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TomB16 investing blog

Discussion in 'Investing' started by TomB16, Aug 7, 2019.

  1. TomB16

    TomB16 Well-Known Member

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    This thread is going going to be an investing blog. It will only be updated when I can add something I feel is of value. Do not expect daily updates, like the excellent thread WXYZ maintains.

    The goal is to provide a view into the thoughts behind a successful retail investor. Further, the goal is to not dilute this thread excessively.

    This thread will cover real estate, market investments, retirement strategies, etc.

    I am part of a couple that is working on retiring. As we wind down our real estate and business, we will need to live off our investments and nest egg. This is a terrible time to retire, from the perspective of the global financial situation, but this is the time that is right for us.


    Investing Ethos:

    - based on our life expectancy, we have 35 years to fund
    - we have a long term investment horizon
    - I don't trade
    - we will work toward independence and freedom ahead of absolute returns
     
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  2. TomB16

    TomB16 Well-Known Member

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    For the last four years, I've held the belief that interest rates will not go up voluntarily.

    The fed has tried to gently push up interest rates but this is going to be difficult in a consumer society that rides on debt.

    Interest rates will go up, at some point. They will go way up. It will be a response to severe economic conditions, not a well thought out choice.

    I currently see a lot of economic strength. This is why I feel the markets aren't responding to traditional indicators that would have huge market impact in a weaker economy.

    Still, I see a weakening global economy so we have been buying medium term bonds and debentures the last few months. That phase is now over. I have no interest in bonds and debentures but our bond holdings are now worth a nice premium.
     
  3. TomB16

    TomB16 Well-Known Member

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    On the market side, we have been building cash for the last few months.

    We have left our corporate drips in place (they are difficult to start and stop) but turned off synthetic drips and other reinvestment plans. Corporate DRIPs will remain in place across any market crashes or circumstances I can imagine.

    I have no intention to sell off due to fear of a market crash. The most aggressive response I will engage in, and am currently engaged in, is to build cash.

    Historically, selling due to fear of a market crash has caused far more opportunity cost than just holding through any crashes which might occur.
     
  4. TomB16

    TomB16 Well-Known Member

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    A couple of months ago, I was happy to take an 8% discount on any of my core value stocks. We picked up quite a bit of stock at great prices at the end of May.

    At this point, we still have more than an average amount of cash but it would take more than an 8% discount to be interesting. I'm prepared to let our cash build to a pretty high level before we return to regular buying.

    At the current rate of cash growth, we will reach my upper comfort limit on cash in mid 2020 but I expect some excellent discounts between now and then so I doubt we will hit it with regular cash flows. We are far more likely to hit an excessive cash situation with our next real estate sale.
     
  5. TomB16

    TomB16 Well-Known Member

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    Let's have a look at the Buffett Index (BI).

    I use a variant of the Buffet Index (BI) of Wilshire 5000 to US GDP. While not identical to the BI, it is close and Wilshire 5000 quotes can be tracked using automated techniques. I shall call this the WBI.

    - the political situation is ripe for market instability
    - WBI is currently around 138%

    A couple of weeks ago, the WBI touched just over 150%. That's a really high value.

    The trick to understanding the BI is to consider what the BI means in comparison to interest rates. In a zero interest situation, stocks would be valuable at an infinite price since they are the only thing that would provide a return. As interest rates increase, stocks become less attractive.

    If interest rates were high, the BI would be a strong crash indicator at current market valuations.

    The WBI is currently near historic highs but we are also in a low interest rate situation with further cuts apparent.

    I suspect interest rates are falling in an attempt to prevent a major market crashes. We've never seen that before but that might be what we are seeing. The Germany interest rate is currently negative.
     

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  6. TomB16

    TomB16 Well-Known Member

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    This is an unstable market. The WBI shows an elevated risk of crash but I don’t think it’s extreme.

    I’m basing my optimism on low and falling interest rates. If rates were higher, we would be ripe for a crash. With low interest rates, there isn’t much incentive to pull out of equity markets and into money markets. We are more likely see migration from growth to distributing stocks.

    From experience, patience is rewarded in a volatile market. We have not been reinvesting for a couple of months and I don’t currently see any reason to return to reinvesting distributions and fixed income before November. That will likely change so I am monitoring it.

