Do Bogleheads Overstate Difficulty of Stock Picking?

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Re: Do Bogleheads Overstate Difficulty of Stock Picking?

Post by sschullo »

Beagler wrote:
Petrocelli wrote: As a group, I think the Bogleheads cannot look objectively at a portfolio such as mine. I offer my initial post simply as a counter-point which may encourage a few people to think outside the box.
Over 40 responses (mostly taking you to task) in less than a day. I'd say your opinion of The Group is correct.
As part of The Group? Guilty as charged and glad for it!
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Re: Do Bogleheads Overstate Difficulty of Stock Picking?

Post by Petrocelli »

Mel Lindauer wrote:
Did you ever stop to think that perhaps the "group" has it right, Beagler?

Perhaps you failed to check the link I provided to Bill Bernstein's excellent research on this very topic? So you can add Bill B to the "group" you seem to be belittling.
I don't think Bernstein's article is directly on point. The article discusses whether having 15 stocks provides adequate diversification. Stein/Demuth advocate adding low beta stocks to a portfolio of mutual funds which is quite a different thing. In that instance, the portfolio would hold hundreds, perhaps thousands, of stocks.

As for the group beings right, prevailing wisdom may be right. I really don't know. However, after a very short period, I found that I have been able to obtain greater returns with far less volatility by adding low beta stocks to a portfolio.
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speedbump101
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Post by speedbump101 »

gkaplan wrote:
as a person who has achieved financial indepence through my own stock picking
Could you be more pompous?
Wow, not for 'pomposity' but for joining today, and having 37 posts already... Valuethinker better watch his six if this keeps up...

Looks like the normal 'lurking' followed by 'lurching' all happened before lunch! :-)

Welcome aboard billspetrino...

SB...
Last edited by speedbump101 on Sat Dec 26, 2009 8:40 pm, edited 2 times in total.
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Re: Do Bogleheads Overstate Difficulty of Stock Picking?

Post by Petrocelli »

Wagnerjb wrote:
I strongly suspect the 18% return is because you added money to the portfolio, not because the stocks you chose did better. M* may be calculating the ending dollar value as compared to the original dollar value, and that may be where the 18% return comes from.
Because I generally buy the worst performer, I often get good deals. That has "juiced" returns slightly.

As an example, I bought Abbott Labs at 55.12 in November 2008. The price fell to, and I bought more at $45.28 in August 2009. That lowered my cost basis. The stock is now at $55.14.

However, when you compare apples to apples, the outperformance of the 20 stocks versus the 500 Index is not that great. However, the stocks have far lower standard deviation.
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Re: Do Bogleheads Overstate Difficulty of Stock Picking?

Post by Petrocelli »

sschullo wrote:
The problem with active management strategy is that their unique individual "strategy" can never be replicated identically to others. Even when asked, billspetrino can only give general advice. So the person who takes the advice of Petro and billspetrino thoughts cannot replicate in a strategic way what they did, never.
There are so many different indexing strategies, that it can hardly be said that there is one indexing strategy.

I have no strategy other than to use low cost actively managed funds as opposed to index funds, given the funds available in my 401(k) plan. I would choose Primecap over the 500 Index, or International Growth over International Index, or Selected Value over Small Value Index.

I don't know if this will work in the future. However, it has worked in the past.
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Post by dumbmoney »

Perhaps it would help to clarify the motivation behind stock picking. Is it:

1) you want to make predictions about the fortunes of particular companies

2) no fund gives you the style you want

3) expense ratio savings and/or tax management

(1) is the most common reason, but it's basically just gambling. No different than placing bets on football games. It only makes sense if you have inside information (and trading on such info is generally illegal). Or if your name is Warren Buffett, I guess.

2-3 are weak reasons given the diversity of funds available.
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Re: Do Bogleheads Overstate Difficulty of Stock Picking?

Post by Beagler »

Mel Lindauer wrote:
Beagler wrote:
Petrocelli wrote: As a group, I think the Bogleheads cannot look objectively at a portfolio such as mine. I offer my initial post simply as a counter-point which may encourage a few people to think outside the box.
Over 40 responses (mostly taking you to task) in less than a day. I'd say your opinion of The Group is correct.

...Perhaps you failed to check the link I provided to Bill Bernstein's excellent research on this very topic?...
I fail to see how Dr. Bill B.s' article on stock diversification of a portfolio directly applies to Petro's situation. Petro is adding low-beta stocks to an already diversified portfolio. What he's doing isn't that far off from adding one of VG's dividend-focused funds to an already diversified portfolio.

So, is Dr. Bernstein's article really "research on this very topic?"
“The only place where success come before work is in the dictionary.” Abraham Lincoln. This post does not provide advice for specific individual situations and should not be construed as doing so.
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Re: Do Bogleheads Overstate Difficulty of Stock Picking?

