The Long Term Investor

Welcome pj96. Some good questions and an interesting article. I see no need for concern with the concept of a shrinking market or shrinking numbers of available shares or public companies. First the shrinkage......2-3%....in my opinion is negligible and will have no impact. As companies CHURN and are bought by private equity I believe that is healthy. AND.....many of these companies in the near to medium term future will return as public companies as the private equity owners take profits. As an established LONG TERM INVESTOR I dont see any negative to this situation at all. Same with companies buying back their own shares. I just see this "stuff" as nothing more than a short term situation. I do .......HOWEVER....on the topic of buybacks believe that this is a TOTAL WASTE OF MONEY for shareholders. If you have extra capital put it into research, acquisitions, plants and equipment, or dividends. Buying back shares that often go to executive stock options or to held executives meet performance bonuses is a total waste of corporate money in my opinion.

Personally as an established investor I believe that a shrinking number of shares or public companies will benefit me by raising the price of my investments. NOW......the real question is.........DOES this shrinking market issue even actually exist or is it fantasy or a made up issue. Personally, I dont see any issue here other than people looking for problems that dont really exist. (not you, the writers of these sorts of articles) In other words, yet another.......albeit minor........little doom and gloom situation being put out there for investors to worry about when the impact in reality will be a big fat NOTHING.

 

Here is a little light reading for investors on the topic of average investor returns and portfolio re-balancing. The average investor article is contains the latest information from research firm DALBAR. The results of their latest research is the same as it has been for a long time.......that the average investor sucks due to their behaviors. The article on re-balancing pokes some holes in the re-balancing FAD that is common with investors at the moment. I see so many people that think they NEED to re-balance every year or some other artificial time frame or construct. Personally I NEVER re-balance my portfolio. I own what I own for a reason....that I believe these particular companies and funds will allow me to have a statistical probability to beat the SP500 over the long term. When I buy shares, I hold them for as long as the business meets my investment criteria. I STRONGLY believe in letting winners run and accordingly NEVER re-balance. I have no problem, however, with selling shares in a business that no longer has my confidence.

It’s (Still) Tough To Beat Mr. Market

http://www.capitalspectator.com/its-still-tough-to-beat-mr-market/

(BOLD is my opinion and what I consider important content)

"If you keep banging your head against the wall, presumably a lesson or two will creep into your cracked skull. But if those lessons are related to investing, the crowd suffers from a recurring and long-running bout of attention deficit disorder.

This is old news, of course, but it’s also forever new, as a fresh batch of data from Dalbar, a research shop, reminds. Courtesy of The New York Times, we once again observe that the average mutual fund investor suffers from chronic, self-inflicted financial pain. As Jeff Summers reports:

Over the past year and for periods of five, 10, 20 and 30 years, the average mutual fund investor has underperformed the markets for both stocks and bonds, according to Dalbar. Bond investors have generally failed to even keep up with inflation.

In the 30 years through December 2018, for example, the average bond mutual fund investor earned 0.26 percent, annualized, compared with annual inflation of 2.49 percent, Dalbar found. Over the course of an entire generation, bond investors’ money shrank more than 2 percentage points a year in real terms.

A rational mind would study the data and conclude that behavior modification is in order. But this is finance and so while it’s possible for any given individual to change old habits, the crowd as a whole faces a different prognosis: Fuhgeddaboudit.

The “wisdom” of the masses is conspicuously lacking on the matter of tracking, much less beating, the market (and Mr. Market’s asset allocation too). For reasons that we’ll sidestep here, the mob has a perennial inability to act in its own best interest in matters of portfolio design and management. But that’s not entirely bad news, albeit for a small slice of the investment population.

The raw material for generating returns that fall into the category of encouraging (or stellar) is the tendency for most investors to make poor decisions. As Professor Bill Sharpe outlined in “The Arithmetic of Active Management,” alpha (market-beating results) is a zero-sum game. For those with the discipline and skills to earn above-average returns, you may want to send thank-you cards to the sea of investors who made those gifts possible, a.k.a. the poor souls who shoot themselves in the foot on a regular basis.

The Dalbar results impart many lessons, starting with the power of simplicity. Almost everyone ignores this advice (including institutional investors), which is why its lessons are worth revisiting from time to time. To wit, consider the following toy example.

