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Value vs. Indexing Today


randomep
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One of the biggest problems I have as a part-time investor is getting a context of where we are today. I have personally experienced the 2000 bust and of course 2008. I don't see any parallels but that may just put me in a position of complacency. I know the overall S&P 500 is richly valued at 20x earnings. But I think the breadth is small. There seems to be no shortage of cheap US stocks.  And so I think this is a stock pickers market. But investing in the S&P500 as a whole seems foolhardy.

 

If I had the time and will I would like to minic Buffett in his younger days and read old copies of the NY times to get a context of things through earlier decades. Where there such cheap companies in other frothy markets?

 

Some cheap stocks now: BAC, AIG, KCLI, ITIC, AAPL, Brk.B

 

 

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"Value" functions in a world of classic macroeconomics: the distribution of limited resources.

 

What happens when technology and society advances to the point where "limited" resourced become much less limited?

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I think I wrote up a bit on this in the other thread ( http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/difficulty-of-outperforming/50/ )

 

So instead of repeating, let me approach this from another side.

Why I don't want to actively invest anymore?

 

1. Burnout. I think that's possibly the most encompassing reason, but it might be also composed from the reasons below.

2. The more I read and learn, the more I see that I don't know anything.  :)

3. In depth analysis is not fun. For multiple reasons: really understanding business is hard for me, modeling predicting future business curve is hard, etc.

4. Related to above: I'm not and I won't be as good in analysis as some people on CoBF. Unfortunately, investing is a lousy business for "OK" people. If you're not great, you are very unlikely to outperform the baseline (index). You can make great living as an OK carpenter or engineer, but you should find another way to spend your time if you're just "OK" investor.

5. Portfolio composition is very hard. I don't know when X will outperform Y and deciding X vs. Y vs. none vs. both is not something that I do well.

6. Corollary of the above: at no time in the past my biggest holdings were best (or even good) performers. In fact my biggest holdings usually performed very badly. (If this continues, lookout for huge FFH/BRK underperformance from here - wait we already had this in 2015 when I bought both. So... you guys have been warned  8) ). "Put your money into your best idea" is usually a great way for me to lose money.

7. Underperformance for last 4-5 years. Outperformance before that possibly based on luck or things that have changed. (I definitely did not know what I was doing then, so it wasn't "expertise").

8. Corollary of the above: underperformance of recent picks or bigger-picture ideas (oil in particular).

 

-------------------------

Another subtopic:

Solutions for SP500 overvaluation if switching to indexing today:

 

1. 60%/40% SP500/bonds - problem: bonds are also overvalued (low yield). I would not advise this. It might be OK to do Graham-suggested 75% stocks/25% bonds (going to 50/50 and 25/75 if valuations change). I doubt I'd go with that, though I probably would hold 20% cash.

2. Buy RSP or PRF instead of market weighted index. This may reduce overvaluation. But don't quote me on it, I did not look at comparative valuations of these funds.

3. 60%/40% US total market / International - international has lagged for years and is cheap(er).

 

If I had an account where I would not be able to buy stocks, but would be able to buy any fund possible, I think I'd go with:

20% cash/bonds (undecided if bonds, due to crappy bond yields, but perhaps some well known bond mutual, possibly PONDX or Loomis Sayles), 20% emerging market stocks fund (no particular name in mind), 20% international developed market stocks fund (possibly Vanguard International or Fido International or one of the "consumer moat" funds), 20% US total market weighed, 20% PRF/PRFZ. Might put some into MOAT - though its performance hasn't been hot.

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A significant portion of the CoB population would be better served, were they to just stick to bank mutual funds. Every January, simply put X% of the portfolio into the worst performing sector of the year – and sit on it. There are lots of different flavours to choose from.

 

Play to your strengths, don’t try to become something you are not, and put the ego away. Talking about fund X, versus stock X, on the cocktail circuit is a lot cheaper.

 

SD

 

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For active (or formerly active) investors, switching to passive investing also requires the discipline to "do nothing", and avoid meddling too much, which can defeat the purpose of passive investing. Also, being satisfied with OK returns that in the long run over perform by not having the big down years is probably not easy for some of us.

 

For those thinking about switching to a passive approach, I believe the keys are: 1) find the lowest possible cost instruments (such as Vanguard ETFs or similar); 2) diversify across markets that are not highly correlated (i.e. local stocks/international stocks/bonds/reits/etc. or a similarly constructed fund) so that yearly rebalancing automatically results in "buying low/selling high" year after year, and 3) the ability to sit on your hands.

 

I've implemented such an approach a few years back for a family member with absolutely no interest in investing (which nicely takes care of #3 above : )  Being in Canada, I also added a currency twist: whenever close to CAD/USD parity, I buy the US and international stocks in USD-denominated instruments, and when the CAD/USD dips significantly (such as now), I switch back to equivalent CAD-based ETFs at the time of rebalancing to lock in the currency gains.

 

In putting this together, the CanadianCouchPotato site has been invaluable for me (my structure was similar to their model portfolio of a few years back). I suspect the Bogleheads forums would be useful for US-based investors.