Post by Mel Lindauer »

Beagler wrote:
Mel Lindauer wrote:
Beagler wrote:
Petrocelli wrote: As a group, I think the Bogleheads cannot look objectively at a portfolio such as mine. I offer my initial post simply as a counter-point which may encourage a few people to think outside the box.
Over 40 responses (mostly taking you to task) in less than a day. I'd say your opinion of The Group is correct.

...Perhaps you failed to check the link I provided to Bill Bernstein's excellent research on this very topic?...
I fail to see how Dr. Bill B.s' article on stock diversification of a portfolio directly applies to Petro's situation. Petro is adding low-beta stocks to an already diversified portfolio. What he's doing isn't that far off from adding one of VG's dividend-focused funds to an already diversified portfolio.

So, is Dr. Bernstein's article really "research on this very topic?"
Not really true, Beagler. If you read the OP, he's talking about his stock "portfolio" in isolation, not as part of an already diversified portfolio. Remember, new members read what's posted here in isolation, so we have to comment on it that way. Just to refresh your memory, here's exactly what Petro said:
Last October 1, 2008, I decided to assemble a portfolio of 20 stocks. After some trial and error, I eventually assembled a portfolio of 19 stocks and 1 ETF. This portfolio is my large cap U.S. stock allocation. You can see the portfolio here.
So our comments (and Bill Bernstein's) are directed to that very topic.
Best Regards - Mel | | Semper Fi
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Post by Petrocelli »

It appears I posted a bad link to my stock portfolio. Here is the correct link:

http://socialize.morningstar.com/NewSoc ... D47C472479
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Post by Wagnerjb »

Petrocelli wrote:It appears I posted a bad link to my stock portfolio. Here is the correct link:

http://socialize.morningstar.com/NewSoc ... D47C472479
Thanks. I got the link. I still don't see where your dramatic outperformance is coming from. M* is showing a very close race after one year. Are you saying that your new money went into the portfolio in just the right stocks to juice your return to great heights? Why doesn't M* show that?

Could it be that you misinterpreted the data?
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Re: Do Bogleheads Overstate Difficulty of Stock Picking?

Post by Beagler »

Mel Lindauer wrote:
Beagler wrote:
Mel Lindauer wrote:
Beagler wrote:
Petrocelli wrote: As a group, I think the Bogleheads cannot look objectively at a portfolio such as mine. I offer my initial post simply as a counter-point which may encourage a few people to think outside the box.
Over 40 responses (mostly taking you to task) in less than a day. I'd say your opinion of The Group is correct.

...Perhaps you failed to check the link I provided to Bill Bernstein's excellent research on this very topic?...
I fail to see how Dr. Bill B.s' article on stock diversification of a portfolio directly applies to Petro's situation. Petro is adding low-beta stocks to an already diversified portfolio. What he's doing isn't that far off from adding one of VG's dividend-focused funds to an already diversified portfolio.

So, is Dr. Bernstein's article really "research on this very topic?"
Not really true, Beagler. If you read the OP, he's talking about his stock "portfolio" in isolation, not as part of an already diversified portfolio. Remember, new members read what's posted here in isolation, so we have to comment on it that way. Just to refresh your memory, here's exactly what Petro said:
Last October 1, 2008, I decided to assemble a portfolio of 20 stocks. After some trial and error, I eventually assembled a portfolio of 19 stocks and 1 ETF. This portfolio is my large cap U.S. stock allocation. You can see the portfolio here.
So our comments (and Bill Bernstein's) are directed to that very topic.
Mel, in this thread Petro says:
I don't worry about missing those stocks with large gains. I will leave it to the mangers at Capital Opportunity and Selected Value to find those stocks. I am just focusing on large caps.

It's obvious to me that he's not relying on these low-beta stocks as the be-all and end-all of his equities position. If these low-beta stocks are an addition to his mutual fund portfolio, then please elucidate how the Bernstein article directly provides "research on this very topic."
“The only place where success come before work is in the dictionary.” Abraham Lincoln. This post does not provide advice for specific individual situations and should not be construed as doing so.
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Post by Petrocelli »

Wagnerjb wrote:
Petrocelli wrote:It appears I posted a bad link to my stock portfolio. Here is the correct link:

http://socialize.morningstar.com/NewSoc ... D47C472479
Thanks. I got the link. I still don't see where your dramatic outperformance is coming from. M* is showing a very close race after one year. Are you saying that your new money went into the portfolio in just the right stocks to juice your return to great heights? Why doesn't M* show that?

Could it be that you misinterpreted the data?
No. The returns I am giving you come from the M* Portfolio performance page. That page shows 2 annualized returns, including "personal" annualized returns which take in to account new cash.

The annualized return of the portfolio is not shown on the figures provided on the "shared portfolio" page.

