Hi Guys,
Earlier today I posted a reply to MFO member Vintage Freak’s observation that “We suck!” as investors. I’m sure that exclamation was made in frustration. I disagreed, and said so.
My response was a reflexive reaction. On reflecting on the matter, I liked the submittal. I concluded that my rapid reaction might be of more general interest to the MFO population as a whole. A wider audience distribution might be appropriate.
So I decided to repost. However, I believe in a value-added policy. So allow me to append an eighteenth mistake that Merriman identified. It escaped me initially. Also permit me to add my version of a slightly modified ancient joke.
First the joke. We all recognize that market wizard’s foolish forecasts are no more accurate than those made by informed amateurs. So: Fool me once, shame on you. Fool me twice, shame on me. Fool me thousands of times, shame on financial experts.
I hope that was not too painful.
Secondly, Merriman also includes a Mistake 18 very late in his paper. For completeness, here it is: Mistake#18: Spending so much time focused on investments that “real life” gets crowded out”.
By all means do not fall victim to that pitfall. A portfolio of mutual funds and ETFs go a long way to steering clear of that egregious error; a portfolio of individual stock and bond holdings exacerbates this time sink.
My original post, unedited, follows immediately:
I seriously doubt that as investors “we suck”. I’m sure some of us do; I’m equally sure that most of us do not suck. I do not suck; you do not suck.
We often make misguided investment decisions, but being 100 % correct when forecasting future market movements is an impossible standard. The unknowns and unknowables overwhelm the knowns.
Don’t judge yourself so harshly. Experts make faulty decisions just as often as we do.
Taken in isolation, brainpower is not sufficient by itself. From the dustbin of history, Sir Isaac Newton lost a fortune in the South Sea bubble; Albert Einstein lost when he overcommitted to failed municipal bonds early in the 20th century. John Maynard Keynes recorded a rocky up-down financial career with his beauty contest approach to investing.
Recently Nobel laureates and economists Robert Merton and Myron Schols were founding members of the Long Term Capital Management debacle. Physicist John Allen Paulos unwisely had a love affair with WorldCom stock while sacrificing 90 % of his investment to bad practices. He did write a book, “A Mathematician Plays the Stock Market”, so he likely recovered from some of his misfortunes.
My takeaway is that scientists are not immune to the same investment foibles that endanger and compromise our investment decision making.
Brainpower is a positive asset, but it must be supplemented with large inputs of knowing the rules and the odds of the investment playing field. A little commonsense also is beneficial. The other side of the investment coin is familiarity with the many pitfalls and traps that snarl neophyte investors
Paul Merriman has an excellent article that identifies 17 common traps. Avoiding these wealth eroding traps should remove anyone from the Sucks list.
Mistake #1: No written plan
Mistake #2: Procrastination
Mistake #3: Taking too much risk
Mistake #4: Taking too little risk
Mistake #5: Paying too much money to others
Mistake #6: Trusting institutions
Mistake #7: Believing publications
Mistake #8: Failing to take little steps that can sometimes make a big difference
Mistake #9: Buying illiquid financial products
Mistake #10: Requiring perfection in order to be satisfied
Mistake #11: Accepting investment advice and referrals from amateurs
Mistake #12: Letting emotions – especially greed and fear – drive investment decisions
Mistake #13: Putting too much faith in recent performance
Mistake #14: Failing to resolve disagreements between spouses
Mistake #15: Focusing on the wrong things
Mistake #16: Not understanding how investing works
Mistake #17: Needing proof before making a decision
Sage advice. Making just a couple of these errors can be ruinous to portfolio health. Merriman concludes the article with recommendations to avoid these pitfalls. Applying his experience-based observations might just save everyone more than a few bucks. Here is the Link to the complete paper:
http://www.merriman.com/PDFs/AvoidTheWorstMistakes.pdf
Please give it a try. It’s worth your time commitment.
Vintage Freak, the marketplace is a tough demanding master. But it can be controlled with discipline and patience. Just review the Lazy-Man performance record that is often referenced in MFO postings.
The long term performance of all these simple options hover around the 7 % annual rate of return. These are accessible, real, and are realistic expectations for market rewards. They demonstrate that investing can be made simple.
But simple does not necessarily equate to easy. It takes work. Sometimes it is not easy to overcome behavioral biases, greed, and the devil renegade in each of us.
Some luck is always needed.
Best Regards.

