Jump to content

Watsa and Buffetville


Packer16
 Share

Recommended Posts

I was re-reading the new version of The Intelligent Investor and could not disagree more with Jason Zweig's comments on stock selection for the lay investor.  He states that for most people an index fund is the best investment and just because that was not available when Graham wrote the book he did not recommend it.  He seems to totally dismisss the value framework that Graham is espoising.  Do you guys have the same impression.?  In my book, it can be harder to pick a good mutual fund (outside of low turnover value funds) as a good stock (as mutual funds have more moving parts than stocks).  Joel Greenblatt says as much in his second book (The Little Book that Beats the Market) also versus his first book (You Can Be a Stock Market Genius) was just the opposite. 

 

Given most folks here use some type of value approach would it make sense to develop a composite of our preformance, send it to Jason and show him what a group of primarily lay investors can do using Grahama and Dodd's principals.  Another metric would be how many hours per week do we spend looking for and eveluating stock.  I think this would be an interesting exercise that I would be willing to put together if you guys can pull the data together.  Thx.

 

Packer

Link to comment
Share on other sites

I totally agree with Zweig. I'd say the average investor is much, much better off in an index fund than individual stocks. Too often people will buy what's trendy, hot, or speculative. Buffett has said that most investors should go with an index fund. He also said something to the effect of "when dumb money realizes it's dumb, it ceases to be so."

Link to comment
Share on other sites

I think what Graham has stated is that if you know you can't deal with picking your own stocks then at least understand the value philiosophy and chose an advisor that can (low turnover value funds or RIAs that invest with such managers).  In my mind, index funds are buying into the Efficient Market Hypothesis (which I disagree with).  The effects of index investing over the past 10 years have been a disaster to which I am suprised no one has commented (other than not investing in stocks).

 

Packer

Link to comment
Share on other sites

I think what Graham has stated is that if you know you can't deal with picking your own stocks then at least understand the value philiosophy and chose an advisor that can (low turnover value funds or RIAs that invest with such managers).  In my mind, index funds are buying into the Efficient Market Hypothesis (which I disagree with).  The effects of index investing over the past 10 years have been a disaster to which I am suprised no one has commented (other than not investing in stocks).

 

Packer

 

To reference Buffett, value is the sort of thing that takes like an inoculation. People either get it, or they don't. If a person doesn't get it, then how can they get what to look for in a value fund? I remember when I thought that value was mainly a low p/b ratio... Looking at some of the value funds out there, I believe that there are a lot of seasoned investors that think that too. If they are good at presentations, then the little old grandma who is looking for a place to put her money doesn't have a chance!

 

I think that people should probably be invested in an index fund if they know little about investing. Heck, they should probably be invested in that type of fund even if they know just enough to make them dangerous!

Link to comment
Share on other sites

Index ETF is an incredibly amazing tool for the average Joe. For a management cost under 0.5% they can build a fully diversified portfolio of stock and bonds and get the liquidity.

 

I bang my head every time I hear people tell me they got some kind of mutual fund offered by their bank. When I ask them what's the management fee they says "management what?". People don't seem to realize that 2% management fee over 30 years is a LOT of money.

 

BeerBaron

Link to comment
Share on other sites

Index funds are momentum based stock funds with low expense ratios.  The only thing they have going for them is low expenses.  I think another distinction folks forget is that most stock mutual funds are trading/speculation funds.  If you filter out the low turnover value oriented funds (the real investment funds) I think they can beat the stuffing out of index funds. 

 

Why as value investor (you understand the concept) would you recommend index funds??  I think the value concept is widely used and accepted when folks fo shopping for other items.  Why can't the folks that understand that concept apply it to stocks/funds as well?  Would you recommend a momentum based fund with low expenses to them? 

 

Packer

Link to comment
Share on other sites

I totally agree with Zweig. I'd say the average investor is much, much better off in an index fund than individual stocks. Too often people will buy what's trendy, hot, or speculative. Buffett has said that most investors should go with an index fund. He also said something to the effect of "when dumb money realizes it's dumb, it ceases to be so."