Much of that outperformance in the "personal" numbers comes from the fact that I invested a lot of money earlier this year. Again, comparing apples to apples, the returns of the two portfolios are similar, but the standard deviation of the stock portfolio is lower.
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Post by Mel Lindauer »

The title of his post is "Do Bogleheads Overstate Difficulty of Stock Picking?" Here's his entire OP:
Petrocelli wrote:Last October 1, 2008, I decided to assemble a portfolio of 20 stocks. After some trial and error, I eventually assembled a portfolio of 19 stocks and 1 ETF. This portfolio is my large cap U.S. stock allocation. You can see the portfolio here.

http://socialize.morningstar.c....D47C472479

I selected stocks with a PE less than 20, a beta less than 1, a dividend yield of at least 2%, and a market cap of at least $10 billion. (I eventually replaced one of the stocks, Southern Company, with a utilities ETF.) I chose stocks after reading Stein/Demuth's "Yes, you can supercharge your portfolio!" I also read a lot of articles by Geoff Considine, and posts by statsguy. I used a Monte Carlo simulator called the Quantext portfolio planner to see how each individual stock impacted the returns and standard deviation of my portfolio.

When it comes to investing new money, I buy one of the 5 stocks with the lowest balance. This allows me to buy low.

After 1.25 years, here is the annualized return according to M* versus the 500 Index.

Total: 9.78%
Personal: 18.12%
500 Index: 8.12%

Thus, in an apples to apples comparison, my portfolio is outperforming the 500 Index by 1.66% annualized. When you consider the impact of new money, it is outperforming the 500 index by 10% annualized.

Here's the kicker: According to my Excel spreadsheet, when we compare the STD of the monthly returns of my portfolio to the 500 Index, its standard deviation is 47.51% lower! Put simply, these low beta stocks do not swing around as much as "the market."

Over the past few weeks, I have noted that there have been a lot of stocks on stock picking. However, do Bogleheads give short shrift to assembling a portfolio of low beta stocks? If you know what you are doing, and have patience, can buying and holding a portfolio of individual stocks be a good way to achieve diversification?
It's appears that he's focusing on stock picking and his stock portfolio, and there's no mention of anything else in his return figures, and that's exactly what Bill's research is about.

I really don't care to go round and round any longer. I took his OP at face value and I think others did, too, and that's how we responded.
Best Regards - Mel | | Semper Fi
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Post by Blue »

Petrocelli wrote:
Wagnerjb wrote:
Petrocelli wrote:It appears I posted a bad link to my stock portfolio. Here is the correct link:

http://socialize.morningstar.com/NewSoc ... D47C472479
Thanks. I got the link. I still don't see where your dramatic outperformance is coming from. M* is showing a very close race after one year. Are you saying that your new money went into the portfolio in just the right stocks to juice your return to great heights? Why doesn't M* show that?

Could it be that you misinterpreted the data?
No. The returns I am giving you come from the M* Portfolio performance page. That page shows 2 annualized returns, including "personal" annualized returns which take in to account new cash.

The annualized return of the portfolio is not shown on the figures provided on the "shared portfolio" page.

Much of that outperformance in the "personal" numbers comes from the fact that I invested a lot of money earlier this year. Again, comparing apples to apples, the returns of the two portfolios are similar, but the standard deviation of the stock portfolio is lower.
Petrocelli,

I am not sure I am following your claim(s). The link you provide to the shared portfolio demonstrates a slightly inferior performance since inception relative to the SP500 index on the performance graph and a 1 year deficit of 8.71% to the SP500 under trailing returns.

Is there a different link that is applicable for your portfolio?
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Post by bnw2001 »

billspetrino wrote:Thats why i have decided to do the newsletter thing instead of startinga fund
Burton Malkiel has some very choice words for investment newsletter writers. And I agree with him, for the most part.
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Post by james22 »

billspetrino wrote:My advice to you is to NOT listen to any"experts"
:roll:
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Post by bb »

Petrocelli:

What % of your net worth is devoted to your active stock picks?
This may indicate your confidence in this approach.

billspetrino:

You keep bringing up reinvesting dividends and compound interest
as if this is something that is not available to a mutual fund investor.

I have no problem with someone picking stocks if they can sit down,
tell me what a stock is worth through some analysis, explain why it
is justified to overweight this stock relative to the overall market, and
at what price they are going to sell the stock.

I start to have a harder time when someone starts explaining that it
is an art.
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Post by Snowjob »

At the moment the majority of my investing is actively managed individual stocks. I think the only real outperformance I've had vs. the market is due to my use of leverage. I'm at the point of reducing my margin because the valuations dont justify the cost of borrowing. I need a huge margin of safey to justify my active involvement and that window is almost shut. Good luck to you staying the active route, for me its not worth the time I need to put in to find the right opportunity -- untill the next panic of course!
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Post by CaveatEmptor »

Of course there are people who can beat the market. In fact there are 4 categories of investors, depending on (i) whether they can or cannot beat the market, and (ii) whether the belief they hold with regards to (i) conforms or does not conform to reality. My probable label is (No,Yes), in other words I have no special ability to beat the market, and I know it (which is why I use index funds). Note that I may well be a (Yes,No) person, one who has misjudged his own skill -- such (Yes,No) people tend to invest like (No,Yes) people, i.e., they index (to their own detriment, because they "have it" but are unaware of this fact). Some people, like Warren Buffett, are (Yes,Yes) -- they can beat the market, and they know it (therefore they act on it and outperform). Because all the three above-mentioned categories perform either average or better than average relative to the market, it is a mathematical certainty that the (No,No) group will underperform: Someone must subsidize the outperformance of the (Yes,Yes) by doing worse than average, and that someone has to be the group of (No,No) -- those who have no special skill at beating the market but believe the opposite.

