Evaluating Managed Funds
 

So I'm rolling over my Microsoft 401k, and I'm thinking about trying out some managed funds for the first time. The way I've been evaluating them so far has been to go to Morningstar and look up stocks of companies I like. I look at the "Top 5 institutional onwers" and see if one fund owns the stock in a concentration much higher than all the others. Then I check the fund and see its top five holdings and evaluate them.

Then I check out the fund's website and prospectus and look at its performance and managment philosophy. Then I look at the fee structure, turnover, etc.

So far, I've found one fund that intrigues me. Fairholme seems to have their ducks in a row. Their symbold is FAIRX.

Anyone here have experience with managed funds and thoughts on my process or pick?

Re: Evaluating Managed Funds
 

I am in the same boat Ed of rolling over a 401(k). Since I invest on my own, I am not looking for a fund that invests in the same things I do. I am looking for solid performance over a long period of time.

Mutual fund managers do this for a living so I hope they know a heck of alot more than I do.

Something else to look for is if the fund is under the same management for awhile since that is what you are really buying. Morningstar is the best resource I have come accross for information on funds.

Re: Evaluating Managed Funds
 

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experience with managed funds and thoughts on my process or pick?

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Mainly these guys are my competitors, but for some of my clients (whose accounts are very small) I utilize funds instead of stocks. Most of the funds on my firm's "approved" list are the ones listed by Lou Lowenstein in his recent paper, which is a modern/updated version of a similar paper/speech written by Mr. Buffett in 1984.

As for your process, it seems like a "bottom up" approach (starting with individual stocks), whereas mine was more of a "bottom down" one (starting with investment philosophy), but it seems pretty good to me. (And, as it turns out, we ended up in the exact same place.)

You mentioned that you look for a low expense ratio, and low turnover, and both are great things. Another two points I would add to any mutual fund checklist is (1) I will never pay a load/commission, and (2) I want to invest with people who have close to 100% of their personal investments in the fund (Longleaf is the hallmark on this one--they require all employees to invest only in Longleaf products).

As it happens, whenever a friend asks me for a short list of mutual fund recommendations, I have the usual suspects like Sequoia, Dodge & Cox, Longleaf, Tweedy Browne, Third Avenue, et al. But most of these are either closed to new investors or just plain huge, so the only fund that I always recommend is Fairholme. This fund is first place in my mind, and there are 3-6 funds tied for a distant second.

Bruce, Larry, and Keith are so incredibly smart, and they have the right temperament in order to succeed. Anecdotal evidence sucks, but....in 1990/1 Bruce was profiled in Outstanding Investor Digest (when he was still with Smith Barney (?)), and he was pitching Wells Fargo. The Californian economy was in dire straits at the time (where have I heard that one before?) and most investors were down on banks in general, but Bruce said he was backing up the truck on Wells. In a short matter of months after that, Berkshire disclosed that they too had bought a large stake (of course this has since been a multi-bagger).

Re: Evaluating Managed Funds
 

Thanks buffett. I'm actually learning something about investing, I think. [img]/images/graemlins/smile.gif[/img]

Trying to pick individual stocks has been frustrating for me so far (granted, I haven't put much time into it), because every time I think I've found a good one, I catch some big red flag or fatal flaw or something in the 10-K. Who knew building a Marketocracy portfolio could be so stresful. [img]/images/graemlins/tongue.gif[/img]

I'm sure I'll get the hang of it.

Right now my Microsoft 401k is 100% in Vanguard Value Index Fund Investor Shares (VIVAX). I just let it sit there since I left the company in 2003 because I didn't know anything better to do with it.

I want to roll it over to a Vanguard IRA. I think I might move a significant percentage to Fairholme and spread the rest between some other Vanguard Index funds. Something like:

Fairholme - 40%
Vanguard 500 Index Fund Investor Shares (VFINX) - 20%
Vanguard Small-Cap Index Fund Investor Shares (NAESX) - 20%
Vanguard Total International Stock Index Fund (VGTSX) - 20%

I don't know if this portfolio is too aggressive.. FWIW, I'm 26 and optimistic about my future earning power.