    Over the years, I’ve learned I cannot predict a crash with sufficient accuracy as to make it worthwhile to withdraw from the market. For that reason, I modulate my level of cash based on various indicators but do not sell assets.

    At this point, we could top 15% cash and I would be fine letting it rot in the corner for many months.
     
  7. TomB16

    TomB16 Well-Known Member

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    Investing versus gambling

    It's clear I've raised the ire of many folks around here by calling trading gambling. I wish those who trade well but I will stand behind those words.
    I also believe that buy and hold of companies, without having an ability to value companies, is also gambling. Again, I don't wish harm to anyone but this is how I see it.

    Buying individual stocks is for people who understand companies, understand how to value companies, are familiar with influences such as seasonal trends, etc.

    For people who either don't know this information or aren't prepared to do the work to find it, they would be best served by index investing. Let's be clear, this is almost everyone.

    This is why I don't re-balance between companies. This is why I don't add companies into my portfolio for the reason of diversity. If I know a company and feel it has value, I hit it hard. If I have money that I'm not comfortable sinking into the companies I know but I wish to invest, I will sink it into an index.
     
  8. WXYZ

    WXYZ Well-Known Member

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    AMEN BROTHER........on many levels.

    Yes, we are in an unstable market, at least at the moment. The so called professionals are jumping in and out with NO reason and program trading is driving the markets up and down with no reason in reality other than following a micro-second trend line. At the same time the media is trying to drive the economy into a recession with their current political hissy-fit. Add in the shorts and traders that are constantly trying to influence the markets and the shallow August situation and you have an unstable market situation. The ONLY good thing is this current STUFF should scare the sh*t out of the Fed and if they are smart they will keep their big mouths shut and not do anything.

    Agree with you completely......day trading, trading, most sorts of technical analysis mumbo jumbo are nothing more than gambling. The end result is no different than gambling addiction. Those doing this stuff, if they were not addicted would easily be able to run the numbers and see that their returns are no where near the SP500, especially when you take into account income taxes on short term gains, trading costs, etc, etc. Although, if you have the money, and wish to challenge yourself, and are operating in reality, and enjoy the mental side of it, there is nothing wrong with allocating some small amount of money to trading.

    ALSO agree completely that the vast majority of investors would be better served by simply investing in an Index Fund like the SP500.

    AND.........yes.......I DO NOT believe in portfolio re-balancing or diversification.

    For those with cash there should continue to be some good buying points. We should see some slight return to normal after Labor Day when everyone comes back to work from their ELITE seasonal rentals and second homes.

    I like the BLOG.
     
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  9. TomB16

    TomB16 Well-Known Member

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    I appreciate the comments, WXYZ.

    Lets go back and finish investing versus gambling so I can not mention it again.


    The odds of becoming independently wealthy by age 50.

    Trader: 0.0000001%
    Classic value investor: 98%

    I won't do the mathematical foundation but those interested can read Jack Boggle's Little Book of Common Sense Investing.


    Background.

    Trading is a redistribution of wealth. If you buy $1000 of stock, sell it within a few days, and make $50, that $50 did not come from the company. That money came from the market. The market is other investors. The company did not produce 5% in a couple of days.

    In cases where wealth is redistributing among investors, not everyone can make money. It's simple math, exactly the way not everyone can win at a poker game. 5 people show up to play poker, each bring $100, and the maximum combined winnings cannot exceed $500. That $500 will be redistributed based on poker outcomes. That is also how the short term market works.

    If you buy a REIT (or any company) that distributes monthly to an annual trailing yield of 7%, that 7% annual return is coming from corporate earnings. It's possible, but not guaranteed, that 7% annual return is sustainable indefinitely. If you reinvest that monthly dividend using a DRIP, compounding will make that return closer to 7.75%.

    In this case, you can double your money in 8.5 years without the stock going up one cent. What's more, everyone who owns the REIT can double their money in the same period of time. Everyone can enjoy the same gain, if they are wise enough to do it.


    Let's consider objectivity.

    The investing world is full of people who are extremely smart and will tell you they make returns beyond market returns. Have you ever heard of anyone claiming to make less than the S&P 500 index? Everyone claims to outperform the S&P and yet we know that everyone cannot outperform the average. When you consider commissions and other loads, extreme few can outperform the S&P. This can be proven with extreme simple math.

    Legions of fund operators have plenty of swagger and make claims of great performance while a nearly effortless fact check indicates almost all of them underperform the S&P.


