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Strategies & Market Trends : Gorilla and King Portfolio Candidates -- Ignore unavailable to you. Want to Upgrade?

To: EnricoPalazzo who wrote (48927)	11/14/2001 10:05:40 PM
From: Wyätt Gwyön	Read Replies (2) \| Respond to of 54805

hi ardethan, you may have heard this joke: aye, that's really a jab at Efficient Market Theory, which maintains that the market is so efficient one cannot beat it (very much against GG principles). in the extreme version of EMT, the position is that NO information, even inside information, is valuable because the market has already priced it in....er...ya mean even though the market doesn't know the information? yep, that's the extreme version, which by logical extension means you couldn't find free money in the street, because the all-seeing market would've done away with it. there are less extreme versions of EMT (Malkiel provides an overview)--e.g., recognizing that stuff like insider info could be valuable info--but indexing in general is going to rely on EMT at some level. it is interesting that indexing has a lot of fans in academia, and few on the Street. this is because the Street wants to manage your money for you, or sell you information, so the idea that the information is already to a large part priced in is anathema. in contrast, academics, whatever their faults may be, are not trying to sign me up for a wrap account with a fat fee. one of the more interesting discoveries of indexing in the real world is that costs matter, not just a little bit, but A LOT. compared to passive index managers, active managers are going to have higher costs ranging from 100 basis points (for a large cap index like the S&P500) to as many as 900 basis points (for less liquid markets like small caps and small overseas markets) according to Bogle. (this stands in contrast to the tiresome cliche about indexing working for large caps but not for less liquid markets.) the thing is, these costs are yearly, so if you have a 25-year horizon, 300 or so basis points (3%) compounds into a very large number. the idea that large numbers of active managers can consistently have alphas exceeding this hurdle, or that an investor could identify such managers in advance, defies credulity in my opinion. and also: alpha always absconds. I personally believe, as with many others on this thread, that TRFM has tended to overstate the greatness of Gorillas, notably the "always undervalued" bit, but also in terms of their invincibility in the market you make a number of good points about GG, most of which i agree with. i suppose if there can be different versions of EMT, ranging from extreme to "nuanced", there can likewise be different degrees of belief in GG. makes sense to me, and obviously GG has evolved in this forum beyond the original book content.