[Paul Merriman: This strategy beats a total stock market fund]

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jdilla1107
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Re: Investing in the largest 10 companies?

Post by jdilla1107 » Thu Oct 24, 2019 6:06 pm

305pelusa wrote:
Thu Oct 24, 2019 5:24 pm
jdilla1107 wrote:
Thu Oct 24, 2019 4:41 pm
305pelusa wrote:
Thu Oct 24, 2019 4:34 pm
jdilla1107 wrote:
Thu Oct 24, 2019 4:13 pm
One Ping wrote:
Thu Oct 24, 2019 12:41 pm

With maybe a touch of cognitive dissonance thrown in for good measure ...
Would you feel better if each of these 10 companies decided to break into 10-20 companies each? Would that remove the risk you are concerned with?

Do you realize that big companies actually operate this way? Microsoft has 100s of business lines. You could say it's almost like 100s of small caps operating under 1 umbrella, because that's what it is.

Diversification should not be measured entirely by "corporate legal structure"
Yes, if each of those companies broke into 10-20 different ones, that did completely different things, that would absolutely be better.
So, If Microsoft announced they were breaking into separate companies:

- Home Entertainment
- Windows
- Business Solutions
- Cloud Computing
- Mobile and embedded devices
- A huge consulting organization

You would think to yourself, 'That's a lot more diversified now"?

That makes no sense.
Huh? It has little to do with whether it's one or multiple entities.

Did you even read my post past what you quoted?
Yes, you said the business units are in too similar of spaces, which doesn't make sense in the top 10 holdings of the market. So, if we also break apart Exxon, JP Morgan, Johnson and Johnson, Procter and Gamble, Berkshire Hathaway, and the world's largest advertising companies down (FB and google), that's incredibly diversified.

The top 10 companies hold thousands of business units in incredibly varied businesses. Thinking diversification means "number of corporate legal entities" is simplistic and misguided. It's repeated so often on this forum that it makes me think people don't even understand the reasons for cap weighting.

tesuzuki2002
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Re: Paul Merriman article

Post by tesuzuki2002 » Thu Oct 24, 2019 6:14 pm

marcopolo wrote:
Mon Oct 21, 2019 2:03 pm
Forester wrote:
Mon Oct 21, 2019 2:01 pm
marcopolo wrote:
Mon Oct 21, 2019 1:18 pm
How does one distinguish these changes from performance chasing.
Bogle told Merriman his 10 fund strategy was too complex, Merriman created Two Funds For Life in response.
I am not sure how that answers the question.
I am not necessarily against added complexity, if it provides a commensurate benefit.
I have yet to see the benefits of complexity....

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Random Musings
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Re: Paul Merriman article

Post by Random Musings » Thu Oct 24, 2019 7:23 pm

tesuzuki2002 wrote:
Thu Oct 24, 2019 6:14 pm
marcopolo wrote:
Mon Oct 21, 2019 2:03 pm
Forester wrote:
Mon Oct 21, 2019 2:01 pm
marcopolo wrote:
Mon Oct 21, 2019 1:18 pm
How does one distinguish these changes from performance chasing.
Bogle told Merriman his 10 fund strategy was too complex, Merriman created Two Funds For Life in response.
I am not sure how that answers the question.
I am not necessarily against added complexity, if it provides a commensurate benefit.
I have yet to see the benefits of complexity....
There is some truth to that. Complexity typically means more components in a portfolio which can result in more second guessing.

RM
I figure the odds be fifty-fifty I just might have something to say. FZ

Northern Flicker
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Re: [Paul Merriman: This strategy beats a total stock market fund]

Post by Northern Flicker » Thu Oct 24, 2019 11:39 pm

I find it interesting to hear some opine about TSM being 'maximally diversified' on one hand while they also seem to relish the idea of 20% of their U.S. stock being in ten companies. It seems to be a very clear example of very strong confirmation bias.
The reason index funds work and that is not a problem is that if and when those N largest companies (where N is 10 or whatever) are no longer the N largest, you will be guaranteed to have been holding at market cap weight the N companies that replace them. That is the diversification of an index fund at work.