    Objectivity is the key to success.

    An objective analysis of any of our retail stock investing returns will have a 99% certainty of under-performing the S&P.

    An objective person will respond by moving money into the more lucrative investment. An objective person will prioritize returns over ego.

    * Note: The S&P 500 is not the only worthy benchmark but it is the primary one. Any benchmark can be used to analyze performance over a reasonable period of time. If you regularly outperform the benchmark... great! If you do not, you should consider buying the benchmark.


    Proof.

    How many day traders become independently wealthy by the age of 45 and live comfortably the rest of their lives? How many 60 year olds do you know who cite "day trading" as the key to their comfortable retirement? I know 0. The day traders I know are all on the cusp of becoming wildly wealthy. I expect they will remain on that cusp until they eventually run completely out of money.

    Consider the same questions from the perspective of long term investing? I know several personally.

    Off topic but... I know about the same number of people who have gained independent levels of wealth through R-E as I know who did it through long term investing.
     
    #9 TomB16, Aug 14, 2019
    Last edited: Aug 14, 2019
  10. TomB16

    TomB16 Well-Known Member

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    Where does the money come from for a long term investor?


    Let's consider Microsoft.

    Let's assume you purchased Microsoft for $21 per share at IPO in 1986. Your investment would now be worth about $1.8M.

    In 1986, Microsoft was the maintainer of a mediocre operating system that they purchased from another company. They were starting to expand their development effort but they did not have a big impact on the IT world.

    By 1990, Microsoft released Windows 3.0. Like the products before it, Windows 3.0 was buggy and performed terribly. It did not look like a product that would take over the world. Word was barely usable, compared to the excellent WordPerfect.

    Meanwhile, IBM had OS/2 v1.2. OS/2 was extremely stable, had more and better network stacks, and was a platform that nearly every bank machine was built around. OS/2 heads of the day scoffed at Windows.

    While Microsoft had some extremely smart people in 1990, IBM had legions of people who were just as smart or more so.

    Today, Windows is an excellent platform. Word is an outstanding word processor. The power of Microsoft software has changed the world. People have long forgotten about OS/2.


    How did Microsoft get here?

    Hard work.

    No other reason.

    Hard work and tenacity will beat out intelligence, every time. You can't be a moron but people are quick to underestimate the intellect of others. The person who works hard will always win.


    How I value companies.

    Valuing companies is the key to investing so don't expect people to share their secrets. I will share mine at the highest level.

    I look for and prioritize the following three characteristics, from most to least important:

    - honesty
    - hard work
    - smart


    Back to Microsoft.

    The $1.8M of stock that was originally purchased for $1000 got to it's current value through the effort of a relatively small group of people who worked hard for decades. Excessive money was not siphoned off by executives. The company invested operating capital wisely.

    It wasn't magic. It didn't come from the market. It wasn't luck. It was hard work.
     
  11. TomB16

    TomB16 Well-Known Member

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    In case there is someone I haven't offended who is still following, here is the conclusion to a few of these lines of thought.

    - Much of what goes on at a site like this is posturing and attempts at alpha leadership. It is not investing.
    - The people who tell you they are smarter and better with money than you, almost never are.
    - Nobody has ever posted an honest citation of their returns in the history of the world. Ignore them. Do not compare your returns to theirs or follow someone because they claim tremendous gains.
    - Not everyone can win so "hot tips" are a losing proposition, by definition.
    - It's not you against me. It's you against a benchmark like the S&P 500.


    Traits of a successful investor.

    - Think for yourself. Pull in the best ideas you find and, if possible, create some of your own.
    - Be objective.
    - A hot stock that has performed well for someone else may not fit your needs and you won't be entering at the same price so you won't have the same performance. Pick your own companies.
    - Do your own research.
    - Be patient.
    - Believe in yourself.
    - Enjoy the companies you own. Remember: when they do good things, you are part of their success because you own part of the company.
    - Evolve your system. Do not remain static; the market doesn't.
     
    #11 TomB16, Aug 18, 2019
    Last edited: Aug 18, 2019
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  12. Onepoint272

    Onepoint272 Well-Known Member

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    Big talk and a big hat for such a small horse. I'd take you on in a New York minute. You buy and hold a $20k portfolio for one, two or more years and I'll trade a $20k portfolio reporting daily closing prices. Heck, I'll even trade the same issues you pick to buy and hold.
     
