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 Post subject: Support for Bogleheads
PostPosted: Thu Aug 09, 2012 5:48 am 

Joined: Thu Jun 23, 2011 3:24 pm
Posts: 88
You know it's bad when...journals for financial analysts, whose profession is investment planning & advice, publish articles questioning the worth of active management.

Finally got around to reading my July/August 2012 CFA 'Financial Analysts Journal' (CFA=chartered financial analyst). Fascinating article titled in part "The Mystery of Underperformance" by Charles D. Ellis, CFA.

Money quote:
"Seen correctly, active management may be the only service ever offered that costs more than the value delivered."

The direct link to a pdf is here http://www.cfapubs.org/doi/pdf/10.2469/faj.v68.n4.2 (or go to cfapubs dot org and search). The article is even available as an audio file. Looks like the same author also did an article in the May/June 2012 issue "Investment Management Fees Are (Much) Higher Than You Think"

Aside: Ellis indirectly addresses the potential problem that 'if everyone indexed then indexing wouldn't perform as well' - "Although everybody knows that patrons of gambling casinos are, as a group, significant losers, the tables and slots stay busy."


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 Post subject: Re: Support for Bogleheads
PostPosted: Thu Aug 09, 2012 7:26 am 

Joined: Fri May 04, 2007 8:14 pm
Posts: 1560
Considering that Charlie Ellis wrote Winning the Loser's Game: Timeless Strategies for Successful Investing with a foreword by John Brennnan, this is not suprising.

For the past couple of years, the book Ellis co-wrote with Burton Malkiel, The Elements of Investing, has been the default recommendation I've made to young people asking me about investing.


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 Post subject: Re: Support for Bogleheads
PostPosted: Thu Aug 09, 2012 10:40 am 
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Joined: Wed Sep 23, 2009 9:01 am
Posts: 5211
You know, I have a theory about this...

If you take a monkey and have it pick stocks randomly he's going to perform in line with the market. But monkeys are cheap.

Take an average investor (let's call him "average joe") and he'll succumb to influences from the media and his own emotions and will usually underperform the market by a percent or two.

Take a professional money manager and he'll probably do no better than the monkey and will charge a 1-2% fee. But he just might be better than "average joe" if he doesn't fall victim to his own biases and emotions.

Take a reasonably knowledgeable amateur investor, maybe someone like Vintek, and you'll have the best of everything - a steady, rational hand managing his own portfolio and no management fees. I personally think everyone CAN be like that. But I also leave the door open for active managers for people who don't WANT to manage their own money.

I look at it like this - I'm a technical guy. I used to work on cars in high school as a hobby and because my friends did it. Even 10 or 15 years ago I used to work on my own cars, change my own oil, etc. I still know how to do that. But I don't really want to do that anymore so I pay others to do that now.

The article is not at all surprising but I'd like to see a comparison with what the "average joe" does in comparison to active managers. I suspect that active managers "earn their fee" by not making the stupid mistakes that "average joes" make. But of course any average joe with an ounce of sense can just buy an index fund instead. AT that point though I'd say he becomes a "reasonably knowledgeable amateur investor" instead.


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 Post subject: Re: Support for Bogleheads
PostPosted: Thu Aug 09, 2012 12:30 pm 

Joined: Fri May 04, 2007 8:14 pm
Posts: 1560
DoingHomework wrote:
If you take a monkey and have it pick stocks randomly he's going to perform in line with the market. But monkeys are cheap.

Take a reasonably knowledgeable amateur investor, maybe someone like Vintek, and you'll have the best of everything - a steady, rational hand managing his own portfolio and no management fees. I personally think everyone CAN be like that. But I also leave the door open for active managers for people who don't WANT to manage their own money.

I look at it like this - I'm a technical guy. I used to work on cars in high school as a hobby and because my friends did it. Even 10 or 15 years ago I used to work on my own cars, change my own oil, etc. I still know how to do that. But I don't really want to do that anymore so I pay others to do that now.

Thanks for the kind words, DH. I actually singled out the 3 paragraphs above because they tie in to my own investment habits. I don't actually do my own investing any more. Like you, there are certain things I'd rather be doing so I pay others for it. And as you have so astutely observed, monkeys are cheap.

Putting those 2 factors together, I had the folks at http://www.newtechusa.com/PPI/talent.asp write programs designed to help predict when the market was going to go up or down. The result is that because it's done by monkeys, I'm pretty much getting market returns. The cost are so low that it's negligible. Well worth it, as I save a lot of time and worry.


Last edited by VinTek on Thu Aug 09, 2012 12:51 pm, edited 1 time in total.

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 Post subject: Re: Support for Bogleheads
PostPosted: Thu Aug 09, 2012 12:39 pm 
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Joined: Wed Sep 23, 2009 9:01 am
Posts: 5211
Vintek, expect a bill for the injuries I sustained falling out of my chair laughing at your post!


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 Post subject: Re: Support for Bogleheads
PostPosted: Thu Aug 09, 2012 12:54 pm 

Joined: Fri May 04, 2007 8:14 pm
Posts: 1560
DoingHomework wrote:
The article is not at all surprising but I'd like to see a comparison with what the "average joe" does in comparison to active managers. I suspect that active managers "earn their fee" by not making the stupid mistakes that "average joes" make. But of course any average joe with an ounce of sense can just buy an index fund instead. AT that point though I'd say he becomes a "reasonably knowledgeable amateur investor" instead.

And because I'm limited to one link per post, there is a http://www.cxoadvisory.com/gurus/ that ranks the accuracy of financial pundits against the market. Not exactly what you asked for, but I really like the site because it so amply illustrates how random a winning record can be.


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 Post subject: Re: Support for Bogleheads
PostPosted: Thu Aug 09, 2012 2:52 pm 
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Joined: Wed Sep 23, 2009 9:01 am
Posts: 5211
VinTek wrote:
And because I'm limited to one link per post, there is a http://www.cxoadvisory.com/gurus/ that ranks the accuracy of financial pundits against the market. Not exactly what you asked for, but I really like the site because it so amply illustrates how random a winning record can be.


Wait a minute. How come none of them got better that a "D?"


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 Post subject: Re: Support for Bogleheads
PostPosted: Sun Aug 12, 2012 3:34 am 

Joined: Thu Apr 05, 2007 3:05 pm
Posts: 1264
Interesting profile of John Bogle in the NY Times here:

http://www.nytimes.com/2012/08/12/business/john-bogle-vanguards-founder-is-too-worried-to-rest.html


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