Reply to @slick: Ya, got into ODVYX before closing in my Wells account but missed it in my Fido rollover :(
Seems like all the good EM funds closed this past year; ABEMX, HEMZX, ODMAX. Not confident in any of the available funds/managers in the space so thinking of splitting exposure to SFGIX, GPROX, & MPACX evenly at 4% each.
I agree. PJP is good, you must have some serious gains in that one. Would have bought it but FBIOX was NTF.

Hi Vintage Freak,
I seriously doubt that as investors “we suck”. I’m sure some of us do; I’m equally sure that most of us do not suck. I do not suck; you do not suck.
We often make misguided investment decisions, but being 100 % correct when forecasting future market movements is an impossible standard. The unknowns and unknowables overwhelm the knowns.
Don’t judge yourself so harshly. Experts make faulty decisions just as often as we do.
Taken in isolation, brainpower is not sufficient by itself. From the dustbin of history, Sir Isaac Newton lost a fortune in the South Sea bubble; Albert Einstein lost when he overcommitted to failed municipal bonds early in the 20th century. John Maynard Keynes recorded a rocky up-down financial career with his beauty contest approach to investing.
Recently Nobel laureates and economists Robert Merton and Myron Schols were founding members of the Long Term Capital Management debacle. Physicist John Allen Paulos unwisely had a love affair with WorldCom stock while sacrificing 90 % of his investment to bad practices. He did write a book, “A Mathematician Plays the Stock Market”, so he likely recovered from some of his misfortunes.
My takeaway is that scientists are not immune to the same investment foibles that endanger and compromise our investment decision making.
Brainpower is a positive asset, but it must be supplemented with large inputs of knowing the rules and the odds of the investment playing field. A little commonsense also is beneficial. The other side of the investment coin is familiarity with the many pitfalls and traps that snarl neophyte investors
Paul Merriman has an excellent article that identifies 17 common traps. Avoiding these wealth eroding traps should remove anyone from the Sucks list.
Mistake #1: No written plan
Mistake #2: Procrastination
Mistake #3: Taking too much risk
Mistake #4: Taking too little risk
Mistake #5: Paying too much money to others
Mistake #6: Trusting institutions
Mistake #7: Believing publications
Mistake #8: Failing to take little steps that can sometimes make a big difference
Mistake #9: Buying illiquid financial products
Mistake #10: Requiring perfection in order to be satisfied
Mistake #11: Accepting investment advice and referrals from amateurs
Mistake #12: Letting emotions – especially greed and fear – drive investment decisions
Mistake #13: Putting too much faith in recent performance
Mistake #14: Failing to resolve disagreements between spouses
Mistake #15: Focusing on the wrong things
Mistake #16: Not understanding how investing works
Mistake #17: Needing proof before making a decision
Sage advice. Making just a couple of these errors can be ruinous to portfolio health. Merriman concludes the article with recommendations to avoid these pitfalls. Applying his experience-based observations might just save everyone more than a few bucks. Here is the Link to the complete paper:
http://www.merriman.com/PDFs/AvoidTheWorstMistakes.pdf
Please give it a try. It’s worth your time commitment.
Vintage Freak, the marketplace is a tough demanding master. But it can be controlled with discipline and patience. Just review the Lazy-Man performance record that is often referenced in MFO postings.
The long term performance of all these simple options hover around the 7 % annual rate of return. These are accessible, real, and are realistic expectations for market rewards. They demonstrate that investing can be made simple.
But simple does not necessarily equate to easy. It takes work. Sometimes it is not easy to overcome behavioral biases, greed, and the devil renegade in each of us.
Some luck is always needed.
Best Regards.