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  13. TomB16

    TomB16 Well-Known Member

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    I would like to point out, I did not ask Onepoint272 to prove the first point of post 11 in this thread. Don't get me wrong, I appreciate his effort but I promise I did not set it up.

    For those interested in Onepoint272's point of view, he has a thread on the Wyckoff approach to investing.

    "I, therefore claim that:
    You need never read anything on the financial page of your newspaper except the table of stock prices and volumes.
    You need pay no attention to the news, earnings, dividend rates or statements of corporations.
    You need never study the financial or the business situation.
    You need not understand railroad or industrial statistics, the money market, the crop situation, the bank statements, foreign trade or the political situation.
    You can absolutely ignore all the thousands of tips, rumors, reports and especially the so-called inside information that flood Wall Street.
    You can discard all of these completely and finally."

    https://www.stockaholics.net/threads/a-wyckoff-student-notebook.804/

    My approach to investing is a ton of work. Wyckoff appears to be as easily managed as it is to use a slot machine.

    A note to those who follow my approach: There are going to be legions of people who, without knowing anything about you, will declare themselves smarter and more successful. Folks like Mr. Onepoint272 will do what they can to create a hierarchy with them on the top and you on the bottom. It is for each individual to chose who to consider allowing through the filters which should exist when learning from the Internet.

    Remember this:

    "- It's not you against me. It's you against a benchmark like the S&P 500."
     
    #13 TomB16, Aug 18, 2019
    Last edited: Aug 18, 2019
  14. Onepoint272

    Onepoint272 Well-Known Member

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    If you believe you only have to compare yourself to a benchmark like the S&P then I don't understand your insistence on running down traders and trading and making inaccurate and obtuse comparisons to their methods.

    So am I to infer you are declining the challenge by responding with ignorant accusation? Is that correct?

    All I'm asking you to do is pick a stock or two to buy and hold. Pick the one you are already in, TSLA. You've already done the work on it, and it's much cheaper now than the last time you were buying it. All the work will be on me as you can just sit back and wait as I do all the work of trading it.

    Say the word and I'll set up a thread. All you have to do is name your pick/s in the 2nd post and the rest will be me trading it.

    If it makes you feel better we'll regularly compare both results against the S&P, the DJIA, gold, the dollar, whatever you want to compare to.
     
    #14 Onepoint272, Aug 19, 2019
    Last edited: Aug 19, 2019
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  15. TomB16

    TomB16 Well-Known Member

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    Settle down, Onepoint272.

    15 years ago, there was a lot of talk of trying to match or beat the performance of Berkshire Hathaway. I knew a way to match Berkshire's performance. It's a technique I developed that I like to call, "purchase BRK".

    These days, forums are littered with people trying to match or beat the S&P. I've developed an ingenious technique to match the S&P that I call, "purchase VOO".

    Back in the 1980s, discussion at my investment club seemed to revolve around trying to keep up with the DJIA.

    From what I can tell, people throw money into ideas without vetting them. Wouldn't it make more sense to move a nest egg into VOO and paper trade some ideas until the magical system is found? Considering the number of people who have figured it out is near zero (but not zero), the odds are low that any given idea will beat the S&P. This seems like the sort of thing that should be prototyped and evaluated, before going into a full blown implementation.
     
    #15 TomB16, Aug 19, 2019
    Last edited: Aug 19, 2019
  16. TomB16

    TomB16 Well-Known Member

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    In a different thread, Onepoint272 asked why I'm going long on the US dollar. It was an interesting question so I will respond here. Thank you for the question, Onepoint272.


    I understand the trading mantra to be, "Buy low. Sell high."

    The investing mantra is, "Buy low. Sell when you no longer want to own the company for business reasons."

    The best thing for buying low is a crash. Market crashes are a huge boon to investors. Look at the money Warren Buffett made after the crash of 2008/2009.

    In order to take advantage of the corporate fire sale, a person has to have some money. Not many people speak openly about this but I will here.

    My system involves watching a modified version of the Buffett Indicator and I halt much of our reinvestment when the indicator is high. It's high right now. The Wilshire 5000 vs US GDP is showing 138.55%.

    I don't find this number crazy but I do believe the risk of market decline is elevated.

    Response to WBI.

