Analysis Paralysis: Can you get to the bottom of things?

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TD2626
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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by TD2626 » Tue Nov 28, 2017 1:30 am

Taylor Larimore wrote:
Mon Nov 27, 2017 1:15 pm
When I am unsure what to do, I seek the advice of experts.
What am I to do when experts disagree? You frequently have wisely said "when experts disagree, it is often because it does not make a forseeable difference".

Experts do disagree, though. Larry Swedroe, Rick Feri, and Paul Merriman suggest substantially different portfolios, for example.

My usual approach, when I see experts disagreeing, is to take a bit of advice from everyone. That's how I ended up proposing a highly complicated portfolio in a thread earlier this summer (as goingup mentioned). I was and still am surprised my proposal was met with almost no support in that thread - I expected by contrast everyone would think it was quite excellent as it pursued nearly every reasonable strategy I could find and only required about 60 holdings.

Maybe I should, when I see experts disagree, not try to incorporate advice from both experts but instead apply Occam's Razor and use the simpler proposal?

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JoMoney
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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by JoMoney » Tue Nov 28, 2017 2:15 am

TD2626 wrote:
Tue Nov 28, 2017 1:02 am
JoMoney wrote:
Mon Nov 27, 2017 2:10 am
:D Everybody think's they're "rational".
Benjamin Franklin wrote:So convenient a thing it is to be a reasonable creature, since it enables one to find or make a reason for every thing one has a mind to do.

Maybe the "rational" thing to do, is to decide what portfolio you want to hold, and then filter out all the obviously irrelevant data to just the points that logically point to a conclusive justification for whatever it is you wanted to do. That's the way most humans seem to make decisions.

If you do think you've found the best portfolio optimization method, maybe look this over to see if it can add some questions to your answers:
Portfolio Optimization Theory versus Practice Roy Ballentine, ChFC, CLU, CFP®
Thanks for the article reference. While I think your proposed solution is interesting as a "plan D", I don't think it is intellectually honest to do this sort of thing. One crafts a hypothesis and tests the hypothesis based on evidence. One doesn't craft a hypothesis and then try to find evidence to prove it (while ignoring evidence to the contrary) - this isn't how science should work in theory.
I don't think it is intellectually honest to think you don't have an opinion, personal values, taste, preferences... Or even a bias in the methodologies you choose to use (potentially based on false premises), maybe because it has a model that looks science'y.... economics is not a science.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by chevca » Tue Nov 28, 2017 9:08 am

TD2626 wrote:
Tue Nov 28, 2017 1:30 am
That's how I ended up proposing a highly complicated portfolio in a thread earlier this summer (as goingup mentioned). I was and still am surprised my proposal was met with almost no support in that thread - I expected by contrast everyone would think it was quite excellent as it pursued nearly every reasonable strategy I could find and only required about 60 holdings.

Maybe I should, when I see experts disagree, not try to incorporate advice from both experts but instead apply Occam's Razor and use the simpler proposal?
Are you honestly still surprised that no one supported that???

I have no doubt you are smarter and more educated than I, OP. Yet, I can't help but feel I'm somehow a better investor. I'm a simple guy, the balanced index fund is good enough for me, and I've actually jumped in and started. :happy

Keep it simple.

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by technovelist » Tue Nov 28, 2017 9:11 am

TD2626 wrote:
Tue Nov 28, 2017 1:30 am
Taylor Larimore wrote:
Mon Nov 27, 2017 1:15 pm
When I am unsure what to do, I seek the advice of experts.
What am I to do when experts disagree? You frequently have wisely said "when experts disagree, it is often because it does not make a forseeable difference".

Experts do disagree, though. Larry Swedroe, Rick Feri, and Paul Merriman suggest substantially different portfolios, for example.

My usual approach, when I see experts disagreeing, is to take a bit of advice from everyone. That's how I ended up proposing a highly complicated portfolio in a thread earlier this summer (as goingup mentioned). I was and still am surprised my proposal was met with almost no support in that thread - I expected by contrast everyone would think it was quite excellent as it pursued nearly every reasonable strategy I could find and only required about 60 holdings.

Maybe I should, when I see experts disagree, not try to incorporate advice from both experts but instead apply Occam's Razor and use the simpler proposal?
Yes, in cases like this, where the best approach is unknowable until after the fact, that's what I would do.
In theory, theory and practice are identical. In practice, they often differ.

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by Peculiar_Investor » Tue Nov 28, 2017 9:28 am