BlackRock’s asset allocation ETFs are part of an elite group of publicly traded funds that offer impressive results in the multi-asset class investment category. Let’s just say that you could do a lot worse in the realm of managing a global portfolio of stocks and bonds. For our purposes, let’s focus on two ETFs, which proxy as aggressive and conservative asset allocation strategies:

At the very least, this pair of ETFs are competitive for almost anything you can do in the long-only space for conventional portfolio design and management on a global basis. But for several reasons, the intelligent investor might want to build his own. How to begin? You could start with a dead-simple plan that holds representative ETFs in each of the main asset allocation buckets: stocks, bonds, real estate and commodities. Let’s call this our Big-4 Beta Strategy.

To pick weights, let’s take guidance from the classic 60% stocks/40% bonds benchmark and tweak ever so slightly by taking 10 percentage points from bonds and redeploying evenly to real estate investment trusts (REITs) and a broad definition of commodities. To round things out, the portfolio is rebalanced to the target weights at the end of each calendar year. The resulting mix:

60%: Vanguard Total World Stock (VT)
30%: Vanguard Total International Bond (BNDX)
5%: iShares Global REIT ETF (REET) – backfilled with RWO
5%: iShares S&P GSCI Commodity-Indexed Trust (GSG)

Using a Dec. 31, 2013 start date, the performance results are shown in the chart below. Note that the Big-4 Beta Strategy offers a midway result vs. BlackRock’s aggressive and conservative results. By changing the allocations, you can dial risk up or down and earn competitive results in line with the risk exposures you select.


None of this surprising, but it’s a reminder that you can easily grab the lion’s share of the world’s market betas with a simple strategy and earn respectable returns. Alpha is complicated (and tends to be elusive). Beta, by contrast, is simple and easily secured, often at rock-bottom prices.

Can you do better? Sure, but as the Dalbar numbers remind, you probably won’t—for reasons that have little to do with the markets per se and everything to do with the little gray cells between your ears."

AND

Almost all retirees make this mistake

https://www.marketwatch.com/story/almost-all-retirees-make-this-mistake-2019-07-26

"Retirees (and soon-to-be retirees) should regularly rebalance their portfolios, right?

That advice seems unobjectionable, of course. It certainly is repeated often enough.

But Humphrey Neill, the father of contrarian analysis, advised us to be skeptical of any advice that is almost universally repeated. He famously insisted: “When everyone thinks alike, everyone is likely to be wrong.”

The occasion to take a second look at rebalancing was my recent Retirement Weekly column, in which I reported on the long-term performance of numerous hypothetical retirement portfolios that involve regular rebalancing. Many of those portfolios performed far worse than expected, and rebalancing was the likely culprit.

My re-examination led me to a new study that exhaustively analyzed rebalancing. It found that rebalancing improves performance only if the markets behaving in certain specific ways. And they don’t always do so.

The study, “Strategic Rebalancing,” was written by Campbell Harvey, a finance professor at Duke University and a consultant to Man Group, the U.K.-based investment management firm, along with three employees of that firm: Nicolas Granger and Sandy Rattray, chief investment officers, and Otto Van Hemert, head of macro research.

The traditional promise of rebalancing, of course, is that it boosts returns. By constantly selling marginal portions of assets that have outperformed, and buying more of positions that have underperformed, you in effect are buying low and selling high. In the process you also are reducing your risk.

Notice carefully, however, the implicit assumption behind these promises: An asset that has underperformed in one period is likely to perform better in the next, and vice versa — reversion to the mean, in other words. That is not always the case.

Consider the 2007-2009 financial crisis. The stock market fell for six calendar quarters in a row, with its losses getting progressively larger as the crisis unfolded. A strategy of frequent rebalancing would have magnified losses rather than reduced them. (See accompanying chart.)


Notice further that even when you’re right about reversion to the mean you can still lose money when rebalancing. You also have to get the right rebalancing frequency. If you rebalance quarterly, for example, you implicitly are assuming that one quarter’s outperformer will be the subsequent quarter’s underperformer. If you rebalance at a yearly frequency, in contrast, you’re assuming that reversion occurs at that longer frequency.