    Options: 1) Buy S&P 500
    2) Buy bonds and/or debentures
    3) Keep in either cash or high interest savings

    A couple of months ago, when the WBI was showing a bit of froth, I picked up some bonds and convertible debentures. I have no plans to trade these securities. The money will be reinvested at the maturity dates of the various holdings. I h ad money to invest and Bonds/Debentures were simply the best investment ideas I had at the time.

    Since then, I have been putting money into an HISA that pays 1.4%. This is the money I will use to buy stock, if there is a pull back.

    To be clear, we still have some corporate DRIPs (not easy or free to turn on and off) but most of our cash flow from FI, distributions, and operations is going into HISA.


    Limits.

    I will not allow our cash to grow without end. By mid 2020, we will have as much cash as I am comfortable in having from current operations. Before next summer, it is near certain we will also have cash from R-E divestment. The amount of cash equivalent I will want to keep, next summer, will vary directly with the WBI at the time.

    Right now, if our cash and equivalents were to hit about 18%, I would start buying stock but I would not spend down the cash buffer; I would just spend the new cash flow.

    In 2010 and 2011, the WBI was low and we were operating at roughly 0% cash. We were fully invested until well into 2013.


    Having cash around.

    Having cash around can be extremely helpful for buying dips. Long term limit orders can be entered or puts can be sold for stock that you would like to purchase at a nice price.



    None of this is more important than buying good companies that are honest and hard working. This is about capital allocation, not directly about investing.
     
    #16 TomB16, Aug 19, 2019
    Last edited: Aug 19, 2019
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  17. TomB16

    TomB16 Well-Known Member

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    Perhaps I should clarify what I feel I'm presenting here. I do not present my views on capital allocation as "correct". It is a system we have used for many years and it has served us well.

    Like the rest of this thread, I am sharing my ideas in appreciation of others doing the same. We can all dip into the idea pool and subscribe as we wish.

    Even though I've been investing since the early 1980s, I have gained a lot of perspective from sites like this. We all benefit from the ideas of others and I appreciate that.

    As for others "correcting" me, that is uncut bullshit and obnoxious behavior. If this site becomes an alpha leadership contest in which only the strongest personalities share ideas, it will be completely worthless. The value of group thinking is the group, not some self-appointed leader.

    When it comes to investing, I have 0 interest in leadership. I have 100% authority over my portfolio. I have 100% responsibility over my portfolio. So, the ideas I chose to onboard are the ones I feel are the most value. The idea of getting into a penis length competition is not one that provides any value.

    The most wealthy people I know are also the most unassuming. Someone in my family drives a 10 year old car, wears a lot of plaid, and is one of the most civilized and elegant people I know. He is a retired farmer. He could own a private jet, if he wanted. He would never come on a site like this and argue with some guy who has been trading for three years about how to best manage money. He just quietly goes about his life with a sparkle in his eye, enjoying people, and encouraging everyone he meets. I admire his approach deeply and wish to emulate some aspects of it.

    There are a lot of wealthy people who go through life without being obnoxious and knowing money isn't the most important thing. I am eternally grateful for their mentorship.
     
  18. TomB16

    TomB16 Well-Known Member

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    Sometimes, my grouchy old white guy holdings go up, when market indices go down. It happens about half the time. Other times, my holdings go down similar to the market.

    All of my holdings, except Tesla, are heavy distributors. My lowest distributor yields just over 4%.

    I suspect that people move into REITs, utlilities, etc. when they expect a long term down turn. I think these holdings are the new bonds.

    The converse of this suspicion is that short term market pull backs do not involve transferring money into REITs, utilities, etc.


    Whatever the case, I time the market by trying to have cash on hand to buy the dips. It doesn't drive up my portfolio immediately or bring in cash but gains are made after the market recovers and I have added to the portfolio at a discount.

    In December of 2018, the market went down pretty far. By the time the market hit bottom, I had extremely little cash. I would have done better to buy later but I have standard buy triggers at various discounts and I ran that process without modification. The only thing I did differently than a normal dip was I scraped money from everywhere I could to buy stock at the bottom, since I had already invested the bulk of cash in our investment accounts.

    The December 2018 dip put our net worth almost a year ahead. It's like a free year of retirement savings. Thank you, knee jerk reactionaries!

    Based on past performance, our portfolio performs better by having a bit of cash on hand. When things are high, we can sell puts and keep long term limit orders open. When things are low, we pick up bargains.