Just kinda throwing this out there for a sanity check before I rollover.

Re: Evaluating Managed Funds
 

From Buffett's link that talked about 10 "great value funds" I was able to get the top 25 holdings as of 09/30/2005 of 9 of these.

These funds have very low turnover and a long-term (2+ year) philosophy so most are probably viewed as good today. Of the 9 funds here are the stocks owned by more than one of these:

Altria Group (2)
American Express (2)
Berkshire Hathaway (5)
Bristol-Myers Squibb (2)
Burlington Resources (2) NOTE: RECENTLY BOUGHT BY COP
Comcast (3)
Diageo (3)
Discovery Holding Co (2)
Freddie Mac (2)
IMS Health (2)
JP Morgan (2)
Knight Ridder (2)
Liberty Media (3)
Newmont Mining (2)
Old Republic International (2)
Pfizer (2)
The Directv Group (2)
Time Warner (4)
Tyco International (3)
Viacom B (2)
Vivendi Universal (3)
Yum Brands (2)
Zale (2)

Any thoughts on these stocks? Altria has had a nice run up recently, but other than that I don't know much about alot of these.

Re: Evaluating Managed Funds
 

The main reason to get into mutual funds is low volatility. They are catering to a mass market which psychologically demands this, so beware of that when selecting your fund.

For mutual fund like performance with the advantages of a stock, I would recommend getting into Berkshire Hathaway instead. That is if you can afford their B shares. Something tells me Ed Miller can do that.

Re: Evaluating Managed Funds
 

The timing on a small purchase of NEM may be ideal this week.

Re: Evaluating Managed Funds
 

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For mutual fund like performance with the advantages of a stock, I would recommend getting into Berkshire Hathaway instead. That is if you can afford their B shares. Something tells me Ed Miller can do that.

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Ya, I agree that BRK is attractive. I may buy some shares one of these days to go to the shareholder meeting, also. [img]/images/graemlins/smile.gif[/img]

(BTW, Fairholme's top holding is BRK.A, so if I were to buy that fund, I'd also be buying BRK.)

Re: Evaluating Managed Funds
 

Oh, dude, we should totally have a 2+2/poker get-together at next year's BRK or WSC meeting.


(If you don't own shares, you can buy a ticket on ebay.)

Re: Evaluating Managed Funds
 

[ QUOTE ]
Trying to pick individual stocks has been frustrating for me so far [...]

[/ QUOTE ]
I am in investment advisor, and as I mentioned in another thread, I feel strongly about passive, non-forecasting investments strategies.

This board may be a bad place to state my opinions, as most of you seem to trade, but I'll try anyway.

Take any stock - Altria was mentioned in this thread. 11 million shares of Altria traded today. So, pensions, mutual funds, and individuals bought 11 million shares of it today - and all of those buyers think the stock is going up. But other pensions, mutual funds and individuals sold it today - the same 11 million shares worth! - and all those sellers think it is going down, or there is someplace better for their money. So, who is right?

And, what do I or you or any individual know that is better information than the millions of people that trade that stock every day? Inside information, is of course, illegal. And all other information is basically made available to everyone at the same time. All "news" that is basically unpredictable.

I believe that, because millions of people are researching and buying and selling all of the stocks every day, there is no one that can pick stocks and beat the benchmark over a long period of time.

Hey, actually 2+2 is a great place for this tidbit. People looking at mutual funds and their past performance - how many months or years of past performance do you need to know that a funds' outperformance is statistically significant? With variance, a losing poker player can win 100 BB or 300 BB over some short periods of time, right? Well, if Morningstar says some mutual fund is outperforming their benchmark over the last 1, 3, and 5 years, does that mean that the fund company or fund manager actually has skill in picking which stocks are going to go up and which down?

Ken French of Dartmouth College said that if a fund outperforms it's benchmark by 3% a year on average, it takes 140 years of perfomance history to tell if it's statistically significant!