Unfortunately, there is no consistency to when reversals occur. Sometimes they occur at monthly frequency, but other times not. The same is true for quarterly and yearly time horizons.

To illustrate the inconstancy of reversal frequency, I turn to a statistic known as the correlation coefficient. It ranges from a theoretically maximum 1.0 (which is what it would be if the market’s direction in one period was always the same as its direction in the subsequent one) to a minimum of minus 1.0 (which would be the case if the market’s direction in one period was always the opposite of its direction in the subsequent one). The table below shows what I found upon calculating this coefficient over every 10-year period since 1896 for the Dow Jones Industrial Average DJIA, +0.19% :


Highest 10-year trailing coefficient since 1896 Lowest 10-year trailing coefficient since 1896
Month-to-month correlation 0.19 -0.32
Quarter-to-quarter correlation 0.27 -0.28
Year-to-year correlation 0.76 -0.53
No wonder rebalancing doesn’t always improve performance.

Now, the researchers found that in most cases an incorrect rebalancing assumption leads to only a modest drag on portfolio performance. Where regular and frequent rebalancing really costs you is an extended bear market, such as the 2007-2009 financial crisis.

Fortunately, the researchers identify a solution: Combine rebalancing with a momentum strategy. Such a combination works because the assumptions behind a momentum strategy are the opposite of those underlying rebalancing: Momentum works to the extent that trends persist, in contrast to the trend reversals assumed by rebalancing.

You might think that it’s impossible to combine the two approaches, but the researchers came up with several ways. One, which is relatively sophisticated, allocates 10% of the money otherwise invested in a rebalancing strategy to a futures-based momentum strategy. (Interested readers are directed to their study for details of this 10% momentum/90% rebalancing strategy.)

Another rebalancing-momentum combination strategy that is more easily implemented uses a momentum signal to delay when rebalancing takes place. This is what the researchers call “strategic rebalancing.”

Otto Van Hemert, one of the study’s authors, described this approach in an interview: You simply delay any rebalancing transactions so long as the stock market is trending downward. It matters relatively little whether you define the trend by looking at the trailing month, quarter or year; the idea is that “you sit out the negative trends” by not rebalancing. Once the trend reverses, you then rebalance.

How much benefit do you derive by following these modified rebalancing strategies? Van Hemert says that the options- or futures-based momentum-plus-rebalancing strategy reduced portfolio drawdown by an average of 5 percentage points during major bear markets. Strategic rebalancing—the strategy of using momentum to delay rebalancing—didn’t perform quite as well historically, but still reduced drawdowns by 2 to 3 percentage points.

The only bear market over the last six decades in which these modified rebalancing strategies didn’t reduce drawdowns, Van Hemert said, was the 1987 crash. That’s because it was over almost as soon as it started. That’s not been the case for most bear markets, he added, which is why these modified strategies reduced drawdowns in the other major bear markets of the last six decades.

While acknowledging that bear markets in the future could all end up being like the 1987 crash, Van Hemert said he has his doubts. That’s because, in the event of a black swan event, it is unlikely the market can “digest all the pain right away.” Far more likely is that “unimagined bad effects keep popping up.” This is what happened in the subprime mortgage crisis, Van Hemert reminded us, when its adverse consequences “rippled throughout different sectors of the economy one by one.”

And, just to repeat, to the extent future bear markets are more extended and drawn-out affairs, delaying rebalancing will markedly reduce your drawdowns.

This new research would be important to bear in mind at any time, but especially now if you think there’s an above-average chance of an imminent major bear market. If so, then it would especially behoove you to put in place now a modified rebalancing strategy."

 

I LOVE these time periods where.....THE INVESTING IS EASY. ALL accounts are at or near record highs. ALL accounts are over CRITICAL MASS (as Bob Brinker used to say) and have long ago reached the point that they are self sustaining.

BUT......is it really that easy. I look at the stocks that I own and many of them have had very negative press, news, and events happen over the past 5-10 years. Like BA right now. In fact the markets in general have withstood massive negative attacks from all fronts over the past 5-10 years. Over the short term it is UP, DOWN, UP, DOWN, UP, DOWN, UP DOWN,.....week to week, day to day, and month to month. We have faced up to every sort of imaginable event and financial event over the past ten years. YET......here we are at record highs and record value for LONG TERM INVESTORS.

