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When (if ever) will you become a passive index investor?


cobafdek
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Several years ago, my liquid net worth achieved > 25x my household annual expenses (currently it's > 30x).  I've been avidly reading mrmoneymustache.com, and since "retirement" is really a state of mind, I decided to retire (in my mind, at least).  I've been actively value investing for about 15 years.  I don't need my "day job" any longer, but fortunately it's always been interesting.

 

Finding almost no new investment ideas in the sense of screaming bargains for the past year or so, I toyed with the idea of switching everything over to modified passive index investing with Vanguard index funds, with a simple plan:  1/4 of the portfolio each in Index 500, Small Cap Index, Total International Index, and Short-term Bond Index.  I would rebalance once a year, and adjust the bond percentage to between 0% - 50% depending on overall market PE (the lower the market PE, the higher allocation to equities).  This plan should average 6-8% annual returns, or equivalent to doubling the portfolio every 10 years.

 

In the past few months, I found a few things of screaming value, such as GP Investments.  And it feels like I've been bitten by the active investing bug again.  Maybe I had just been exercising that most valuable trait of value investors (patience) to the extreme point of boredom, and now I think I may be actively investing to my last dying breath, just for the sport of it.

 

What would you guys do?

 

 

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How were your returns during your 15 years value investing?  Did your final numbers beat a local index?

 

I honestly think that indexes can be more dangerous than buying individual stocks if you are diversified.  At least with stocks you somewhat understand the risks. 

 

Just my opinion.

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I have considered it a few times. But then I look at the biggest weightings in the index and think - I dont want to own these companies.

 

TBH I would rather just own BRK or a selection of holding companies.

 

I think I will seriously consider indexes when I want to stop spending any time at all investing and have so much money that the dividends can sustain my way of life.

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TBH I would rather just own BRK or a selection of holding companies.

 

Looking at my portfolio, that is basically what I do.  BRK, LUK, LMCA, DC-A.to, BAM, FFH.to, I own mostly just holding companies in place of ETFs.  I think if you can buy them at low discounts to book based on historic figures, on average their holdings should return average results (if EMT is correct) but eventually they will trade at higher premiums to book.  So if nothing else you get average results + a kicker if you sell at a book multiple which is higher than that which you purchased it at.  Even with EMT they should revert to historic book value multipliers at some point.  Best case they are superior capital allocators so you get superior investment results + kicker from selling out at a higher multiple.

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no_free_lunch, looking at my portfolio, I see it possibly evolving into a collection of holding companies.  I own a similar collection (BH, BAM, BRKB, CHEUY, CSWC, FRFHF (a small amount), L, LUK, MKL, and PICO), all bought at BVs less than 1.2.  I recently sold DJCO (with its BV greater than 2). 

 

I considered buying a basket of closed-end funds selling at steep discounts to NAV, but I found that the amount of time needed to research these seems to be no less than just researching for cheap stocks.  I also have more confidence in the capital allocation skills of the holding companies, and don't know too much about the closed-end fund managers.  Not to mention that closed-end funds seem to have hefty expense ratios compared to ETFs and Vanguard funds.

 

As alternatives to active value investing, either of these two strategies is still a step-up from passive index investing.  I guess it's tough to send us value investors (who enjoy the game) out to permanent pasture.

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TBH I would rather just own BRK or a selection of holding companies.

 

Looking at my portfolio, that is basically what I do.  BRK, LUK, LMCA, DC-A.to, BAM, FFH.to, I own mostly just holding companies in place of ETFs.  I think if you can buy them at low discounts to book based on historic figures, on average their holdings should return average results (if EMT is correct) but eventually they will trade at higher premiums to book.  So if nothing else you get average results + a kicker if you sell at a book multiple which is higher than that which you purchased it at.  Even with EMT they should revert to historic book value multipliers at some point.  Best case they are superior capital allocators so you get superior investment results + kicker from selling out at a higher multiple.

 

I have always wondered about the performance of this type of a portfolio vs. the S&P 500.  What types of 5 and 10-year returns have you been able to achieve buying holding cos vs. lets say the S&P 500?  TIA.

 

Packer

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Packer,

 

I think I misspoke.  This holding company portfolio is a newer development and just reflective of where I have been finding value lately.  Over the past decade they were usually only 5-20% of my portfolio,  not enough for the results to be statistically significant.  However, I definitely have beaten the averages and the overall portfolio even with my holding company picks.

 

I don't think I would do as well if I made this a dedicated strategy as I would end up buying holding companies just to fill the portfolio and would probably ignore the qualitative factors.

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It's said that you can't last in this business of investing if you have no passion for it. In other words, you can't fake passion...