Think of it another way. Take 1000 fund managers and put them in a room. Ask them to flip a coin and try to get heads. After one flip, roughly 500 will flip tails, and they will be asked to leave the room. Roughly 500 flip heads and stay, and flip a second time. Do this for 10 flips. It would not be unusual for 1 of these fund managers to flip heads 10 times in a row. (Odds of that are 1 in 1024.) (If you had 2000 fund managers, you'd probably have at least one of the flop 10 heads in a row.)

So, was that fund manager skilled at flipping heads? No, they just happened to be the lucky one who happened to do it. So, if you take 1,000 US Large Cap Blend mutual funds, you can probably find 1 that outperformed their benchmark for 10 years in a row. Skill? Could just be luck like the coin flipper.

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I want to roll it over to a Vanguard IRA. I think I might move a significant percentage to Fairholme and spread the rest between some other Vanguard Index funds. [...]

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Vanguard is a great company with index funds and low expenses. In fact it is a mutual company owned by the shareholders, so they are not trying to rip off their investors and earn a profit. I have used Vanguard in the past and highly recommend them. (I don't use them now, and have never worked for them.)

I'd skip that Fairholme and stick with index funds. There's a lot of good web sites and books about asset allocation with index funds. If you want to be aggressive (100% stocks) and diversified, how about something like:

20% Total Stock Market Index
20% Value Index
10% Small Cap Index
10% Small-Cap Value Index
10% REIT Index
10% European Stock Index
10% Pacific Stock Index
10% Emerging Markets Stock Index

For Vanguard IRAs I think it's a $2,000 minimum per fund, so you could do this allocation with $20,000. With a smaller amount, I could come up with a simpler allocation.

If you want to be a little less aggressive, add Short-Term Corporate Bond Fund and keep the stock funds in the same proportion.

A great book I recommend is The Four Pillars of Investing by William Bernstein:

http://www.amazon.com/gp/product/0071385...ks&v=glance

Good luck!

-Tom

Re: Evaluating Managed Funds
 

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there is no one that can pick stocks and beat the benchmark over a long period of time

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Oh, please.*

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Take 1000 fund managers and put them in a room. Ask them to flip a coin and try to get heads....

[/ QUOTE ]
Have you read The Superinvestors speech?




* I'm not saying it's easy, I'm just saying that all tautologies are false [img]/images/graemlins/wink.gif[/img] and there's a lot of data that contradict you/Fama/French/Malkiel/Samuelson/.....

Re: Evaluating Managed Funds
 

[ QUOTE ]
And, what do I or you or any individual know that is better information than the millions of people that trade that stock every day? Inside information, is of course, illegal. And all other information is basically made available to everyone at the same time. All "news" that is basically unpredictable.

I believe that, because millions of people are researching and buying and selling all of the stocks every day, there is no one that can pick stocks and beat the benchmark over a long period of time

[/ QUOTE ]

It is not having extra information that gives the best investors the advantage it is how that information is used.

Re: Evaluating Managed Funds
 

[ QUOTE ]
* I'm not saying it's easy, I'm just saying that all tautologies are false [img]/images/graemlins/wink.gif[/img] and there's a lot of data that contradict you/Fama/French/Malkiel/Samuelson/.....

[/ QUOTE ]

Honestly, I don't understand how people who lived through 1998-2001 could claim that the stock market is too efficient to beat.

BTW, I definitely appreciate your advice, jively. And I agree 100% that index funds are an excellent investment vehicle. But I don't believe that the market is always priced too efficiently to exploit.

Though, I certainly agree with you that you can't look at a managed fund's return for the past X years and draw a conclusion about its ability to pick stocks well.

Re: Evaluating Managed Funds
 

[ QUOTE ]
Take any stock - Altria was mentioned in this thread. 11 million shares of Altria traded today. So, pensions, mutual funds, and individuals bought 11 million shares of it today - and all of those buyers think the stock is going up. But other pensions, mutual funds and individuals sold it today - the same 11 million shares worth! - and all those sellers think it is going down, or there is someplace better for their money. So, who is right?