MY QUESTION..........did you hold through all the past 5-10 years to get these gains? Did you stick out the market CHAFF and FOOLISHNESS from all the "experts". Is your account at record highs? Are you beating or close to the unmanaged averages?

The statistics (see post above) say you did not, and you are not. HOPEFULLY those on this board are not the "average" and have achieved above the averages. IF NOT.....you need to evaluate what and why you are doing what you do and attempt to learn what you can tweak to improve your investing and at the same time stay within your risk tolerance and general life plan.

MODEL PORTFOLIO:

"Here is my "PORTFOLIO MODEL" for all accounts managed which is the basis for MUCH of my discussion in this thread. I am re-posting this since I often talk in this thread about my portfolio model. My custom in the past on this sort of thread was to re-post my portfolio model every once in a while since I will tend to talk about it once in a while. I "manage" six portfolios for various family including a trust. ALL are set up in this fashion. If I was starting this portfolio today, lets say with $200,000. I would put half the money into the stock side of the portfolio, with an equal amount going into each stock. The other half of the money would go into the fund side of the portfolio, with an equal amount going into each fund. As is my long time custom, I would than let the portfolio run as it wished with NO re-balancing, in other words, I would let the winners run. Over the LONG TERM of investing in this style (at least in my actual portfolios), the stock side seems to reach and settle in at about 55% of the total portfolio and the fund side at about 45% of the total portfolio over time. That is a GOOD THING since it tells me that my stock picks are generally beating the funds over the longer term. AND....since the funds in the account generally meet or beat the SP500, that is a VERY good thing.

As mentioned in a post in this thread, I include the funds in the portfolio as a counter-balance to my investing BIAS and stock picking BIAS and to add a VALUE style component (Dodge & Cox Stock Fund), a top active management fund that often beats the SP500 (Fidelity Contra Fund) and a SP500 Index Fund to get broad exposure to the best 500 companies in AMERICAN business and economy. The funds also give me broad diversification as a counter-balance to my very concentrated 12 stock portfolio.

STOCKS:

Alphabet Inc
Amazon
Apple
Boeing
Chevron
Costco
Home Depot
Honeywell
Johnson & Johnson
Nike
3M
MSFT

MUTUAL FUNDS:

SP500 Index Fund
Fidelity Contra Fund
Dodge & Cox Stock Fund

CAUTION: This is a moderate aggressive to aggressive portfolio on the stock side with the small concentration of stocks and the mix of stocks that I hold and with the concentration of big name tech stocks. Especially for my age group. (65+). So for anyone considering this sort of portfolio, be careful and consider your risk tolerance and where you are in your life and financial needs. I am able to do this sort of portfolio since my stock market account is NOT needed for my retirement income AND I have a fairly HIGH RISK TOLERANCE."

MY COMMENT:

HOPEFULLY the stock portion of the portfolio will now be stable for many years into the future with good performance on the part of the various companies in their business and no trades necessary. I prefer to NOT make changes or trades, but if necessary I will pull the trigger without hesitation or emotion.

 

AGREE COMPLETELY TomB16. I dont subscribe to any of the 50/50 or 60/40 or other bond stuff. I should state that I post a lot of articles and a lot of information. I try to highlight in BOLD what I agree with and consider important content. BUT.....I post the articles that I do on the basis that they contain information that might be of benefit.....especially to long term investors. I DO NOT subscribe to everything in an article that I post. I try to put information out there in this thread that might help or be of interest to others.

I subscribe to a similar view:

I hold stocks based on fundamentals, potential for momentum, and familiarity.

I do NOT believe in the slightest that stock performance or the markets in general are random.

I do NOT subscribe to the ZERO SUM GAME crap.

I NEVER buy bonds in my stock or investment portfolios

I hold a very small concentrated number of stocks.

I NEVER rebalance.

I am FULLY INVESTED all the time for the LONG TERM.