Of course the members of the (No,No) group do not all individually underperform, but as a group they must. The Boglehead philosophy prevents one from falling in that (No,No) underperforming group. Many investors have a vague intuitive feeling that they have special investing talents, but it is a siren song to be resisted, because it is more likely than not to put them in the underperforming category.
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Post by Jacobkg »

Well said, caveat!
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Post by luckyduck288 »

I don't have much else to add as many other Bogleheads have said it well already, but I find two comments from billspetrino as striking. In one post the comment was:
Iam not at liberty to give Individual stock picks as it is not fair to my personal clients and my newsletter clients as well
and then the further advice was:
My advice to you is to NOT listen to any"experts"
.

Why should any of your clients listen to your particular advice? Have you beaten the comparable index(s) for twenty years? What makes you so confident you can continue to do so after costs?

Also, this is a side point that was made above, but it is still something that bothers me: I take issue when people use Buffett's holdings as an indicator of the value of an individual stock. Buffett is not an investor, he is a businessman. When he buys stocks, he is often actively involved in the management of the company and has enough dollars to invest that he can cut deals and discounts the rest of us would never be able to pull off. I know billspetrino said he doesn't blindly replicate Buffett's investments, but I still don't think comparison to Buffett for determination of good "value" is good advice to give to the average investor.
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Post by dividend machine »

It is obvious most investors can not beat the market averages. Does that mean that you it is impossible to beat the market averages? I mean most marriages that have happened in the past 30 years have ended in divorce,Does that mean we should not get married? In fact most people who have gotten married in the past 30 years are either divorced or unhappily married. But I do not see the call for outlawing marriage. Like it or not, life is a series of decisions,and how you make them invariably determines how your life will turn out. Many members of this forum have chosen index funds and for good reason.They do not have the ability or aptitude or desire to outperform the market. There are those however who do have the ability and should choose individual stocks. Selfishly I feel that those who have decided to choose index funds and in effect have been told not to think have actually helped me and others investment performance by ignoring extra investment in the undervalued securities.My point is that there are peopel who can outperform the market and studying their habits would be informative. If you found that of the top 30 men in America 22 came from the same trainer,clearly that trainers methods would be studied. Warrenbuffett mentioned this in 1984 in the investors of graham and Doddsville and one would be better informed if they read this.
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Post by bb »

Active stock picking for large cap stocks also seems the most implausible
area to add value. What are you going to discover that an army of
analysts covering each large cap stock don't already know and isn't
already public.

Also, take a large cap stock like GE - I would love for someone to
tell me how they crunch the numbers to arrive at a fair value for GE.
Let's see - you would have to have a pretty good feel for the locomotive
business, jet engine business, light bulb business, finance business,
etc, etc, etc.
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Post by dividend machine »

Bb astock like General electric is impossible to value because understanding their multiple businesses is not easy even though 50% of their income comes from the finance and insurance arm. Understanding general Mills business however is quite easy and the business is fairly predictible.Certainly at some price general mills would be a great investment. Knowing that price is paramount
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Re: Do Bogleheads Overstate Difficulty of Stock Picking?

Post by rcshouldis »

Petrocelli wrote:
richard wrote:You can achieve a fair amount of diversification with a relatively small number of stocks. You don't get as much diversification as with a larger number - you will likely miss one of the few stocks with enormous gains (as well as a few real losers, but while you can't lose more than 100%, you can gain more).

...

Congrats on your success picking stocks, but don't quit your day job.

As for my day job, I will have it for another 15 years.

Are you sure about that? Don't be.
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Post by Jacobkg »

Could you compute the "fair value" for a company like general mills? Or the bargain value? Based on my readings of Graham, he could not in general do this. Instead, he looked specifically at tangible asset value, the value of all a companys physical assets, and then would only purchase when the stock price dipped at least 30% below that (the margin of safety). In other words, he would buy when the stock was way below it's liquidation value. In an age before computers and before institutional investors dominated the market, these deals would come along every so often. I highly doubt that you are going to find any now, when any institutional trading desk or hedge fund can have a supercomputer monitoring prices in real time and purchasing stocks they like before the latest prices even are available to you or me.

Anybody can come up with their own pet guess for what a particular large cap is really "worth". I contend, along with many finance experts, that the best guess is whatever the stock is currently priced at. It may not be correct in some absolute sense of the word, but it is better than anything else.

