PP investors--stay the course

[craigr]

And yet they still managed to endanger their bank as well as the entire financial system of Switzerland, and maybe the world.

Yes.

Which brings me back to my post above:

And even with all that information, Wall St. traders frequently get burned by bad calls.

Trading against Wall St. is a tremendously bad idea. They even lose when trading against each other!

You have to be widely diversified and indexing. That is the best strategy. And I should also add that we shouldn't confuse strategy with outcome. I can go into a casino and put everything on the Roulette Table black and win. That would be a good outcome, but bad strategy. When going up against Wall St. you may win and have a good outcome initially, but long-term it's a bad strategy trying to out-trade those groups of people.

[rickb]

I believe that frommi is an adherent of the ideas promoted by Rob Bennet, based on the language he uses (e.g.: "Do you buy stuff in the supermarket when its too expensive?").  This is sometimes called "value-informed investing".

Is that correct, frommi?

You can learn more about this here:
http://www.passionsaving.com/
and here:
http://www.passionsaving.com/stock-valuation.html

There is an interesting discussion in the comment section here involving Harry Browne's PP(the post's OK, too):
http://arichlife.passionsaving.com/2008 ... /#comments

I personally find Bennet's ideas interesting, and would enjoy a discussion of them.  It's basically: stocks are too expensive right now (based on a rolling 10-year average of P/E).  So, most likely, returns will be bad (2.21%, currently).  So don't buy them.

Bennet used to argue about his "value informed investing" ideas at Bogleheads.  You might look up some of those threads.  I believe he's been banned from BH - for basically insisting that his "system" beats buy and hold, but never producing any actual algorithm you could follow (or even back-test).  If you buy low and sell high, wait for the next low and repeat, you will certainly end up with more than someone who buys and holds.  However, if you can't specify how low your buy point is, or how high your sell point is, you're not helping anyone.  It turns out defining "low" and "high" in an actionable way that beats buy and hold is incredibly difficult.

[frommi]

Trading against Wall St. is a tremendously bad idea. They even lose when trading against each other!

You have to be widely diversified and indexing. That is the best strategy. And I should also add that we shouldn't confuse strategy with outcome. I can go into a casino and put everything on the Roulette Table black and win. That would be a good outcome, but bad strategy. When going up against Wall St. you may win and have a good outcome initially, but long-term it's a bad strategy trying to out-trade those groups of people.

I fullheartly agree. For most people indexing is best. But buying high priced assets will allways end up with loosing money. In 2000 tech stocks dominated the indexes and they were massivly overvalued, heck even KO was overvalued back then. And it was so simple to see, that everybody could have seen it if he was really aware. Currently its the same with bonds and gold. You can argue with me day and night, but common sense alone tells me that these two assets are massivly overvalued. And that is the reason i think the PP will fail to bring good returns in the next years.
Most asset allocation strategies will perform poorly in the next decade, simply because everbody is using them. 2008 was a once in a lifetime event, but everybody invests now as it is happening every 5 years.

And because valueing an index of 500 stocks is nearly impossible to do, i own only stocks which i can value and where i am 100% certain that they are not overvalued. That is the best wealth protecting strategy i have found, and its the only one where i know that people using it have become rich over time. But its not a get rich quick method. If you want to know more about value investing simply read about Ben Graham, Warren Buffet, Charlie Munger, Walter Schloss, Martin Whitman, Peter Lynch etc etc. That are all old and wise man, who have seen many things in their lives and made a fortune with value investing. But even in value investing there are different types of doing it. But all have one thing in common and that is don`t buy overpriced securities.

[craigr]

If you want to know more about value investing simply read about Warren Buffet, Charlie Munger, Walter Schloss, Martin Whitman, Peter Lynch etc etc. That are all old and wise man, who have seen many things in their lives and made a fortune with value investing.