I agree that management changes are one of the greatest challenges for an investor holding stocks for the long term and are often the reason to sell a long term holding. Stocks that I have sold in the past due to management changes......GE, IBM, Disney, etc, etc, etc. I have also sold many mutual funds over the years due to new management. The greatest being MAGELLAN FUND

I AGREE completely that there is no magic formula and I am including all the TOTALLY COMPLEX technical analysis based stock systems that many people follow and try to use. NOTHING in investing beats SIMPLICITY combined with reason, logic, and a clinical focus on the long term. To me it is all about buying a specific business via their stock and following the financial results of that business over the years. As I have said many times.

 

AMEN Trahn. I see a lot of crazy stuff that comes from some of these modern CEO's. The modern model of the CEO being a glad handing, celebrity, drives me crazy. Give me a boring, financial oriented, business oriented CEO with no media charisma that has come up through the business and knows the business. The level of IDIOCY that you see with many of the celebrity CEO types is pathetic. You can allways tell when a company has a BIG CEO problem when there is a issue and the buck NEVER stops at their desk. There is allways some excuse and UNFORTUNATELY too often it is.........."Gee I didnt know about that". LIKE all the politicians using the line that they did not know about something......."till they saw it in the news". Any CEO that did not know about a major issue or uses that excuse to avoid responsibility should simply be FIRED. It also drives me crazy when these celebrity CEO types put the company out there in support of some political or social viewpoint. STICK TO BUSINESS......quit pissing off half your customers. Keep your nose out of politics, social issues, religion, male/female "stuff", racial "stuff", etc, etc, etc.

MY CEO and business pet peeve of the moment is, of course.............doing business with China, locating manufacturing in China, etc. In my opinion it is management malpractice to do business and manufacturing in China as it is currently being done. I believe that the massive amount of information out there about STEALING of technology, stealing of products, counterfeiting, etc, etc by the CHINESE would support a shareholder lawsuit against any company that is doing business in China. There is absolutely NO DOUBT that BILLIONS if not trillions in corporate tchnology and assets is being lost by doing business in China. Corporate management is intentionally allowing this to occur in the face to conclusive evidence that company assets are beng stolen. There are many alternative sources of labor and many other countries that can be used for manufacturing.

 

EXACTLY........just another day and another week. I continue to be fully invested for the LONG TERM as usual. August tends to be a shallow time for the markets with many traders and others in the financial industry on vacation till Labor Day. As a result we get oversized impact from items like the.........CHINA SCARE.......that was dominating the news today.

The ONLY thing we are doing wrong with China is our wimpy actions. We should hit them with some BIG tariffs. May as well rake in some money from them and perhaps at the same time help to TANK their economy. The last time we showed some GUTS in a situation we basically FREED half of Europe from communist domination as well as took down the Berlin wall, and caused Russia to make massive internal changes (many of which have now backtracked).

It is APPARENT that China has decided to wait out the election and has no intention to do anything. In fact in hindsight this was their plan all along if they could not get us to give them the same old deal where we SCREW ourselves. Personally if I was in charge......ALL their exports to the USA would have a 50% tariff AND if there was no deal than they would go to 100% the day after the election. May as well wring every last dime out of them that we can. Their impact on our GDP and as a percentage of our entire economy is MINUSCULE to us.......to them HUGE. As a side benefit we would see many, if not all, the companies that are taking advantage of their labor flee the country.

BUT THAN.......I am of the opinion that GB should just exit the EU without a deal and just tell them to F&#K OFF. In such a situation GB could end up being the super economy of Europe in about 5-10 years.

 

Zukodany

CONGRATULATIONS on the decision to invest in stocks and funds. Cant say I am a fan of Tesla stock or the company with their various issues and financials. BUT.....it is not going to kill you to have five shares. If your time is taken up with running your business, the SP500 Index is a no brainier way to invest for the LONG TERM.

YES......those comic books especially the early classics have been HOT, HOT, HOT. I dont buy them but it is amazing the appreciation that is being seen in the early classics.........IF........they are in great condition. Seems like a very good collecting area since a lot of younger people are interested. I am on a lot of the mailing lists from Heritage and see material on various categories of collectables regularly. I am also amazed at the prices of some of the illustration art recently, especially some of the fantasy art that was used for book and magazine covers. Also the baseball collectables from the early classic days.......off the charts in appreciation. BUT as you know with comics, with the baseball stuff condition is everything. I did notice recently that there is somewhat of a mini-scandal going on right now with the grading of baseball cards and dealers or card speculators making alterations to get higher grading on cards. I do collect art and a few other categories of "stuff" that heritage and other auction houses deal in. In the art world there are a lot of categories of art that are sort of up in the air since it is unknown how or if the younger people will embrace it going forward. That is why my rule of thumb is to ALWAYS buy the absolute best of the best..........at least to the extent that you can afford.