Best,
Jacob
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Post by eurowizard »

Petrocelli:

If you purchased these stocks on January 1st 2009 instead of October 2008 then I believe the results would be VERY different.

Utilities and Financials (high dividends) returned something around 15% in 2009 YTD whereas the rest of the market returned about 40%.

It's not what you buy, it's WHEN you buy them.
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Post by LHerr »

"Over 40 responses (mostly taking you to task) in less than a day. I'd say your opinion of The Group is correct."

It is not that investors, through stock picking, cannot beat the market. The point is that, on average, the odds of being successful are very low.

There are numerous studies showing where active managers under perform their benchmark. I don't know of any studies that show where investors, by selecting individual stocks, are besting the market over long periods. By long periods, I suggest a minimum of 10 years and better - 20 years.

Would anyone know of such a study?

LHerr
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Post by Wagnerjb »

CaveatEmptor wrote:Because all the three above-mentioned categories perform either average or better than average relative to the market, it is a mathematical certainty that the (No,No) group will underperform: Someone must subsidize the outperformance of the (Yes,Yes) by doing worse than average, and that someone has to be the group of (No,No) -- those who have no special skill at beating the market but believe the opposite.
I have been posting at M* and here for around 8 years now, and I have seen an awful lot of the (No, No) types. In my opinion, they truly believe they are outperforming the market. Here are their mistakes:

a) They measure themselves against the wrong benchmark

b) They don't understand income taxes, so they ignore them in their benchmarking

c) They ignore certain time periods. They got hammered in 2000, so they begin their analysis in 2003...and viola - they beat the market.

d) They don't understand math. They add new money to a portfolio and their brokerage shows them with a huge "return". So they proudly believe they beat the benchmark. Or they don't know how to calculate compound returns.

These people truly believe they beat the market, they just don't know the reality. It isn't that these people try to beat the market and fail...then learn the truth. It is that these people continue to believe they are beating the market, when the reality is the opposite.

In my experience with Petrocelli, he is a victim of issues (a), (b) and (d).
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Post by LHerr »

"a) They measure themselves against the wrong benchmark

b) They don't understand income taxes, so they ignore them in their benchmarking

c) They ignore certain time periods. They got hammered in 2000, so they begin their analysis in 2003...and viola - they beat the market.

d) They don't understand math. They add new money to a portfolio and their brokerage shows them with a huge "return". So they proudly believe they beat the benchmark. Or they don't know how to calculate compound returns."

I agree with all the above with exception of (b). If one includes (b), does anyone truly beat the market, and if so, how does one tax a benchmark? Even if one omits (b), most investors will not beat or even match a benchmark.

While coming up with a customized benchmark is not easy, tracking a benchmark accurately is another problem where individual investors fall short, particularly when cash flows in and out of the account.

One more point related to the original post. 1.25 years is insufficient time to come up with an accurate calculation for the standard deviation. Software packages I'm familiar with require a minimum of three years of data. In addition, SD is not the best method for measuring risk as it penalizes the investor for variance to the upside, something we want to happen. As Markowitz pointed out, it is better to use semivariance.

LHerr
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Post by dividend machine »

wagnerjb you really believe that peopel who have been investing do not understand whether or not they are beating the market as a whole? In the past decade if you have more than you started the decade with you are ahead are you not?
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Post by mda42 »

A good analogy is gambling. The house always takes a huge cut so, on average, gamblers lose. Some gamblers walk out with large winnings, but it is almost always luck and they cannot replicate this performance over the long run. (A lot of people have too much confidence in their ability, but they lose a lot of money over the long run.) A rational strategy is to avoid gambling. This is like the Boglehead approach.

BUT the rationality of the Boglehead approach does not negate the fact that there are some rare individuals that consistenly make money through gambling in fields like poker and horse races. Those people make too much money too consistently for it to be chance. They probably spend all day long for years and years studying the relevant statistics, etc. Not the life I would want to live, but some people do it. Most fail. But a handful are successful.
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Post by LHerr »

"you really believe that peopel who have been investing do not understand whether or not they are beating the market as a whole?"

The vast majority of investor do not have a clue if they are beating the market, or better, a benchmark that is customized to their portfolio.

1) As mentioned in a prior post, the benchmark is not customized to fit the portfolio. It is possible to customize a benchmark, but it does require a personalized spreadsheet as I know of no affordable commercial program that will do this for the investor.

2) The return of the benchmark is frequently not calculated properly as it does not account for cash moving in and out of the portfolio. If there is cash flow in the portfolio, the benchmark also needs to account for this cash flow. I spend a lot of time working on this using a customized Excel spreadsheet so I know it can be done.

LHerr
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Post by richard »

dividend machine wrote:wagnerjb you really believe that peopel who have been investing do not understand whether or not they are beating the market as a whole? In the past decade if you have more than you started the decade with you are ahead are you not?
Having more than you started with does not mean that you've beaten the market. You may not even have beaten inflation.

