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Barry Ritholtz: Time Is An Investing Ally, Not An Enemy
I just read the Barry Ritholtz referenced column. It certainty has a philosophical bent to it. Each of us is likely to have a very personal takeaway from it based on our investment and life experiences.
Mine is that he is cautioning investors to be patient. We may have a reasonable understanding of what might happen tomorrow, but extend the timeframe to weeks and months and that understanding evaporates quickly over time. Except for a few rare souls, whose record over extended times is somewhat suspect, the experimental evidence is that forecasters can’t forecast.
Market gurus’ prediction accuracy rate falls precipitously over time. Phil Tetlock is proving just how challenging forecasting is in his extensive multiyear studies. Here is a Link to an older Tetlock perspective::
My simple takeaway from Tetlock’s staggeringly huge study is that forecasting is a very illusive skill that can only marginally be improved under certain restrictive conditions.
Near the end of the Ritholtz article he suggests that mathematicians might prosper in the investing universe by the manner and tools by which they approach problems. That speculation might be true, but I suspect the evidence is meager, if it exists at all. Anecdotally, I know too many solid mathematicians who have not done especially well with their investment portfolios or financial decision making.
As Rudyard Kipling noted: “There are nine and sixty ways of constructing tribal lays, And every single one of them is right”. There are likely that many ways to win in the marketplace. It is equally likely that there are many more than 69 other ways to lose in the marketplace. I doubt that mathematicians have discovered the magical mix.
Experience is certainly one way to enhance the success odds. But experience alone is costly, is painful, and leaves scabs and scars. The science that a mathematician can contribute is an alternate way. It trades on statistical analyses, which is mostly backward dependent for relationships.
The future will not necessarily resemble that history. Hence mathematics alone is not a sufficient answer. A more promising approach is a merger of scabs, scars, and science to improve investment outcome odds. Exactly how that merging should be executed is far above my pay-grade.
But note that the Tetlock article that I referenced is titled “Why Foxes are Better Forecasters than Hedgehogs”. Relying on a more diversified investment toolbox just might improve our investment outcomes. Using an entire toolkit of experience, scabs, scars, and science is a worthwhile approach to consider.
Since Barry Ritholtz waxed philosophical in his column, I believe that permits me to wax philosophical in my reply.
Goodness, I actually enjoyed both the article and MJG's response. I must be losing my curmudgeon genes along with my sex drive. I'd hate to let Ted outclass me in curmudgeonry... I wonder if there's a pill for curmudgeon genes?
Loved MJG's response. Not considering myself an investment expert of any sorts, I luckily chose dollar cost averaging in a field I know something about...... health. So a 30 year period of regular contributions to Vanguard Health worked out well. Later I switched to T Rowe Price Health Sciences. I did not know much about any other field but eventually I read about diversification and have since acted upon it. But my first approach was like throwing out a dart. Would it not be a scream if after another 20 years I wished that I did not learn about diversification and kept on placing money only in PRWCX? prinx
PRWCX is an "outlier" in my opinion. I'm hard-pressed to understand why it has consistently bested its categories (has been placed in a number of different ones) over its 25+ year existence. As I recall, it was introduced by Price in '86 as an even more conservative alternative to their than high-flying PRFDX which had met with much success under popular manager Brian Rogers. (Since PRFDX was already deemed a very conservative offering, PRWCX seemed truly an equity fund for widows and orphans.)
Since it's had three or four different managers over this period, some with markedly different approaches (and relatively little experience), manager alone cannot account for the success of PRWCX. Smaller size initially was a strength - as it was able to play largely in the mid-cap market, but that's not been the case over the past decade. Fees have consistently fallen as with many other Price offerings as scale has increased. But at .70 it's certainly not cheap compared to the .53 for DODBX. Nor does a highly flexible mandate fully explain its success - since, as we know, that can be either a blessing or a curse (and is all too often the latter).
Early on it held significant stakes in Newmont and other miners. At other times it's favored junk bonds. More recently it overweighted big "blue chip" stocks. And quite recently it reported selling call-options on some of its equity holdings as a way of generating higher income than the fixed rate markets can currently provide. (A recent post alluded to the low return on PRWCX's bond portfolio - but may have overlooked this important income component).
I'd say the fund exemplifies Price's generally careful "Steady-Eddy" investment approach and the company's very deep managerial bench. Culture, promotion from within and a customer-friendly philosophy all play a part. But I also sense that luck, good-fortune, statistical oddity, or whatever else you want to call it play as big a part. I own some PRWCX and have for a couple decades - but I'd be loath to pour all my money into this single fund offering. Time will tell if the next 25 years can be as successful as the last.
@hank, I agree that PRWCX is an outlier among the moderate asset allocation fund. Consistency year after year has been one trait that other AA funds lack, including DODBX. I understand they use different approach, but the results are quite different. During drawdown periods, DODBX sustained more loss than the benchmark, Vanguard Balanced Index for example, while it (sometime) outperformed on the upswings. 2008 is a good example. Considering a full market cycle, DODBX is on the bottom of my list. I also like FPA Crescent, but the ER is not shareholder friendly with its already large asset basis. Vanguard Wellington is another one of my favorite and it takes on a value approach.
I have invested with PRWCX for over ten years, and still surprise how well it performs.
@sven: Owning both PRWCX and DODBX, I'd agree that the latter is a bit more aggressive (and suffered a larger drawdown in ''07-'09). However, a lot had to do with bad investment calls on the equity side at D&C during that period. So, it's hard to predict for certain that history will repeat.