Warren Buffet recommends using index funds to invest and has for years. Here's an article from 2007:

http://www.reuters.com/article/2007/05/ ... 9820070507

"A very low-cost index is going to beat a majority of the amateur-managed money or professionally-managed money,"

And in 2013:

http://www.cnbc.com/id/100518304

"They should buy a low-cost index fund and they can participate in the growth of America over the next 20 or 30 or 40 years and they'll do fine. But if they're paying high fees to achieve that same result, they're going to get hurt. They should look very carefully at costs. But they should hold a diversified group of really high-class companies, which you can do by buying an index fund. And then they should forget it. They should just pretend the stock market closes for five years and they shouldn't look at prices every day…"

He doesn't like gold or bonds. But if you look at how he has invested in the past he has held silver bullion in his portfolio at times:

"The company owns 129,710,000 ounces of silver. Its first purchase was made on July 25, 1997 and its most recent purchase was made on January 12, 1998.

During 1998, Berkshire has accepted delivery of 87,510,000 ounces in accordance with the terms of the purchase contracts and the remaining contracts for 42,200,000 ounces call for delivery at varied dates until March 6, 1998…Over 30 years ago, Warren Buffett, CEO of Berkshire Hathaway, made his first purchase of silver in anticipation of the metal's demonetization by the U.S. Government."


He also owns large chunks of fixed income and cash which people often overlook. So even if you read a book telling you how he invests, they likely cherry picked a lot of details. Also understand that he owns many companies that he invests in. He is not working like a mutual fund and picking stocks based on P/E, etc. He owns them outright as a major shareholder and controls operations and management in ways normal investors cannot do.

[frommi]

If you want to know more about value investing simply read about Warren Buffet, Charlie Munger, Walter Schloss, Martin Whitman, Peter Lynch etc etc. That are all old and wise man, who have seen many things in their lives and made a fortune with value investing.

Warren Buffet recommends using index funds to invest and has for years. Here's an article from 2007:

http://www.reuters.com/article/2007/05/ ... 9820070507

"A very low-cost index is going to beat a majority of the amateur-managed money or professionally-managed money,"

And in 2013:

http://www.cnbc.com/id/100518304

"They should buy a low-cost index fund and they can participate in the growth of America over the next 20 or 30 or 40 years and they'll do fine. But if they're paying high fees to achieve that same result, they're going to get hurt. They should look very carefully at costs. But they should hold a diversified group of really high-class companies, which you can do by buying an index fund. And then they should forget it. They should just pretend the stock market closes for five years and they shouldn't look at prices every day…"

He doesn't like gold or bonds. But if you look at how he has invested in the past he has held silver bullion in his portfolio at times:

"The company owns 129,710,000 ounces of silver. Its first purchase was made on July 25, 1997 and its most recent purchase was made on January 12, 1998.

During 1998, Berkshire has accepted delivery of 87,510,000 ounces in accordance with the terms of the purchase contracts and the remaining contracts for 42,200,000 ounces call for delivery at varied dates until March 6, 1998…Over 30 years ago, Warren Buffett, CEO of Berkshire Hathaway, made his first purchase of silver in anticipation of the metal's demonetization by the U.S. Government."


He also owns large chunks of fixed income and cash which people often overlook. So even if you read a book telling you how he invests, they likely cherry picked a lot of details. Also understand that he owns many companies that he invests in. He is not working like a mutual fund and picking stocks based on P/E, etc. He owns them outright as a major shareholder and controls operations and management in ways normal investors cannot do.

I know, and i can repeat it, i think for most investors investing in index funds is right. And he bought silver as it was really really cheap but has sold it around 2005 when it was fairly valued in his eyes. BRK is a conglomerate spreaded above the whole economy of the US, his investment portfolio is only a small portion its bookvalue. But you must understand that BRK is an insurance company and has to act accordingly. WB stated not long ago that long term goverment bonds are currently a terrible investment. http://bonds.about.com/b/2013/05/07/war ... ht-now.htm

[frommi]

Btw. i just found an interview with him where you find everything about asset classes of the PP from Feb 2012.

http://finance.fortune.cnn.com/2012/02/ ... er-letter/

Could be an interesting read when you put down your blinders.

[craigr]

Please understand that I'm well aware of Warren Buffet. I'm also well aware that he is a stock bug and advocates owning mostly stocks. I also understand that he has political and insider connections that most people will never have. He also has the ability to trade in ways that do not impose significant personal income taxes the way individuals do. He also has access to capital markets that individual investors do not. He also operates more as an owner of companies, than outright investor sitting on the sidelines.

