Ellis,

I think the interest is still there, but the message of how to invest is changing. Finally, the efficient market hypothesis is gaining traction and more investors saving in index funds. ETFs are seeing a big increase in the flow of dollars.

Lowell

@Lowell Herr
Lowell,

You may be right; but I hope you’re wrong.

There’s a world of difference between simply finding a comfortable system to permit riding the averages with the herd, and actually investing: selecting good quality companies to own and enjoy profiting from their operations.

If the swing is in that direction, then I guess I’m facing an uphill battle to convince people otherwise.

The good news is that the young people coming up, if they are at all interested in making money with their money, will not have to unlearn the things that more experienced “investors” have embraced. And I’m convinced they can earn more money doing it Nicholson’s way.

Just the notion of “efficient market” disturbs me because it lends credence to the notion that the value of shares is somehow tied to the market price and not to the value of the underlying companies and their ability to make money for their owners!

Lowell, how can it be argued that the value of companies that are consistently profitable, and which continue to reinvest their profits in their own equity to increase their resources and enable them to make even more profit each year, shouldn’t be object of investment?

How can it make sense to consider putting one’s money in anything so flimsy as an average of stocks whose value is largely determined on a day-to-day basis by gamblers who have no clue as to the worth of the shares they hold except the hope that someone will pay them more for them? It’s the averaging that makes this attractive; and it’s that averaging that holds down the potential return.

The only thing that makes this approach at all profitable over time is the fact that there are intelligent investors who grab the shares from the herd when they’ve irrationally depressed it and are able to keep restoring down markets to reason. If it weren’t for us, there would be no anchor at all for growth in the EFT or Index market.

Being a slave to a temporal market price really discredits this approach, no matter how popular it may be becoming, IMO.

“Just the notion of “efficient market” disturbs me because it lends credence to the notion that the value of shares is somehow tied to the market price and not to the value of the underlying companies and their ability to make money for their owners!

Lowell, how can it be argued that the value of companies that are consistently profitable, and which continue to reinvest their profits in their own equity to increase their resources and enable them to make even more profit each year, shouldn’t be object of investment?

How can it make sense to consider putting one’s money in anything so flimsy as an average of stocks whose value is largely determined on a day-to-day basis by gamblers who have no clue as to the worth of the shares they hold except the hope that someone will pay them more for them? It’s the averaging that makes this attractive; and it’s that averaging that holds down the potential return.”

Let me put the challenge to you. Provide me with five academic research papers that demonstrate active investors can perform better than an appropriate benchmark.

Another challenge. Take the records from your own portfolio and enter that data as far back as possible into the latest version of the TLH spreadsheet. The TLH spreadsheet, when maintained properly, will include three benchmarks and the current version will also permit you to build a benchmark that is customized to your particular portfolio. It is also set up to determine the risk of the portfolio, something most investors neglect to calculate.

I continue to maintain that most investors do not have a clue as to how well their portfolio is performing with respect to an appropriate benchmark, nor do they know what risk they are taking with their investments.

Let me know when you are able to sell a stock based on relative value. (g) I’ve only managed to sell or buy anything at market value.

BTW, I found too many errors in the Nicholson way to follow that method of investing. I tried to explain it a few times on the old ICL group but was shot down. Never again.

Keep your eyes open for those positive research papers on active management. I’ve not been able to lay my hands on any such papers. I’m not saying it cannot be done as the laws of probability argue there will always be chance winners.

Lowell

Ellis,

Have you ever read any of the books on my list of Top Ten Investment Books?

Lowell

This one is easy Ellis.

People are lazy.

People are therefore, uneducated (at least in financial matters).

Being uneducated, people make emotional decisions, aka stupid mistakes.

This describes me too so I don’t want to appear aloof, but I know I do this and seldom make a major decision without consulting a trusted friend.

People don’t really know what they want. They seem to want whatever makes their friends and neighbors jealous.

It’s the nature of humans to seek pleasure and avoid pain. That’s just how our brains work.

It’s also in our nature to seek immediate pleasure and avoid immediate pain.

What you’re asking is how to reverse human nature and that’s going to be tough.

Especially since recent history has the greatest affects on decisions. It was easy to interest people in investing when the market was zooming up, but with the recent crash of 50% I think it will be very difficult to entice people into investing since that painful memory is so fresh.

The only way to entice people into investing is to show them they can make their money work had for them so they won’t have to work hard.

IOW, you’ll always be working for your money until you learn to make your money work for you.

Bob Brinker calls this the Land of Critical Mass. I like that concept.

Imagine getting out of bed each morning and your free “the struggle for the legal tender” as the song says.

However I do think you have the cart before the horse here. You need to address money management so people have discretionary income to invest in the first place.

Perhaps something like Dave Ramsey?

http://www.daveramsey.com/

I really think this is where most people need to start.

One philosopher observed there are two types of pleasure; hedonic and cerebral. The first you get from eating ice cream. The latter you get from solving a calculus problem.

