Indexing, EMH/MPT, mutual funds, etc.:
> Porc,
> My favorite quote in the book ["Bogle on Mutual Funds"], which he
> attributes to James Vertin:
> After twenty years of watching investment practitioners
> dance around the fire shaking their feathered sticks, I
> observe that far too many of their patients die and that
> the turnover of medicine men is rather high. There must
> be a better way.
That can be said of any business. Is that a reason for an
entrepreneur to go into 500 businesses at once, rather than only one?
If an investor doesn't want to be bothered with stock selection,
then, imo, Indexing is the only way to go. And, the S&P 500 is the
only Index an investor will ever need. Its 500 components (I know,
370) are themselves asset allocated into bonds, commodities,
microcaps, emerging markets, etc. So, Bogle fails to carry his own
argument to its logical conclusion: In the end, only a fund's
management fees matter; therefore, get the Index fund with the
lowest fees -- period.
>Obviously, the book was a commercial for Index funds.
MPT/EMH is:
1) So stupid only academic economists would believe it;
2) So cynical only Wall Street would try to get away with it.
As to 1), Samuelson, a godfather of MPT/EMH, concedes in his
preface
to "Bogle on Mutual Funds" that it is "*trivially*" obvious that the
average gross performance of some 6000 mutual funds trading 6000
listed stocks back and forth to one another will equal the average
performance of the 6000 stocks. Wow! Ergo, only management fees
matter in the long run. But, as Bogle himself concedes, some are
better pickers than others (like his own John Neff was). PS:
Samuelson woumd up buying shares of Berkshire, a fact he omits from
the book's preface.
As for point 2), there isn't anyone on Wall Street that doesn't
believe s/he can beat Indexing -- including Vanguard's Indexing
manager, Gus Sauter! In fact, Vanguard is finally allowing Sauter to
run his own actively managed fund(s), no doubt to keep him from
bolting. So, it's utterly cynical of them to peddle this twaddle.
If you owned a department store chain, would you hire as a head buyer
someone who said "My B school teacher taught us that markets are
efficient, therefore I'm going to a buy a pro rated basket of
everything retail manufacturers turn out, at whatever the current
market price of these goods happens to be, as soon as and as often as
revenues come into the store". Of course you wouldn't -- and no
analyst on Wall Street would recommend investing in such a store.
What EMH/MPT really is, from Wall Street's point of view, is a cloak
of academic respectability for what is actually a form of *price
fixing*. Wall Street need only "pay" for the funds of their
institutional investors the market average return on the asset
classes they've invested in.
Yet the whole basis of Capitalism is that every asset
allocator's job is to take assets away from underperfoming uses and
concentrate them into uses that provide above average returns.
Imagine a baseball team's manager telling the owner that
since the average won-lost record has to be 50-50, that's all he's
going to try for. Therefore, they won't have to spend money on the
better players, etc., so they'll earn a higher profit. (That seems
to be what some teams in smaller media markets are actually doing.
But, Wall Street is hardly one of the smaller franchises in the world
of finance.)
Look what happened to large cap cyclicals that diversified in the 80's
to reduce "earnings volatility". They took a tremendous bath in the
early 90's -- a very *shallow* recession. Ever since they
"undiversified", earnings, ROE, etc., have skyrocketed -- and they're
much better prepared to weather the next recession in terms of leaner
inventories, staffing, etc.
> I
> recently called
> Vanguard to have them send one of my friends a prospectus for their
> Specialized Health Care Fund (one of the Wow funds). The young
man on the
> other end said "you know, this is one of our riskier funds". I said,
excuse
> me, it is the only fund you have that has beat the Index over 1, 3, 5,
and
> 10 years. I suggested he meant volatile. He essentially indicated that
he
> only worked there.
All these guys make $20,000/year or so -- about half what a secretary
makes. That's why I can't really get sore at Waterhouse for not
understanding margin, etc. -- they're all bunglers, from Merrill
Lynch on down.
>They had a decent asset allocation model (accumulation/distribution
> phases
> of life). I hate the concept of doing on age, or so many years until
> retirement. I've got tax clients in their 70's that will never spend the
> income to say nothing of the principal. How much more long term
> can you get.
Well, you never know <g>.
>The analysis of last year's stars vs. next year's dogs was very
> interesting. But, could you imagine getting a company's annual report
> saying "past performance is not indicative of future results". Would
you
> buy the stock?
Can you imagine buying the stock of a company that said they'd spend
nothing on R&D because that would only detract from their goal of
long term industry-average returns on capital?
>My observations are the speciality areas - health care, finance,
> convertible, and high yield - are the categories where the manager can
> really add value.
Every time I have ever looked at a fund prospectus, I've said to
myself: "I don't want this or that stock. Stocks I do want are
missing. I've never heard of these stocks, so I'll have to research
them, etc." So, I wind up picking stocks on my own, thereby creating
my own "special situations" fund.
>Its clear that professionals, myself icluded, become too emotionally
> involved in the stocks and the market. I'm convinced that most
investors
> would be better served if the mutual fund manager would make their
> well-considered picks, and then, go on vacation for a year.
>Get me your facs number and I send you a copy of my success
> ratio analysis.
The fax broke, and porc has no intention of getting it fixed --''''> |