The recent under-performance of value is in part because value portfolios did not own the current largest companies shortly before and as they were growing to occupy that place of largest companies.

Factor tilts properly implemented (and not just a somewhat arbitrary collection of funds with the right-sounding names) and index fund portfolios are both reasonable strategies. Arguing that one strategy is categorically superior to the other is never going to lead to resolution or clarity.
Index fund investor since 1987.

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willthrill81
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Re: [Paul Merriman: This strategy beats a total stock market fund]

Post by willthrill81 » Fri Oct 25, 2019 12:11 am

Northern Flicker wrote:
Thu Oct 24, 2019 11:39 pm
I find it interesting to hear some opine about TSM being 'maximally diversified' on one hand while they also seem to relish the idea of 20% of their U.S. stock being in ten companies. It seems to be a very clear example of very strong confirmation bias.
The reason index funds work and that is not a problem is that if and when those N largest companies (where N is 10 or whatever) are no longer the N largest, you will be guaranteed to have been holding at market cap weight the N companies that replace them. That is the diversification of an index fund at work.

The recent under-performance of value is in part because value portfolios did not own the current largest companies shortly before and as they were growing to occupy that place of largest companies.

Factor tilts properly implemented (and not just a somewhat arbitrary collection of funds with the right-sounding names) and index fund portfolios are both reasonable strategies. Arguing that one strategy is categorically superior to the other is never going to lead to resolution or clarity.
I understand how market-cap weighting works. It's a very reasonable strategy. But to claim that it represents the maximum level of diversification achievable in U.S. equities is simply false.
“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

rascott
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Re: Investing in the largest 10 companies?

Post by rascott » Fri Oct 25, 2019 10:43 am

jdilla1107 wrote:
Thu Oct 24, 2019 6:06 pm
305pelusa wrote:
Thu Oct 24, 2019 5:24 pm
jdilla1107 wrote:
Thu Oct 24, 2019 4:41 pm
305pelusa wrote:
Thu Oct 24, 2019 4:34 pm
jdilla1107 wrote:
Thu Oct 24, 2019 4:13 pm


Would you feel better if each of these 10 companies decided to break into 10-20 companies each? Would that remove the risk you are concerned with?

Do you realize that big companies actually operate this way? Microsoft has 100s of business lines. You could say it's almost like 100s of small caps operating under 1 umbrella, because that's what it is.

Diversification should not be measured entirely by "corporate legal structure"
Yes, if each of those companies broke into 10-20 different ones, that did completely different things, that would absolutely be better.
So, If Microsoft announced they were breaking into separate companies:

- Home Entertainment
- Windows
- Business Solutions
- Cloud Computing
- Mobile and embedded devices
- A huge consulting organization

You would think to yourself, 'That's a lot more diversified now"?

That makes no sense.
Huh? It has little to do with whether it's one or multiple entities.

Did you even read my post past what you quoted?
Yes, you said the business units are in too similar of spaces, which doesn't make sense in the top 10 holdings of the market. So, if we also break apart Exxon, JP Morgan, Johnson and Johnson, Procter and Gamble, Berkshire Hathaway, and the world's largest advertising companies down (FB and google), that's incredibly diversified.

The top 10 companies hold thousands of business units in incredibly varied businesses. Thinking diversification means "number of corporate legal entities" is simplistic and misguided. It's repeated so often on this forum that it makes me think people don't even understand the reasons for cap weighting.

Enron had a lot of business units in various industries, too.

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Leif
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Re: Paul Merriman article

Post by Leif » Fri Oct 25, 2019 11:32 am

Random Musings wrote:
Thu Oct 24, 2019 7:23 pm

There is some truth to that. Complexity typically means more components in a portfolio which can result in more second guessing.

RM
And more choices for retirement withdrawal. I love it!

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willthrill81
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Re: Investing in the largest 10 companies?