[/ QUOTE ]

This line would also argue that no one can beat a sportsbook over the longterm. After all, someone is always taking the other side of your bet.

Re: Evaluating Managed Funds
 

[ QUOTE ]
I am in investment advisor, and as I mentioned in another thread, I feel strongly about passive, non-forecasting investments strategies.

[/ QUOTE ]

It may be your job to convince people of this, that doesn't make it true. It's only difficult to beat the S&P because you guys are too busy charging fees.

Re: Evaluating Managed Funds
 

I have started to learn from the very intelligent people on this board and based on their recommendations have started to read "The Intelligent Investor". So far I am through about only about 10% of the book and am thouroughly enjoying it so far. Here is a passage that is very well stated:

"The market is a pendulum that forever swings between unsustainable optimism (which makes stocks too expensive) and unjustified pessimism (which makes them too cheap). The intelligent investor is a realist who sells to optimists and buys from pessimists." - Benjamin Graham

Re: Evaluating Managed Funds
 

I'm currently investing in a bunch of American Funds. They are front loaded but seem to have beat the market for a long while by a significant margin. Take a look at them if you like.

Krishan

Re: Evaluating Managed Funds
 

[ QUOTE ]
Fairholme - 40%
Vanguard 500 Index Fund Investor Shares (VFINX) - 20%
Vanguard Small-Cap Index Fund Investor Shares (NAESX) - 20%
Vanguard Total International Stock Index Fund (VGTSX) - 20%

[/ QUOTE ]

Do yourself a favor and read the latest books by Larry Swedroe and Rick Ferri. The evidence for asset allocation via indexing with small cap, value tilt (and equal amts of international) is compelling.

Since I am only active with a small part of my portfolio, these 2 authors have radically changed (for the better) my passive investment decisions.

I wouldn't buy a single fund until I read at least 1 of those 2 authors latest books.

Also see the Vanguard Diehards forum at morningstar.com (its free).

Great stuff you won't hear from anyone working sell-side wall street (i.e. every breathing human on tv and 99.9% of the other authors out there).

Good luck

Re: Evaluating Managed Funds
 

[ QUOTE ]
20% Total Stock Market Index
20% Value Index
10% Small Cap Index
10% Small-Cap Value Index
10% REIT Index
10% European Stock Index
10% Pacific Stock Index
10% Emerging Markets Stock Index

[/ QUOTE ]

Great start but I'd say small cap intl (no index available but VINEX is good alt) and 5-10% commodities (pcrix) to make this the perfect (but very aggressive portfolio)

I'll help with some symbols

VTI - 20% Total Stock Market Index
IJJ - 20% Value Index
IJR - 10% Small Cap Index
IJS - 10% Small-Cap Value Index
VNQ - 10% REIT Index
VGK - 10% European Stock Index
VPL - 10% Pacific Stock Index
VWO/EMM - 10% Emerging Markets Stock Index

Your expense ratio on the above funds will be tiny (especially the Vanguard Vipers) and you will have a very diversified portfolio across different asset classes. Throw in some VINEX or PISRX and some PCRIX and you are good to go.

Re: Evaluating Managed Funds
 

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I'm currently investing in a bunch of American Funds. They are front loaded but seem to have beat the market for a long while by a significant margin. Take a look at them if you like.

Krishan

[/ QUOTE ]

I'd strongly consider not doing this. Read Bernstein, Bogle, Swedroe and Ferri for more info.

Re: Evaluating Managed Funds
 

[ QUOTE ]
[ QUOTE ]
I am in investment advisor, and as I mentioned in another thread, I feel strongly about passive, non-forecasting investments strategies.

[/ QUOTE ]

It may be your job to convince people of this, that doesn't make it true. It's only difficult to beat the S&P because you guys are too busy charging fees.

[/ QUOTE ]

The mutual funds are worse.