 

I agree, the average man is a financial dim wit. Unfortunately the truth hurts. With that said they are equally dim when it comes to mutual fund selection. A smart man would be setting up a gold fund now after closing his oil and gas fund in 2008.

 

Out of all my non value investing friends - all own stocks and couldnt really tell you why (from a financial prospective). Its always a story stock but with no mention of value. 3 of these guys are even accountants. I have tried explaining value investing to them and its hopeless. They pitch me an Idea and I say whats it worth. Then they say it is at $5 and was trading at $40, then I say but whats it worth. It just keeps going back and forth from there.

 

They start telling me about buy and hold, and how its a long term deal for them. Its very interesting.

Link to comment
Share on other sites

Index funds are momentum based stock funds with low expense ratios.  The only thing they have going for them is low expenses.  I think another distinction folks forget is that most stock mutual funds are trading/speculation funds.  If you filter out the low turnover value oriented funds (the real investment funds) I think they can beat the stuffing out of index funds.  

 

Why as value investor (you understand the concept) would you recommend index funds??  I think the value concept is widely used and accepted when folks fo shopping for other items.  Why can't the folks that understand that concept apply it to stocks/funds as well?  Would you recommend a momentum based fund with low expenses to them?  

 

Packer

 

 

 

Packer, i agree with you that with a little research and work, people can do better than an index. however, for the person that would rather go to the dentist than deal with an investment (ie the average person), index funds are great investments. They'll beat 80% or so of the funds over a long period of time. They have low expenses and are relatively tax efficient. Plus, you don't have to think! Also, many 401k plans don't have great value investments, so index funds may be the ideal option.

Link to comment
Share on other sites

I've been investing since I was a kid. it took me a long, long time, but only recently over the past couple years did I become a value investor. So, it took me 10 years to discover value investing. I went through college with a degree in finance and I didn't understand much of anything. CAPM? Efficient frontier? MPT? Beta? Standard deviation? Huh?

 

I understood the concepts of what it was trying to get to, but I could not wrap my head around how this stuff made up a stock price or why it made stocks go up and down. Around 2004, I decided to learn more about Warren Buffett. Over the next couple years of going through grad school (which also didn't help much), I really started to delve deeper into value investing. Granted, I'm still trying to learn more, but valuing a stock based on a business made sooo much more sense! Much more intuitive than all of the statistics and other mathematics I learned in school.

 

I'm still trying to get rid of the stuff I've learned in school though. :)

Link to comment
Share on other sites

I am still having a hard time seeing when an index fund is helpful.  Most of the points for an index fund, people don't have the time, inclination or insight appear to be surmountable.  If you don't have time to investigate the stock market with your hard earned $ then you should invest in a money market fund. 

 

I think many folks who are coupon shoppers and bargain shoppers can at least understand value investing.  That is all it takes.  For these folks, index funds are a cop out.  There may be an information overload issue for investing but value investing provides the appropriate filiters.  I find it ironic that Jason Zwieg is counseling folks to buy index funds in a book on value investing.  For most people who read the Intelligent Investor (and by inference understand or are curious about value investing), the advice in my mind is silly.

 

Packer

Link to comment
Share on other sites

>>I am still having a hard time seeing when an index fund is helpful.

 

I think I can give you my job's retirement plan example. We have two plans at job, 401 & 457 being semi-government agency. These plans offer only limited choices to invest in Mutual funds and index funds. I did not invest but accumulate most of my job's retirement money started in 2004, until, October of 2008 when Buffett published his buy america article, Since then started investing in S&P 500 index fund until July 2009. After then did not invest any additional money but started accumulating again. This strategy seems to work as long as one does not have many choices for investments in retirement accounts. I recognize that it's kind of loser's choices; but if your job account gives you limited choices , i think  could live with it.

 

 

Link to comment
Share on other sites

I would suggest that the average investor Jason is talking about isn't anything like the average investor on this board. His comments were likely directed at the "average investor" that numerous studies show achieves 50% to 75% of market returns. They buy near highs and sell when the market tanks. Those investors would benefit from a buy and hold index fund strategy.