Post by willthrill81 » Fri Oct 25, 2019 11:35 am

rascott wrote:
Fri Oct 25, 2019 10:43 am
jdilla1107 wrote:
Thu Oct 24, 2019 6:06 pm
305pelusa wrote:
Thu Oct 24, 2019 5:24 pm
jdilla1107 wrote:
Thu Oct 24, 2019 4:41 pm
305pelusa wrote:
Thu Oct 24, 2019 4:34 pm


Yes, if each of those companies broke into 10-20 different ones, that did completely different things, that would absolutely be better.
So, If Microsoft announced they were breaking into separate companies:

- Home Entertainment
- Windows
- Business Solutions
- Cloud Computing
- Mobile and embedded devices
- A huge consulting organization

You would think to yourself, 'That's a lot more diversified now"?

That makes no sense.
Huh? It has little to do with whether it's one or multiple entities.

Did you even read my post past what you quoted?
Yes, you said the business units are in too similar of spaces, which doesn't make sense in the top 10 holdings of the market. So, if we also break apart Exxon, JP Morgan, Johnson and Johnson, Procter and Gamble, Berkshire Hathaway, and the world's largest advertising companies down (FB and google), that's incredibly diversified.

The top 10 companies hold thousands of business units in incredibly varied businesses. Thinking diversification means "number of corporate legal entities" is simplistic and misguided. It's repeated so often on this forum that it makes me think people don't even understand the reasons for cap weighting.
Enron had a lot of business units in various industries, too.
Indeed.

10 legally separate entities are less risky than 1 entity containing all 10 of the same units.
“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

jdilla1107
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Re: Investing in the largest 10 companies?

Post by jdilla1107 » Fri Oct 25, 2019 12:59 pm

willthrill81 wrote:
Fri Oct 25, 2019 11:35 am
rascott wrote:
Fri Oct 25, 2019 10:43 am
jdilla1107 wrote:
Thu Oct 24, 2019 6:06 pm
305pelusa wrote:
Thu Oct 24, 2019 5:24 pm
jdilla1107 wrote:
Thu Oct 24, 2019 4:41 pm


So, If Microsoft announced they were breaking into separate companies:

- Home Entertainment
- Windows
- Business Solutions
- Cloud Computing
- Mobile and embedded devices
- A huge consulting organization

You would think to yourself, 'That's a lot more diversified now"?

That makes no sense.
Huh? It has little to do with whether it's one or multiple entities.

Did you even read my post past what you quoted?
Yes, you said the business units are in too similar of spaces, which doesn't make sense in the top 10 holdings of the market. So, if we also break apart Exxon, JP Morgan, Johnson and Johnson, Procter and Gamble, Berkshire Hathaway, and the world's largest advertising companies down (FB and google), that's incredibly diversified.

The top 10 companies hold thousands of business units in incredibly varied businesses. Thinking diversification means "number of corporate legal entities" is simplistic and misguided. It's repeated so often on this forum that it makes me think people don't even understand the reasons for cap weighting.
Enron had a lot of business units in various industries, too.
Indeed.

10 legally separate entities are less risky than 1 entity containing all 10 of the same units.
How much did index fund investors lose on Enron?

If Microsoft went to zero tomorrow due to fraud, TSM would go down 5%. That is assuming that all the other software companies didn't soak up the remaining business valid parts of the business. (Which is what happened with parts of Enron)

With a 20% small cap tilt, it would go down 4%? A 50% tilt and it would go down 2.5%?

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305pelusa
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Re: Investing in the largest 10 companies?

Post by 305pelusa » Fri Oct 25, 2019 1:22 pm

jdilla1107 wrote:
Fri Oct 25, 2019 12:59 pm
willthrill81 wrote:
Fri Oct 25, 2019 11:35 am
rascott wrote:
Fri Oct 25, 2019 10:43 am
jdilla1107 wrote:
Thu Oct 24, 2019 6:06 pm
305pelusa wrote:
Thu Oct 24, 2019 5:24 pm

Huh? It has little to do with whether it's one or multiple entities.

Did you even read my post past what you quoted?
Yes, you said the business units are in too similar of spaces, which doesn't make sense in the top 10 holdings of the market. So, if we also break apart Exxon, JP Morgan, Johnson and Johnson, Procter and Gamble, Berkshire Hathaway, and the world's largest advertising companies down (FB and google), that's incredibly diversified.

