Stock Market?

[DesertCat]

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I concede that if we are looking for a zero % gain or less, 40 years is a stretch, but I did say "20-40 year period". If you'd like to calculate the dividend return over the past century to see what kind of difference it would have made during dismal market periods, knock yourself out.
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If I buy the Dow 30 today and come back in 40 years to check on it, chances are I will have made some money. But it's no guarantee. Not even close.

Cheers.

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I think you and Vic Sperando both misunderstand the true definition of stock market returns. From Ben Graham's "The Intelligent Investor", the average stock yielded between 4% & 5.8% from 1891-1940. So if Dow Jones index funds existed in 1896, and you bought shares in one, and sold those shares for the same price in 1932, you'd have made an average return of about 5% a year.

Of course, Vic is cherry picking the worst possible time frames, so let me do the opposite. If you had sold at the top in 1937, you would have made about 6 times your money. Counting dividends you're return would have been over 9% per year for 40 years! If you sold at the top in 1929, your return would have been 13% per year for 30 years!

Vic again ignores dividends also in his statement about 1962-74, where you would have made about 3% per year even though the index briefly returned to 1962 levels in 1974. He also ignores the fact that the index doubled over the next two years. Vic's a "really smart guy" who relies on misleading his audience with half truths to make points. If I were you, I'd find a new hero.

Essentially, your premise is wrong. It's virtually impossible to lose money investing in indexes over very long periods. Until the last few decades, dividends would always make up the difference.

But of course nowadays, dividends have fallen out of favor for several reasons. Mainly share buybacks have replaced them because until Bush's tax cuts, they were more tax efficient. But companies are still returning cash to shareholders in one manner or another, and that's going to make it unlikely your indexes are going to provide negative returns over long periods.

Of course, you can't rely on dividends to compensate you for making bad decisions on individual stocks. I suggest you read the "Intelligent Investor" and start thinking about what the true "intrinsic value" of your investments are. When you stop paying more than intrinsic value, you make fewer mistakes, and will find it easier to avoid those moments of mania where the market's pricing is irrational.

[buffett]

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you make fewer mistakes

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Is it just me, or does this seem to be the key to success in almost everything? I'm sure we could brainstorm some counter examples, but in my life this is true for most things: golf, investing, poker, ...

[BarkingMad]

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Vic is cherry picking the worst possible time frames

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C'mon, it's not like he (or I) was trying to represent the returns during those time frames as typical, but rather to illustrate that there are historical periods where returns would have been far less than stellar.

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Vic's a "really smart guy" who relies on misleading his audience with half truths to make points. If I were you, I'd find a new hero.


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I have no idea how smart he is, and the only heroes I know of are dead. He's just a guy who managed to put together an average yearly gain of 72% over 18 years, and he wrote two books I happen to like.

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It's virtually impossible to lose money investing in indexes over very long periods.

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I think thats a dangerous assertion. You made a good argument with the inclusion of dividends and how they would have buoyed the returns into the black even during the darkest "cherry picked" market periods. I'll take your word for it. But when you speak of "virtual impossibilities" with regard to losing money in the markets you're stretching it. Remember the old maxim - as a trader or investor, your largest loss always lies in the future. The markets' longest, & most volatile moves will always be waiting past the right edge of the chart.

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Of course, you can't rely on dividends to compensate you for making bad decisions on individual stocks. I suggest you read the "Intelligent Investor" and start thinking about what the true "intrinsic value" of your investments are.

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So now were talking about stock picking strategies and value investing. Ok. This brings up one of my biggest gripes about the long term buy and hold argument, that is, no one can seem to agree on what exactly it is. Earlier in your post you spoke about indexing, and now were picking stocks?

If we buy a stock because the share price looks good relative to the value then what happens when the stock doubles? Surely there is an exit point somewhere when the value is no longer so attractive, particularly when we have 1000's of stocks to chose from and at some point we will surely be able to get a better risk adjusted return elsewhere (based on our original value strategy). So, once we exit the market in this example, what have we just done? We just timed the market! Sure, we used fundamentals rather than oscillators or trendlines, but the end result was basically the same. From your input here, I can only conclude that you are not a proponent of the efficient market theory, and thus I am not certain that we actually have that much to disagree about.

-BM

[buffett]

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average yearly gain of 72% over 18 years

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There's no way this is a CAGR, so can you give more details? How much money was he managing? How much capital did he return back to investors each year? How much is the guy worth now? etc.

PS
Which is more impressive....this guy's 72% or a ~20% CAGR?

[econophile]

seems like most arguments on this board are based on anecdotes rather than systematic empirical evidence. please correct me if i'm wrong.

[BarkingMad]

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There's no way this is a CAGR

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It is a Compound Annual Growth Rate. I realize that might seem pretty spectacular in Graham-and-Doddsville, but that is the reason why Schwager chose Sperandeo for an interview in the book "New Market Wizards, conversations with America's top traders". If you look at it with that in perspective, it makes sense.

I realize that would result in an initial $10,000 investment growing to $173,584,940.27 in 18 years (thats what Excel tells me), and I think we can safely conclude that there were significant management fees and client withdrawls during that period. I don't know the specific details though, and I'm not sure why Vic's personal net worth is relevant.

