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ERE blog condemns index investing. Thoughts?

Posted: Thu Dec 01, 2011 4:32 pm
by donttreadonme
As one of the younger guys on this forum, I read a lot of blogs about early retirement. One of the most well known is the Early Retirement Extreme blog. While the guy usually has some interesting points, I found today's blog posting to be quite backwards.
Some (many?) people know that they don’t know enough the market and they also know that they can’t identify a manager who does know. (“I don’t know anything about carpentry and I also don’t know how to identify a good carpenter”). These people should by all means realize this about themselves and pick index funds.
I would not count this as a “defeat” in the “I’m not smart enough”-sense. It may simply be that investing is uninteresting or that they have so little savings relative to their earned income that they would be better off spending their time improving their earned income instead of their investment income. This is the case for most people (but not for ERE).
Given (3) and (4) the best generic cover-your-ass advice-for-everybody is to buy and hold broad market index funds. (“If you don’t know or trust your driving, you should take the bus.”) The only danger here is that index funds typically concentrate on the equity markets which is just a small sliver of the total market (you also have currency, land, commodities, and bonds). In particular, it is an asset class that’s done particularly well, trend-wise, from 1983-2001 which is why “uninformed investors” are still going woot woot woot about it(*). I suspect that after 10 more years of flat markets, equities aren’t going to look so hot anymore.

(*) I think to a large extent the current recommendation of index funds is not much different that the widespread recommendation of money market funds in the late 70s/early 80s.
I know of course that indexing will beat 80% of mutual funds over the long term. I'm sure we're all on the same page on this forum so we can see the flaws in his arguments. This posting just caught me by surprise when the guy usually has wise advice. Thoughts?

Re: ERE blog condemns index investing. Thoughts?

Posted: Thu Dec 01, 2011 4:36 pm
by hsv_climber
I would not pay much attention to ERE blog wrt to investing. I am not even sure that Jacob ever read books by Ferri/Swedroe/etc. or know who they are.

Re: ERE blog condemns index investing. Thoughts?

Posted: Thu Dec 01, 2011 4:37 pm
by Igglesman
Woot woot woot.

Re: ERE blog condemns index investing. Thoughts?

Posted: Thu Dec 01, 2011 4:38 pm
by Mel Lindauer
Just because someone has a blog doesn't mean they have a clue; it simply means they can say whatever they want because they own the site.

Reader beware!

Re: ERE blog condemns index investing. Thoughts?

Posted: Thu Dec 01, 2011 4:59 pm
by Taylor Larimore
I linked to EREs blog to read his investment strategy which appears to be individual stock picking. Here it is:
Here are my buying and selling rules.

For any given company I will set a minimum entry point yield, typically 5% for companies and 10% for REITs.
I will enter a position gradually. Buying stocks in round lots of 100.
I will also set exit point yields, typically 3% for companies and 5% for REITs.
Once the stock price moves close to the exit point, I will pursue two strategies depending on the stock. If it is a volatile stock I will sell calls with a strike price around my exit price. If it is a nonvolatile stock or it does not have options, I will set a limit order at the exit price.
If there are no stocks to buy, I will buy short maturation (next year maturation) single issue corporate bonds rating above junk.

My portfolio strategy is as follows

I will own no more than 20 different companies. This allows for substantial diversification while still making it possible to follow each company individually.
No company should exceed 10% of my total holdings. I will not rebalance if it happens, but I will not buy more.
I will own mainly US companies. It is easy to get international exposure by owning transnationals. My international exposure is in my 401k/IRA (currently less than 10% of my holdings) because it makes doing taxes easier. I am willing to sacrifice returns for this.
I follow no strict asset allocation. My asset allocation is determined by my trading strategy above. For the same reason I do not rebalance.
When it comes to buying stocks, it gets tricky. Usually there are 10 or more criteria of what makes a perfect stock. Unfortunately, all of them are never fulfilled. This makes pulling the trigger a judgment call. When it comes to pure screen metrics, I like a P/B below 1, but I am willing to entertain higher values. I also like trailing earnings yields higher than 10% (P/E<10), but again I am willing to entertain lower values. I think debt/equity ratios are also also important(*). Ideally this should be 0, but often you don’t get a deal like that.

(*) Which is more impressive? Assets of of $200000 with $0 in debt or assets of $500000 with $300000 in debt? Both have the same net worth (equity), but the first have a debt/equity ratio of 0 whereas the latter have a debt/equity ratio of 150%. Hence the former is a much more financially secure/stable person/company.

See how this process works. Relying strictly on measurable metrics is like hiring a person based on their GPA. It may give you an indication, but it does not give the whole story. The important idea is that the numbers are not the end all but their give an indication of where to look and where not to look. To get a better idea, I read through the 10K and last few 10Qs and try to find some conference call transcripts to get an idea of what kind of management the company has. In general though I read as much as I possibly can about the company. As with anything, the more you read the easier it becomes to understand subsequent readings.
http://earlyretirementextreme.com/day-1 ... remen.html

The writer sounds like me 40 years ago.

Best wishes
Taylor

Re: ERE blog condemns index investing. Thoughts?

Posted: Thu Dec 01, 2011 5:15 pm
by FredPeterson
3% and 5% moves are signals for him to do something with the stock?

He must have had a lot of turnover in the last couple of months.

Re: ERE blog condemns index investing. Thoughts?

Posted: Thu Dec 01, 2011 5:34 pm
by thatwhichisgood
Love Jacob :shock: and so much of his message.

BUT I was and still am very surprised and uncomfortable when he was willing to move into investment advice. So much so that I stopped being a fan. I thought he had a great niche without it. I stopped promoting it to others for fear they would not do there own due diligence.