TG2 wrote:
Sun Nov 26, 2017 12:35 am
It is said that "the perfect is the enemy of the good." Looking for the perfect will blind you to all of the other perfectly good options. There are way too many variables to even attempt to find "perfect" and you have little to no control over many of them. Find the best you can for your own situation, recognizing that what is best for you may be terrible for someone else. Adjust when necessary. Enjoy the results.
The OP, and anyone else who hasn't already read it, might want to read Bogle's The Dream of a Perfect Plan October 16, 1999
Jack Bogle wrote:Over the years, I've often cited Von Clausewitz' epigram, "the greatest enemy of a good plan is the dream of a perfect plan." This morning I'm going to use that profound thought as the theme of my keynote speech to you investors who are here today. My theme will echo the fact, not only that "Money Matters," but that your money matters. We are all trying to make sense out of our volatile financial markets, our U.S. economy that is each day becoming more a part of the global village, and the implications of our present revolution—and it is no less than that—in information technology and communications. In these wild days in the markets, deciding on an intelligent investment plan must seem both complex and confusing. What, you must wonder, is the best way to allocate your assets among stocks and bonds and cash, and even other kinds of assets? Once you make those decisions, how do you implement your plan? What role should mutual funds play? Which funds should you select from among the 7,500 that exist today? These are all tough decisions, especially since the world of investing may well be at a sort of inflection point today, and it is never easy to see around the corner.
As others have stated, the goal shouldn't be the perfect plan, a good plan such as the Three-fund portfolio has been shown to work and it keeps things simple.
Normal people… believe that if it ain’t broke, don’t fix it. Engineers believe that if it ain’t broke, it doesn’t have enough features yet. – Scott Adams

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by JamesSFO » Tue Nov 28, 2017 9:43 am

TD2626 wrote:
Sat Nov 25, 2017 3:25 pm
...

I told myself about 6 months ago I’d get to the bottom of investing – and took a deep, deep dive, reading an enormous number of historical threads on this site, reading Vanguard white papers, academic papers, the wiki, books, etc. I’ve been primarily focused on wrapping my head around theory and finding the ideal, perfect portfolio.

Unfortunately, it’s just not working. The more I learn, the more I realize how little I know compared to all there is to learn. I’ve gained some familiarity with many topics, and I had hoped that by now I would be able to find perfection. However, I am not able to find anything that I can prove beyond a reasonable doubt would improve upon a simple portfolio like the Three Fund portfolio (or a similar portfolio involving things like Lifestrategy or Target date options, or Total World + Total bond two fund portfolios, etc).

The issue is that there are plenty of things that I could reasonably and defensibly add to a three fund portfolio. Some of them I could even argue meet a “preponderance of evidence” standard for inclusion. But if I try to tilt towards everything I’d end up with an unmanageable mess. And none of this would meet my high standards for perfection and quantitative rigor when coming up with allocations.

...
Have you looked at Gretchen Rubin's 4 Tendency Framework? (Author website - https://gretchenrubin.com/books/the-fou ... ies/intro/) or jump to this page with a ~5 min video with Rubin talking about questioners https://gretchenrubin.com/2017/06/questioners-video/

Reading your original post and the dialog you come across strongly as a questioner in this thread.

You might want to think about some of Rubin's strategies for moving forward with the decision:

1) Set a deadline to act, e.g. by this date I will implement a strategy and move on

2) Try an experiment with some of your money (or multiple experiments) and re-evaluate if it is working in ~12-24 months

3) Pick just one, later in the thread there is a discussion of you merging ~5 or so well respected experts opinions to create a ~60 fund portfolio. The reality is that experts are not going to have a unity of opinion, so pick one you feel is most rational from your experience and go with that (see (2) and (1))

4) Accept that understanding investing is a process. Whatever your day job is, you didn't become a pro at it overnight. Learning about investing is going to take time, so perhaps stage gate this into what you will do for the next 3-5 years as you learn more vs. what you do after. (variation of (2)/(3))

5) Outsource the decision making, go to a low cost robo advisor (Schwab, Wealthfront, Betterment, Vanguard PAS is effectively one) and decide that you will accept their expert opinion for now.

Etc.

Anyhow, good luck on your learning journey.

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by LadyGeek » Tue Nov 28, 2017 4:00 pm

For anyone who was wondering what "IPS" stands for: Investment policy statement
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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by livesoft » Tue Nov 28, 2017 4:45 pm

JamesSFO wrote:
Tue Nov 28, 2017 9:43 am
You might want to think about some of Rubin's strategies for moving forward with the decision:
....
Sounds similar to something out of Decisive by Heath and Heath which has been discussed on the forum before. It's a great book.
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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by protagonist » Tue Nov 28, 2017 8:47 pm

TD2626 wrote:
Tue Nov 28, 2017 1:08 am
protagonist wrote:
Mon Nov 27, 2017 9:57 pm
Option B for sure.

The real world IS messy. You WILL NEVER get to the bottom of things.

If you want to read something valuable, start with complexity theory/chaos theory rather than with arcane investment porn. You will rapidly realize that predicting10,20,30, 50 years into the future is useless, and the more time you spend trying to perfect your crystal ball, the more frustrated you are likely to get.

If you don't believe me, get a copy of "The Book of Predictions" published in 1980. You can get a used hardcover copy on Amazon right now for $3.24, and it will be the best 3.24 you have ever spent. If nothing else, it is good for a laugh.

Most of your fancy models are built on about 90 years of data. Predicting what will be best for the next 30 based on retrospective analysis of 90 years of data (largely by people motivated to find correlations) is like deciding in New Orleans that if it didn't rain on Monday, Tuesday or Wedhesday, don't bother taking an umbrella on Thursday.
I try to avoid basing things solely off 90 years of data. Indeed, I think that is far too short. I've put a lot of effort into understanding much longer-range data. For example, I participated in this thread (viewtopic.php?t=227268) by Simplegift where he discussed stock returns going back to the 1370s.