FWIW, if Schwager had calculated a simple average of the individual yearly returns the result would be slightly less than the CAGR, not more.

[DesertCat]

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It is a Compound Annual Growth Rate. I realize that might seem pretty spectacular in Graham-and-Doddsville, but that is the reason why Schwager chose Sperandeo for an interview in the book "New Market Wizards, conversations with America's top traders". If you look at it with that in perspective, it makes sense.

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I don't believe it. He'd be among the richest men in the world were it true. Returns like that for 3 years alone would force Vic to bar the doors to hold back the flood of investors money wanting in. Has he ever offered audited proof of his returns?

Here's what some others say about Vic.

"1-900-Trader-Vic. Man, talk about getting hammered six ways to Sunday! There's a dude named Vic Sperandeo out there who goes by the cutesy title "Trader Vic." He has a website, occasionally appears as a guru on CNBC and Barron's and built his reputation making a call on the '87 stock market before it crashed. He's written several books including Methods of a Wall Street Master (humble bloke), and he also had this really cool 1-900 number that you could call up to 5 times a day for $2.95 a minute. Vic would tell you which way the market was going. Not only was I stupid enough to buy into his futures/cash market mumbo-jumbo, but I also actually tried to trade based on some of his recommendations. I lost my shirt! Did I mention that my phone bill typically ran close to $300 a month for the short time I was listening to Vic? What a foolish (notice the small "f") racket he had going."

Motley Fool

There are many rumours that Vic went bankrupt after a single bad trade in the late 90s.

[DesertCat]

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Remember the old maxim - as a trader or investor, your largest loss always lies in the future. The markets' longest, & most volatile moves will always be waiting past the right edge of the chart.


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Remember this, it's not a loss until you sell. No-one forces you to sell your index funds at market lows.

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So now were talking about stock picking strategies and value investing. Ok. This brings up one of my biggest gripes about the long term buy and hold argument, that is, no one can seem to agree on what exactly it is. Earlier in your post you spoke about indexing, and now were picking stocks?

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There is no such thing as "buy and hold investing". There is "value investing", which can be a very effective strategy if you are patient and apply it correctly. But your holding period will be dictated by your investments intrinsic value vs. it's price. Most people don't have the patience or fortitude to be good value investors, so their best option is to buy index funds.

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If we buy a stock because the share price looks good relative to the value then what happens when the stock doubles? Surely there is an exit point somewhere when the value is no longer so attractive, particularly when we have 1000's of stocks to chose from and at some point we will surely be able to get a better risk adjusted return elsewhere (based on our original value strategy). So, once we exit the market in this example, what have we just done? We just timed the market! Sure, we used fundamentals rather than oscillators or trendlines, but the end result was basically the same. From your input here, I can only conclude that you are not a proponent of the efficient market theory, and thus I am not certain that we actually have that much to disagree about.


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Well, I don't agree with the "strong" version of the efficient market theory. I think it's pretty clear that most equities are fairly priced most of the time, but not all of the time. And I think the evidence that prices are a "random walk" is very compelling. I.e. I don't believe there is any trading strategy better than flipping a quarter, unless it involves material non-public information (like access to proprietary order books, etc).

Value investing isn't "market timing", though it often appears to offer that ability. Market timing is the buying or selling of securities based on the idea that you know it's price is headed lower or higher. Value investors have no idea whether prices are going up or down. They just know how to estimate whether the current price is "fair" or "unfair" in relation to a securities true value.

2+2 members laugh at people who buy "pattern mappers" to try to beat online poker games by predicting the deal of the deck. 2+2'rs take pride in Sklanksy's theory of poker, that says put money in the pot when your share of the pot is likely to be greater than your contribution. I.e. 2+2'rs are "value investors" when they play poker.

I'm always bemused when those same rational poker players invest ignoring the true value of their investments, and instead trade trying to predict the future with their own fancy "pattern mappers" like charts that have no scientific basis and have been shown over and over again to have no predictive ability.

[mrbaseball]

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I'm always bemused when those same rational poker players invest ignoring the true value of their investments

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You should read the Sports betting forum [img]/images/graemlins/smile.gif[/img] A successful investment, or a poker bet, or a sports bet are all based on getting an edge. And people who seemingly understand this completly when it comes to "pot odds" in poker can't seem to translate it to investments or sports bets. Much of life comes down to pot odds and it's surprising a lot of poker players don't seem to grasp that.

[Sniper]

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There is no such thing as "buy and hold investing"

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Tell that to the mutual fund industry [img]/images/graemlins/wink.gif[/img]

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2+2 members laugh at people who buy "pattern mappers" to try to beat online poker games by predicting the deal of the deck. 2+2'rs take pride in Sklanksy's theory of poker, that says put money in the pot when your share of the pot is likely to be greater than your contribution. I.e. 2+2'rs are "value investors" when they play poker.

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All bets at the poker table are not Value Bets! [img]/images/graemlins/smile.gif[/img]

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I'm always bemused when those same rational poker players invest ignoring the true value of their investments, and instead trade trying to predict the future with their own fancy "pattern mappers" like charts that have no scientific basis and have been shown over and over again to have no predictive ability.

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No reason to hijack this thread with a long discourse, so I will simply say to each his own... there are many ways to make money in the market!