Sad but true.

Re: ERE blog condemns index investing. Thoughts?

Posted: Thu Dec 01, 2011 8:53 pm
by exigent
And today, he announced his un-retirement.

http://earlyretirementextreme.com/so-lo ... -fish.html

Re: ERE blog condemns index investing. Thoughts?

Posted: Thu Dec 01, 2011 9:32 pm
by White Coat Investor
The problem with extreme early retirement is that it requires that you hate working for a living a great deal. For most of us, our career is something we like at least a little and we like being able to waste some money.

I read his blog and think about getting rid of my house and car and eating lentils all the time and I say to myself, "Self, I like to see patients more than I like to eat lentils." There's a small percentage of society that COULD retire very early, and of that percentage, it's a very small percentage that actually would want to do that versus the alternative.

Re: ERE blog condemns index investing. Thoughts?

Posted: Thu Dec 01, 2011 10:07 pm
by Indices
Why do people read this guy? He never actually retired and from what I've read gets health insurance from his spouse who remains full time employed. And now people are willing to market time with him? Huh?

Re: ERE blog condemns index investing. Thoughts?

Posted: Thu Dec 01, 2011 10:27 pm
by lawman3966
donttreadonme wrote:As one of the younger guys on this forum, I read a lot of blogs about early retirement. One of the most well known is the Early Retirement Extreme blog. While the guy usually has some interesting points, I found today's blog posting to be quite backwards.
Given (3) and (4) the best generic cover-your-ass advice-for-everybody is to buy and hold broad market index funds. (“If you don’t know or trust your driving, you should take the bus.”) The only danger here is that index funds typically concentrate on the equity markets which is just a small sliver of the total market (you also have currency, land, commodities, and bonds). In particular, it is an asset class that’s done particularly well, trend-wise, from 1983-2001 which is why “uninformed investors” are still going woot woot woot about it(*). I suspect that after 10 more years of flat markets, equities aren’t going to look so hot anymore.

I know of course that indexing will beat 80% of mutual funds over the long term. I'm sure we're all on the same page on this forum so we can see the flaws in his arguments. This posting just caught me by surprise when the guy usually has wise advice. Thoughts?
The author implies that index funds omit commodities and bonds. Total stock market index funds include numerous companies whose stock values are tied to commodities. Thus, the remark about commodities is at best misleading.

The remark about bonds is not merely misleading; it's plainly false. He doesn't specify what type of "index funds" he's talking about. The omission of bonds from stock index funds is inherent and desirable. However, most major mutual fund companies including Vanguard and Fidelity have bond index funds. Thus, the suggestion that "index funds", in general, omit bonds is plainly false and tends to indicate that the author either doesn't pay close attention to what he's saying, or lacks fundamental knowledge about the financial markets, including index funds. He's done you and us a favor. He has signalled that he is not worth paying attention to.

Re: ERE blog condemns index investing. Thoughts?

Posted: Thu Dec 01, 2011 10:48 pm
by AndrewS
I read Jacob's blog on and off for awhile. Sort of funny how he's on a more standard physics career path now (loads of theory-oriented physicists end up in finance) after taking a break to dirt-bag it a bit.
I never really had a problem with his investment philosophy, he seems to be a value investor. Certainly if I quit my job and lived in a RV on <200k I would have the time and interest to more actively manage my portfolio.

Re: ERE blog condemns index investing. Thoughts?

Posted: Thu Dec 01, 2011 10:58 pm
by jh
.....

Re: ERE blog condemns index investing. Thoughts?

Posted: Thu Dec 01, 2011 11:15 pm
by centrifuge41
Indices wrote:Why do people read this guy? He never actually retired and from what I've read gets health insurance from his spouse who remains full time employed. And now people are willing to market time with him? Huh?
Jacob Fisker's blog has been really interesting to read. I say "was" because he doesn't post much new content, and he re-posts old content, with an accompanying "Originally posted 2010-03-25 08:32:17."

I agree. His investment advice is fraught with risk, and probably not suitable for the vast majority of us. His writing is great, and thought-provoking though. You may not agree with specific points such as his dislike for travel, eating out, etc (things many/most of us like), but it's good to see his unique perspective. It's good to see his creative ability to do more with fewer resources, and his philosophical and environmental, and perspective/worldview is eye-opening and worth considering.

Re: ERE blog condemns index investing. Thoughts?

Posted: Thu Dec 01, 2011 11:26 pm
by Mrs.Feeley
jenny345 wrote:Plus in most of the extreme early retirement budgets posted online, the posters simply do not account enough for possible stock market losses, inflation and increasing health care costs as they age. For people in their fifties with kids, the health insurance premiums alone for individual coverage can be over a thousand a month and that is with high deductibles and out of pocket maximums. I've never seen a extreme early retirement budget that took all of those factors into account. All of their expenses put together often do not equal what the health insurance premiums plus deductibles are for a middle aged couple with children, so I don't see how most of their budgets would ever work over the long term.
I very much agree with all of the above. These early-retirement blogs have always struck me as pie-in-the-sky, with the writers failing to factor in future health insurance costs and poor stock market returns. Not to mention kids. Kids are real expensive. Heck, life is expensive. Especially as you grow older. It's one thing to live in a trailer eating beans like a hermit when you're 25 and single, but do you really want to enter middle-age like that? Do you really want to grow old not having the money to give to your favorite charity and help out your elderly parents? A life lived with generosity and grace requires more of an effort than simply socking away money in your first working decades. It really does require ongoing effort.