Your best bet is to keep it simple. Three fund portfolio for example. It's not perfect but it is probably as good as anything else, it won''t keep you awake at night, and if things go wrong you won't torture yourself with blame for faulty analysis. Because it's really the black swans that you have to worry about, and your analysis won't help you there.
Yes, understanding black swan risk is one of the most difficult things to do when taking a quantitative approach. That's why I am considering diving into kurtosis and co-kurtosis tensors.
Great, but I doubt that will help. Unless you are lucky. And if you are not, you will blame yourself, rather than fate. That will make you more unhappy and bitter than if you just lost money. To quote the Firesign Theatre, we are all bozos on this bus. There are those who admit it and those who don't.

Maybe if you have access to the same vast computing power, enormous data bank, the fastest connections, and the best and brightest MIT and Harvard employees, like Robert Mercer, you can do better. Though most of those people (fund managers) don't. Remember.... for every buyer there is a seller and only one of those people wins-the other loses. And it's the Mercers and the Buffetts that you are competing with, using your models. I'm no match for them so I stick to my simple portfolio. Maybe you are . Good luck. (I mean that....not being sarcastic).

Did you buy The Book of Predictions? It is quite sobering to read what the experts of 1980 had to say. It is one of the few books I ever read that had significant impact on my life. And it's a way easier read, I would imagine, than Co-kurtosis Tensors. Probably funnier too.

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by Derby » Tue Nov 28, 2017 9:02 pm

TD2626 wrote:
Sat Nov 25, 2017 9:53 pm
*********************************************************
sambb wrote:
Sat Nov 25, 2017 8:25 pm
just put it all into lifestrategy moderate growth, and be done with it for a few decades... if you dont want to ponder it further. Youll be fine.
I've always thought that Lifestrategy funds were for investors who knew very little about investing, and it would seem like capitulation and cruel irony if I ended up in one. I am realizing that that may be a very reasonable option, though.
A few years back Mike Piper (Oblivious Investor) switched his retirement account to one LifeStrategy Fund.

https://obliviousinvestor.com/my-portfolio-updated/

About halfway down the comments, a poster named Brian basically makes the bolded comment above, and Mike responds why he disagrees.
Carpe Diem.

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by nedsaid » Tue Nov 28, 2017 9:06 pm

TD2626 wrote:
Mon Nov 27, 2017 11:18 pm
nedsaid wrote:
Mon Nov 27, 2017 9:16 pm
TD2626, there were several reasons for my New 'Doo thread.
I consider the "New 'Doo thread to be one of the most interesting and important "classic" threads I've seen on this site. It's great that you've done this analysis and tracked things so closely.

Regarding the actual results, it's hard to know what to make of it:
I seem to be doing well compared to the "lazy" portfolios
but seem to have lagged the simple 3-fund portfolio held steady at 50% US Stocks/17% International Stocks/33% Bonds.
I seem to be doing okay versus Vanguard Moderate Growth
My individual stocks beat US Total Market by 0.10% a year over 15 years, last I looked.
Keeping up with the market decently well in and of itself is an accomplishment. Outperforming the Total US stock market, particularly over long periods, on a risk adjusted basis, and due to foresight and not luck, is essentially the holy grail. You've shown long term outperformance - 0.1% a year for 15 years is impressive - but it's hard show it's not due to luck.

It's great to have an actual case study instead of having to guess. Theory suggests that an investor who invests reasonably for long periods should likely be able to roughly keep pace with the market, give or take some tracking error. Seeing this case as a likely example of that helps to substantiate that theory. (It seems like given you're doing well compared to some lazy portfolios, underperforming another, the Three Fund, and doing well compared to LifeStrategy, it probably is a matter of noise and tracking error and the overwhelming signal in the noise is tracking the broad market).

Good luck with your future investing!


.....
On second thought, I guess some could argue that spending a lot of time working on the portfolio for many years and not outperfoming the 3-fund is something I should learn from and avoid. I don't really see things like that - wouldn't the "insurance" benefit of having a multi-strategy approach outweigh that? It isn't bad to pay for insurance and not use it, and by investing in many different approaches maybe that's sort of like insuring against a single approach not working.
Pretty much, investing across factors and investing in volatile asset classes like REITs, International Developed, International Emerging, Mid/Small-Cap seemed to help from 2000-2008 but not since the financial crisis of 2008-2009. Value and International have lagged the US Total Market since the financial crisis. Before the crisis, I was the man. After the crisis, some disappointment.

Also, diversification across factors and volatile asset classes really helped in the 2000-2002 bear market but deepened losses a bit in 2008-2009. Sometimes the fancy, schmancy stuff works and sometimes it doesn't.

So yes, you can view my thread as a case study.
A fool and his money are good for business.

