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Strategies & Market Trends : Graham and Doddsville -- Value Investing In The New Era -- Ignore unavailable to you. Want to Upgrade?

To: porcupine --''''> who wrote (519)	7/16/1998 7:46:00 PM
From: porcupine --''''>	Respond to of 1722

Abby Cohen will be the "Guest Monitor" on PBS's Nightly Business News tomorrow night. I wonder if she will say that the Market still isn't overvalued --???>

To: porcupine --''''> who wrote (519)	7/16/1998 9:02:00 PM
From: Freedom Fighter	Respond to of 1722

Reynolds, >>But purchases made in the 1927-1929 period were under water or >>>close too it 20 years later. >Not if they had dollar-cost-averaged. As mentioned elsewhere, near the beginning of The Intelligent Investor, Graham calculates ("roughly" as he puts it) that dollar-cost-averaging into the DJIA every January for 20 years, commencing January 1929, would have produced an average annual return of 8%. I know >of no other asset class that would have performed this well.<< The net of all the purchases performed well. Those made in the 27-29 period were in the red so they obviously under-performed all asset classes. It appears that you are trying to defend net purchases of stocks no matter what the valuation situation. If you are, you are defending a strategy that is monumentally ridiculous for more informed individuals. That is the only reason I am suggesting you give it more careful thought. Stocks are "almost always" discounted to return larger amounts than alternate investments. So of course you will get better returns by dollar cost averaging over 20 years. In most years you are getting the best of it and the expectation will be for favorable results on a NET BASIS. That the net of a series of bets is favorable does not mean that all the bets were wise! What you are suggesting is similar to the following: If I can accept 7-5 on coin flips for 20 years I am almost certain to make larger amounts than people accepting 6-5 on coin flips during the same period. That being the case, should I still accept 4-5 during some years because I will still net out ahead of them? Of course not! This is utterly ridiculous! You should never accept 4-5 on the flip of a coin. It is a loser. So dollar cost averaging or a series of coin flips will outperform over 20 years because you are getting favorable odds relative to alternative investments in most years. But you should still not invest when you are getting bad odds. Now for people who cannot make these determinations, (as you say) they will just have to live with the returns from an index knowing full well that in some years they are taking 4-5 and being very foolish. You should also consider that an investor cannot duplicate the index in reality because there are annual administrative costs, yearly commissions to add more money etc.. that reduce the annual return in any index fund vs the reported figures for the index. So you must make some sort of adjustment to all historical studies. This is something that none of them does I don't believe. There are no commissions or administrative costs for cash and many bonds. You also have to remember that most investors are accumulating significant savings only after buying and paying for their house, putting the kids through school etc... So the majority of savings comes around ages 45-60. If they accept 4-5 late in that period, they may not be alive to see the eventual out-performance of the NET TOTAL. They may also not be in a position to continue dollar cost averaging since they would be at the withdrawal stage, unable to benefit from future dollar cost averaging. They would then be in bad shape having to withdraw at the very time that dollar cost averaging would be providing the better returns that would enable net outperformance! >I no longer have access to the WSJ article which reported it, but >I believe it was Market historian Jeremy Siegel who has shown >that a similarly modest, but satisfactory, outcome would have >resulted with a program begun in 1972. No doubt! >An interesting point, and one near and dear to the hearts of the >Efficient Markets/Modern Portfolio crowd. In his last years, >Graham started to come around to this way of thinking, which >Buffett found disheartening -- but, of course, not so >disheartening as to give up trying. It has nothing to do with the efficiency of markets. It's just a value phenomenon that is best described with an example. 1. You buy a company for half its value that grows its earnings at 15%. 2. In five years the value is recognized. $1 invested will now be equal to $4. $2 of the profit is the value recognition that occurred within 5 years. The rest is earnings growth. This is a very high annualized return. (30% or so) If you invest in the same company growing at 15% for 20 years the value recognition portion of the return is now spread over 20 years. So the compound annual return shrinks (20% or so) and comes closer and closer to the 15% growth rate the further you go. Fortunately, value is recognized in a few years in most cases. So it makes it worth while to search for it. >The average individual investor, even if he or she has the same >degree of talent, doesn't put in the kind of hours the immortals do. Once again, I don't have access to the article, but missing the one best month in every year (easy to do when you're moving in and out of the Market based upon some formula) reduces average annual returns by 5%. I would be loathe to recommend that >someone try to beat these odds from home. No doubt. Most investors should dollar cost average. I don't think that the above study would apply to value investing though. By definition you are buying higher returns and selling lower returns. If the stock movements are random, you will do better.