Link to comment
Share on other sites

Let's invert.  Let's construct the opposite of a great investor.

 

That investor would be:

 

1) More likely to be a woman than a man

 

2) A non reader, especially someone who doesn't often read books, particularly nonfiction books

 

3) A person who may sometimes test well on standard tests, but who  doesn't like to tackle the hard problems, the problems where the answer may be indeterminate and the truth only approximated

 

4) A spender, not a saver

 

5) Emotional for the greater part, rather than logical

 

6) Social rather than contemplative

 

7) Conformist rather than nonconformist

 

8) nonquantitative in thinking and reasoning

 

8) And --- help me out here. :)

Link to comment
Share on other sites

Let's invert.  Let's construct the opposite of a great investor.

 

That investor would be:

 

1) More likely to be a woman than a man

 

2) A non reader, especially someone who doesn't often read books, particularly nonfiction books

 

3) A person who may sometimes test well on standard tests, but who  doesn't like to tackle the hard problems, the problems where the answer may be indeterminate and the truth only approximated

 

4) A spender, not a saver

 

5) Emotional for the greater part, rather than logical

 

6) Social rather than contemplative

 

7) Conformist rather than nonconformist

 

8) nonquantitative in thinking and reasoning

 

8) And --- help me out here. :)

I can see why most of these behaviors are not good for your wealth. But why the average investor is a women? ???

Link to comment
Share on other sites

Let's invert.  Let's construct the opposite of a great investor.

 

That investor would be:

 

1) More likely to be a woman than a man

 

2) A non reader, especially someone who doesn't often read books, particularly nonfiction books

 

3) A person who may sometimes test well on standard tests, but who  doesn't like to tackle the hard problems, the problems where the answer may be indeterminate and the truth only approximated

 

4) A spender, not a saver

 

5) Emotional for the greater part, rather than logical

 

6) Social rather than contemplative

 

7) Conformist rather than nonconformist

 

8) nonquantitative in thinking and reasoning

 

8) And --- help me out here. :)

I can see why most of these behaviors are not good for your wealth. But why the average investor is a women? ???

 

 

Actually, women on average are slightly better investors than men, probably because they tend to hold for longer periods and avoid gambling.  Men tend to trade more and gamble.  However, what we are seeking is the antithesis of the qualities that make a great investor, not merely an above average investor.  Few women have become great investors like Buffett, Graham, etc.  Therefore, these generally good investing qualities that women have may be  negative if taken to extreme or not balanced with other qualities.

 

Women are much more after security than men.  This may be a negative for great success in investing, while at the extremes this a much better quality than gambling.  A touch of gain seeking acquisitive motivation balanced with a healthy dose of risk aversion may be a prerequisite for becoming a great investor.

 

Thanks to your post, we have four more qualities to add to our list of negative predictors:

 

9) a preference for high frequency trading.

 

10) gambling

 

11) lack of motivation for acquisitiveness to balance extreme risk avoidance

 

12) a tendency to hold too long and not cut losses if fundamentals deteriorate

 

From nodub's post #19 here are two more negative predictors:

 

13) lack of focus on value in relation to price

 

14) viewing market price declines as a negative rather than a possible buying opportunity

Link to comment
Share on other sites

I think what Graham has stated is that if you know you can't deal with picking your own stocks then at least understand the value philiosophy and chose an advisor that can (low turnover value funds or RIAs that invest with such managers).  In my mind, index funds are buying into the Efficient Market Hypothesis (which I disagree with).  The effects of index investing over the past 10 years have been a disaster to which I am suprised no one has commented (other than not investing in stocks).

 

Packer

 

Believe it or not, investing in Index funds has nothing to do with efficient markets (though they tend to go together in peoples minds). It is simple math and logic. People investing in Index funds for the very long term (DCA over 30-40 year period for example) would earn the business returns i.e. about 6% real returns. Since all the active investments involve much higher costs, nearing about 1.5% to 2% of the real returns every year, active investors as a group earn about 4% real returns. Thus on aggregate, indexers outperform something like 80-90% of all investors over say a 30 year period. It makes a lot of sense to just invest in an index fund and outperform 80-90% of the people over a 30 year period. If you disagree, you need to answer one question: Do you believe that all the investors in aggregate can outperform the market? and Do you think all the investors in aggregate earn return higher than what the business generates over the long term?