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by TD2626 » Wed Nov 29, 2017 2:09 am

Derby wrote:
Tue Nov 28, 2017 9:02 pm
TD2626 wrote:
Sat Nov 25, 2017 9:53 pm
*********************************************************
sambb wrote:
Sat Nov 25, 2017 8:25 pm
just put it all into lifestrategy moderate growth, and be done with it for a few decades... if you dont want to ponder it further. Youll be fine.
I've always thought that Lifestrategy funds were for investors who knew very little about investing, and it would seem like capitulation and cruel irony if I ended up in one. I am realizing that that may be a very reasonable option, though.
A few years back Mike Piper (Oblivious Investor) switched his retirement account to one LifeStrategy Fund.

https://obliviousinvestor.com/my-portfolio-updated/

About halfway down the comments, a poster named Brian basically makes the bolded comment above, and Mike responds why he disagrees.
Thanks for the link to the article. Brian makes compelling arguments, but Mike's article (and response to Brian) seems more reasonable.

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by TD2626 » Wed Nov 29, 2017 2:14 am

livesoft wrote:
Tue Nov 28, 2017 4:45 pm
JamesSFO wrote:
Tue Nov 28, 2017 9:43 am
You might want to think about some of Rubin's strategies for moving forward with the decision:
....
Sounds similar to something out of Decisive by Heath and Heath which has been discussed on the forum before. It's a great book.
Thanks for the recommendations.

I think I will look into decisionmaking models, procedures, and heuristics. It seems as though this is an area where I won't be able to let the data stand for itself and let my mathematical and computer models make all the decisions for me --- I might actually have to make a decision myself. So reading about decisionmaking and thinking about decisionmaking as it pertains to investing is probably the best course.

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by Dottie57 » Wed Nov 29, 2017 7:56 am

TD2626 wrote:
Wed Nov 29, 2017 2:14 am
livesoft wrote:
Tue Nov 28, 2017 4:45 pm
JamesSFO wrote:
Tue Nov 28, 2017 9:43 am
You might want to think about some of Rubin's strategies for moving forward with the decision:
....
Sounds similar to something out of Decisive by Heath and Heath which has been discussed on the forum before. It's a great book.
Thanks for the recommendations.

I think I will look into decisionmaking models, procedures, and heuristics. It seems as though this is an area where I won't be able to let the data stand for itself and let my mathematical and computer models make all the decisions for me --- I might actually have to make a decision myself. So reading about decisionmaking and thinking about decisionmaking as it pertains to investing is probably the best course.
There isn't any plan that is perfect. Put your money into the market and let it work. Make a dcision and live with it. Stop the research. Perfection or best is not knowable.

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by JamesSFO » Wed Nov 29, 2017 7:59 am

TD2626 wrote:
Wed Nov 29, 2017 2:14 am
livesoft wrote:
Tue Nov 28, 2017 4:45 pm
JamesSFO wrote:
Tue Nov 28, 2017 9:43 am
You might want to think about some of Rubin's strategies for moving forward with the decision:
....
Sounds similar to something out of Decisive by Heath and Heath which has been discussed on the forum before. It's a great book.
Thanks for the recommendations.

I think I will look into decisionmaking models, procedures, and heuristics. It seems as though this is an area where I won't be able to let the data stand for itself and let my mathematical and computer models make all the decisions for me --- I might actually have to make a decision myself. So reading about decisionmaking and thinking about decisionmaking as it pertains to investing is probably the best course.
Holy Questioners Batman! ;)

Just be careful you don't fall into the abyss of figuring out all of the decision research out there. You have more than enough information to start making some decisions now and trying some things out.

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by dbr » Wed Nov 29, 2017 9:23 am

TD2626 wrote:
Wed Nov 29, 2017 2:14 am
livesoft wrote:
Tue Nov 28, 2017 4:45 pm
JamesSFO wrote:
Tue Nov 28, 2017 9:43 am
You might want to think about some of Rubin's strategies for moving forward with the decision:
....
Sounds similar to something out of Decisive by Heath and Heath which has been discussed on the forum before. It's a great book.
Thanks for the recommendations.

I think I will look into decisionmaking models, procedures, and heuristics. It seems as though this is an area where I won't be able to let the data stand for itself and let my mathematical and computer models make all the decisions for me --- I might actually have to make a decision myself. So reading about decisionmaking and thinking about decisionmaking as it pertains to investing is probably the best course.
While investing can't be made less simple than it is, the fact is that personal investing is really not very complicated. An important lesson is that the uncertainty involved is not reducible and you are tilting at windmills to try.

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by Veiled » Wed Nov 29, 2017 8:11 pm

JamesSFO wrote:
Wed Nov 29, 2017 7:59 am
Just be careful you don't fall into the abyss of figuring out all of the decision research out there. You have more than enough information to start making some decisions now and trying some things out.
I think we all keep saying versions of this to the OP.

My IPS (from objectives to withdrawal strategy) is 9 lines of an excel sheet. I have a separate document for notes I take about math/laws/whatever. Your current and past posts make it abundantly clear that you're a more sophisticated investor than I ever will be. But my dollars are hard at work obeying the commands of my IPS. Are yours? How long are you going to let them slack on the job?
Last edited by Veiled on Wed Nov 29, 2017 10:38 pm, edited 1 time in total.
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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by 552BB » Wed Nov 29, 2017 9:41 pm

Good evening all,

I found this quote funny.
flyingaway wrote:
Mon Nov 27, 2017 1:23 am
If I had the perfect portfolio, I would not tell anyone.
For me, I think if I had the perfect portfolio, I would tell everyone.