I’m fortunate to enjoy the second type of pleasure and I’m sure it is what has enabled me to accomplish as much as I have.

The amazing part is that so few are doing so little that if you do anything at all, you’re doing enough to succeed.

Imparting the qualities of hard work, education, and delayed gratification seem to be a daunting task.

Ellis I would also suggest that with or without a college degree you have a high IQ and this enables you to accomplish tasks that many can not. I have several friends with no college experience that are very bright and hard working. I’d bet their IQ is significantly higher than mine!

“Lowell, I’m not sure which ten books you’re referring to. Your site recommends a number of books about various topics. I guess you’re talking about the asset allocation collection. And, no, I have not. The little I’ve seen about asset allocation, the less interested I am in it. Every effort made to reduce the risk has relied upon incorporating assets that are less and less fruitful.”

There is so much to reply to in your reply. I will need to break it into parts. Don’t dismiss asset allocation quickly. There are several studies, Ibbotson & Associates among them, that show that the most important decision an investor makes is that of asset allocation or how the portfolio is constructed. Yes, it is more important than stock selection and market timing, as much as that goes against “common sense.”

Lowell

” Let me put the challenge to you. Provide me with five academic
research papers that demonstrate active investors can perform better
than an appropriate benchmark.

I will never be able to provide you with five academic research papers that can possibly give you evidence that “active investors can perform better than an appropriate benchmark.”

As Richard Ferri points out in an article coming up in a few days on my blog, there is no unbiased research that shows active investors are able to perform better than a well-designed benchmark.

Lowell

“Lowell, I’m not sure which ten books you’re referring to. Your site recommends a number of books about various topics. I guess you’re talking about the asset allocation collection. And, no, I have not. The little I’ve seen about asset allocation, the less interested I am in it. Every effort made to reduce the risk has relied upon incorporating assets that are less and less fruitful.”

I’m referring to books written by William Bernstein (3), Roger Gibson, Richard Ferri, Larry Swedroe, Mark Hebner, David Swensen, Michael Edesess, Charles Ellis, John Bogle, and Burton Malkiel to name some of the most prominent. If you search for those names on my blog you will find book titles.

Lowell

“You think as a scientist (of course). And, as such, you may enjoy the luxury of authoritatively dismissing a methodology simply because there is no scientific way to affirm it. But, like the aerodynamicists who ruled out the ability for a bumble bee to fly, you throw out the baby with the bathwater when you dismiss it because of some of the “mistakes” that are inherent in the original Nicholson implementation.”

I do not automatically dismiss it. In fact, I gave it a try for 10 years while I was conducting parallel studies related to index investing. I learned that the individual is insufficiently skilled, or at least I am, to come up with stocks that incorporate specific asset classes of the U.S. equities market, emerging markets, developed international markets, REITs, bonds, commodities, as well as a few other asset classes. No one person can cover all those areas and that is why large endowment funds have many money managers. Even Swensen, head of the Yale endowment, recommends index investing for the small investor.

Lowell

“Now it’s time for me to issue you a challenge: Pick on any facet of my approach and tell me what’s wrong with it. Don’t tell me it won’t work because there’s on one out there that can prove to your satisfaction that it does. Tell me, in simple terms, what fault you find with the theory. That’s an arena I’m very comfortable with.”

Ellis, you may be one of those rare individuals who perform better than their benchmark year after year. The question is not whether your method is successful or not. Only you can answer that question, but to do that, one must have an appropriate benchmark and then some way to measure the performance of the portfolio against that benchmark. The TLH spreadsheet is the best vehicle I know of to see how well your system is working.

I am testing the principles of asset allocation with 19 portfolios of different size and varying launch dates. The records are available on my blog.

Lowell

“Your talents would better be put to use, IMHO, in trying to develop a means of testing this hypothesis, simply because the fundamental approach is as unassailable logically as it is.

Moreover, I have yet to hear a single point from you that would disprove its efficacy.”

I just checked the bivio record on the performance of investment clubs. The “club index” as measured by bivio, shows that investments clubs, over the past nine years, lost 5.8% annually to the VTSMX or Total Stock Market Index fund. This is the information I use to support my point that individual investors, on average, are not able to perform better than the broad market.

I know we are reading different books and research articles as we arrive at different points of view when it comes to portfolio construction and management. I’m making an extreme effort to measure portfolio return and risk for a semi-wide variety of portfolios as a way of self-testing the principles of asset allocation. I know of a few others who are doing this with fewer portfolios as a way to check on their investing methods.

Lowell

“You continue to sidestep my challenge. You avoid mentioning a single point in my methodology that fails the test of logic.

I’m really surprised that the scientist in you is trying so hard to avoid the real issues here.

We aren’t reading different books. You’re reading different books! I’m very well satisfied with the common sense of my approach and am still convinced that the dilution of a portfolio with anything but the common stock of quality companies would reduce your potential return.”