 

So with that in mind, I really wondered if there were members on this board who were into investing just for the sake of money and not because they "loved" it. Meaning if they had enough money to live comfortably from the passive income (dividends) would they opt for it?

 

 

Do we have any Andrew Lahdes on this board?

 

Well I guess this thread answers/will answer that question.

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I'm fairly sure I will be investing into my 90s. I make just a few buys/sells a year but still look every day passively.

 

Why not invest in a fundamentally weighed index? There is a lot of research that any fundamental indicator will perform better than market cap.

http://wealthtrack.com/recent-programs/robert-arnott/

 

You could also invest in a magic formula type basket or fund.

 

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Hey, that interview with Bob Arnott is what I linked to above!  ;D 

 

But Specops, you might want to check it out (if you're not already well versed on the subject, he wrote a book about it several years ago), he's researched some of the problems/issues you raise with respect to traditional index funds.  I'm also following the Guggenheim Pure Value etfs that some other poster on here alerted us to.

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When you get tired of true value investing, why not buy a basket of good companies and hold indefinitely? There are many companies that can be bought for reasonable prices in good industries that are going to grow earnings at 10% a year out there. I would feel more comfortable knowing what I am holding than buying a passive index containing a lot of companies I wouldn't touch if I were to look into them.

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When you get tired of true value investing, why not buy a basket of good companies and hold indefinitely? There are many companies that can be bought for reasonable prices in good industries that are going to grow earnings at 10% a year out there. I would feel more comfortable knowing what I am holding than buying a passive index containing a lot of companies I wouldn't touch if I were to look into them.

 

You are in a sense doing what you suggest when you buy the S&P 500 as the index, while slow moving, is not entirely passive.

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Minor problem with the S&P is that it is cap-weighted and float-adjusted. I.e. you're overweight expensive stocks and underweight owner-operators. Some of the new stuff is indeed interesting, fundamentally-weighted indices or, even simpler, equal weight indices. I like that concept. Still, a problem with all these index strategies is that they get exploitable when they become too popular.

 

Regarding the original question: investing is fun. I'd probably even do it if I don't outperform the index :P.

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I agree with the comments here. The money is a great byproduct, but not the primary reason to invest. I'm the same person when I started with my -20k line of credit. I have even commented to a friend how it would be fun to go back to zero and try to do it all over again. 

 

I actually don't enjoy spending money, I am a value guy in more ways than one. I get just as much joy out of a bargain at the grocery store where I will buy multiples of what is needed. You either love the process or love the proceeds. I love the process, I love learning, and know what meets my needs.

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Hey, that interview with Bob Arnott is what I linked to above!  ;D 

 

But Specops, you might want to check it out (if you're not already well versed on the subject, he wrote a book about it several years ago), he's researched some of the problems/issues you raise with respect to traditional index funds.  I'm also following the Guggenheim Pure Value etfs that some other poster on here alerted us to.

 

Oh yeah I didn't notice it. I watch every new Walthtrack interview like a new episode of Breaking Bad.

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Hey, that interview with Bob Arnott is what I linked to above!  ;D 

 

But Specops, you might want to check it out (if you're not already well versed on the subject, he wrote a book about it several years ago), he's researched some of the problems/issues you raise with respect to traditional index funds.  I'm also following the Guggenheim Pure Value etfs that some other poster on here alerted us to.

 

Oh yeah I didn't notice it. I watch every new Walthtrack interview like a new episode of Breaking Bad.

 

Even the ones about timing social security elections? and the ones with WSJ writers opining on fixed annuities?  hehe!  I do watch it too.  Next week:  Heebner

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When you get tired of true value investing, why not buy a basket of good companies and hold indefinitely? There are many companies that can be bought for reasonable prices in good industries that are going to grow earnings at 10% a year out there. I would feel more comfortable knowing what I am holding than buying a passive index containing a lot of companies I wouldn't touch if I were to look into them.

 

You are in a sense doing what you suggest when you buy the S&P 500 as the index, while slow moving, is not entirely passive.

 

I don't think the S&P index is similar to this at all. You are buying the 500 largest companies for better or for worse when you buy the index. Choosing 15-25 great companies at a fair or even slightly expensive price is not too hard and should outperform the index in the long term. If nothing else, there are some interesting ETF's that I believe are less risky than the index as a whole. MOAT is one that I recommend to friends. I'm not stoked on Amazon being in the ETF right now, but most of the holdings seem to be high quality companies at fair prices and the ER is only 0.5%.

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MOAT is an interesting one.  I keep it on my watchlist to see how it performs and to watch the portfolio for ideas.  Turnover rate has been too high for me to mention it to friends looking for a passive option.  I've been going with VIG for the quality focus, but I don't love the cap weighting methodology. 

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