The guy gives good advice and you don't need an investment advisor to implement his advice.

I know its easy to take shots at the way a man puts food on the table but investment advisors have their place.

If one has a large portfolio that can be tax-loss harvested every year to offset other cap gains, a CFA is worth the money and then some. They will rebalance for you optimally and get you optimal tax losses.

You don't need a CFA for this but if your portfolio is big and has many securities or funds it can be worth it.

Re: Evaluating Managed Funds
 

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
I am in investment advisor, and as I mentioned in another thread, I feel strongly about passive, non-forecasting investments strategies.

[/ QUOTE ]

It may be your job to convince people of this, that doesn't make it true. It's only difficult to beat the S&P because you guys are too busy charging fees.

[/ QUOTE ]

The mutual funds are worse.

The guy gives good advice and you don't need an investment advisor to implement his advice.



[/ QUOTE ]

I thought he meant mutual funds with his advice. I'm not against financial advisors per se, but some of them are quacks who take there fees then recommend mutual funds that charge fees/loads and you end up being better off buying bonds or something.

I guess I'm still bitter from my personal experience [img]/images/graemlins/mad.gif[/img]

Re: Evaluating Managed Funds
 

Ed, my allocation looks a lot like yours, but I am heavier in Foreign markets (35-40%).

This is something to consider as it is a hedge against a major drop in the dollar.

Re: Evaluating Managed Funds
 

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a CFA is worth the money and then some....You don't need a CFA for this...

[/ QUOTE ]
I think you mean CFP.
-Aaron, CFA

Re: Evaluating Managed Funds
 

[ QUOTE ]
Ed, my allocation looks a lot like yours, but I am heavier in Foreign markets (35-40%).

This is something to consider as it is a hedge against a major drop in the dollar.

[/ QUOTE ]
I haven't read this whole thread, but I suspect this is the best post in it.

Re: Evaluating Managed Funds
 

[ QUOTE ]
This is something to consider as it is a hedge against a major drop in the dollar.




[/ QUOTE ]

Why should Ed have to be concerned about a major drop in the US dollar if his assets are based on US companies? Most of these companies transactions will be dollar to dollar.

Also, with the Fed increasing rates and the EU unlikely to do so, it's more likely the dollar will get stronger not weaker versus euro and other currencies, so european funds will need to overcome that drag.

Re: Evaluating Managed Funds
 

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Why should Ed have to be concerned about a major drop in the US dollar if his assets are based on US companies? Most of these companies transactions will be dollar to dollar.


[/ QUOTE ]

Well there is taking advantage of the "tailwind" foriegn equity values get from the declining dollar.

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Also, with the Fed increasing rates and the EU unlikely to do so, it's more likely the dollar will get stronger not weaker versus euro and other currencies, so european funds will need to overcome that drag.

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How much longer will the Fed increase rates? How much longer CAN the fed increase rates? Not much longer I think.

Our government is still running huge deficits, this devalues the dollar over time. This year the dollar got a respite because of a one time large inflow of repatriated corporate foreign income. That "tax holiday" just ended. I think it's highly likely the dollar has a bad year next year and that this will continue until we address our budget deficits.

Re: Evaluating Managed Funds
 

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I think it's highly likely the dollar has a bad year next year and that this will continue until we address our budget deficits.

[/ QUOTE ]
So does Mr. Buffett.

Re: Evaluating Managed Funds
 

[ QUOTE ]
[ QUOTE ]

Why should Ed have to be concerned about a major drop in the US dollar if his assets are based on US companies? Most of these companies transactions will be dollar to dollar.


[/ QUOTE ]

Well there is taking advantage of the "tailwind" foriegn equity values get from the declining dollar.

[ QUOTE ]

Also, with the Fed increasing rates and the EU unlikely to do so, it's more likely the dollar will get stronger not weaker versus euro and other currencies, so european funds will need to overcome that drag.

[/ QUOTE ]

How much longer will the Fed increase rates? How much longer CAN the fed increase rates? Not much longer I think.