The main points in all of this:

1) Most people cannot invest like Buffet because of the above.

2) Given pure statistical random chance, there will always be a Warren Buffet in all fields of life. They could have gotten there with a big dollop of luck combined with skills that may never happen again.

3) The past success of the U.S. stock market when Buffet was primarily investing may not continue into the future in the same way.

4) People may have events going on in their lives that dictate when they need their money. Sometimes those needs show up during very bad stock markets where you don't have time to wait things out the way Buffet can. So a portfolio with low volatility serves a good purpose for individuals.

5) Warren Buffet is also a salesman for Berkshire and sometimes may make statements publicly that could benefit his trades that he has not disclosed or help companies that he owns in ways that are no obvious to you.

Finally, I get it that the value investing strategy has a strong pull. I mean beating the markets never sounds so easy as when reading a book and real money is not at stake. But let's just look since 2008 when the market crashed and it should have represented the single best value stock buying opportunity in at least a generation. How did Berkshire do against a comparable index of the Vanguard Total Stock Market? Did Buffet's value skills beat the unsophisticated index?

Vanguard Total Stock Market is Red
Buffet's Berkshire is Blue



Where was the value added by his skills in the greatest value buying opportunity in the stock market in decades?

I wish you all the best.

[dualstow]

I bought BRK-B on 1/22/2008. Could be worse, but I'm not thrilled with the results.
38% gain. Using date and CAGR calculators, I think that's 5.75% annualized.

[rickb]

Btw. i just found an interview with him where you find everything about asset classes of the PP from Feb 2012.

http://finance.fortune.cnn.com/2012/02/ ... er-letter/

Could be an interesting read when you put down your blinders.

In this article Buffet is comparing investments in single asset classes over long periods of time.  I don't think anyone here disagrees that a 100% investment in cash (t-bills), or long term bonds, or gold will underperform a 100% investment in stocks over a sufficiently long period of time (multiple decades). However we're not comparing 100% stocks to 100% something else over multiple decades, we're comparing 100% stocks to a rebalanced, diversified portfolio consisting of all of these assets over much shorter time frames (less than 5 years).  In this comparison, the diversified portfolio is far less risky (much less likely to encounter significant drawdowns).  For example BRK-A dropped from 147,000 to 73,195 (slightly more than 50%) between Sept 2008 and Mar 2009, while PRPFX dropped from 36.47 to 29.12 (slightly more than 20%).  PRPFX had recovered by Oct 2009 while BRK-A hadn't recovered until Jan 2013.

I think it's obvious that a widely diversified portfolio will be inherently more resistant to large drawdowns than an investment in any single asset class.  Please let us know whether you agree or disagree with this.

Assuming you agree, the question then becomes what is the expected difference over long periods of time between the diversified portfolio and (say) a 100% stock portfolio, and is this difference worth the additional short term risk.  In Stocks for the Long Run, Siegel claims the average real return for stocks is 6.5-7%.  Over the past 40 years the average real return for the PP has been about 4.5% (per melveyr's blog, http://www.stableinvesting.com/2011/04/ ... hmark.html).  Over 40 years a 2% difference should add up to a lot of money, but over the last 40 years the PP is pretty much neck and neck with 100% stocks.  Maybe the next 40 years will be different but maybe not.  Or maybe 40 years simply isn't long enough for stocks to exhibit their inherent superiority. 

On the other hand, over 6 months the difference between -50% and -20% is definitely a lot of money.

What time horizon is more important to you?  6 months?  Or 40+ years?  There's really no wrong answer here.  Different strokes for different folks.

[frommi]

What has the stock price of BRK to do with his investment success? When you want to look at his investment success, you should look at his investment portfolio and not on the BRK stock. I don`t own BRK, and probably won`t as long as WB is alife. But you can look at http://www.gurufocus.com/score_board.php when you are interested, its built from their SEC filings of purchases and sells. WB has a 10 year CAGR of around 10% where the S&P had 7,94%. You can find a good amount of value investors that had even better returns than that. ( But not all guru`s are value investors  )

[frommi]