I don’t think I am side stepping any argument. My contention is based on lots of research and it is simple to understand. On average, the process of stock selection, by what ever method, will not result in portfolio returns that will perform better than the market. William Sharpe showed this to be true mathematically. Keep in mind, I do use the words, on average, as there are investors who from time to time will do better than the market.

I am not critical of any specific method, although as I recall, Take $tock only did slightly better than the VTSMX over the five years I tested it. Keep in mind that I did use my own “Creme List” as an overlay when following the T$ rules so that may have added a bit of value.

If your methods are successful, and they well may be, then put the methods to the test and accurately measure the portfolio against a reasonable benchmark. If all your stock selections come from the U.S. market, then the VTSMX is a reasonable index.

If I were to use Take $tock in a taxable account, I know it would not perform as well as a well-diversified index based portfolio due to the high turnover. Jim Thomas pointed that out several times during the five-year test. I am not sure how one gets around that problem.

Lowell Herr

“Your argument, that you must have a benchmark to match and an empirical means of comparing an investment method with it in order to judge its efficacy, is like looking under a street light for your lost wallet because the light is better there than it is where you lost it!”

Investors who do not benchmark their portfolios are satisfied with self-delusion. If I don’t know how well I am performing with respect to a benchmark, then I can tell myself I am doing very well.

Lowell

Ellis :@Gary SimmsGary,

YOur points are well-taken. And that issue of laziness and lack of motivation seems to be in concert with my thoughts about it (although you haven’t offered any conjecture as to the cause).

>>>Again, this is an easy answer. Over the last 20 years the middle class has been pushed down into the lower class. Local facotries (CAT:NYSE) have forced two tier wage scales on the unions so you have people doing the same work for hald the money! Any disposable income folks happen to end up with is quickly whisked away by the advertising industry hitting us with a barage of enticements for goods and services we can not do without be it a house, car, vacation, or some other endless choice. One fellow commented he was heavily invested in rent and groceries!

You’re right, that financial literacy must precede investment education for our youth. But they must both need and want it. Without needing to create their own wealth, our kids are hardly motivated to learn about where money comes from and what it really means. Nor are they likely to be able to make much of it unless they find someone willing to pay them for their skill sets and experience with little concern for their productivity. I think we’ll see a generation of salesmen dominating the financial arena, don’t you?

>>>>One trend I’ve noted is that adults are doing many of the traditional jobs once held by teenagers, e.g., newspaper boy or girl, lawn mowing services, or working in the local fast food joint are now being done by formerly retired or currently laid off workers. The financial salespeople of the future will have a much smaller market from which to profit.

>>>>>It bothers me that my neices have never had a small business to run. Running a professional office is a major step up from mowing the grass, but the basic lessons of a small business were still learned. Kids today lack this basic experence. They are always looking for a job rather than looking for a business opportunity.

>>>>>One observation in the book, The Millionare Next Door, was that the millionares were small business owners that lived well below their means. Young people today have much less chance for wealth if they are an employee as noted inb the book, Cash Flow Quadrants.

>>>The current trend seems to be away from any defined benefit plan (my sister-in-law’s company just stopped DB plans for new hires to her company, Tate & Lisle.)

>>>The new thrust is toward 401 Roth plans which the government likes becasue it generated current tax revenue unlike the current IRAs or 401K plans.

I was impressed with Dave Ramsey’s site…and somewhat envious. Wish I could attract the crowd he has!

>>>>There are many more that need to get their basic financial life in order. You have a MUCH smaller pool from which to draw followers!
blockquote>

I have followed all of the comments by Ellis and Lowell over the years and have found the discussions very educational. I have one question. I use Portfolio Manager 5 which gives the annualized returns on a portfolio vs the S&P 500. One of my portfolio’s is an S&P 500 index fund. The portfolio’s performance with dividends reinvested agrees exactly with the performance of the S&P 500. My all stock portfolio following the Take Stock principals has out performed the performance of the S&P 500 index by 1-2%. Can’t I believe I am outperforming the index?

“The portfolio’s performance with dividends reinvested agrees exactly with the performance of the S&P 500. My all stock portfolio following the Take Stock principals has out performed the performance of the S&P 500 index by 1-2%. Can’t I believe I am outperforming the index?”

Arnie,
It is certainly believable you are outperforming the S&P 500 as that benchmark is made up primarily of large-cap stocks. I’ll bet you hold a number of mid and small-cap stocks in your portfolio and they can make a big difference in performance.

I have a portfolio, coming up on ten years of operation, where it is ahead of the VFINX (S&P 500 equivalent) by 4.7%, but it only beats the VTSMX (total market index) by 3.6%. That is still a hefty gain on a benchmark. The portfolio is weighted toward value and away from growth. In addition it holds commodities, developed international, REITs, and emerging markets. All the holdings are ETFs so the portfolio holds thousands of stocks through these ETFs.

Lowell