Our government is still running huge deficits, this devalues the dollar over time. This year the dollar got a respite because of a one time large inflow of repatriated corporate foreign income. That "tax holiday" just ended. I think it's highly likely the dollar has a bad year next year and that this will continue until we address our budget deficits.

[/ QUOTE ]

Probably not many more increases, but everyone's figuring on at least one more. At that's 1 more than the EU plans. With the deficit increasing this year the Fed tightening of the money supply has managed to strengthen the dollar.

FWIW, I just don't think rising/declining dollar is much of an issue for someone with there money in US markets.

It might be a reason to get into europe markets.

Re: Evaluating Managed Funds
 

[ QUOTE ]
[ QUOTE ]
Ed, my allocation looks a lot like yours, but I am heavier in Foreign markets (35-40%).

This is something to consider as it is a hedge against a major drop in the dollar.

[/ QUOTE ]
I haven't read this whole thread, but I suspect this is the best post in it.

[/ QUOTE ]

Ok, that's a fair point... my worry when I first constructed it was that I was too heavily invested in US stocks. So how would you change it exactly? How about?

Fairholme - 30%
Vanguard 500 Index Fund Investor Shares (VFINX) - 15%
Vanguard Small-Cap Index Fund Investor Shares (NAESX) - 20%
Vanguard European Stock Index Fund Investor Shares (VEURX) - 20%
Vanguard Total International Stock Index Fund (VGTSX) - 15%

I don't like skimping on Fairholme, though... I think it's quite likely to beat the market less fees (the fees and turnover are modest). Maybe just take out the 500 fund altogether, just letting Fairholme represent the big stuff:

Fairholme - 40%
Vanguard Small-Cap Index Fund Investor Shares (NAESX) - 20%
Vanguard European Stock Index Fund Investor Shares (VEURX) - 20%
Vanguard Total International Stock Index Fund (VGTSX) - 20%

BTW, this is more of a learning exercise than anything else. The actual amount of money in my Microsoft 401k is small (by small, I mean 10% is about the smallest allocation I can make into any fund).

Re: Evaluating Managed Funds
 

[ QUOTE ]

Probably not many more increases, but everyone's figuring on at least one more. At that's 1 more than the EU plans. With the deficit increasing this year the Fed tightening of the money supply has managed to strengthen the dollar.


[/ QUOTE ]

I don't believe that fed interest rate increases directly impact the dollar much. I believe the fed has increased rates something like 13 times over the last few years. This year, the dollar went up, last year and previous years it went down. I think the clearer correlation is dollar inflows/outflows caused by the deficits and the tax repatriation bill. I think there is a much clearer correllation between Clintons balanced budgets and strong dollar, and Bush's deficits and weak dollar. The one exceptional year to the deficits argument is this year, the year of repatriation.

[ QUOTE ]

FWIW, I just don't think rising/declining dollar is much of an issue for someone with there money in US markets.

It might be a reason to get into europe markets.

[/ QUOTE ]

I'm an active investor so I pretty much ignore the dollar. I don't feel I have the time or ability to invest internationally and am getting good returns in the U.S. market.

But if you are a passive investor, I think it makes sense to invest some of your portfolio internationally, say 20% or so just for broader exposure. An index fund is only useful if it gives you broad exposure to the market. Well there is more than a U.S. market, so why skip international exposure for your portfolio? That's the basic argument.

But the "world is coming to an end argument" is, as long as the U.S. runs large deficits, why not keep some of your money where investments don't lose purchasing power because of their currencies? Because of our deficits, if I was a passive investor I would definitely consider upping intl. exposure to 30-40% or more.

At least until we elect another Republican president like Clinton who'll balance the budget [img]/images/graemlins/grin.gif[/img]

Re: Evaluating Managed Funds
 

[ QUOTE ]
[ QUOTE ]

Probably not many more increases, but everyone's figuring on at least one more. At that's 1 more than the EU plans. With the deficit increasing this year the Fed tightening of the money supply has managed to strengthen the dollar.