Reply to @Daves:
I'll give this a try:
5 year gains = Your average return over a 5 year period (June 2008 - June 2013)
5 year standard deviation = The maximum dispersion away from that average return over a 5 year time frame.
"The road to (average return) is full of ups and downs (standard devaition)"

Ted,
I don't understand the difference between 5 year (gains) and 5 year standard variation.

Thanks as well David, excellent piece. And Bee is spot on with the small investor having limited options.
There is one, worthy investment option, not often discussed here, which does avail itself to many individual, Mom and Pop investors.
The option is to hire a financial services firm, Not a Stock Broker, to serve as your personal investment manager. Fees run about 1% to 1.45%.
Repeat Not A Stock Broker. (I've fired way too many brokers, to me they're generally all the same).
I became frustrated with my own stock and mutual fund selections, as well as my risk adjusted gains as the market rotated away from bonds to mid caps, small caps, market neutrals, perferred, convertibles etc. Then trying to control my own emotions, and foresee future market rotations requires skills I don't have. I've had a little success over the last 40 years, but the enviroment is changing.
Being retired I couldn't afford a major blunder or being wrong every five to seven years
as David points out. I got tired of not sleeping at night, because the ground is shifting.
My Fidelity advisor and I were discussing this fact, and he made a suggestion that I'd never considered. Apparently Fidelity realized there were many of us thinking the same way.
My advisor in Tampa, through a Fidelity screening and interview process, suggested a four major investment firms that operate according to a strict Fidelity standards of practice arrangement.
In my case, four firms that met my guidelines were recommended from around the country. I spent a month interviewing them, and landed on one firm outside my state, but I'll cut that story short. Eye opening to say the least.
In my case the chosen firm manages assets of $40 Billion. The firm and I, after extensive conversations, set up various portfolios for me which are modeled to meet my goals with various timelines, and cash flow models. Highly sophisticated. Highly sophisticated indeed.
They don't use mutual funds.
These firms operate through internal investment committees. They have as many as 60 Certified financil analysists choosing the investments. They don't want my opinion or my emotions or my input. But my client relations advisor there is a CFP.
The firm often will make a change or move every few days. Very transparent and I view all the allocation adjustments on my Fido site. They prove you don't have to take excessive
risk to make money.
Lastly, some of the stocks I owned previously were retained. But the firms buy and sell models are based on analytical formula's.
The firm may like a stock, but it may like it's preferred stock better, or it's convertible better or they may buy puts or calls instead of the individual stock. Few of these strategies I'd ever feel comfortable using on my own, with limited information. But the way they do it, is most interesting. It's active management but not too churning.
Lastly there are a number of these firms who you'd never know even exist, but to whom great fortunes are entrusted.
Good Investing,
Steve

Oakseed's inaugural shareholder letter is nicely written and contains a fair amount of personal history for Mr. Park and Mr. Jackson.
Highlights:
As we began putting pen to paper late last year, we thought long and hard about the kind of firm
and fund we wanted to have, keeping a few key objectives in mind:
1. A “go anywhere” investment mandate.
2. No investment committees, minimal meetings, and low administrative demands.
3. Alignment of interest with our investors.
---------
A bit more on that last point: we believe having common ownership of the Fund between its managers and other shareholders strongly aligns goals. As co-portfolio managers we are committed to managing our personal capital alongside yours. Our current combined Fund investment stands at approximately $10 million with the objective to become the largest shareholders over time (and we do not allow individual stock purchases for personal accounts at our firm). We look for personal “skin in the game” in our companies’ executive ownership of their stock; how could our own shareholders possibly expect any less from us?
--------
[T]here are several common threads that run through the Fund highlighting our investment approach. First, in each
instance we believe the company’s returns on equity or returns on invested capital are improving, if they are not already higher than average. . . Second, we believe that the valuation does not reflect our assessment that returns are high or improving. This is most likely due to what we believe are short-term problems, either with the business itself, the industry, or perhaps an overall stock market decline. Our investments are usually “contrarian,” meaning the expectations of other investors are lower than what we think they should be, so we are willing to bet the other way for the potential to earn a higher rate of return. Finally, most of our stocks need time before the rest of the market sees what we see. Although it is easy to understand why instant gratification is more appealing than waiting around, we think it is far easier to buy an undervalued stock if most people are not factoring in events three to five years away that could add a lot of value to the company. Unfortunately, events three to five months away are more often than not already incorporated into today’s stock price and it is very difficult to gain an edge trading that way.
----------------
In a bit of Murphy’s Law, the Fund missed out on January 2, the first trading day of 2013, when most major market indices were up 2% to 3% since all trades are booked the following day and therefore the Fund’s NAV was unchanged. As a result, with the S&P 500 up 2.54% that first day the Fund began the year behind its benchmark the same amount.
For what it's worth,
David