In this article Buffet is comparing investments in single asset classes over long periods of time.  I don't think anyone here disagrees that a 100% investment in cash (t-bills), or long term bonds, or gold will underperform a 100% investment in stocks over a sufficiently long period of time (multiple decades). However we're not comparing 100% stocks to 100% something else over multiple decades, we're comparing 100% stocks to a rebalanced, diversified portfolio consisting of all of these assets over much shorter time frames (less than 5 years).  In this comparison, the diversified portfolio is far less risky (much less likely to encounter significant drawdowns).  For example BRK-A dropped from 147,000 to 73,195 (slightly more than 50%) between Sept 2008 and Mar 2009, while PRPFX dropped from 36.47 to 29.12 (slightly more than 20%).  PRPFX had recovered by Oct 2009 while BRK-A hadn't recovered until Jan 2013.

I think it's obvious that a widely diversified portfolio will be inherently more resistant to large drawdowns than an investment in any single asset class.  Please let us know whether you agree or disagree with this.

Assuming you agree, the question then becomes what is the expected difference over long periods of time between the diversified portfolio and (say) a 100% stock portfolio, and is this difference worth the additional short term risk.  In Stocks for the Long Run, Siegel claims the average real return for stocks is 6.5-7%.  Over the past 40 years the average real return for the PP has been about 4.5% (per melveyr's blog, http://www.stableinvesting.com/2011/04/ ... hmark.html).  Over 40 years a 2% difference should add up to a lot of money, but over the last 40 years the PP is pretty much neck and neck with 100% stocks.  Maybe the next 40 years will be different but maybe not.  Or maybe 40 years simply isn't long enough for stocks to exhibit their inherent superiority. 

On the other hand, over 6 months the difference between -50% and -20% is definitely a lot of money.

What time horizon is more important to you?  6 months?  Or 40+ years?  There's really no wrong answer here.  Different strokes for different folks.

Error #1: You assume that rebalancing adds miracles to the portfolio where in reality it adds only 1% to the returns. But you ignore the risk of rebalancing when one asset goes slowly to zero.
Error #2: You assume that the Max DD of the PP has occured in the past. But what if it lies in the future and is bigger?

When i buy undervalued securities with a good margin of safety, there is not much to loose. When i buy a stock near its liquidation value, than the only thing that can bring me a loss is when i was wrong on the valuation of the stock or things where not on the balance sheets. But that was than my fault and i can learn from that. What did you learn from the last Drawdown?

[Kshartle]

Error #1: You assume that rebalancing adds miracles to the portfolio where in reality it adds only 1% to the returns.

I think I proved in this thread that it doesn't add anything to returns, of course anyone is free to disagree (no one did):

http://gyroscopicinvesting.com/forum/pe ... the-pp/30/

[notsheigetz]

I can see where it's appealing to follow in the footsteps of someone like WB who has amassed a fortune of 60 billion dollars but with that much money a major stock market crash probably isn't going to have much effect on his retirement plan. I wish I lived in that universe but I don't which is why I'm here.

[rickb]

Error #1: You assume that rebalancing adds miracles to the portfolio where in reality it adds only 1% to the returns. But you ignore the risk of rebalancing when one asset goes slowly to zero.

Where did I assume any miracles?  What I said was over 40+ years the real return of the PP has been about 4.5%, and that it has essentially matched a 100% stock portfolio (total stock market, not hand-picked value stocks).   

Error #2: You assume that the Max DD of the PP has occured in the past. But what if it lies in the future and is bigger?

Again, where did I assume this?  What I said was that PRPFX's drawdown in 2008 was about 20% while BRK-A's was about 50%.  PRPFX is similar to the 25/25/25/25 PP, but not identical - just as BRK-A is simply one example of a value portfolio.  The max historical drawdown of the 25/25/25/25 PP was actually less than 20%, and in 1980 not 2008.  The max stock market drawdown has been something like 90% (from the peak in 1929 to the subsequent low in 1932, and total stock market rather than hand-picked selection of value stocks).  Of course, this isn't exactly fair.  So how about over the last 40 years?  There's a list at http://pragcap.com/stock-and-bond-drawd ... erspective, showing the top ten (annual!, not peak to trough) stock drawdowns since 1970.  The max was 48% in 2008 and all were 17% or more.  Maybe hand-picked selections of value stocks would have done better, but I'd bet they'd be in the same ballpark.  During this same period, according to Craig's numbers (at https://web.archive.org/web/20160324133 ... l-returns/) the max annual PP drawdown was 4.1% (not 41%, 4.1%) in 1981.  What I'm actually saying is that a diversified portfolio will be inherently more resistant to large drawdowns than a portfolio invested in any single asset class.  Do you agree with this or not?