 

Those in Canada looking for a simpler solution could do a lot worst than Mawer's balanced fund (or simply use it as a benchmark). From my research, it is a tough one to beat in good and bad markets (long as they do not change their approach I guess). Chou's Associates Fund may also be interesting if you can handle lumpy performance (he recently underperformed, so this may be a good time to buy in).

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"Value" functions in a world of classic macroeconomics: the distribution of limited resources.

 

What happens when technology and society advances to the point where "limited" resourced become much less limited?

 

huh, can you elaborate?

OK so this is a totally half-baked futuristic scenario, but what happens to the economy when the marginal cost of production approaches zero?

 

Let's take Nike, in say 100 years (or however long). The world has fully transitioned to solar power and the price of oil has plummeted to practically nothing. The COGS of a Nike shoe is freakin' miniscule. They've got robots handling 99% of production at lightning fast speeds at mini-factories to minimize shipping costs. If the total cost of Nike shoe is $10 today, let's say its $0.25 in this futuristic world.

 

And it's not just Nike with minuscule costs of production, it's across the whole developed world. Self-driving cars has ensured auto insurance doesn't exist. Insurance brokers? There's an app for that. Manufacturing is about as hands-off as it gets. Planes fly themselves. Improved satellites mean the cost for a cell phone carrier is practically nothing for incredible bandwidth. The advancement of technology has made the cost of resources and production super low.

 

So a lot of people are not working in these areas, not making a salary, but on whole their quality of life is greater than it is today. But perhaps their wages are much lower. Does this mean the market price of a Nike shoe is going to drop from $150 to $20? Monetarily this reduces the discounted present value of Nike. But economically they are still just as valuable.

 

On a whole what does that world look like on a monetary vs. economic level (price vs. value)?

 

/super rambly post

 

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On a whole what does that world look like on a monetary vs. economic level (price vs. value)?

 

/super rambly post

 

LC, I am not a thinker in this area of thought. So I cannot comment much. In the future people may live to be 150yrs old on average. All of earth may run on clean fusion power.  Reproductive rate may be 1.2 persons per woman.  We may have certain parts of the world living in the stone age due to religous dogma.  People may lose all motivation to work hard and devote their lives to having sex with as many people as possible because birth control is no hassle and 100% effective and all STDs have cures.

 

In this context I have no idea what economics and business is like. Also it is just an academic exercise as I'll dead by then.

 

I come to CoBF to get practical ideas to my financial problems.

 

BTW, don't get me wrong, I am strongly against censorship and you are free to post any thoughtful topic you like, I was just thrown off by your post.

 

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Like randomep says, future-economics is rather OT and not practical to discuss right now.

 

However, transition to such might be quite violent: e.g. if Earth population stops growing and starts shrinking, economy may go into perpetual what we call "recession". Not clear how this will be handled. Similar issue with <20% population having jobs (i.e. 80%+ unemployment). And younger members of CoBF may experience it firsthand. But still 20+ years to get there I'd guess.

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"Value" functions in a world of classic macroeconomics: the distribution of limited resources.

 

What happens when technology and society advances to the point where "limited" resourced become much less limited?

 

huh, can you elaborate?

OK so this is a totally half-baked futuristic scenario, but what happens to the economy when the marginal cost of production approaches zero?

 

Let's take Nike, in say 100 years (or however long). The world has fully transitioned to solar power and the price of oil has plummeted to practically nothing. The COGS of a Nike shoe is freakin' miniscule. They've got robots handling 99% of production at lightning fast speeds at mini-factories to minimize shipping costs. If the total cost of Nike shoe is $10 today, let's say its $0.25 in this futuristic world.

 

And it's not just Nike with minuscule costs of production, it's across the whole developed world. Self-driving cars has ensured auto insurance doesn't exist. Insurance brokers? There's an app for that. Manufacturing is about as hands-off as it gets. Planes fly themselves. Improved satellites mean the cost for a cell phone carrier is practically nothing for incredible bandwidth. The advancement of technology has made the cost of resources and production super low.

 

So a lot of people are not working in these areas, not making a salary, but on whole their quality of life is greater than it is today. But perhaps their wages are much lower. Does this mean the market price of a Nike shoe is going to drop from $150 to $20? Monetarily this reduces the discounted present value of Nike. But economically they are still just as valuable.

 

On a whole what does that world look like on a monetary vs. economic level (price vs. value)?

 

/super rambly post

 

The Grand Nagus says, "there will always be a market for Romulan Ale. Invest now, HUMAN!"

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Indexing doesn't have to be an all or nothing proposition

 

Can valuation time indexing too.

 

I guess. My point was if you are unsure if you can beat the market but unsure if you want to index, why not make the S&P 500 50% of your portfolio (or more or less)?

 

If you only find one investment every one or two years, maybe the right answer is 80% index and 20% 2 or 3 names. IDK, just something to consider.

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Indexing doesn't have to be an all or nothing proposition

 

Can valuation time indexing too.

 

I guess. My point was if you are unsure if you can beat the market but unsure if you want to index, why not make the S&P 500 50% of your portfolio (or more or less)?