The top 10 companies hold thousands of business units in incredibly varied businesses. Thinking diversification means "number of corporate legal entities" is simplistic and misguided. It's repeated so often on this forum that it makes me think people don't even understand the reasons for cap weighting.
Enron had a lot of business units in various industries, too.
Indeed.

10 legally separate entities are less risky than 1 entity containing all 10 of the same units.
How much did index fund investors lose on Enron?

If Microsoft went to zero tomorrow due to fraud, TSM would go down 5%. That is assuming that all the other software companies didn't soak up the remaining business valid parts of the business. (Which is what happened with parts of Enron)

With a 20% small cap tilt, it would go down 4%? A 50% tilt and it would go down 2.5%?
To me that's A LOT for an ideosyncratic risk. Even 2.5% of portfolio loss due to fraud seems really high to me so I don't skimp on my international allocation either. That would be a 50 thousand loss on a 1MM portfolio for purely fraudulent behavior.

Man I'd be pissed if someone stole a hundred bucks from me. But a brand new SUV?

jdilla1107
Posts: 802
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Re: Investing in the largest 10 companies?

Post by jdilla1107 » Fri Oct 25, 2019 2:12 pm

305pelusa wrote:
Fri Oct 25, 2019 1:22 pm

To me that's A LOT for an ideosyncratic risk. Even 2.5% of portfolio loss due to fraud seems really high to me so I don't skimp on my international allocation either. That would be a 50 thousand loss on a 1MM portfolio for purely fraudulent behavior.

Man I'd be pissed if someone stole a hundred bucks from me. But a brand new SUV?
Now you have to remember that the risk of fraud will be higher for stocks with smaller capitalizations. Mr Market is pretty good at pricing risk.

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305pelusa
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Re: Investing in the largest 10 companies?

Post by 305pelusa » Fri Oct 25, 2019 2:24 pm

jdilla1107 wrote:
Fri Oct 25, 2019 2:12 pm
305pelusa wrote:
Fri Oct 25, 2019 1:22 pm

To me that's A LOT for an ideosyncratic risk. Even 2.5% of portfolio loss due to fraud seems really high to me so I don't skimp on my international allocation either. That would be a 50 thousand loss on a 1MM portfolio for purely fraudulent behavior.

Man I'd be pissed if someone stole a hundred bucks from me. But a brand new SUV?
Now you have to remember that the risk of fraud will be higher for stocks with smaller capitalizations. Mr Market is pretty good at pricing risk.
AFAIK, Mr Market, at least in theory, shouldn't be pricing fraud risk at all.

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nedsaid
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Re: Paul Merriman article

Post by nedsaid » Fri Oct 25, 2019 9:30 pm

arcticpineapplecorp. wrote:
Mon Oct 21, 2019 9:23 pm
thanks for sharing. this was a bit surprising (the small cap growth part) because he and Larry Swedroe have often referred to SCG I believe as buying lottery tickets.

Anyway, I like Paul and how he builds portfolios, but he has so many different machinations (ultimate buy and hold, m1, motif, ultimate 2 funds for life) that it seems like the article "150 portfolios better than yours":

https://www.whitecoatinvestor.com/150-p ... han-yours/

I'm having trouble with titling something "ultimate" when he keeps changing/tweeking his portfolios!
Okay then, the "ultimate ultimate" portfolio.
A fool and his money are good for business.

rascott
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Re: Investing in the largest 10 companies?

Post by rascott » Fri Oct 25, 2019 9:41 pm

jdilla1107 wrote:
Fri Oct 25, 2019 2:12 pm
305pelusa wrote:
Fri Oct 25, 2019 1:22 pm

To me that's A LOT for an ideosyncratic risk. Even 2.5% of portfolio loss due to fraud seems really high to me so I don't skimp on my international allocation either. That would be a 50 thousand loss on a 1MM portfolio for purely fraudulent behavior.

Man I'd be pissed if someone stole a hundred bucks from me. But a brand new SUV?
Now you have to remember that the risk of fraud will be higher for stocks with smaller capitalizations. Mr Market is pretty good at pricing risk.

Market cap investing is not the most efficient way to invest. It may be the simplest and cheapest, but it defies logic of true diversification across asset classes.

jdilla1107
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Re: Investing in the largest 10 companies?