If you start with 100 and your portfolio goes up 5% and the market goes up 8%, your ahead, but have not beaten the market. If inflation was 6%, you seem to be ahead but lost on an inflation adjusted basis.
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Post by richard »

Anyone remember the Beardstown ladies? They published a best selling book about beating the market. 15 years later someone noticed that they were counting contributions as investment gains.

http://en.wikipedia.org/wiki/Beardstown_Ladies

http://www.amazon.com/Beardstown-Ladies ... 140&sr=8-1
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Re: Do Bogleheads Overstate Difficulty of Stock Picking?

Post by Petrocelli »

The questions I initially asked were:
Petrocelli wrote:
[D]o Bogleheads give short shrift to assembling a portfolio of low beta stocks? If you know what you are doing, and have patience, can buying and holding a portfolio of individual stocks be a good way to achieve diversification?
Based on this thread, the group's answers appear to be:

1. You are an idiot
2. You are really an idiot.

My answers would be:

1. Yes. (See comparison to Beardstown ladies.)
2. Who the hell knows? Maybe.

I am OK being called an idiot by people who reuse paper towels, because I am one of a handful of posters around here who will be the first to admit that I don't have a clue. In fact, I truly do not understand about half of the posts on this forum discussing investing. I just keep buying stuff, and it seems to work out.

I have to admit that this idea of adding low beta stocks to a portfolio of mutual funds is not mine. I got it from Stein/Demuth, and a guy named Geoff Considine. (Google his name for a lot of good articles.) I tried it and it appears to have worked out in the short term. I have noted that the stocks I bought do not go up as much, or down as much as the market. Although there are about 10 posts telling me (perhaps correctly) that I can't calculate standard deviation, I can eyeball numbers on a daily basis, and I can tell you these stocks don't go up or down as much as the market. Also, as a group, they behave differently than my mutual fund portfolio.

Oddly, my portfolio is probably more Boglehead than most people, but my rules are a little different. Here's what I would say to an investor:

1. Keep costs low, but don't be obsessed by them. So it's OK to buy a low cost actively managed fund.
2. Pay attention to taxes, but don't be obsessed by them.
3. Save a lot of money.
4. Buy some stuff that makes you happy, because you'll be dead soon enough.

As an aside, I am in the Super Bowl in my fantasy football league this week and am up 38-15 as of 10:55 a.m. PST. I'd like to see the Beardstown Ladies' team.
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Post by Wagnerjb »

LHerr wrote:I agree with all the above with exception of (b). If one includes (b), does anyone truly beat the market, and if so, how does one tax a benchmark? Even if one omits (b), most investors will not beat or even match a benchmark.
Yes, I agree that you cannot compare your after-tax returns to a pretax benchmark index with no costs. But it isn't that hard at all. You compare yourself to a passive low-cost fund that tracks that benchmark. That specific fund is "the benchmark". And it is a real-life investable alternative that you could have used. In many cases, we can use Vanguard index funds, but I wouldn't hesitate to use iShares ETFs or other similar low-cost passive funds.

Best wishes.
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Post by Petrocelli »

Wagnerjb wrote:
I have been posting at M* and here for around 8 years now, and I have seen an awful lot of the (No, No) types. In my opinion, they truly believe they are outperforming the market. Here are their mistakes:

a) They measure themselves against the wrong benchmark

b) They don't understand income taxes, so they ignore them in their benchmarking

c) They ignore certain time periods. They got hammered in 2000, so they begin their analysis in 2003...and viola - they beat the market.

d) They don't understand math. They add new money to a portfolio and their brokerage shows them with a huge "return". So they proudly believe they beat the benchmark. Or they don't know how to calculate compound returns.

These people truly believe they beat the market, they just don't know the reality. It isn't that these people try to beat the market and fail...then learn the truth. It is that these people continue to believe they are beating the market, when the reality is the opposite.

In my experience with Petrocelli, he is a victim of issues (a), (b) and (d).
Andy, I think you forgot many other things I am guilty of:

1. I call directory assistance for numbers I could easily look up myself.
2. I often engage in a "one-cheek-sneak" at large gatherings.
3. I once brought pastries to a dinner party, and did not bring an assortment.
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Re: Do Bogleheads Overstate Difficulty of Stock Picking?

Post by LH »

Petrocelli wrote:Last October 1, 2008, I decided to assemble a portfolio of 20 stocks. After some trial and error, I eventually assembled a portfolio of 19 stocks and 1 ETF. This portfolio is my large cap U.S. stock allocation. You can see the portfolio here.

http://socialize.morningstar.c....D47C472479

I selected stocks with a PE less than 20, a beta less than 1, a dividend yield of at least 2%, and a market cap of at least $10 billion. (I eventually replaced one of the stocks, Southern Company, with a utilities ETF.) I chose stocks after reading Stein/Demuth's "Yes, you can supercharge your portfolio!" I also read a lot of articles by Geoff Considine, and posts by statsguy. I used a Monte Carlo simulator called the Quantext portfolio planner to see how each individual stock impacted the returns and standard deviation of my portfolio.

