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John Bogle, founder of Vanguard, has died

Bogle founded Vanguard in 1975 and revolutionised low cost fund management, he has been called the father of the index fund.

  • Dow Jones reporting Mr. Bogle has passed away
  • Bogle was 89
  • Vanguard has more than 5tln USD under management
Warren Buffet remarked on Bogle :
  • says he is the person who has done the most for American investors
  • he helped millions of investors realize far better returns on their savings than they otherwise would have earned
Bogle had a heart transplant back in 1996

Top 17 Quotes from Buffett's Letter

  1. “I needed no unusual knowledge or intelligence to conclude that the investment had no downside and potentially had substantial upside.”
  2. “You don’t need to be an expert in order to achieve satisfactory investment returns. But if you aren’t, you must recognize your limitations and follow a course certain to work reasonably well.”
  3. “Keep things simple and don’t swing for the fences.”
  4. “When promised quick profits, respond with a quick ‘no.'”
  5. “If you don’t feel comfortable making a rough estimate of the asset’s future earnings, just forget it and move on. No one has the ability to evaluate every investment possibility.” 
  6. “Games are won by players who focus on the playing field — not by those whose eyes are glued to the scoreboard.”
  7. “Forming macro opinions or listening to the macro or market predictions of others is a waste of time.” 
  8. “It should be an enormous advantage for investors in stocks to have those wildly fluctuating valuations placed on their holdings — and for some investors, it is.”
  9. “Owners of stocks…too often let the capricious and irrational behavior of their fellow owners cause them to behave irrationally as well.” 
  10. “In the 54 years (Charlie Munger and I) have worked together, we have never forgone an attractive purchase because of the macro or political environment, or the views of other people. In fact, these subjects never come up when we make decisions.” (more…)

Not A One Way Train

Words of wisdom from Dave Landry’s new book, The Layman’s Guide To Trading Stocks:

Wall Street Myth 1: The market always goes up longer term

It seems to be universally preached that the market “always goes up longer term.” And, all you have to do is buy a diversified mutual fund or index fund and wait. The problem is that markets do not always go up longer term. Well, I suppose it all depends on what you mean by longer term.

Suppose you bought stocks in 1929 at the market peak. Provided you could have held through a 90% loss, it would then have taken you a quarter of a century just to get back to breakeven.

Let’s say you bought stocks in the mid-1960’s. Your return would have been almost zero until the market finally broke out in 1983, which was 17 years later.

When I began this chapter, I was concerned that there might be a “that was then, this is now” mentality. After all, the benchmark S&P 500 wasn’t far below breakeven from the 2000 peak. I thought I was going to have to make a strong case for not buying and holding. Unfortunately for the buy and hold crowd, the market made my case for me. The bear market that began in late 2007 would turn out to be the worst since 1929. By March 2009, the S&P was at 13-year lows. From these lows, the market will have to rally over 200 percent just to get to breakeven.

At more than one cocktail party, I have had people laugh in my face when I tell them that the market can go 25 years or more without going up. This has made for some heated discussions and awkward social situations. I have since learned from Dale Carnegie and my wife Marcy to just nod my head and enjoy my drink. Do not take my word for it, just look at the charts and grab me a Black and Tan while you are at it!

Ferri, The Power of Passive Investing

He cites several studies and some of his own tests that demonstrate the futility of seeking alpha. Among the findings, a single actively managed fund has a 42% chance of beating a comparable index fund over the course of a single year, a success rate that drops to 12% over 25 years. The statistics get much worse as you add more active funds. If you own ten funds, you have a 27% chance of beating an all index fund portfolio over one year and a mere 1% chance over 25 years.

Ferri’s own work analyzed the returns of actively managed funds within a generic asset class over five years. He found that a portfolio of five randomly selected active funds had only a 16% chance of beating an index fund, that only 5% of them won by 0.5% or more, and that 63% of them lost by 0.5% or more. When the portfolio was expanded to ten active funds, the numbers were much worse. Only 8% were winning portfolios, 1% of them won by 0.5% or more, and 70% lost by 0.5% or more. Ferri then massaged his model to see whether the numbers could be significantly improved; they couldn’t. As he summarized the results, “Active fund investors have strong headwinds against them. The probability of selecting a winning fund is low; the average payout for those winning funds does not compensate them enough for the shortfall from being wrong; the addition of several active funds in a portfolio reduces the probability of success; and the longer that portfolio is held, the odds drop even more. That’s a lot of headwind!” (p. 92) (more…)

A few news books in Our Library

● Market Sense and Nonsense: How the Markets Really Work (and How They Don’t)
By Jack Schwager
Excerpt via publisher, Wiley
Many investors seek guidance from the advice of financial experts available through both broadcast and print media. Is this advice beneficial? In this chapter, we have examined three cases of financial expert advice, ranging from the recommendation-based record of a popular financial program host to an index based on the directional calls of 10 market experts and finally to the financial newsletter industry. Although this limited sample does not rise to the level of a persuasive proof, the results are entirely consistent with the available academic research on the subject. The general conclusion appears to be that the advice of the financial experts may sometimes trigger an immediate price move as the public responds to their recommendations (a price move that is impossible to capture), but no longer-term net benefit. My advice to equity investors is either buy an index fund (but not after a period of extreme gains—see Chapter 3) or, if you have sufficient interest and motivation, devote the time and energy to develop your own investment or trading methodology. Neither of these approaches involves listening to the recommendations of the experts.