As you point out, there's a big difference in how the two are structured and operate. DODBX is far less flexible than PRWCX, essentially investing in the portfolios of DODGX and DODIX (as I understand it) to achieve the desired equity and fixed-income exposures. PRWCX, on the other hand, is more of a stand-alone offering. (Taken in that light, the higher fees appear justified.) Being more flexible, PRWCX might be better able to avoid the potential damage of the long predicted bond "implosion" should it ever occur. On the other hand, I'd never discount the smarts of the folks at D&C.
You mention some other good funds. In hindsight I wish I had invested in the Vanguard offerings. There's more good ones out there than any of us can hope to own.
Comments
I just read the Barry Ritholtz referenced column. It certainty has a philosophical bent to it. Each of us is likely to have a very personal takeaway from it based on our investment and life experiences.
Mine is that he is cautioning investors to be patient. We may have a reasonable understanding of what might happen tomorrow, but extend the timeframe to weeks and months and that understanding evaporates quickly over time. Except for a few rare souls, whose record over extended times is somewhat suspect, the experimental evidence is that forecasters can’t forecast.
Market gurus’ prediction accuracy rate falls precipitously over time. Phil Tetlock is proving just how challenging forecasting is in his extensive multiyear studies. Here is a Link to an older Tetlock perspective::
http://longnow.org/seminars/02007/jan/26/why-foxes-are-better-forecasters-than-hedgehogs/
My simple takeaway from Tetlock’s staggeringly huge study is that forecasting is a very illusive skill that can only marginally be improved under certain restrictive conditions.
Near the end of the Ritholtz article he suggests that mathematicians might prosper in the investing universe by the manner and tools by which they approach problems. That speculation might be true, but I suspect the evidence is meager, if it exists at all. Anecdotally, I know too many solid mathematicians who have not done especially well with their investment portfolios or financial decision making.
As Rudyard Kipling noted: “There are nine and sixty ways of constructing tribal lays, And every single one of them is right”. There are likely that many ways to win in the marketplace. It is equally likely that there are many more than 69 other ways to lose in the marketplace. I doubt that mathematicians have discovered the magical mix.
Experience is certainly one way to enhance the success odds. But experience alone is costly, is painful, and leaves scabs and scars. The science that a mathematician can contribute is an alternate way. It trades on statistical analyses, which is mostly backward dependent for relationships.
The future will not necessarily resemble that history. Hence mathematics alone is not a sufficient answer. A more promising approach is a merger of scabs, scars, and science to improve investment outcome odds. Exactly how that merging should be executed is far above my pay-grade.
But note that the Tetlock article that I referenced is titled “Why Foxes are Better Forecasters than Hedgehogs”. Relying on a more diversified investment toolbox just might improve our investment outcomes. Using an entire toolkit of experience, scabs, scars, and science is a worthwhile approach to consider.
Since Barry Ritholtz waxed philosophical in his column, I believe that permits me to wax philosophical in my reply.
Best Wishes.
Not considering myself an investment expert of any sorts, I luckily chose dollar cost averaging in a field I know something about...... health. So a 30 year period of regular
contributions to Vanguard Health worked out well. Later I switched to T Rowe Price Health Sciences. I did not know much about any other field but eventually I read about
diversification and have since acted upon it. But my first approach was like throwing out a dart. Would it not be a scream if after another 20 years I wished that I did not learn about diversification and kept on placing money only in PRWCX?
prinx
Since it's had three or four different managers over this period, some with markedly different approaches (and relatively little experience), manager alone cannot account for the success of PRWCX. Smaller size initially was a strength - as it was able to play largely in the mid-cap market, but that's not been the case over the past decade. Fees have consistently fallen as with many other Price offerings as scale has increased. But at .70 it's certainly not cheap compared to the .53 for DODBX. Nor does a highly flexible mandate fully explain its success - since, as we know, that can be either a blessing or a curse (and is all too often the latter).
Early on it held significant stakes in Newmont and other miners. At other times it's favored junk bonds. More recently it overweighted big "blue chip" stocks. And quite recently it reported selling call-options on some of its equity holdings as a way of generating higher income than the fixed rate markets can currently provide. (A recent post alluded to the low return on PRWCX's bond portfolio - but may have overlooked this important income component).
I'd say the fund exemplifies Price's generally careful "Steady-Eddy" investment approach and the company's very deep managerial bench. Culture, promotion from within and a customer-friendly philosophy all play a part. But I also sense that luck, good-fortune, statistical oddity, or whatever else you want to call it play as big a part. I own some PRWCX and have for a couple decades - but I'd be loath to pour all my money into this single fund offering. Time will tell if the next 25 years can be as successful as the last.
I have invested with PRWCX for over ten years, and still surprise how well it performs.
As you point out, there's a big difference in how the two are structured and operate. DODBX is far less flexible than PRWCX, essentially investing in the portfolios of DODGX and DODIX (as I understand it) to achieve the desired equity and fixed-income exposures. PRWCX, on the other hand, is more of a stand-alone offering. (Taken in that light, the higher fees appear justified.) Being more flexible, PRWCX might be better able to avoid the potential damage of the long predicted bond "implosion" should it ever occur. On the other hand, I'd never discount the smarts of the folks at D&C.
You mention some other good funds. In hindsight I wish I had invested in the Vanguard offerings. There's more good ones out there than any of us can hope to own.