I don't think I could help myself.



To the OP, you have been given great advice here.

The perfect portfolio will never exsist. Not even in hindsight. It is not possible.

Think about that.



You either have to take a crap, or get off the pot. :D

Stop spinning your wheels.



Remember, you have an infinite number of possible outcomes with your investments.

But you do not have an infinite amount of time.

Time will stop for no one.



So get invested.

Get a life.

And then come join me for a beer on the beach in Puerto Vallarta Mexico.

I'll buy.



:sharebeer

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by flyingaway » Thu Nov 30, 2017 10:24 am

552BB wrote:
Wed Nov 29, 2017 9:41 pm
Good evening all,

I found this quote funny.
flyingaway wrote:
Mon Nov 27, 2017 1:23 am
If I had the perfect portfolio, I would not tell anyone.
For me, I think if I had the perfect portfolio, I would tell everyone.

I don't think I could help myself.



To the OP, you have been given great advice here.

The perfect portfolio will never exsist. Not even in hindsight. It is not possible.

Think about that.



You either have to take a crap, or get off the pot. :D

Stop spinning your wheels.



Remember, you have an infinite number of possible outcomes with your investments.

But you do not have an infinite amount of time.

Time will stop for no one.



So get invested.

Get a life.

And then come join me for a beer on the beach in Puerto Vallarta Mexico.

I'll buy.



:sharebeer
Too bad I have something called job.

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by TG2 » Sat Dec 02, 2017 12:44 pm

552BB wrote:
Wed Nov 29, 2017 9:41 pm
And then come join me for a beer on the beach in Puerto Vallarta Mexico.

I'll buy.
Only place I have ever gotten robbed.

Not saying that you were involved, of course. :D

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by abuss368 » Tue Dec 05, 2017 8:21 pm

I have "suffered" with this here and there over the years! When in doubt I turn to the investment experts such as Jack Bogle and the forum. In fact, this is the reason why I have every Jack Bogle, Vanguard, & Boglehead book on my shelf!
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by Taylor Larimore » Tue Dec 05, 2017 9:04 pm

abuss368 wrote:
Tue Dec 05, 2017 8:21 pm
I have "suffered" with this here and there over the years! When in doubt I turn to the investment experts such as Jack Bogle and the forum. In fact, this is the reason why I have every Jack Bogle, Vanguard, & Boglehead book on my shelf!
Abuss 368:

I didn't know Vanguard wrote a book?

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by abuss368 » Tue Dec 05, 2017 9:45 pm

Taylor Larimore wrote:
Tue Dec 05, 2017 9:04 pm
abuss368 wrote:
Tue Dec 05, 2017 8:21 pm
I have "suffered" with this here and there over the years! When in doubt I turn to the investment experts such as Jack Bogle and the forum. In fact, this is the reason why I have every Jack Bogle, Vanguard, & Boglehead book on my shelf!
Abuss 368:

I didn't know Vanguard wrote a book?

Best wishes.
Taylor
Not the company but rather anything about them: The Vanguard Experiment (Jack Bogle), Andy Clarke also has a good book out, Jack Brennan, etc.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by Caduceus » Tue Dec 05, 2017 10:31 pm

I think you should choose Option B, in part because you think that statistics and math constitutes your investing learning path. The real language of investing is accounting, not math. If you can learn to value a business, and you read both broadly and deeply, you can beat the market over time. This is not different from an owner of his own business being able to estimate how much his own business is worth. He won't be able to tell you that his business is worth exactly $10 million dollars. But he could tell you that he would sell his company for $25 million in a heartbeat (an overvalued price), or that someone would be stealing his company from him at $3 million.

The thing about the stock market is that occasionally you will get these crazy quotes of $3 million, where you can buy fractional interests in great businesses at a discount to their true value. If you are the type of person who can look at the numbers and the economics and figure out you are getting a great deal, you will make a lot of money over time. Few people can do this, because it's also a matter of temperament.

It's much smarter to admit you don't know anything. The "know-nothing" investor will out-perform the vast, vast majority of fund managers.

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by Sandi_k » Tue Dec 05, 2017 10:34 pm

Dude, I'd check your ego and your intellect at the door. The idea that your big brain can figure out something with a year of research that pros have been dissecting for decades is ludicrous.

So stop.

If your cash is not invested, your "analysis" is doing you actual HARM. It's far better to understand some basic concepts:

1) Your savings rate matters more than almost anything.
2) Be aware of tax-efficient placement of funds.
3) Expenses matter - so look for low-cost index funds.
4) Time in the market is more important that timing the market

There you go - those are demonstrably true, so get invested ASAP.

If you want to continue this as an analytical exercise, divvy up your portfolio - perhaps your 401(k) becomes your Three Fund Portfolio, and your IRAs become your Option C Portfolio. Set a time - say 24 months - and see which does best. Then integrate the next recession, and re-assess. Then decide how to move forward for the next five year period.

The idea that this is irrevocable, unretrievable, and unchangeable is stupid. Stop it. Embrace the idea that if/when you know better, you can tweak/slice/do better. And get on with living the rest of your life.