    If the market were to be perfectly stable for 24 months with normal gains and no dips, we would be better off to be 100% invested but I've never seen that in the 35 years I've been investing.
     
    #18 TomB16, Aug 23, 2019
    Last edited: Aug 24, 2019
  19. WXYZ

    WXYZ Well-Known Member

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    GOOD DISCUSSION. Obviously, I fall on the side of long term stock and fund picking and NOT trading. To each their own. I dont follow any of the traders on here, but from past experience on other boards and seeing the returns....or at least some of the returns...that traders choose to post, the results are OBVIOUSLY inflated by many on message boards or are not a reflection of their true results. I have yet to see someone post their short term capital gains taxes and trading expenses.

    HOW do I know this without knowing them or their real results......because if they were doing what they claimed Investment Banks and Trading Platforms would be lined up at their door to hire them as professionals. Of course we do know through Dalbar and other sources that have access to real audited data, that the REALITY is that the vast majority of traders can not get close to the returns of the unmanaged indexes. We KNOW what the SP500 does in REALITY since it is published daily for ALL to see and follow. I have one question:

    Where are ALL the audited or verified returns of all the various traders that are beating the SP500...CONSISTENTLY..not just once in a while or when they choose to publish returns? Five year, ten year, fifteen year and twenty year.

    Here is an ANCTUAL challenge that fits the above discussion and the result was EXACTLY as you would expect based on the research and probability:

    https://assetbuilder.com/knowledge-...arrassing-side-of-buffetts-million-dollar-bet

    The Embarrassing Side of Buffett’s Million-Dollar Bet

    (emphasis is mine)

    "I think I could beat Warren Buffett in a footrace. I might even beat him in a burger-eating contest. But if he issued an investment challenge, I would turn my tail and run. By now, you’ve probably heard that the Oracle of Omaha won the so-called million-dollar bet against Ted Seides, a co-manager of Protégé Partners.

    Here’s what happened: In 2005, Buffett said investment management costs far too much money. And hedge funds, he continued, were the worst of the lot. He also said he would put his money where his mouth is.

    In his 2016 letter to Berkshire Hathaway shareholders he wrote, “I publicly offered to wager $500,000 [in 2005] that no investment pro could select a set of at least five hedge funds – wildly-popular and high-fee investing vehicles – that would, over an extended period, match the performance of an unmanaged S&P-500 index fund charging only token fees. I suggested a ten-year bet and named a low-cost Vanguard S&P fund as my contender.”

    That’s no burger-stuffing contest. That’s why I was surprised when Mr. Seides accepted the challenge. He picked five funds-of-hedge funds that would battle Vanguard’s S&P 500 Index over the 10-year period ending December 31, 2017. Each hedge fund contained a series of hedge funds within it. Each of those funds likely had a great track record. But past results aren’t winning lottery tickets.

    In March 2015, SPIVA reported that 568 U.S. stock market mutual funds were among the top 25 percent of performers. By March 2017, SPIVA determined how many of those funds remained among the top quartile. Just 1.94 percent maintained their winning ways.

    Hedge funds cost a lot more than most actively managed funds. That’s why the majority perform poorly. They typically charge 2 percent per year plus 20 percent of any profits earned. If that’s not bad enough, a fund of hedge funds often charges an additional 1 percent. Fees helped to sink Mr. Seides’ ship. But they weren’t the only factor.

    If a typical hedge fund earns 8 percent before fees, its investors would only earn 4.8 percent. Fees would eat the difference. If a fund of hedge funds collected an additional 1 percent fee, the investors would make just 3.8 percent per year.

    Hedge Fund Investors Give Up A Lot
    Pre-Fee Annual Gain 5% 8%
    Result after 2% management fee 3% 6%
    Deduction equal to 20% of the profits made -0.4% -1.2%
    Net Gain after fees 2.6% 4.8%

    Over Buffett and Seides’ 10-year bet, Vanguard’s S&P 500 gained a compound annual return of 7.1 percent per year after fees. That includes the market’s dump in 2008. In contrast, Protégé Partners’ hedge funds averaged a compound annual return of just 2.2 percent after fees.

    Twelve months ago, Mr. Seides felt the squeeze. The S&P 500 had gained a total of 85.4 percent. In contrast, his hedge funds were up just 22 percent. He published an early concession: Why I Lost My Bet With Warren Buffett.