Reply to @golub1: You've given a good argument for legacy funds - if they are decent funds, and you have substantial gains that you expect to get wiped out (eventually) upon your demise, let it ride.
But there are still things you can do. You can (somewhat) reduce the holdings by selling specific shares - shares that were purchased at a higher (or at least not much lower) price than the current market price. Be careful if you've already used average cost basis though - the cost of those specific shares may not be what you think.
Another thing you can do is stop reinvesting dividends. Take those dividends and invest them in the funds you really want to grow. This usually doesn't stop the growth of the legacy fund, but it does slow it down, sometimes substantially.
If you're donating to charities during your lifetime (as opposed to through your will), donate the most appreciated shares (or complete positions). You'll be able to write off the current value while never recognizing the gain.

Reply to @golub1: Could you dollar cost average out of the funds versus a one time withdrawal/exchange? In a similar situation, I was fortunate enough to get out of funds with gains in years I had losses so they cancelled each other. I may be wrong so a tax preparer or an accountant friend might be worth a visit if these gains are substantial.

Very interesting comments: I will simplify. I'm convinced that for me consolidation is in order. Now the hardest issue will be and if and how to consolidate funds with big gains in taxable accounts. If they are passed on upon death to my children they get a stepped basis. That's an important benefit, but it complicates the consolidation/ simplification procedure? I can only imagine the multiplicity of factors that need to be taken into account. The most important for someone my age in my 70s has to be life expectancy. Anyone know or have a model for dealing with taxable holdings?

Bitzer:
I do not know where you got the impression that Yacktman's funds were defensive. Both YACKX and YAFFX suffered horrific drawdown in the last bear market, shedding over 50% of their NAV from 2007 through 2008. In fact, I believe they lost more than SPY (the S&P 500 index fund).
There are numerous defensive mutual funds that lost less than SPY during the 2007 - 2008 bear market but you have to be willing to accept subpar performance on the way up. Funds that immediately come to mind which are defensive yet still give decent performance on the upside are (both balanced funds and pure equity MFs):
QRSVX: Queens Road Small Cap Value. That said, NO SC fund is truly defensive.
PVFIX:Pinnacle Value
FPACX:F P A Crescent
ICMBX:Intrepid Capital
FOBAX:Tributary Balanced
APPLX:Appleseed
XLP: SPDR Consumer Staples ETF
XLV: SPDR Health Care ETF
Finally, I strongly suspect that the new Oakseed Fund SEEDX that David Snowball has introduced to this website will also prove to be defensive in a bear market. I base this guess on their Top 25 holdings and their performance in the last 6-7% swoon.
DlphcOracl

S&P gained 13% in 2012 and is up 18.6% this year. Dow gained 7% in 2012 and is up 17.71% this year. Healthy gains - but not outsized or unheard of in bull markets. What seems remarkable is the steadiness of the assent. Can't recall any 1,000+ point dips on the Dow over the past 12-18 months. At current levels that would amount to only about a 7% pullback. November's election results and again Cyprus did jolt the markets a little - but 1000 points? Probably not. So, during this period a fully invested approach likely worked better than trying to hedge.
I think there's merit in all the various approaches presented in recent days. But, I don't think anyone - not Skeeter, Ted, Catch, MJG, or anyone else - is going to throw away a time-worn and finely tuned plan (which meets their own individual needs) based solely on a couple years' market performance.