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by Taylor Larimore » Tue Dec 05, 2017 10:36 pm

abuss368 wrote:
Tue Dec 05, 2017 9:45 pm
Taylor Larimore wrote:
Tue Dec 05, 2017 9:04 pm
abuss368 wrote:
Tue Dec 05, 2017 8:21 pm
I have "suffered" with this here and there over the years! When in doubt I turn to the investment experts such as Jack Bogle and the forum. In fact, this is the reason why I have every Jack Bogle, Vanguard, & Boglehead book on my shelf!
Abuss 368:

I didn't know Vanguard wrote a book?

Best wishes.
Taylor
Not the company but rather anything about them: The Vanguard Experiment (Jack Bogle), Andy Clarke also has a good book out, Jack Brennan, etc.
Abuss 368:

We think alike. I also own the books you mention.

It is very reassuring to know that we are following the advice of "the investors greatest friend."

Best wishes
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by Caduceus » Tue Dec 05, 2017 10:40 pm

I also think you should be careful about "tilting". A lot of the categories constructed in finance are completely arbitrary. For example, one of the key metrics of whether a stock is a "value" stock (assuming you want to tilt to "value") is if it has a low price to book ratio. But surely common sense tells us that not all similar P/B ratios reference the same economic reality.

Since many balance sheets carry assets using a mixed-cost model (some assets are carried at cost, others at fair value), it's hard to compare books across companies and industries. But even if the assumptions used were consistent, surely not all assets have the same economic value, even if they have the same accounting value. Are Synchrony Financial's credit card receivables similar to Consumer Portfolio Services' auto-secured finance receivables? And are either of these similar, say, to mortgage receivables secured by a regulatory promise? Surely not.

A lot of finance folks play around with numbers as if they accurately represent some type of economic reality. A stock with a 0.3 P/B ratio might in fact be overvalued. Go take a look at some of the junior gold miners, who capitalize their expenses on gold mines as assets. When they eventually sell them, many take a loss or recognize only a fraction of their accounting value. Yet, these stocks are often categorized as "value" stocks because of their low p/b ratio!

All this to say that "tilting" one way or another assumes you know what and how you are tilting to, and in most cases, this is not true.

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by abuss368 » Wed Dec 06, 2017 12:14 am

Taylor Larimore wrote:
Tue Dec 05, 2017 10:36 pm
abuss368 wrote:
Tue Dec 05, 2017 9:45 pm
Taylor Larimore wrote:
Tue Dec 05, 2017 9:04 pm
abuss368 wrote:
Tue Dec 05, 2017 8:21 pm
I have "suffered" with this here and there over the years! When in doubt I turn to the investment experts such as Jack Bogle and the forum. In fact, this is the reason why I have every Jack Bogle, Vanguard, & Boglehead book on my shelf!
Abuss 368:

I didn't know Vanguard wrote a book?

Best wishes.
Taylor
Not the company but rather anything about them: The Vanguard Experiment (Jack Bogle), Andy Clarke also has a good book out, Jack Brennan, etc.
Abuss 368:

We think alike. I also own the books you mention.

It is very reassuring to know that we are following the advice of "the investors greatest friend."

Best wishes
Taylor
Thank you Taylor!
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by TD2626 » Wed Dec 06, 2017 12:52 am

Caduceus wrote:
Tue Dec 05, 2017 10:31 pm
I think you should choose Option B, in part because you think that statistics and math constitutes your investing learning path. The real language of investing is accounting, not math. If you can learn to value a business, and you read both broadly and deeply, you can beat the market over time. This is not different from an owner of his own business being able to estimate how much his own business is worth. He won't be able to tell you that his business is worth exactly $10 million dollars. But he could tell you that he would sell his company for $25 million in a heartbeat (an overvalued price), or that someone would be stealing his company from him at $3 million.
Interesting idea about the real language being accounting and not math. I feel that fundamental analysis should not (if the semi-strong EMH holds) be able to provide excess risk adjusted return. I ultimately think math is more important - calculating CAGR, variance, sharpe ratio, skew, kurtosis, etc from return distributions is a better way of understanding investing history and theory than by understanding accounting.

The thing about the stock market is that occasionally you will get these crazy quotes of $3 million, where you can buy fractional interests in great businesses at a discount to their true value. If you are the type of person who can look at the numbers and the economics and figure out you are getting a great deal, you will make a lot of money over time. Few people can do this, because it's also a matter of temperament.

It's much smarter to admit you don't know anything. The "know-nothing" investor will out-perform the vast, vast majority of fund managers.
I do readily admit that I know virtually nothing, at least relative to all there is to know.

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by TD2626 » Wed Dec 06, 2017 12:55 am

Caduceus wrote:
Tue Dec 05, 2017 10:40 pm
I also think you should be careful about "tilting". A lot of the categories constructed in finance are completely arbitrary. For example, one of the key metrics of whether a stock is a "value" stock (assuming you want to tilt to "value") is if it has a low price to book ratio. But surely common sense tells us that not all similar P/B ratios reference the same economic reality.

Since many balance sheets carry assets using a mixed-cost model (some assets are carried at cost, others at fair value), it's hard to compare books across companies and industries. But even if the assumptions used were consistent, surely not all assets have the same economic value, even if they have the same accounting value. Are Synchrony Financial's credit card receivables similar to Consumer Portfolio Services' auto-secured finance receivables? And are either of these similar, say, to mortgage receivables secured by a regulatory promise? Surely not.

