotions will take over. This method has more risk than reward.

There are some platforms where you can get a paper money account and trade that; so you're not risking any real money. If you have a TDAmeritrade account, you can download "ThinkOrSwim" and get a paper (fake) account. I'm sure there are others. There are also systems where you can come up with trading ideas and backtest them (which doesn't prove they would work, but it can be a fun intellectual exercise). Even on portfoliovisualizer.com which is often cited here on bogleheads, there are some timing systems you can check out.

For a few decades, I've studied technical analysis, looked for timing models, and looked at various ways of trading (Peter Lynch's buy stock in companies you know well; William O'Neil's CANSLIM; motley fool; option credit spreads), and over the years I realized I knew that none of that would work if I wasn't spending a great deal of time and mental effort on it. Then if I did "do all my homework", it still might not work. So, now I am a boglehead. It was a long journey to get here; fortunately I didn't risk much money on the journey.

Good luck on your journey.
Just because you're paranoid doesn't mean they're NOT out to get you.

Park
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Re: Investing idea--what am I missing?

Post by Park » Sun Nov 18, 2018 10:49 am

Null42 wrote:
Sat Nov 17, 2018 5:45 pm
Newbie here: I'm an early-middle-age investor (age 40) with a high salary (appx 250K) I don't expect to necessarily be able to maintain forever and am treating as a windfall rather than a reason to upgrade my lifestyle.
You have a high salary, and you don't expect to necessarily be able to maintain it forever. So it sounds like there is some uncertainty, as to whether you can keep your high salary. Time spent on your job is more likely to be productive than time spent on security selection, and very likely to be more productive than time spent on market timing.

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