[/ QUOTE ]

I don't believe that fed interest rate increases directly impact the dollar much....

[/ QUOTE ]

It definately does, because it makes American bond rates more attractive. The deficit does too. But France and Germany are starting to run deficits also. And it's likely the rates will be 4.5% vs. 2% for 2006, so that will keep US money relatively tight.

[ QUOTE ]



FWIW, I just don't think rising/declining dollar is much of an issue for someone with there money in US markets.

It might be a reason to get into europe markets.

[/ QUOTE ]

I'm an active investor so I pretty much ignore the dollar. I don't feel I have the time or ability to invest internationally and am getting good returns in the U.S. market.

But if you are a passive investor, I think it makes sense to invest some of your portfolio internationally, say 20% or so just for broader exposure. An index fund is only useful if it gives you broad exposure to the market. Well there is more than a U.S. market, so why skip international exposure for your portfolio? That's the basic argument.

But the "world is coming to an end argument" is, as long as the U.S. runs large deficits, why not keep some of your money where investments don't lose purchasing power because of their currencies? Because of our deficits, if I was a passive investor I would definitely consider upping intl. exposure to 30-40% or more.

At least until we elect another Republican president like Clinton who'll balance the budget [img]/images/graemlins/grin.gif[/img]

[/ QUOTE ]

Not sure I buy the US investor putting money in Europe, at least I don't see it as protection for weak dollar when Ed is living in US and spending all his money in US dollars.

But I agree, us investors yearn for the days of the Republican/Conservative Clintons.

Re: Evaluating Managed Funds
 

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[ QUOTE ]
[ QUOTE ]
Why should Ed have to be concerned about a major drop in the US dollar [...]


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Well there is taking advantage of the "tailwind" foriegn equity values get from the declining dollar.
[ QUOTE ]
Also, with the Fed increasing rates and the EU unlikely to do so[...]

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How much longer will the Fed increase rates? How much longer CAN the fed increase rates? Not much longer I think. [...]

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Probably not many more increases, but everyone's figuring on [...]

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Whoa, why all the need to make forecasts? The dollar may go up or may go down - who knows? Who cares! It's still a great idea for US investors to invest internationally.

From 1970 to 2004, the S&P 500 compounded at 11.3% per year, with a SD of 17.2%. The EAFE Index (Europe, Asia, Far East) in US dollars compounded at 11.1% per year, with a SD of 22.4%.

A portfolio of 70% S&P 500 and 30% EAFE index compounded at 11.5% per year, with a SD of 16.9%. So over this time, diversifying with international stocks increased your return and lowered your risk, without having to make any forecasts about the dollar moving up or down. The dollar has flung around a lot over the last 35 years.

I recommend globally diversifying (we use 30% international), and never changing your allocation because of forecasts.

-Tom

Re: Evaluating Managed Funds
 

[ QUOTE ]
[ QUOTE ]
Take any stock - Altria was mentioned in this thread. 11 million shares of Altria traded today. So, pensions, mutual funds, and individuals bought 11 million shares of it today - and all of those buyers think the stock is going up. But other pensions, mutual funds and individuals sold it today - the same 11 million shares worth! - and all those sellers think it is going down, or there is someplace better for their money. So, who is right?

[/ QUOTE ]

This line would also argue that no one can beat a sportsbook over the longterm. After all, someone is always taking the other side of your bet.

[/ QUOTE ]
Interesting point. However, the buyers and sellers of stock do think it is going up or going down, so the current price is a pretty good indication of the stock's value. With sports betting, the point spread is determined by the bookmaker, not as an estimate of how much the favorite will win by, but only designed to equalize the bets so they break even no matter who wins. If too many people are buying one side they move the point spread to equalize it. Sports betting may be more inefficient than the stock market.

-Tom

Re: Evaluating Managed Funds
 

"I recommend globally diversifying (we use 30% international), and never changing your allocation because of forecasts."