    He wrote, “The S&P 500 is a strategy that is concentrated in the largest U.S.-listed stocks. Compared to more diversified, low-cost passive investments, the S&P 500 is biased toward U.S. stocks relative to global stocks and large companies relative to small ones. These two bets generated anomalously strong relative performance in this period.” He added, “It was global diversification that hurt hedge fund returns more than fees.”

    But I’m not so sure. According to Morningstar, large-cap global stocks averaged a 10-year compound annual return of 5.45 percent to December 31, 2017. That would have turned a $10,000 investment into $17,000. In contrast, a $10,000 investment in Protégé Partners’ hedge funds would have turned the same $10,000 into just $12,431.

    Mr. Siedes wrote that large U.S. stocks experienced an “anomalously strong relative performance,” so I wanted to see what would have happened if we hadn’t counted such stocks.

    I used portfoliovisualizer.com to see how a portfolio allocated into the following categories of low-cost index funds might have stacked up.

    • 25% U.S. Mid-Cap Stocks
    • 25% U.S. Small-Cap Stocks
    • 25% International Stocks
    • 25% International Small-Cap Stocks
    Rebalanced annually, such a portfolio would have averaged a compound annual return of 6.3 percent over the 10-year period. If we deducted 0.2 percent for index fund fees, it would have turned a $10,000 investment into $18,078. That’s still a lot more than the $12,431 earned by Protégé Partners’ hedge funds.

    But here’s where things get interesting. Let’s assume the hedge funds had averaged 6.3 percent before fees, instead of the 2.2 percent they delivered. A 2 percent management fee, plus 20 percent of the profits would see net returns of 3.44 percent per year. If Protégé Partners’ had deducted a further 1 percent fee, the funds of hedge funds would have earned 2.44 percent per year.

    That’s still higher than the 2.2 percent average return that the hedge funds earned. In other words, if the hedge fund managers had worked for free (not charging 2 percent per year plus 20 percent of the profits) and if Protégé Partners’ hadn’t taken its cut, a global stock market index would have still beaten these pros.

    But what about risk? Hedge funds are supposed to give strong returns, while protecting investors from falling markets. At least, that’s the pitch.

    However, a low-cost global stock market portfolio with 60 percent in U.S. bonds (and no exposure to large U.S. stocks) would have beaten the hedgies too–and with far lower risk.

    January 2008 - December 31, 2017
    • 10% U.S. Mid-Cap Stocks
    • 10% U.S. Small-Cap Stocks
    • 10% International Stocks
    • 10% International Small-Cap Stocks
    • 60% US Bonds
    Source: portfoliovisualizer.com

    The above portfolio would have averaged a compound annual return of 5.53 percent. That would have turned a $10,000 investment into $17,123.

    In its worst year (2008) it would have dropped 13.34 percent, compared to the 23.9 percent drop of Protégé Partners’ hedge funds. Its best year would have beaten the hedge funds too. In 2009, such a conservative basket of indexes would have gained about 19.62 percent. That same year, the hedge funds gained just 16.1 percent.

    Fees matter, a lot. But when we couple high fees with future predictions it’s expensive and embarrassing."



     
    TomB16 likes this.
  20. Onepoint272

    Onepoint272 Well-Known Member

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    You did not answer the question I had in mind. The more accurately quoted question I asked was, why are you a dollar bull? In other words, why are you going into the US Dollar and not the Euro, or the Yen, or the Loony, or Aussie, or bonds, or gold, etc. The US Dollar is strong now, but I've been thinking of shifting a large part of my reserve to gold and price equities in ounces of gold instead of doll hairs.

    As you can see from the chart, the S&P priced in ounces of gold was in a bear market for 11 to 12 years and lost very nearly 90% of its value and this last rally was not quite so impressive as when priced in Fed-manipulated doll hairs. Further, you can see that the S&P priced in ounces of gold is already in a downtrend, a lower high and two lower lows.

    It seems buying and holding the Essenpee from the 2000 high was a big loser, even until now, in terms of gold, a more stable standard of wealth. It appears like equities are in a larger, generational, bear market, and in the coming years the whole S&P will be able to be bought for less than 1/2 ounce of gold.

    Monthly bars:
    upload_2019-8-25_20-56-19.png
     
    #20 Onepoint272, Aug 25, 2019
    Last edited: Aug 26, 2019
    OldFart and bigbear0083 like this.

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