Reply to @Art:
Hi Art,
Sorry for the delay in responding. I somehow must have missed it.
Form retirement, I have not yet got to slow down. My old firm keeps calling me back to the office from time-to-time to sort things out and meet with preferred clients. Seems nobody felt I did much but collect my time and money form being around the place. Then, when it was left up to others to do what Skeeter did ... Well, they are now seeing it was not so simple. After all, I grew with the position through the years, knew the people and knew how to handle issues to meet the customer's satisfaction. My boss is still there and she simple told them to do what Skeeter use to do ... after all ... it worked for him for many years. She was good at letting me go and do pretty much what I wanted to do and allowed me to take much of the summer off while she took much of the fall off. We could cover and work one anothers desk. Now she seems to have the mind set to let them learn on their own, much like she and I did. This is a small family run business and I handled much of the back office and she handled the front office and we could switch off while the others reported to us.
I have started billing them for my time when they call because the cusomers ask for me and if I have to come in to the office the rate is subject to what I find must be done. Somebody is going to screw something up real soon and real good ... and, I don't want to be around when they do. I don't think my boss does either and if she did not own the place she'd probally be out of there ... trying to kick back like I am doing. By the way I will get income trails for the next three years form the firm plus time that I might bill for my time. Told her she had to stay until my trails were paid.
So Art, That's how it is going. And, oh yes ... I play golf on Thursday afternoons and then drive to the coast for the weekend and then back to Charlotte on Sunday evenings. The wife still works in the local school system as a 52 week employee ... but, she works Monday thru Thursday through the summer months plus taking vacation. She will retire out of the system in about two years. We plan to gift the Charlotte homestead to our son when we move to the coast as it was gifted to us by my parents plus we have our own home too. In this way, we should be well pass the look back should we fall in poor health in the years to come and run out of money. I don't think so ... but, one really never knows.
I am still trying to find the time to start a restoration project on my 1992 Jeep Cheorkee that I have had for many years. I went and looked at a new one but just value my capital too much to let go of it. The Jeep needs a rear main seal, a set of new tires and just gone over in general but overall all I'd start out to the west coast in it on most any day. It is needed to put the boat in and out of the water at the coast and trail it back and forth during the off season rather than paying high slip and storage fees in the inlet. I have ramp acces through my HOA but not long term dock and storage.
I am not going there with Catch22 & Ted. There seems to be something of an issue ... hopefully, it will get worked out. They both are contributors and I would hate to see either leave. But, I do not enjoy the ongoing feud either.
I could go on ... but, I'd get in a rant. And, I just don't want to do that. Not now anyway.
Have a good one and thanks for asking.
How was the book?
Skeeter

Dear golub1: Why do they own 20 or 30 equity funds ? They don't know anything about investing, and want to make fund companies rich. Having to own 8 different funds for large-cap exposure is total nonsense. You can have adequate exposure to large-caps for two accounts by owning SPY in each account.
Morningstar found that single-fund portfolios had the highest standard deviation, delivering either the biggest gains or the heaviest losses. So owning just one fund can be a risky bet. Add a fund and the standard deviation drops significantly. Returns are lower, but the downside is less severe, too.
After seven funds, however, a portfolio's standard deviation stays pretty much the same regardless of how many funds you add. In other words, once you own seven funds, there may be no need for more.
I own just six funds, SPY, IHJ, PFF, PBDCX, PONCX, PRHSX

