Back to Basics with Jack Bogle - Pillar 7

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pkcrafter
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Back to Basics with Jack Bogle - Pillar 7

Post by pkcrafter » Wed Aug 22, 2007 10:40 am

Jack Bogle's Pillar 7

The Vanguard Diehards forum has a well-earned reputation as one of the best investment resources on the internet because of its long history of attracting and helping newer, inexperienced investors. The seeds of success have grown from the fundamental teachings of our mentor, Jack Bogle. I feel our mission has been, and continues to be, to pass along the wisdom of Mr. Bogle.

In recent years, the forum has also attracted more knowledgeable investors who enjoy discussing sophisticated ways to reduce risk and/or increase investing returns. This is interesting and educational for knowledgeable and experienced investors. However, our advanced discussions are sometimes confusing and possibly even overwhelming for newbies and less-experienced investors. As a result of these more sophisticated conversations (about which experts often disagree), it is not unusual to see new investors with a few thousand dollars trying to start with complicated slice-and-dice portfolios.

I discussed this problem with Mel and Taylor with the idea that the best way to help new and less sophisticated investors would be to post a series of conversations that will bring us back to Jack Bogle's common sense, easy-to-understand ways to invest successfully. Mel and Taylor agreed and suggested I review each of Jack's "12 Pillars of Wisdom."

The 12 Pillars were originally published in 1994 as an Epilogue in Mr. Bogle's first book, Bogle on Mutual Funds. I will post a series of conversations featuring each of Mr. Bogle's "Twelve Pillars of Wisdom" for the benefit of our new and less-experienced investors. Replies are encouraged, but please keep on topic.

Pillar 7. The Powerful Magnetism of the Mean

In the world of investing, the mean is a powerful magnet that pulls financial market returns toward it, causing returns to deteriorate after they exceed historical norms by substantial margins and to improve after they fall short. Reversion to the mean is a manifestation of the immutable law of averages that prevails, sooner or later, in the financial jungle.
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Reference: Pillar 6

http://www.diehards.org/forum/viewtopic ... ght=pillar


Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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White Coat Investor
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Post by White Coat Investor » Wed Aug 22, 2007 10:52 am

Here's one we can quibble over. While I think this is a fair rule-of-thumb (that something that has been doing poorly will likely do better in the future) it is in no way an absolute truth. Just because something does poorly doesn't mean it will soon "revert to the mean." Japanese stocks in the 90s are a good example. Likewise, just because TIPS had a great few years after they were initially introduced, doesn't mean they're in for low returns. Perhaps the great few years were just due to people not understanding/trusting them, and now we'll have normal returns. Sometimes asset classes reach a new plateau, either on the way up or the way down. Just because tech stocks got crushed in 2000-2002 doesn't mean they've done well since then. Need I go on?

I frequently hear people repeat the advice that you want to buy stocks on a day that they go down. This makes the assumption that because they went down today they will likely go up tomorrow. I don't think anyone has ever shown that this is true. Momentum theory would argue they are more likely to continue to go down tomorrow. Random walk theory would argue they are just as likely to go down as up tomorrow.

I don't think reversion to the mean is an investing principle worthy of being one of the "pillars."
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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Barry Barnitz
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Post by Barry Barnitz » Wed Aug 22, 2007 11:05 am

The Long Term Risks Of Global Markets by Phillipe Jorian
This research investigates the persistence of investment risk across time horizon, a crucial issue in asset allocation decisions. Previous empirical results have focused mainly on US data and suffer from limited sample size in the analysis of long-horizon returns. Investigation of a long-term sample of thirty countries provides additional empirical evidence. The results are not reassuring. There is no evidence of long-term mean reversion in the expanded data sample. Downside risk is not reduced as the horizon lengthens. On the positive side, a globally diversified portfolio would have displayed much less downside risk than any single market.
regards,
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dcd
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Post by dcd » Wed Aug 22, 2007 5:58 pm

EmergDoc wrote:I don't think reversion to the mean is an investing principle worthy of being one of the "pillars."
I could be mistaken but what I remember reading from Bogle and mean reversion was usually referring to managed mutual funds and the tendency for managers who perform well to eventually become average or below average.
Denny

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Post by unclemick » Fri Aug 24, 2007 11:00 am

January 28, 1998 Distinguished Lecture Series MIT in the archives of Bogle Financial Markets Research Center.

Long winded as Mr Bogle is wont to do - but high performance over time, value vs growth, high vs low priced, US vs foreign, etc.

Pssst - the Norwegian widow is known to bet on RTM in individual stocks!

heh heh heh - :lol: :shock: Dat's a no no for a 'pure' indexer.

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Taylor Larimore
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Reversion to the Mean --"The Tell Tale Chart"

Post by Taylor Larimore » Fri Aug 24, 2007 12:01 pm

I don't think reversion to the mean is an investing principle worthy of being one of the "pillars."
With all due respect, in my opinion, "reversion to the mean" is one of the most important principles of investing.

At Diehard III, in Chicago, in the worst year of the last bear market, Mr. Bogle was the keynote speaker at a large Morningstar Convention for financial advisors.

Diehards were given front-row seating. His speech was titled, "The Telltale Chart." He explains the importance of Reversion to the Mean.

http://www.vanguard.com/bogle_site/sp20020626.html

Best wishes.
Taylor

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Re: Reversion to the Mean --"The Tell Tale Chart"

Post by unclemick » Fri Aug 24, 2007 9:14 pm

Taylor Larimore wrote:
I don't think reversion to the mean is an investing principle worthy of being one of the "pillars."
With all due respect, in my opinion, "reversion to the mean" is one of the most important principles of investing.

http://www.vanguard.com/bogle_site/sp20020626.html

Best wishes.
Taylor
Amen. :wink:

richard
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Post by richard » Sat Aug 25, 2007 4:47 am

Unfortunately, the Jorian paper Barry linked earlier in the thread serves to refute Mr. Bogle's paper. The first two pages of Jorian are easy to read.

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