● Who’s the Fairest of Them All?: The Truth about Opportunity, Taxes, and Wealth in America
By Stephen Moore
Review via The Washington Times
Stephen Moore’s latest book, “Who’s the Fairest of Them All?: The Truth About Opportunity, Taxes, and Wealth in America,” fairly sets our liberal friends straight on the issue that seems to be confusing President Obama and the general American public a lot — economics and, in particular, tax policy. Mr. Moore, the senior economics writer for the Wall Street Journal’s editorial page, formerly president of the Club for Growth and a fellow of the Cato Institute and Heritage Foundation, has an encyclopedic knowledge of the tax fights of the 1980s. He condenses that nearly three decades in public policy in a slim 119-page volume that is an accessible and thorough guide to understanding economic growth. He understands that if we don’t learn the lessons of the past, we’re bound to repeat the follies, and so he has taken aim squarely at their chief originator, President Obama. While Mr. Obama may think of himself as Snow White — “the fairest of them all” — when it comes to taxing, he’s really Dopey, treating the world as if the Laffer Curve didn’t exist, as if food stamps and unemployment insurance actually grow the economy. (more…)

A Short Note

“Jack Bogle likes “cheap” index funds. I don’t know why as they are risky and expensive considering the heavy losses, limited “work” involved and lack of skill. If a firm “manages” $1 trillion and charges “only” 20bp, that is $2 billion PROFIT every year even when returns are negative and retirement plans are wrecked! Lose investors’ hard-earned money? It’s the market’s fault not theirs, right? Get someone to make a list of stocks for a benchmark, buy them, and then endure many years below the high water mark! Who would invest in such a dangerous product as an index fund? No-one with fiduciary responsibility.”

Risk & Chance

Here are some interesting quotes from ‘Risk & Chance’ (Dowie and Lefrere) that have a relevance to trading and speculation more generally:

Henslin (1967) notes …dice players behave as if they are controlling the outcome of the toss.  One of the ways they exert this is to toss the dice softly if they want a low number, or hard for a high number.  Another is to concentrate and exert effort when tossing.  These behaviours are quite rational if one believes that the game is a game of skill. 

As a trader I wish I could figure out what portion of my trading results can be attributed to luck, and what portion to skill. The problem is that trading seems to be a game of both skill and luck, so we spend half our time figuring out just how hard we should be throwing the dice. Splitting skill from luck is a problem for all speculators, but high frequency traders can find out much sooner than low frequency macro traders, who only take a few positions each year. In the latter case, it may be close to impossible to look back to a macro trader’s career and make this determination with any reasonable level of certainty.  

De Charms(1968) stated that “Man’s primary propensity is to  be effective in producing changes in his environment.  Man strives to be a causal agent, to be the primary locus of causation for, or the origin of, his behaviour; he strives for personal causation.

The polar opposite of mastery is helplessness.

In the markets, those with an ‘edge’ over the market can be thought of as masters, while those who don’t believe in outperformance of the averages can be thought of as helpless. Of course, in this case the helpless are not truly helpless; they may accept they have no influence on the outcome but provided they accept the proven long-term upward drift of the market, they can choose the path of the low-cost index fund, saving time and money against the perceived masters (on average, the indices outperform).  This doesn’t apply to the foreign exchange market.

Lefcourt (1973)… concluded that “the sense of control, the illusion that one can exercise personal choice, has a definite and positive role in sustaining life.” Thus, people show a preference for controllable over uncontrollable events.The distinction between skill and chance situations is further complicated by the fact that positive outcomes are most often attributed to the actions that precede them.

Think of many of the individuals who have made big gains in the housing market, founders of certain successful businesses, and some flavour-of-the-month fund managers. Positive results, especially those associated with a large monetary gain, often imbue individuals with a false sense of superiority and foresight, or even control, over events that are actually largely outside of their control.  

Risk & Chance

Here are some interesting quotes from ‘Risk & Chance’ (Dowie and Lefrere) that have a relevance to trading and speculation more generally:

Henslin (1967) notes …dice players behave as if they are controlling the outcome of the toss.  One of the ways they exert this is to toss the dice softly if they want a low number, or hard for a high number.  Another is to concentrate and exert effort when tossing.  These behaviours are quite rational if one believes that the game is a game of skill. 

As a trader I wish I could figure out what portion of my trading results can be attributed to luck, and what portion to skill. The problem is that trading seems to be a game of both skill and luck, so we spend half our time figuring out just how hard we should be throwing the dice. Splitting skill from luck is a problem for all speculators, but high frequency traders can find out much sooner than low frequency macro traders, who only take a few positions each year. In the latter case, it may be close to impossible to look back to a macro trader’s career and make this determination with any reasonable level of certainty.   (more…)

The best investors (and traders) are modest

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

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.