Well, I guess I’ll chime in here.
Within my highly diversified portfolio I have currently been sitting on the sidelines, for the most part, and harvesting from my crops their unrealized capital gains that I planted sometime ago. As the market moves upward, I harvest from them as they grow. Sounds a little biblical, it is, as I have watched through the years my unrealized gains get vaporized, from time-to-time, in a market downdraft. Now, I harvest form my gains as the market progresses upward. In this way, it reduces the possibility they might go stale before booking profit.
I just recently read Jeffery Saut’s weekly market commentary which I have linked below. It seems others that operate in a high risk environment learned that they too should harvest form their takings and put some back for use sometime in the future. I have linked his commentary below for those that might be interested in reading it. It is titled “The One Chip Rule.” http://www.raymondjames.com/inv_strat.htm
In addition, I’d like to thank Charles and David for their work in the “MFO Fund Ratings” spread sheet. Indeed this is great work. Having bet at some dog tracks ... in my earlier years ... Well, this spread sheet should aid in keeping one from putting money on a "slow" dog type fund.
I wish all “Good Investing.”

FYI: In my capital preservation portfolio I own the Investment Grade Corporate Bond Fund.
Regards,
Ted
http://blogs.wsj.com/moneybeat/2013/08/06/pimcos-july-fund-flows-spark-great-rotation-debate/tab/print/

Another good quarter from Oaktree (OAK)
_________________
Oaktree Capital beats by $0.19, beats on revsFont size: A | A | A
8:33 AM ET 8/6/13 | Briefing.com
Reports Q2 (Jun) adjusted earnings of $1.75 per share, $0.19 better than the Capital IQ Consensus Estimate of $1.56; revenues rose 62.7% year/year to $555.1 mln vs the $547.94 mln consensus.
Adjusted net income per Class A unit grew 97% for the second quarter, to $1.75, and 106% for the year's first two quarters, to $3.69, as compared with the corresponding prior-year periods, on gains in incentive income driven by fund realizations.
Distributable earnings per Class A unit grew 90% for the second quarter, to $1.94, and 116% for the year's first two quarters, to $3.73, as compared with the corresponding prior-year periods, on gains in incentive income, as well as higher investment income proceeds.
Economic net income per Class A unit grew 88% for the second quarter, to $1.13, and 63% for the year's first two quarters, to $3.16, as compared with the corresponding prior-year periods, as higher fund returns drove gains in incentives created (fund level) and investment income.
GAAP net income attributable to Oaktree Capital Group, LLC grew 129%, to $56.6 million, and 164%, to $114.1 million, for the second quarter and first two quarters of 2013, respectively, as compared with the corresponding prior-year periods.
Oaktree declares a quarterly distribution for the second quarter of $1.51 per Class A unit, bringing to $2.92 the aggregate distribution for the year's first two quarters, up 91% and 118%, respectively, over the prior-year amounts.
"Howard Marks, Chairman, said, “Our investment teams continue to deliver both exceptional cash returns and new opportunities for future growth and income. In the second quarter, our closed-end funds distributed $4.7 billion to investors, yielding record incentive income of $338.1 million. As a demonstrated leader in credit strategies, we continue to raise significant capital for our newest products to provide our clients with superior risk-adjusted investment performance across market cycles.”'
http://finance.yahoo.com/news/oaktree-announces-second-quarter-2013-123000566.html

You seem to be focusing on value-leaning funds (with funds that I like), but on the growth side is another obvious fund - Capital Opportunity VHCOX.
Managed by the Primecap team, and the only way to get these managers in a Vanguard fund (I believe the other Primecap-managed funds are closed, though you can get the team through Primecap Odyssey funds).
On the international side, I'd stick with VG's index funds - specifically, all world ex US, There are two such funds, tracking different indexes:
- VTIAX tracking FTSE Global All Cap ex US Index (5300 stocks, 46 countries in the index),
- VFWIX tracking FTSE All World ex-US (2200 stocks, 46 countries in the index)
The former has more (and consequently smaller) stocks; if one is going for an index, it would be my preference.

Additionally, some of the fund's dividend is a return of capital.