 

If you only find one investment every one or two years, maybe the right answer is 80% index and 20% 2 or 3 names. IDK, just something to consider.

 

I think many people do something like this. Although the company they invest in outside of an index is usually the company they work for (irrespective of price).

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Indexing doesn't have to be an all or nothing proposition

 

Can valuation time indexing too.

 

I guess. My point was if you are unsure if you can beat the market but unsure if you want to index, why not make the S&P 500 50% of your portfolio (or more or less)?

 

If you only find one investment every one or two years, maybe the right answer is 80% index and 20% 2 or 3 names. IDK, just something to consider.

 

Two reasons: asset location differences (restrictions, tax treatment) and asset classes/sectors preferences.

 

I'm restricted to only a few attractive few index funds in my 401k, so value time there between TSM/TIM and TBM.

 

I prefer index-like funds for SV, ISV, and EM classes and Energy and PM&M sectors and so value time between them and STT in my Roth IRA.

 

I prefer dividend-paying individual stocks of a type (FRFHF) in my Roth IRA, adding when attractive.

 

I prefer non-dividend-paying individual stocks of a type (BRK, MKL) in taxable, adding when attractive.

 

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I think many would be well served here to check out Howard Marks's recent memos.

 

Also, maybe more of a shift to indexing or Berkshireing is appropriate.

 

the man with 110 IQ buys an index fund. the man with 120 IQ buys Berkshire when it's cheap. The man with 130 IQ clones cheap stock picks (or just buys straight up low EV/EBITDA or EV/EBIT)

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I think many would be well served here to check out Howard Marks's recent memos.

 

Also, maybe more of a shift to indexing or Berkshireing is appropriate.

 

the man with 110 IQ buys an index fund. the man with 120 IQ buys Berkshire when it's cheap. The man with 130 IQ clones cheap stock picks (or just buys straight up low EV/EBITDA or EV/EBIT)

 

Maybe the man and women with a 130+ IQ do something more useful than investing (building his own business, research, cure cancer) and invest in index funds ;)

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I think many would be well served here to check out Howard Marks's recent memos.

 

Also, maybe more of a shift to indexing or Berkshireing is appropriate.

 

the man with 110 IQ buys an index fund. the man with 120 IQ buys Berkshire when it's cheap. The man with 130 IQ clones cheap stock picks (or just buys straight up low EV/EBITDA or EV/EBIT)

 

Maybe the man and women with a 130+ IQ do something more useful than investing (building his own business, research, cure cancer) and invest in index funds ;)

 

Why? Better returns on investing if you have sufficient funds (relative to time invested).

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I finally started indexing in my 401k last year.

It took me almost twenty years to not be so stupid.

My cost in that fund (S&P 500) is two basis points.

If I switch jobs ,I may lost access to that fund, unfortunately.

 

401(k)s are easy... or are they?

 

There is usually no access to VTI or equivalent. So I do synthetic VTI by splitting SP500 + midcap/smallcap whatever is available. Possibly waste of fees.

 

I put 40% into international funds. Possibly waste of fees and performance. For last 5+ years international has underperformed hugely. Will it revert?

 

I put 20% into bonds/cash. Well, this is per-person decision, so that's not very interesting.

 

I guess out of these, the biggest and most interesting decision is whether to put money into international or not.

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  • 1 year later...

"Value" functions in a world of classic macroeconomics: the distribution of limited resources.

 

What happens when technology and society advances to the point where "limited" resourced become much less limited?

 

huh, can you elaborate?

OK so this is a totally half-baked futuristic scenario, but what happens to the economy when the marginal cost of production approaches zero?

 

Let's take Nike, in say 100 years (or however long). The world has fully transitioned to solar power and the price of oil has plummeted to practically nothing. The COGS of a Nike shoe is freakin' miniscule. They've got robots handling 99% of production at lightning fast speeds at mini-factories to minimize shipping costs. If the total cost of Nike shoe is $10 today, let's say its $0.25 in this futuristic world.

 

And it's not just Nike with minuscule costs of production, it's across the whole developed world. Self-driving cars has ensured auto insurance doesn't exist. Insurance brokers? There's an app for that. Manufacturing is about as hands-off as it gets. Planes fly themselves. Improved satellites mean the cost for a cell phone carrier is practically nothing for incredible bandwidth. The advancement of technology has made the cost of resources and production super low.

 

So a lot of people are not working in these areas, not making a salary, but on whole their quality of life is greater than it is today. But perhaps their wages are much lower. Does this mean the market price of a Nike shoe is going to drop from $150 to $20? Monetarily this reduces the discounted present value of Nike. But economically they are still just as valuable.

 

On a whole what does that world look like on a monetary vs. economic level (price vs. value)?

 

/super rambly post

 

I think you are discussing a very interesting scenario, and probably not an unlikely one! My take is that in such a world you would want to own brand companies, not commodity producers. Competition will drive the price on commodity products down to the costs, thus the benefits of lower production costs will be passed onto consumers. Brands (Nike!) on the other hand are priced according to their (perceived) value to consumers, thus they should see their margins improve with falling production costs...

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