A lot of finance folks play around with numbers as if they accurately represent some type of economic reality. A stock with a 0.3 P/B ratio might in fact be overvalued. Go take a look at some of the junior gold miners, who capitalize their expenses on gold mines as assets. When they eventually sell them, many take a loss or recognize only a fraction of their accounting value. Yet, these stocks are often categorized as "value" stocks because of their low p/b ratio!

All this to say that "tilting" one way or another assumes you know what and how you are tilting to, and in most cases, this is not true.
I would presume that tilting would be a case of more risk, more (expected) return (using "expected" in the technical sense). I would not presume to expect a higher risk-adjusted return through tilting alone. Maybe a higher return -- but in exchange for higher volatility. (Risk does exist, and if the risk shows up, it could be lower return). Is this useful in portfolio designs? It would seem to allow for the potential for expected returns (not guaranteed, just based on historical averages) (slightly) >100% TSM even with (slightly) >0% in bonds. Is this the case?

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by TD2626 » Wed Dec 06, 2017 12:57 am

Sandi_k wrote:
Tue Dec 05, 2017 10:34 pm
Dude, I'd check your ego and your intellect at the door. The idea that your big brain can figure out something with a year of research that pros have been dissecting for decades is ludicrous.

So stop.

If your cash is not invested, your "analysis" is doing you actual HARM. It's far better to understand some basic concepts:

1) Your savings rate matters more than almost anything.
2) Be aware of tax-efficient placement of funds.
3) Expenses matter - so look for low-cost index funds.
4) Time in the market is more important that timing the market

There you go - those are demonstrably true, so get invested ASAP.

If you want to continue this as an analytical exercise, divvy up your portfolio - perhaps your 401(k) becomes your Three Fund Portfolio, and your IRAs become your Option C Portfolio. Set a time - say 24 months - and see which does best. Then integrate the next recession, and re-assess. Then decide how to move forward for the next five year period.

The idea that this is irrevocable, unretrievable, and unchangeable is stupid. Stop it. Embrace the idea that if/when you know better, you can tweak/slice/do better. And get on with living the rest of your life.
I guess the fact that I feel anything I do would be " irrevocable, unretrievable, and unchangeable" is due to two things:

1. In taxable accounts, capital gains could be significant. If I invest in a marginally imperfect fund or individual stock in taxable, and it goes up in value, there would be a large tax cost to switch funds. If I (hypothetically) wanted to slice and dice and bought 9 index funds for each of the styleboxes, and then later desired to switch to TSM, it wouldn't be responsible to do so in taxable due to capital gains - e.g. I'd be stuck with the complexity forever.

2. If large declines occur in, say, small caps, I would need to stay the course - one shouldn't sell at the market bottoms. So any tilts would need very strong evidence to support them.

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by Sandi_k » Wed Dec 06, 2017 2:01 am

1) Your returns are not linear, and will not always trend upward. You could just as easily have capital LOSSES to offset any gains.

2) Sunk cost fallacy. If you buy stocks that are inappropriate, and you realize that you got into them for all the wrong reasons - SELL THEM.

You seem to think more analysis will make you infallible. You're wrong. ;)

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by Caduceus » Wed Dec 06, 2017 5:35 am

TD2626 wrote:
Wed Dec 06, 2017 12:52 am
Interesting idea about the real language being accounting and not math. I feel that fundamental analysis should not (if the semi-strong EMH holds) be able to provide excess risk adjusted return. I ultimately think math is more important - calculating CAGR, variance, sharpe ratio, skew, kurtosis, etc from return distributions is a better way of understanding investing history and theory than by understanding accounting.
[/quote]

But what is the "math" actually describing and assuming? Modern finance and modern portfolio theory is structured in one form or another around the idea of beta (or its substitutes). In this framework, a stock is risky (and therefore provides higher expected returns) if it reacts more strongly than the market benchmark, and less risky if its price movements are more muted than the market benchmark.

But the problem is that even within this intellectual framework, beta is changing all the time, as it should, because businesses are not static entities. Some acquire stronger liquidity and capital positions. Some take on more debt than they have historically. Some engage in disastrous acquisitions. Others are hit by unforeseen disasters. So, at best, the beta, or stock variance that you see, is merely an approximation of the historical relationship of a stock to a market benchmark. It tells you nothing about the future. Do you know its future beta?

Furthermore, even if you could divine a stock's future beta, is beta really a good predictor of stock's returns? The available research suggests the answer is "No." Remember that the mathematics you speak of isn't being used to model systems like those in physics. Stock prices are fractional interests in businesses, and as such, their numbers don't emanate from any underlying physical laws.

Think about it the way a business owner would. Would you ever value your own business and decide how much you would be willing to part with it, based on how volatile your business has been in relation to the market benchmark over the last decade?

