Something stolen (borrowed) from moringstar chat and Warren Buffett: but something I ALWAYS believed in:
" if you are a know-something investor, able to understand business economics and to find five to ten sensibly priced companies that possess important long-term competitive advantages, conventional diversification makes no sense for you. It is apt simply to hurt your results and increase your risk. I cannot understand why an investor of that sort elects to put money into a business that is his 20th favorite rather than simply adding that money to his top choices-the businesses he understands best and that present the least risk, along with the greatest profit potential." WB
ALL dummies please see Indexing funds.....for your investing pleasure...
Comments
Should one be buying Berkshier Hathaway ?
Derf
Rather a harsh judgment that Index investors, many of whom are institutional agencies, are dummies. There's some relief given the assessment could have escalated from dummies to idiots.
I admire and cherish the rugged investor who is so sure of his decisions that he is confident in assembling a highly focused portfolio. More power to him. He does a great market service in promoting price discovery. Not all of us are so sure of our rightness.
Concentrated portfolios are high risk adventures. Pick any fund manager you trust and examine his holding numbers. Typically he diversifies. Peter Lynch held hundreds of positions; Fidelity superstars Will Danoff and Joel Tillinghast do likewise. Buffett is a rare exception.
Posting Buffett's quote is fair; the closing pejorative is not. Besides, the quote goes back to an older Buffett wisdom. More recently he said: " My advice to the trustee could not be more simple: Put 10% of the cash in short term government bonds and 90% in a very low cost S&P 500 index fund (I suggest Vanguard's)." This quote comes from his 2013 shareholder letter.
Study after study concludes that active investors do not achieve Index equivalent rewards. Over the last 20 years, something like 70 to 80% of active funds have underperformed Indices. DALBAR documents significant individual investor shortfalls relative to Indices year after year. A recent updated Vanguard study, "The Case for Index Fund Investing", which I Linked a few days ago, reinforces these consistent findings.
It must feel terrific to be at the apex of the investing pyramid. The rewards must be astonding. But only a select few reach that elite position. Maintaining that high position over time is also a dubious task. My investing record clearly demonstrates that I'm not among that elite group, so part of my portfolio goes into Index products.
I doubt that that decision qualifies me as a dummie. But everyone is free to express their own opinions and biases.
Best Regards.
Meet Tampabay. You should honored to be in his presence. He will teach you how to invest in 20% to 30% of active funds that that beat the indices. You will graduate from being a dummy and live happily ever after.
Mona
And as Steve Martin is known to have said: "Some people have a way with words, and some people... have...not...way.
People (investors) don't understand when Buffett tells people to invest in Index funds"
He is saying you are not smart enough to pick out companies like JNJ, PG, Pep, ect ect. and to carry it farther your not smart enough to know a good fund manager from a poor fund manager. So Does Buffett have you pegged or not?
Why did he put in his will to have his wife's portfolio invested 90% in the S&P 500 index fund and 10% in short term government bonds? If he believed the above, would he not have named a stock picker to pick "five to ten sensibly priced companies"?
Jim Cramer advises to pick five to ten companies, no more, no less. 20% of your portfolio in one stock is that not a gamble? Even Buffett has made some significant errors in picking stocks. If you do that with a 20% position.........
"if you are a know-something investor, able to understand business economics" : there are thousands of mutual fund managers who can't beat an index fund over a longer time frame. Certainly they "know something", and are "able to understand business economics". They still can't beat an index fund on a consistent basis.
Just don't see Warren Buffett, or Charlie Munger, advising investors to pick five to ten stocks, rather than what I think, correct me if I am wrong, is their consistent message to just buy a low cost index fund.
What I think is his quite controversial position, is to have an asset allocation of 90% S&P 500 index fund and 10% short term government bonds. Buffett is NOT a fan of bonds! He seems to be quite consistent with his position on fixed income also.
It think most active managers who know what the are doing will agree that dont want to invest in too many atocks but only their best ideas. Very few can get away with it in the real world. Tahy will either not be able to market their fund, or they will have more assets that can move stocks if they only use a few which may notbe desirable.
Plus i am sure their are many other practical and necessary conditions for bothivestors and managers. I think it is time we stopped this debate. I am not seein the point of this day in and day out. If nothing else, let financial pron work a little harder and cone up with soething more useful to debate. This topic has become the "who killed marilyn monroe" topic on tv. How long will we keep wasting our time?