When it comes to investing new money, I buy one of the 5 stocks with the lowest balance. This allows me to buy low.

After 1.25 years, here is the annualized return according to M* versus the 500 Index.

Total: 9.78%
Personal: 18.12%
500 Index: 8.12%

Thus, in an apples to apples comparison, my portfolio is outperforming the 500 Index by 1.66% annualized. When you consider the impact of new money, it is outperforming the 500 index by 10% annualized.

Here's the kicker: According to my Excel spreadsheet, when we compare the STD of the monthly returns of my portfolio to the 500 Index, its standard deviation is 47.51% lower! Put simply, these low beta stocks do not swing around as much as "the market."

Over the past few weeks, I have noted that there have been a lot of stocks on stock picking. However, do Bogleheads give short shrift to assembling a portfolio of low beta stocks? If you know what you are doing, and have patience, can buying and holding a portfolio of individual stocks be a good way to achieve diversification?
The link does not work for me.......

I assume you posted this portfolio back in 2008?

What portion of this is your net worth? Do you have other active funds you picked? How are they doing? Clearly, anyone who picks anything, can pick the best subset and post it after the fact.

If the portfolio had really really sucked, would you have posted it? Maybe you would, being the individual you are, but statistically, humans would NOT have posted it......... So there is selection bias in these types of posts, they are ancedotal.

I too, picked FXI as a individual bet of sorts, with 5 percent of my portfolio, it has returned 13 percent annualized from 2005 according to an XIRR internal rate of return of my inputs to it, and I have gotten out of it. But so what? That is meaningless really, I just got lucky.

Bogleheads do not say its impossible, heck, playing the lottery can be the winning thing to do, its just not the winning thing to do expectantly.

Humans really suck at self reporting, the will mentally deep six thier losses as humans are hard wired to do(including me, very provably so, I cannot remember my worse loss anymore, AGAIN, not even its name!!!! I will never forget however, that I bought nvidia at 4 and sold at 45, ah how easily that comes to me), not report on thier losses, report thier winners, screw up there reports (aka the beardstown ladies), it just goes on and on.

All these kinda things, operate basically in the murk, but I tell you what, you get you, a like minded group of your fellows, and if your investments were recorded and monitored strictly by a neutral third party, ALL of your investments, and reports made out each year, you guys would fail relative to a matched index, over a period of ten years, likely near the rate of 80 percent of you. You have expected failure relative to indexing.

Thats what the available evidence shows. Mutual funds, if there were not brutually tracked, would be reported to "beat" the indexes all the time, I am sure, but they are rigorously tracked.

Aug-6-02 NVDA $4.52 200
Jul-26-02 NVDA $7.63 100 $20 923.99
Jun-28-02 NVDA $8.93 100 $20 782.99
07/13/07 NVDA 45.93 -400 $20 912.95
9.99 -18362.01
xirr nvidia 0.48


There is one of my better ones, made with little money as I had at the time available, I am a friggin genius aren't I? 48 percent annualized. Yeehaw. Means nothing I posit, just like my only bet for the past several years of FXI, being successful, means zip. heh, I cannot even remember my losers offhand, and dont want to even go back and look at em either.

Cause I tell you what, I did not have that stuff to trot out, I would have kept my mouth shut, and not posted just my losers...... selection bias again.

So yeah, "winning" is trivial, happens all the time over short periods, and with ex post selection bias. Bogleheads just report the facts, and the facts, when verified independantly, and without selction bias, and over the long term, are simply brutually against any advantage of stock picking expectantly. heck, I cant even get your link to work.

Congratulations though : )

LH
Last edited by LH on Sun Dec 27, 2009 2:55 pm, edited 2 times in total.
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Post by Petrocelli »

Petrocelli wrote:It appears I posted a bad link to my stock portfolio. Here is the correct link:

http://socialize.morningstar.com/NewSoc ... D47C472479
I don't think I posted it back in 2008. I may have. Why would you assume I did?

P.S. Up 43-16.
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Post by bnw2001 »

Petrocelli although I do not agree with you I admire you for keeping your cool and your sense of humour. Cheers.
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Post by Petrocelli »

bnw2001 wrote:Petrocelli although I do not agree with you I admire you for keeping your cool and your sense of humour. Cheers.
Thanks. I am currently working on my book which is titled, "If your portfolio is so great, why are you reusing paper towels?"
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Post by rapscallion »

Petrocelli wrote:Andy, I think you forgot many other things I am guilty of:

1. I call directory assistance for numbers I could easily look up myself.
2. I often engage in a "one-cheek-sneak" at large gatherings.
3. I once brought pastries to a dinner party, and did not bring an assortment
I had to google "one-cheek-sneak." Hilarious.

http://www.urbandictionary.com/define.p ... heek+sneak

Rap
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Post by LH »

Petrocelli wrote:
Petrocelli wrote:It appears I posted a bad link to my stock portfolio. Here is the correct link:

http://socialize.morningstar.com/NewSoc ... D47C472479
I don't think I posted it back in 2008. I may have. Why would you assume I did?

