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The best investors (and traders) are modest

  
  Education
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Let’s face it you suck at investing. Your advisor sucks at investing too.  You have all seen where monkeys picking stocks or throwing darts at a list can do better than many if not all advisors.

But Quartz is out with their annual analysis of just how bad you suck at this game.  If you had picked the best stock to buy every day you could have turned $1000 into $179 billion by mid December. That is a 17.9 billion percent return.

Did you even get a 1 billion percent return? How about 1 million percent? 1000%? 100%? If you did not hit a 100% return then you did not get even 4/10 millionths of what was out there. Translation: You suck at stock picking. People like Jack Bogle will use this type of data to tell you that you are wasting your time even trying and that you should just index your portfolio.

Coincidentally he runs a few dollars in an index fund. I find it more interesting when some manager makes a killing and convinces themselves that they are geniuses. No one in this game is a genius. 100% return sucks remember? (more…)

Index Investing Unmasked: 96% Of Stocks Are Garbage

  
Analysis, Education
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Warren Buffett released his annual letter over the weekend, in which he praised Jack Bogle as his “hero” for promoting index investing. The irony is that investors would have been better off buying Berkshire shares. Over the last 10 years, Berkshire stock is up 139% while the S&P 500 is up 71%. The real question is why Buffett just doesn’t tout his own stock rather than promote index investing. He tries to explain himself:

 “Charlie and I prefer to see Berkshire shares sell in a fairly narrow range around intrinsic value, neither wishing them to sell at an unwarranted high price – it’s no fun having owners who are disappointed with their purchases – nor one too low.”

Buffett is doing something every skilled salesman does: managing expectations. Buffett’s own performance is compared against the S&P 500, and what better way to win that game than by putting a floor under the Berkshire price with the promise of share buybacks and then putting a ceiling on the stock by promoting index investing? The real secret is Buffett is talking his book by not talking it: Rather than tell investors to buy Berkshire at any price, he tells people to invest passively through an index, which leads to the very market inefficiencies that he profits from.

The great appeal of index investing is its low fees, but like buying a cheap pair of shoes that falls apart after 6 months, investors will find that index investing is the most expensive thing they ever did. Vanguard promotes its rock bottom expense ratios, but what is not published is market impact costs that are incurred when the fund rebalances. Since these rebalances are often announced ahead of time, they are extremely vulnerable to front running. Christophe Bernard, PhD Senior Scientist at Winton Capital Management, estimates that front running costs index investors 0.20% per year. That’s 4 times the official expense ratio of Vanguard’s S&P 500 ETF.

In his latest research, finance professor Hendrik Bessembinder discovered that 58% of stocks don’t even outperform a Treasury bill. This study was based on 26,000 stocks from 1926 to 2015. Just 4% of stocks accounted for all of the $31.8 trillion in gains during this period. That means 96% of stocks were complete garbage. Even worse, shares of unprofitable companies outperform their profitable counterparts, which is why you have a marketplace that is dominated by Twitters and Teslas.

Index investing means buying a box of garbage stocks sprinkled with a few hope and glamour stocks whose price gains are solely a result of underperforming fund managers grasping for quarterly bonuses and retail investors juicing up their portfolios in a doomed attempt to catch up on their retirement targets.

While mom and pop buy a Vanguard index with their $500,000 and get front run all day by proprietary traders, the capitalist televangelist Warren Buffett will continue to actively trade billions while preaching the miracle of buy and hold investing.

John C Bogle classics- Two Books

  
  Education
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Two of John C. Bogle’s books on investing have now been designated classics. They have been added to the Wiley Investing Classics series, joining such titles as Lombard Street, The Go-Go Years, Reminiscences of a Stock Operator, and The Alchemy of Finance.

Bogle on Mutual Funds: New Perspectives for the Intelligent Investor was originally published in 1993. Since then, investments in mutual funds as a whole have surged eight-fold, and Vanguard’s fund assets have grown 25-fold. They are now 50% larger than the entire industry was when Bogle wrote this book.

To readers who are familiar with Vanguard’s philosophy, this book may seem, as Bogle himself admits, “old hat.” That is only natural. A book isn’t designated a classic if only a handful of people ever read it. Or, in the case of investing books, if its message never resonated.

Bogle on Mutual Funds had two missions: to steer the individual investor in the right direction and to cajole the mutual fund industry into adopting more investor-friendly policies. On both fronts Bogle has had considerable success, even he would like to see even more reform.

His advice to the investor is pretty straightforward, but his arguments are definitely worth rereading, or reading for the first time. People have the bad habit of throwing money at the market without knowing anything about the basics of investing. So they invest in the wrong things, or at the wrong time, and curse their bad luck. No investor can be called “intelligent” who doesn’t understand the principles Bogle articulates in this book. The investor may still decide to try his hand at outperforming the market, but he should know what he’s up against.

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