OK, that makes more sense.

But I don't think it's so much diversifying, surely the worlds largest economy is big enough for us small frys, or a dollar hedge (we are going to be spending dollars anyway).

Re: Evaluating Managed Funds
 

[ QUOTE ]
[ QUOTE ]
there is no one that can pick stocks and beat the benchmark over a long period of time

[/ QUOTE ]
Oh, please.*

* I'm not saying it's easy, I'm just saying that all tautologies are false [img]/images/graemlins/wink.gif[/img] and there's a lot of data that contradict you/Fama/French/Malkiel/Samuelson/.....

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Ok, maybe the stock market is less than 100% efficient, and it is possible for a few active managers to outperform their benchmark over a long period of time. However, by the time you have enough years of data to see they are truly skilled and not just lucky, they'll be retired. And if you are trying to find those managers before they have all of the necessary data, you could be wrong and underperorm the benchmark.

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Take 1000 fund managers and put them in a room. Ask them to flip a coin and try to get heads....

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Have you read The Superinvestors speech?


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I just looked it up. I'll look at it in more detail later. However, it looks like Graham and Dodd are into deep value, right? Great. I like deep value as well. The Fama/French research from 1992- shows that deep value outperforms the market over long periods of time, and I recommend a deep value tilt. When looking at the past performance W. Buffett mentions, is there still positive alpha after evaluating on the 3-factor model?

The average compound annual return from 1927 to 2004 is:

10.4% S&P 500 Index
11.4% US Large Cap Value Stocks

-Tom

P.S. Didn't W. Buffett say that most investors would be better off in index funds during a shareholder letter in the 90s?

Re: Evaluating Managed Funds
 

You can't predict with any certainty whether a fund will do good in the future (endless academic studies showing that funds can't beat the S&P 500).

Just use CAPM for investing decisions (sounds like that is best for your level of knowledge). Or, if CAPM is too advanced for you, just buy shares of an index fund.

Re: Evaluating Managed Funds
 

I'll interject something here, evaluating the risk to acheive the expected albeit uncertain returns must be evaluated as well. Sounds like a trite statement but I assure you it is not. For example if I take the "equivalent" risk of leveraging SPY by 2-1 in my portfolio but only "expect" investment returns 1.5x what I would expect with SPY by investing in my portfolio, I've taken on more risk than I need to. Hope I explained what I'm driving at. Anyway in evaluating any money managers record IMO one has to evaluate the risk that was undertaken to achieve the returns.

Re: Evaluating Managed Funds
 

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I'll interject something here, evaluating the risk to acheive the expected albeit uncertain returns must be evaluated as well. Sounds like a trite statement but I assure you it is not. For example if I take the "equivalent" risk of leveraging SPY by 2-1 in my portfolio but only "expect" investment returns 1.5x what I would expect with SPY by investing in my portfolio, I've taken on more risk than I need to. Hope I explained what I'm driving at. Anyway in evaluating any money managers record IMO one has to evaluate the risk that was undertaken to achieve the returns.

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Exactly. This is a complex decision (efficient frontier stuff, etc) for which he is not going to be able to make a profitable decision without the requisite background in finance (unless he gets lucky). He might consider lottery tickets instead, which are going for a buck a pop.

Re: Evaluating Managed Funds
 

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P.S. Didn't W. Buffett say that most investors would be better off in index funds during a shareholder letter in the 90s?

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Yes, Warren Buffett is well aware of the poor performance of most fund managers, and that is why he's advised the average investor to choose index funds. But the point of his "Superinvestors of Graham & Doddsville" is that while the market is frequently efficient, it's consistantly beatable by a smart investor. His example investors didn't squeak by the indexes either, most of them crushed the indexes and did so taking substantially less (real) risk.

Of course I'm not sure how Buffett beat the market since he believes the CAPM is pure BS, and that Beta has nothing to do with risk. He's just an old fuddy duddy so out of touch with these smart academic types that he's content with a 50 year record averaging north of 25% a year....