Watsa and Buffetville

[vinod1]

 

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

 

SJ,

 

I am talking about the average Joe, not the members of this message board. If I had a pick of several investors on this message board especially the majority of those who post with some frequency, I have no doubt in my mind they (yourself included) would outperform the market.

 

Value Investing (a la Buffett/Graham) is so counter-intutive and unlike how the work is accomplished/success is achieved in other fields. I do not think it can be practiced successfully say by 80 to 90% of the overall general population. That and only that is my point.

 

Vinod

[vinod1]

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

 

 

I would look at 20 year returns for a better idea of what returns can be achieved. I posted longleaf's and they are not all that impressive. Also, most value funds and incorrectly measured against the overall market rather than to the type of stocks that generally are populated in their funds. Take Pabrai for example, he loads the funds mostly with small and value stocks (per the academic definition, of low price/book), so I do not think it would be correct to measure his performance aganist S&P 500 but rather aganist say Russell 2000 value or some combination thereof. I know measuring performance this way is a can of worms, but this is something I found most good value investors have done a bad job off, as a result of insufficient attention/thinking on this topic.

 

Mairs and Powers, yes it out performed by 4% over 20 years, but if you had instead looked at in comparision to small value index, it probably outpermed by a smaller percentage over this period.

 

Yes, we have a few mutual funds that have outperformed by a little (1-3%) over 20 years, but I do not think it would have been easy to pick the succesful funds ahead of time. I am not saying someone who is well immersed in value investing like folks on this board, cannot pick good value managers who can outperform the market by a little bit. For the average investor, it is practically impossible.

 

If you really want to look at Sequoia performance under current manager's take out BRK and look at the performanc of the rest of the portfolio. You know they have BRK due to their predecessor's inclusion, so this would give you a good idea of current manager's capabilities. It is not very impressive.

 

 

Vinod

[vinod1]

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.  

 

Packer

 

 

Graham had a wonderful paragraph that I am unable to find now. It goes something like this: Investing is a business undertaking and should be carried out as such. It is incorrect to think that with just a little effort one can achieve results substantially better than the market as a whole. It requires a level of intensity that a businessman would employ in the conduct of his business. Nevertheless a great majority of the people seem to have this belief. No one would think that can achieve great wealth in a business if they spend just a little effort but this same reasoning does not seem to apply when investing in stocks.

 

I probably butchered what he wrote but that I think is what he said.

 

All the funds you mentioned are good. The question is, can an average Joe - who would never every read or even understand the Intelligent Investor at least to the degree that is required to select good managers - been able to find these managers 10-20 years before they had this performance?

 

I would not name a message board that I had participated in a long while back about indexing, but we had people with several years of experience who ran trading floor and have written books on investing (pretty good too) argue about the riskiness of a 3% allocation between two funds one of which had 600 stocks and the other had 2000 stocks. Here they are worrying about a 3% portfolio allocation that is spread over 600 stocks as being too risky and that the 2000 stocks fund is better. My point here is just because someone reads Intelligent Investor (many of these guys did), it would make them good value investors. Let me say that the first time I read the Int Investor, I liked it but did not really get it. You could count me in as one of the basket cases at that time :-)

 

Vinod

 

Vinod

 

[vinod1]

  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

 

If you think Fairholme would be able to beat S&P 500 by 10% going forward over the next 10 years, I would gladly take up an offer to bet otherwise.

 

Vinod

[Guest]

over the past 15 year SEQUX has returned 9.71% while BRKA has returned about 10.20%. I don't think most of the fund's out performance has been due to berkshire. From what I can remember the fund "only" had about 20% or so in Berkshire for most of the time.

 

Now, if we look over the past 5 years (since Ruane died) the fund has still performed nicely, but not nearly has close as BRK. 3.76% (top 3% of funds within that category) vs 8.96% for BRK. S&P 500, meanwhile was around .21%.

[Packer16]

Given Fairholme's size, I agree that it will be difficult but he does seem to be changing some of the deals he is getting involved with (General Growth is one) so amongst managers I think he has the best chance for his size.  I think part of the reason for the interest of stocks on this board is to outperform funds.  If you cannot do that by a significant margin why waste your time?

 

Packer

[vinod1]

over the past 15 year SEQUX has returned 9.71% while BRKA has returned about 10.20%. I don't think most of the fund's out performance has been due to berkshire. From what I can remember the fund "only" had about 20% or so in Berkshire for most of the time.

 

Now, if we look over the past 5 years (since Ruane died) the fund has still performed nicely, but not nearly has close as BRK. 3.76% (top 3% of funds within that category) vs 8.96% for BRK. S&P 500, meanwhile was around .21%.

 

Good point. I am shooting from the hip here, based on vague recollection. I stand corrected.

 

Thanks

 

Vinod

[vinod1]

Given Fairholme's size, I agree that it will be difficult but he does seem to be changing some of the deals he is getting involved with (General Growth is one) so amongst managers I think he has the best chance for his size.  I think part of the reason for the interest of stocks on this board is to outperform funds.  If you cannot do that by a significant margin why waste your time?

 

Packer

 

Agree completely. I think many people on this board can and would outperform the market by a significant margin. My point is regarding only mutual funds and that for the average person (not the value investing fanatics of this board :-) ) index funds are the more reasonable choice.

 

Vinod

[PLynchJr]

I'm the co-administrator for our company's 401k plan.  I deal with the "average" investor on a day to day basis.  Trust me...suggesting that investing in index funds is their best option is an understatement IMO.  Just trying to get the average investor not to sabotage their investments by making horribly timed emotional decisions is very difficult.  They have almost no chance of outperforming the indexes by attempting to pick the best value funds.  Even if they did stumble upon one of the few funds that outperforms for a long period of time chances are they'd bail the first year the fund underperforms and chase the past performance of another "hot" fund.

[Guest longinvestor]

I'm the co-administrator for our company's 401k plan.  I deal with the "average" investor on a day to day basis.  Trust me...suggesting that investing in index funds is their best option is an understatement IMO.  Just trying to get the average investor not to sabotage their investments by making horribly timed emotional decisions is very difficult.  They have almost no chance of outperforming the indexes by attempting to pick the best value funds.  Even if they did stumble upon one of the few funds that outperforms for a long period of time chances are they'd bail the first year the fund underperforms and chase the past performance of another "hot" fund.

Amen brother! I used to do the same thing, "fire" one fund manager and hire the one who just had a good year. Made me feel powerful. Of course there was little to no return. Slowly, I started to to look at 5, 10 year performance and trading less and less. I learned enough in this process to give myself the alias I use on this board. Thank goodness, this was something I did 15-20 years ago when i did not have much to work with. And then I got religion, value investing!

 

But you are right, many people do exactly what you are seeing as the co-admin of your 401K.