As an investor, I do not understand business economics. That is why I own funds. Long term advantage can be lost in a hurry with poor management at the helm. The competition can catch your new product in a hurry today. As for less funds, the better....yes, I agree. Am doing so now. Indexing I think is a good thing....am using it more. The funds I have, such as healthcare, afford me access to the sector because of change happening so fast. 1 or 2 companies could be left behind quickly. So I want many in an overweight area for that reason. The Index is something I can't seem to ever beat, so at least I know what I am now. If you could put up some examples, I would appreciate that. Or, if you could share some pointers on what to own now regarding your portfolio, that would be helpful as I have some cash.
the Pudd
What I own Vs. S&P, for specifics (individual investments) you have to ask Mona, she won't let me announce on public air waves..
Cyclical 18.20 30.39
Basic Materials 0.98 3.30
Consumer Cyclical 7.72 10.22
Financial Services 9.45 14.95
Real Estate 0.04 1.92
Sensitive 23.55 42.78
Communication Services 11.26 4.03
Energy 2.60 9.70
Industrials 3.35 11.02
Technology 6.34 18.02
Defensive 58.26 26.83
Consumer Defensive 28.45 9.52
Healthcare 28.77 14.32
Utilities 1.04 3.00
Not Classified 0.00 0.00
Note: Healthcare, consumer defensive,Communications...the majority...I think 70+%
By sensitive, my guess is interest rate. If not, please advise. From what I see, you are playing defense. May I ask why? And, for how long? Where do you think we are in the market cycle: mid-, or late-? Also, how often do you adjust your portfolio? As for me, also overweight healthcare and energy. As for what I see: sunshine and blue skies in the future as things keep getting better. Mona---some tidbits, please.
the Pudd
I would/could "adjust" my portfolio Daily if I felt the need, but last few years just adding to "Good buys" and riding the waves. Withdraw times coming....
Does that mean 20-30% of managers outperform indices? Just wondering
How many funds can you buy?
I'm sticking with my outperforming managers, labor and all.....
I think his thoughts on index funds are more about human nature than anything else. His success is based in part on his ability to be greedy when others are fearful and fearful when others are greedy. No matter how much we might all like to be that way, Warren is better and his deepest of the deep pockets make that a lot easier.
I keep wondering, when we all talk about a large portion of fund managers underperforming, how many managers would outperform after adding their management fee back to their returns. If the underperformers are still a big number even after adding back their pay, then index funds look even better. But if many managers outperform on their investments and underperform because of what they get paid, then its a different question.
In mant respects I think that's pounding the nail on the head. Mr. Buffett has the "RESOURCES" to do what he wants to do when he wants or is afforded the opportunity(ies) to do so. Your average mom & pop investor doesn't have the kind of cushion that will support them if they are wrong so they have to play it safer.
Can't disagree with TB or many of the others. If you want to make the most money you don't diversify but concentrate your investments. If you want safety you do diversify. As with most black and white choices, the answer is somewhere gray in between. You want to maximize your return while not being too risky. Not too many people are willing to 'bet it all' on a few stocks. Many of us nibble around the edges.
Most investors don't have the time nor aptitude nor desire to actively manage their portfolios. The industry tells them to just cover the squares and it'll all be good in the long run. Ergo, index funds. Ideal passive investment that will probably work to a degree IFF your long run is long enough. You will probably approximate the long run market returns. Now lets put on our way back hats and remember that this is all because the market is efficient and always reverts to the mean . . . again, in the long run.
Ah, but in the short run, the market is anything but efficient and can remain inefficient for years - before reverting to the mean. First, this provides a window of opportunity to actively manage your portfolio to take advantage of the abnormalities in the market. This led me to momentum investing where I would simply overweight (to a greater or lesser degree) whatever sector/segment/region was outperforming the overall market. It was never an all or nothing bet - just overweighting the outperforming areas - but it permitted me to beat the averages and that was my goal. However, this does require time and effort and study and the vast majority of people don't want to bother.
Second, because the market can remain inefficient for years before 'reverting to mean', means that you might not live that long depending upon your age. This is where passive index type investing can really hurt you. Assurances from the industry that we should set tight and it will recover are hollow promises when you're in your later years. You don't have no steeenking long term to recover.
and so it goes,
peace,
rono
It does not even matter whether you index or not. Sorry to harp, but when vs what. I don't think most people accept that. You are investing actively fine, just don't fall in love with your fund. Yours truly was guilty of it, but grew out of it. Sure I have opinions on funds, but that no longer does it keep me in my fund just because.
I've also made another point before. WWWFX vs VFINX. M* called this the worst fund. Then at some point they grew silent. Why? Look at the chart of this fund since inception against the S&P 500 at M* no less. Think of those people who bought the fund at inception and then those who bought at the peak.
I'm sure M* will have something to say about WWWFX again but only after it will drop 80% again, not otherwise. But never mind that. What really is distressing is that MFO will not recognize WWWFX as a mutual fund symbol.