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by TD2626 » Thu Dec 07, 2017 11:54 am

Caduceus wrote:
Wed Dec 06, 2017 5:35 am
Furthermore, even if you could divine a stock's future beta, is beta really a good predictor of stock's returns? The available research suggests the answer is "No." Remember that the mathematics you speak of isn't being used to model systems like those in physics. Stock prices are fractional interests in businesses, and as such, their numbers don't emanate from any underlying physical laws.
I do think that the underlying theories behind financial economics are reasonable approximations. The nature of business risks and human behavior are relatively timeless in aggregate. People will always have risk aversion. People will always feel the "time value of money" and want compensation (return) for saving (and deferring gratification). Non-satiety is also a very reasonable approximation for many people. I understand that they aren't iron laws, but the major theories and theoretical frameworks behind investing are important.

Ultimately, one could argue that since aggregate investor behavior is determined by (among other things) investor emotions, and since investor emotions are based on chemical interactions in the brain (hormones and other molecules), and since these chemical interactions can be modeled using the laws of physics, the market's behavior should at least in theory depend on the laws of physics (weakly).

Unfortunately, I have never seen the Capital Asset Pricing Model derived from, say, Newton's second law. :annoyed
If anyone can do this in a research paper, I'd be quite impressed.

Sandi_k wrote:
Wed Dec 06, 2017 2:01 am
You seem to think more analysis will make you infallible. You're wrong. ;)
For the record, I never claimed I can make an infallible or invincible portfolio. I indeed admitted that I can't make a perfect portfolio earlier in this thread, as I feel I demonstrated conclusively that that is impossible in a post upthread (regarding Zeno's paradox). I do think that with sufficent analysis I can make a nearly perfect portfolio. Unfortunately, this would require nearly infinite time and energy (which I don't have).

Any portfolio is subject to risks - and even large risks. It is only through careful analysis and consideration of risks that one can preform proper risk management - and get a portfolio that has the lowest feasible amount of risk for the level of expected return sought.

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by Taylor Larimore » Thu Dec 07, 2017 2:48 pm

It is only through careful analysis and consideration of risks that one can preform proper risk management - and get a portfolio that has the lowest feasible amount of risk for the level of expected return sought."
TD2626:

Many academics, including Nobel Laureate William Sharpe, believe that the market portfolio has the lowest feasible amount of risk for the level of expected return sought. It is one of the reasons I often recommend The Three-Fund (market) Portfolio.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by 552BB » Thu Dec 14, 2017 11:52 am

Hello BH,



Good morning flyingaway,


flyingaway wrote:
Thu Nov 30, 2017 10:24 am
552BB wrote:
Wed Nov 29, 2017 9:41 pm
Good evening all,

I found this quote funny.
flyingaway wrote:
Mon Nov 27, 2017 1:23 am
If I had the perfect portfolio, I would not tell anyone.
For me, I think if I had the perfect portfolio, I would tell everyone.

I don't think I could help myself.



To the OP, you have been given great advice here.

The perfect portfolio will never exsist. Not even in hindsight. It is not possible.

Think about that.



You either have to take a crap, or get off the pot. :D

Stop spinning your wheels.



Remember, you have an infinite number of possible outcomes with your investments.

But you do not have an infinite amount of time.

Time will stop for no one.



So get invested.

Get a life.

And then come join me for a beer on the beach in Puerto Vallarta Mexico.

I'll buy.



:sharebeer
Too bad I have something called job.


I just got back from my time in Mexico, and I was reviewing my posts.



Some of these responses made me smile.



I will go back to Mexico in a couple of weeks for my next vacation for the New Years celebration.

So..... you still have another chance.

If I find any bogleheads in Puerto Vallarta, beers will still be on me!!! :D



What does this have to do with the title subject; I don't know. I guess just do it!!!



:sharebeer

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Re: Analysis Paralysis: Can you get to the bottom of things?

Post by flyingaway » Thu Dec 14, 2017 9:50 pm

552BB wrote:
Thu Dec 14, 2017 11:52 am
Hello BH,



Good morning flyingaway,


flyingaway wrote:
Thu Nov 30, 2017 10:24 am
552BB wrote:
Wed Nov 29, 2017 9:41 pm
Good evening all,

I found this quote funny.
flyingaway wrote:
Mon Nov 27, 2017 1:23 am
If I had the perfect portfolio, I would not tell anyone.
For me, I think if I had the perfect portfolio, I would tell everyone.

I don't think I could help myself.



To the OP, you have been given great advice here.

The perfect portfolio will never exsist. Not even in hindsight. It is not possible.

Think about that.



You either have to take a crap, or get off the pot. :D

Stop spinning your wheels.



Remember, you have an infinite number of possible outcomes with your investments.

But you do not have an infinite amount of time.

Time will stop for no one.



So get invested.

Get a life.

And then come join me for a beer on the beach in Puerto Vallarta Mexico.

I'll buy.



:sharebeer
Too bad I have something called job.


I just got back from my time in Mexico, and I was reviewing my posts.



Some of these responses made me smile.



I will go back to Mexico in a couple of weeks for my next vacation for the New Years celebration.

So..... you still have another chance.

If I find any bogleheads in Puerto Vallarta, beers will still be on me!!! :D



What does this have to do with the title subject; I don't know. I guess just do it!!!



:sharebeer
Haha, I will be in Los Cabos between January 2 and 7. I will certainly drink some Mexico beers. All-inclusive, why not.

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