 

Now efficient marketeers take this to an extreme and say no one can outperform the market expect by luck. We know that is not true. However, this does not take away from the fact that for the vast majority of the people, by definition, index funds are the most suitable option.

 

I spent several years immersed in efficient markets and their study before finding home in Graham and Buffett.

 

 

"It is no difficult trick to bring a great deal of energy, study, and native ability into Wall Street and to end up with losses instead of profits." - Ben Graham

 

Vinod

 

 

 

 

 

Link to comment
Share on other sites

If you take a look at some of the best value mutual funds, they have only added a very modest (1-2% ) after-tax out-performance over the broad stock market. Take longleaf partners fund, they outperformed before-tax by about 2.6% over S&P 500 index. If you really benchmark this over say Russell 1000 value which I think is the most appropriate and that investors could own this fund (though not over the same period), then it turns into insignificant out-performance to downright underperformance (I really dont have the numbers for 1000v but know it outpermed S&P by a little bit).

 

I posted the performance records of about 20 pre-selected group of value investors mutual funds in the old MSN message board wondering why they have not really shown any good performance compared to the stock market. It seems it should be so easy to beat the market but it is not in practice.

 

A lot of this is due to (1) behavior of investors themself which force managers to worry about short term performance and make subobtimal choices (2) drag due to asset size that does now allow many opportunities to be expolited (3) compensation more aligned with getting more AUM.

 

Vinod

Link to comment
Share on other sites

Chairman Warren Buffett reiterated his view that for most small investors who don't have time to research individual companies, cheap index funds are the best way to invest in the stock market.

 

"The best way in my view is to just buy a low-cost index fund and keep buying it regularly over time, because you'll be buying into a wonderful industry, which in effect is all of American industry," Buffett told CNBC anchor Liz Claman.

 

"If you buy it over time, you won't buy at the bottom, but you won't buy it all at the top either," the billionaire investor said.

 

http://www.marketwatch.com/story/warren-buffett-backs-index-mutual-funds-over-etfs

 

When a shareholder asked for the single best specific investment idea Buffett could recommend to an individual in his 30s, Buffett said: "I would just have it all in a very low-cost index fund from a reputable firm, maybe Vanguard. Unless I bought during a strong bull market, I would feel confident that I would outperform ... and I could just go back and get on with my work."

 

http://seekingalpha.com/article/75563-buffett-s-advice-to-the-berkshire-faithful-buy-index-funds

 

Vinod

Link to comment
Share on other sites

Vinod1,

 

Thanks for your last posts. I agree.

 

 

If anyone thinks indexing is a bad suggestion for the average investor (or even for the average reader of The Intelligent Investor) please consider the following:

 

Try to remember that the "average" investor does not even read the financial section of the newspaper (they own mutual funds pushed on them by bank salespeople and sales commission based financial advisors).  

 

Of the few people that have an interest in investing and do try to educate themselves a little bit... most of them still do not "get it". They get sidetracked by momentum or technical trading,  etc. Most of these people still never learn to value a company (this includes 9 out of 10 typical people that take an interest in Buffett). Many take an interest in Buffett and the idea of value... but they never actually "get it" and start applying it themselves.

 

A small subset can "get it" and start to buy companies at a price that is comfortably below an estimate of the true value. An even smaller subset also learns emotional control so they have the stomach to seize the opportunities when the markets are in turmoil and so-called investors are panicking.

 

As a percentage of the investing public.. there are very few that can do this.

Link to comment
Share on other sites

As to value mutual funds outperforming over time, I disagree.  Over a 10-yr period, Longleaf has outperformed over 5%.  So has Sequoia, Farholme, Mairs & Power Growth, Mutual Series and Harbor Int'l.  What funds were on your list that underperfomed?  Did they have a value manager at the helm and low turnover? I agree that some value index funds can add some value via low cost and a value tilt but buying index funds over the past 10-yrs has not yielded much return.  