Post by jdilla1107 » Sat Oct 26, 2019 7:59 am

rascott wrote:
Fri Oct 25, 2019 9:41 pm
jdilla1107 wrote:
Fri Oct 25, 2019 2:12 pm
305pelusa wrote:
Fri Oct 25, 2019 1:22 pm

To me that's A LOT for an ideosyncratic risk. Even 2.5% of portfolio loss due to fraud seems really high to me so I don't skimp on my international allocation either. That would be a 50 thousand loss on a 1MM portfolio for purely fraudulent behavior.

Man I'd be pissed if someone stole a hundred bucks from me. But a brand new SUV?
Now you have to remember that the risk of fraud will be higher for stocks with smaller capitalizations. Mr Market is pretty good at pricing risk.

Market cap investing is not the most efficient way to invest. It may be the simplest and cheapest, but it defies logic of true diversification across asset classes.
I don't think the term "asset classes" means what you think it means:

https://en.wikipedia.org/wiki/Asset_classes

"In other words, describing large-cap stocks or short-term bonds asset classes is incorrect. "

jdilla1107
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Re: Investing in the largest 10 companies?

Post by jdilla1107 » Sat Oct 26, 2019 7:59 am

305pelusa wrote:
Fri Oct 25, 2019 2:24 pm
jdilla1107 wrote:
Fri Oct 25, 2019 2:12 pm
305pelusa wrote:
Fri Oct 25, 2019 1:22 pm

To me that's A LOT for an ideosyncratic risk. Even 2.5% of portfolio loss due to fraud seems really high to me so I don't skimp on my international allocation either. That would be a 50 thousand loss on a 1MM portfolio for purely fraudulent behavior.

Man I'd be pissed if someone stole a hundred bucks from me. But a brand new SUV?
Now you have to remember that the risk of fraud will be higher for stocks with smaller capitalizations. Mr Market is pretty good at pricing risk.
AFAIK, Mr Market, at least in theory, shouldn't be pricing fraud risk at all.
Completely incorrect.

rascott
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Re: Investing in the largest 10 companies?

Post by rascott » Sat Oct 26, 2019 9:33 am

jdilla1107 wrote:
Sat Oct 26, 2019 7:59 am
rascott wrote:
Fri Oct 25, 2019 9:41 pm
jdilla1107 wrote:
Fri Oct 25, 2019 2:12 pm
305pelusa wrote:
Fri Oct 25, 2019 1:22 pm

To me that's A LOT for an ideosyncratic risk. Even 2.5% of portfolio loss due to fraud seems really high to me so I don't skimp on my international allocation either. That would be a 50 thousand loss on a 1MM portfolio for purely fraudulent behavior.

Man I'd be pissed if someone stole a hundred bucks from me. But a brand new SUV?
Now you have to remember that the risk of fraud will be higher for stocks with smaller capitalizations. Mr Market is pretty good at pricing risk.

Market cap investing is not the most efficient way to invest. It may be the simplest and cheapest, but it defies logic of true diversification across asset classes.
I don't think the term "asset classes" means what you think it means:

https://en.wikipedia.org/wiki/Asset_classes

"In other words, describing large-cap stocks or short-term bonds asset classes is incorrect. "
I suggest you contact Merriman and tell him he doesn't know what it means either, then.


https://paulmerriman.com/10-things-ever ... t-classes/


We are discussing different equity asset classes.... which are a subset of the larger "equity" asset class. If you just want to nitpick and wordsmith comments, knock yourself out, but that does nothing for the conversation.

Uncorrelated
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Re: [Paul Merriman: This strategy beats a total stock market fund]

Post by Uncorrelated » Sat Oct 26, 2019 9:46 am

The problem with the word "asset class" is that different asset classes might not have independent risk factors. In practice this means that the distinction is vague and worthless. You want to diversify across different sources of compensated risk, not different asset classes.

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305pelusa
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Re: Investing in the largest 10 companies?

