Question on "Telltale Chart"

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bb
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Question on "Telltale Chart"

Post by bb »

Started to read John Bogle's "Telltale Chart" - Somewhat confused by the charts/graphs. Referring to RTM of 4x25 vs S&P 500 graph would seem to indicate there has been a significant advantage to S&D portfolio. I am having trouble matching up the text to the graph.

For example he says S&D faltered after 1983 for 17 years. Referring to the graph in 1983 the value is 6 and in 2000 it is 5 and then the graphs ends at a value of 5.4.

In what way does this graph illustrate RTM. I am obviously not understanding something basic here.

The thrust of the arguement is there is RTM which I assume would mean the RTM graphs would end up somewhere close to 1.0 but
they don't.

Any help would be appreciated.

Brian
Roy
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Post by Roy »

Hi, bb,

Use the search function and you'll get some discussion on the problems with Bogle's "Telltale Chart".

Larry comments on it a bit here but there are other posts he made (here and Morningstar) that explicate the problems based on style drift and other errors:
http://www.bogleheads.org/forum/viewtop ... ce9#393981
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LadyGeek
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Post by LadyGeek »

Good eyes (URL: The Telltale Chart). I think it has to do with the fact that it's a cumulative return. The description (bottom) says Cumulative return: Portfolio/S&P 500. IOW, he's referring to the slope of the line. The returns were virtually identical from ~1945 to 1964 - the line is flat. Now, draw a horizontal line from 1978 through 2001, it varies above and below 5 (within 0.5% as stated). I'm going by the description, this is what makes sense to me.

(Adding to Roy's link.) Wiki article link: Slice and Dice

Be sure to read the forum discussions referenced at the bottom of the page. Also, Owning The Market vs. Slice n' Dice

(Update: removed one comment (not relevant))
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Topic Author
bb
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Post by bb »

If there is RTM amoung asset classes shouldn't the cumulative return of 1 asset class divied by the cumulative return of another asset class converge on a value of 1.0 ? Not 5 ?
Multifactor Advisor
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Post by Multifactor Advisor »

Brian: let me save you the time. You can skip the article entirely. All Bogle is saying here is that size/value tilted portfolios don't always beat the market over short/intermediate intervals, just as stocks don't always beat bonds over short/intermediate intervals (he conveniently ignores this fact while choosing to pick on the other 2 factors in the 3F model--of course, Vanguard is largely based on a one-factor model, so you understand Bogle's agency conflicts).

The reality is, YES, if we look at the 84-99 period, a 4x25 approach underperformed the S&P 500 by 2.1% per year. BUT, it still compounded at 16% per year! Further, if we extend the tape to '84-'10, we see the 4x25 goes on to make up lost ground and has outpaced the S&P 500 by 1.5% annually (75% of the 2% advantage over the entire 28-10 period).

Also, this has the silly assumption that you put 100% of your $ to work in 1984, immediately after a 20 year period where 4x25 beat the S&P 500 by 6% per year. What if you got in just 2 years earlier? From '82-'10, again we see the S&P 500 underperform the 4x25 by it's historical average of 2% per year.
Roy
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Post by Roy »

Multifactor Advisor wrote:Brian: let me save you the time. You can skip the article entirely. All Bogle is saying here is that size/value tilted portfolios don't always beat the market over short/intermediate intervals, just as stocks don't always beat bonds over short/intermediate intervals (he conveniently ignores this fact while choosing to pick on the other 2 factors in the 3F model--of course, Vanguard is largely based on a one-factor model, so you understand Bogle's agency conflicts).

The reality is, YES, if we look at the 84-99 period, a 4x25 approach underperformed the S&P 500 by 2.1% per year. BUT, it still compounded at 16% per year! Further, if we extend the tape to '84-'10, we see the 4x25 goes on to make up lost ground and has outpaced the S&P 500 by 1.5% annually (75% of the 2% advantage over the entire 28-10 period).

Also, this has the silly assumption that you put 100% of your $ to work in 1984, immediately after a 20 year period where 4x25 beat the S&P 500 by 6% per year. What if you got in just 2 years earlier? From '82-'10, again we see the S&P 500 underperform the 4x25 by it's historical average of 2% per year.
Multifactor has it right.

This is in addition to the points made by Larry about using funds that style drift, thus sullying the analysis—regardless of time frame chosen. Why this "research" keeps getting used is beyond me when there are perfectly valid reasons to use a Total Markets approach that need not rely on flawed work.
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