 

You guys seem to relagate the average investor to some kind of idiot who is an emtional basket case.  I disagree.  I especially disagree about readers of the Intelligent Investor.  If you have gotten to that reading and understand the concepts then you should at least be able to find an advisor/mutual fund that follows those ideas.  True there are some folks that are emotional basket cases but what we and value investors do is not rocket science.  It can be performed with algebra and an average IQ.  High IQ's may be a disadvantage due to making the process too complex when it doesn't have to be.  

 

In summary, I think recommending index funds to those folks who understand and accept value investng precepts is not very smart.  This is what Zweig does throghout the value investing book (which I think is a shame) because if you didn't know otherwise (via boards like this) you would be condemend to lower performance than the concepts would provide.  To a certain extent its like a Bible commentary written by an agnostic or atheist.  

 

BTW I have no problems with his type of commentary in Random Walk Down Wall Street as this is consistent with the concepts in that book.

 

Packer

 

 

 

 

 

 

 

 

 

Link to comment
Share on other sites

I do accept what vinrod has stated for a group of folks.  Nobnub has presented an applicable set of filters.  For the folks that have not made it through the discover and accept stages of value precepts, I think index funds make sense due to not falling into other mistakes (momentum, leverage & speculation) and low cost.  However, for those who have made it through those 2 filters, they do not.  We may disagree on how many folks can make it through those 2 filters (I think quite a few can if they try and are provided the correct framework which should the focus on the Intelligent Investor).

 

As to investors beating the index, from my own experience and others on the this site when we have shared our returns, they have outperformed the index at 5 - 10% + rates for many years.  That is why I thought it would be interesting catalogue our returns/experiences similar to the Graham and Doddsville article to show it could be done by interested folks.

 

Packer

Link to comment
Share on other sites

vinod1,

 

What you write will not be accepted here.  But even given the nature and deep study of those on this board I'd bet heavily that the great majority of us will underperform Mr. Market over time even given (as Charles Ellis states it) what will near certainly be a brief period of significant out performance.

 

 

Whoa there!  If the great majority of us underperform the market over the long term, that implies that research has negative value or that our costs entirely eat the value of our research.  I can tell you that my costs are very low....like 0.1% per year.  Even Vanguard would have trouble doing that.  I'm pretty confident that I can meet that 0.1%  hurdle.

 

SJ

Link to comment
Share on other sites

I also think Charles Ellis is right from the perspective of mutual funds and other managed investments were rules (like diversification) were developed to prevent mistakes.  How many mutual funds will buy FFH LEAPs (even though they were incredibly cheap) or have FFH concentrations like folks on this board?  Unconstrained many of these institutions could remove many of the value opportunties out there but due to their constraints they will mostly be index huggers.  Good for us as our research adds value.  That is why the best modest size fund out there (Fairholme) is going to get you S&P + 12% but many boardmembers can get S&P +15% or higher.

 

Packer

Link to comment
Share on other sites

If you take a look at some of the best value mutual funds, they have only added a very modest (1-2% ) after-tax out-performance over the broad stock market. Take longleaf partners fund, they outperformed before-tax by about 2.6% over S&P 500 index. If you really benchmark this over say Russell 1000 value which I think is the most appropriate and that investors could own this fund (though not over the same period), then it turns into insignificant out-performance to downright underperformance (I really dont have the numbers for 1000v but know it outpermed S&P by a little bit).

 

 

Vinod

 

I tried to look this up. Russell is only give 11 year returns for the the 1000 value index on their site that I could find. For the period ending sept 17, it was up 2.74% per year. Longleaf, from my calculation earning about 4.99% per year.

 

According to Morningstar,  $10,000 investment at inception of the fund would've grown about $110,000 today, vs about $50,600 for large blend,  $66,100 for s&p500, and $79800 for large value. to be fair, they only started tracking large value around 1997, but the fund has still outperformed since then.

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

×
×
  • Create New...