Post by 305pelusa » Sat Oct 26, 2019 10:25 am

jdilla1107 wrote:
Sat Oct 26, 2019 7:59 am
305pelusa wrote:
Fri Oct 25, 2019 2:24 pm
jdilla1107 wrote:
Fri Oct 25, 2019 2:12 pm
305pelusa wrote:
Fri Oct 25, 2019 1:22 pm

To me that's A LOT for an ideosyncratic risk. Even 2.5% of portfolio loss due to fraud seems really high to me so I don't skimp on my international allocation either. That would be a 50 thousand loss on a 1MM portfolio for purely fraudulent behavior.

Man I'd be pissed if someone stole a hundred bucks from me. But a brand new SUV?
Now you have to remember that the risk of fraud will be higher for stocks with smaller capitalizations. Mr Market is pretty good at pricing risk.
AFAIK, Mr Market, at least in theory, shouldn't be pricing fraud risk at all.
Completely incorrect.
What makes you think that Fraud risk, a stock-specific, ideosyncratic risk that is fully diversifiable, would be priced in?

UberGrub
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Re: Investing in the largest 10 companies?

Post by UberGrub » Tue Oct 29, 2019 9:00 pm

jdilla1107 wrote:
Sat Oct 26, 2019 7:59 am
305pelusa wrote:
Fri Oct 25, 2019 2:24 pm
jdilla1107 wrote:
Fri Oct 25, 2019 2:12 pm
305pelusa wrote:
Fri Oct 25, 2019 1:22 pm

To me that's A LOT for an ideosyncratic risk. Even 2.5% of portfolio loss due to fraud seems really high to me so I don't skimp on my international allocation either. That would be a 50 thousand loss on a 1MM portfolio for purely fraudulent behavior.

Man I'd be pissed if someone stole a hundred bucks from me. But a brand new SUV?
Now you have to remember that the risk of fraud will be higher for stocks with smaller capitalizations. Mr Market is pretty good at pricing risk.
AFAIK, Mr Market, at least in theory, shouldn't be pricing fraud risk at all.
Completely incorrect.
Wait so what was the consensus? If the risk of fraud is higher with small caps, is the market pricing that in via some form of discount?

Thanks

fsh71
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Re: Paul Merriman article

Post by fsh71 » Tue Oct 29, 2019 10:24 pm

Leif wrote:
Mon Oct 21, 2019 3:32 pm
It's too bad the pics are now gone from Trev's thread. They showed a compelling story. I am surprised at the SG component, even if it has done well recently.
FYI, I re-posted the original graph on page 15 of Trev's thread viewtopic.php?f=10&t=38374&start=700#p4753834

YRT70
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Re: [Paul Merriman: This strategy beats a total stock market fund]

Post by YRT70 » Wed Oct 30, 2019 10:11 am

Paul Merriman goes into the discussion on this forum in the first few minutes of his new podcast: https://paulmerriman.com/lessons-from-t ... investors/

heyyou
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Re: [Paul Merriman: This strategy beats a total stock market fund]

Post by heyyou » Wed Oct 30, 2019 1:59 pm

Not even near to being on topic, but saving more is an easy way to have extra portfolio growth.
Yes, that is obvious, but more growth is the desired result from all of the above portfolio yoga. Individuals could focus on more savings instead of the emphasis in this thread of trying to mine extra money in the future, from the historical data.

Expect your risks, during your time in the markets, to randomly deviate from whatever was optimal for any previous period. Similar results will be a coincidence, not a given outcome.

donaldfair71
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Re: [Paul Merriman: This strategy beats a total stock market fund]

Post by donaldfair71 » Wed Oct 30, 2019 2:29 pm

heyyou wrote:
Wed Oct 30, 2019 1:59 pm
Not even near to being on topic, but saving more is an easy way to have extra portfolio growth.
Yes, that is obvious, but more growth is the desired result from all of the above portfolio yoga. Individuals could focus on more savings instead of the emphasis in this thread of trying to mine extra money in the future, from the historical data.

Expect your risks, during your time in the markets, to randomly deviate from whatever was optimal for any previous period. Similar results will be a coincidence, not a given outcome.
1. Perfect post
2. But what fun would that be?
3. Investing should be boring
4. Stay the course

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