P.S. Up 43-16.
just wondering if it was classic ex post report or not, I actually assumed you did not, but caught myself and said, hey, that link I cannot get to work, maybe he DID post it back then, and is the rare person who does post something measurable going forward, that also has the unfortunate side effect that it can FAIL going forward, as going forward, its expected to fail........ Instead of, the usual, Hey, look, I am successful after the fact selection bias post. Its like the incubator funds, only the successful make it out, all the failures do not get reported : )
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Re: Do Bogleheads Overstate Difficulty of Stock Picking?

Post by Triple digit golfer »

Petrocelli wrote:As an aside, I am in the Super Bowl in my fantasy football league this week and am up 38-15 as of 10:55 a.m. PST. I'd like to see the Beardstown Ladies' team.
I lost last week. I was in 1st out of 12 since Week 3. I was 12-2. Then I lost 157.36 - 156.66...yes, 0.70 points. Seven additional yards rushing, or one additional catch, or 18 yards passing would have been all I needed.

So this week I'm in the third place game. Whoopee.

I'm like the Colts are most years. Best regular season record, playoff choker! HEY-OOH!!!

Good luck. I hope you win the championship.
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Post by Petrocelli »

Mel Lindauer wrote: It's appears that he's focusing on stock picking and his stock portfolio, and there's no mention of anything else in his return figures, and that's exactly what Bill's research is about.

I really don't care to go round and round any longer. I took his OP at face value and I think others did, too, and that's how we responded.
Mel:

While we are on the subject of Bill Bernstein, he not only dislikes individual stocks, he also thinks that those unloved mid-caps kind of suck.

http://www.efficientfrontier.com/ef/900/barbell.htm

Not to fret. I have had 40% of my 401(k) stocks in two mid-cap funds (Selected Value and Cap. Opp.) and did OK despite the good doctor's protestations. Dan Wiener likes midcaps too, so you have that going for you, which is nice.
Last edited by Petrocelli on Sun Dec 27, 2009 3:26 pm, edited 2 times in total.
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Post by Triple digit golfer »

rapscallion wrote:
Petrocelli wrote:Andy, I think you forgot many other things I am guilty of:

1. I call directory assistance for numbers I could easily look up myself.
2. I often engage in a "one-cheek-sneak" at large gatherings.
3. I once brought pastries to a dinner party, and did not bring an assortment
I had to google "one-cheek-sneak." Hilarious.

http://www.urbandictionary.com/define.p ... heek+sneak

Rap
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Post by Triple digit golfer »

Petro,

My advice for you is to keep doing what you're doing and ignore the faults people find here. I'm personally a three-fund guy myself: Total Stock Market, Total International, and Total Bond. But that doesn't mean your approach is bad. I know I hate trailing the markets, so total market investing is the prudent choice which allows me to stay the course.

Your portfolio seems to be low cost and very diversified. Just because it isn't indexed and isn't all mutual funds doesn't mean it's bad.

You deviating from the market is no different than Mel deviating by overweighting midcaps or Larry deviating by overweighting small value.
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Post by LHerr »

"Yes, I agree that you cannot compare your after-tax returns to a pretax benchmark index with no costs. But it isn't that hard at all. You compare yourself to a passive low-cost fund that tracks that benchmark. That specific fund is "the benchmark". And it is a real-life investable alternative that you could have used. In many cases, we can use Vanguard index funds, but I wouldn't hesitate to use iShares ETFs or other similar low-cost passive funds."

This answer still does not answer the original question of how one compares a portfolio involving taxes vs. a benchmark were taxes are involved.

Because of all the complications, including each investor has a different tax obligation, it makes sense to leave taxes out of any comparisons. I will assume I pay the same rate of taxes on the portfolio as I do on the benchmark.

LHerr
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Post by Mel Lindauer »

Petrocelli wrote:
Mel Lindauer wrote: It's appears that he's focusing on stock picking and his stock portfolio, and there's no mention of anything else in his return figures, and that's exactly what Bill's research is about.

I really don't care to go round and round any longer. I took his OP at face value and I think others did, too, and that's how we responded.
Mel:

While we are on the subject of Bill Bernstein, he not only dislikes individual stocks, he also thinks that those unloved mid-caps kind of suck.

http://www.efficientfrontier.com/ef/900/barbell.htm

Not to fret. I have had 40% of my 401(k) stocks in two mid-cap funds (Selected Value and Cap. Opp.) and did OK despite the good doctor's protestations. Dan Wiener likes midcaps too, so you have that going for you, which is nice.
Looks like we have a few things in common, Petro:
1. Both of us disagree with Bill on at least one thing, and
2. Our mutual belief in "Mel's Unloved Mid Caps".

:beer
Best Regards - Mel | | Semper Fi
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