What era and types of comics are you collecting and what are you seeing in prices? What do you see as HOT areas in the comic world?

 

TEN YEAR treasury yield is at 1.78% as I type this. FUTURES are down 371 on the DOW and down on all the general averages. We are.......perhaps.......at the start of a little summer correction. NOT financial, not fundamental, not anything to do with the economy. Simply due to CHINA and our obsession with a trade deal with China. Simply a symptom of our linking a small portion of our economy and future to an UNRELIABLE, DISHONEST, CRIMINAL, ABUSIVE, COMMUNIST, DICTATORSHIP.

It is an old story.......Lay down with the dogs and you will get fleas. UNFORTUNATELY we have gotten to the point that many in the business world are willing to IGNORE all the OBVIOUS negatives of dealing with and linking our future with China. Is there ANYONE that thinks China will reform and stop blatantly stealing our technology regardless of patents and legal rights? Will they ever stop being the NUMBER ONE human rights violator in the world? Will they ever start to trade and operate in a normal economic fashion? NO, no, and no, they will not change as long as we enable them to continue with their disruptive and dangerous behavior. I would love to see a REAL number for the amount of money that China has stolen from our economy in the form of stolen tech, patent violations, counterfeiting, etc, etc. No doubt it would be hundreds or perhaps thousands of times more than any benefit that we have gotten from linking them to our business and manufacturing.

Why do we do it.......in a word, GREED. Simply short term greed on the part of business management combined with delusional disconnect on the part of the general population. The good news is that this sort of market impacting event is going to be very short term. The good news is that we could simply disconnect ourselves from China with little economic impact or effort. BUT, at the moment we dont have even the slightest will to do so. As a result we will see these little corrections and financial events every so often as we go forward. Over the LONG TERM the impact will be negligible. UNFORTUNATELY, the general public, driven by the obsessive and NOW dishonest media will be impacted in their investing and money behavior by this sort of short term event.

INSTEAD of flailing around worrying about whether we can get a trade deal with China, we should be having a NATIONAL discussion on the subject of disconnecting ourselves, our manufacturing and our businesses from China.

I continue to be fully invested for the LONG TERM as usual.

 

Hi Zukodany

Thanks for the reply. Feel free to post all your investing moves or discussion on this thread. It helps us all if there is active discussion. Nothing "horrible" about hoping for a good entry point. I think you might get some good buys this month and onward into whatever correction we have due to this China currency manipulation situation. Needless to say........there will NOT be a trade deal before the election. OUR BIG mistake was letting them into the WTO in 2001. THAT is when all this GREED and idiocy on the part of our manufacturing businesses started. We have ONLY been in there big time for the past 10-15 years or so. We need to get out NOW while we still can with little to no impact on our economy. BUT..........obviously, this will NOT happen. We will be arrogant FOOLS as usual in our business behavior.

 

HOW is all this China STUFF working out today for all the companies that are doing their manufacturing, research, technology, etc, etc, in China. Talk about losing shareholder value due to IDIOTIC management decisions. Add this loss in shareholder and company value due to stock losses today to all the losses due to stolen technology, counterfeit goods, loss of research and.......BINGO......you have a situation that is TOTALLY the fault of senior management in allowing a company to become CAPTIVE to China at an EXTREME cost. NO......manufacturing in China is NOT saving anyone ANY money when you consider the actual, real value, of what you lose by doing business in CHINA.

I dont expect anything to change......but if people like me put some stuff about this issue on the internet, perhaps there is a chance that someone with some ability to change things or at least with a soapbox will realize and spread the fact that doing business in China is NOT saving any money at all.

Perhaps as company stock tanks, some of these CEO and executive types will FEEL THE PAIN in their pocketbook of doing business in China when their stock performance bonuses are impacted.