When i buy undervalued securities with a good margin of safety, there is not much to loose. When i buy a stock near its liquidation value, than the only thing that can bring me a loss is when i was wrong on the valuation of the stock or things where not on the balance sheets. But that was than my fault and i can learn from that. What did you learn from the last Drawdown?

Now here's an actual assumption (bold added).  Would you care to quantify "not much to lose" in percentage terms?  BRK-A is a collection of "value" companies.  It took a 50% hit in 2008.  I don't know about Buffet's personal portfolio, but I'd guess he took a similar sized hit.

Unless you're buying companies that are already in bankruptcy (value investing ala Michael Price), the liquidation value does not provide an effective price floor.

I'll bet the next time stocks get hammered, value stocks also get hammered and even a hand-picked selection of value stocks will lose much more than a diversified multi-asset portfolio.  I'll also bet that over the next couple of decades, a diversified, multi-asset portfolio will do nearly as well (within a percent or two per year) as a 100% stock portfolio, or even 100% hand-picked value stocks.  I'm perfectly willing to give up a percent or two per year to avoid getting hammered.  But if you're a True BelieverTM in value investing, by all means go for it. Like I said before, different strokes for different folks.

[MediumTex]

Everyone seems testy with one another.

If you're not careful, these types of discussions can start to look like a yard-full of dogs frantically running around peeing everywhere another dog has peed.  It probably makes the dogs feel very busy, but it obviously doesn't accomplish much.

Understanding is like a length of pipe and each point of disagreement or conflict is like a valve that automatically begins to close as the level of frustration with other points of view increases.

The good thing about this forum IMHO is that we seem to stay out of these patterns much of the time.

Remember the wise counsel of Bill and Ted: "Be excellent to each other." 

[notsheigetz]

Error #2: You assume that the Max DD of the PP has occured in the past. But what if it lies in the future and is bigger?

Oh my God! I never even thought of that.

[Bean]

Error #2: You assume that the Max DD of the PP has occured in the past. But what if it lies in the future and is bigger?

Oh my God! I never even thought of that.

If we had a ugly drawdown or fire sale of a few asset classes, I would be ready because of the PP structure.  Blood in the streets...

[notsheigetz]

When you sit on the pot, think about losing everything and be ready.

Buddha say.

[frommi]

Everyone seems testy with one another.

If you're not careful, these types of discussions can start to look like a yard-full of dogs frantically running around peeing everywhere another dog has peed.  It probably makes the dogs feel very busy, but it obviously doesn't accomplish much.

Understanding is like a length of pipe and each point of disagreement or conflict is like a valve that automatically begins to close as the level of frustration with other points of view increases.

The good thing about this forum IMHO is that we seem to stay out of these patterns much of the time.

Remember the wise counsel of Bill and Ted: "Be excellent to each other." 

That was not my intention, i apologize for that. The last part is probably the reason i am still here. 

[Tyler]

(Laughing maniacally as I look at the gold ticker today and run my hands through my imaginary pirate chest full of gold coins)

If you're gonna look at the portfolio often, you might as well pay equal attention to the good days as the bad. 

[dragoncar]

(Laughing maniacally as I look at the gold ticker today and run my hands through my imaginary pirate chest full of gold coins)

If you're gonna look at the portfolio often, you might as well pay equal attention to the good days as the bad. 

I like the good days, but I prefer a good month

[Pointedstick]

Everything is up today! Is it sustainable?? The PP is a bubble! The sky is falling!!!

[dragoncar]

Why is gold reacting today, but didn't yesterday?

[Libertarian666]

Why is gold reacting today, but didn't yesterday?

Obviously there must be people somewhere who thought there was actually a possibility that the government was going to have to cut its spending back to equal its income, which for some reason is called "default" when (if) they do it.

[Reub]

One of the hardest parts of the PP is getting used to the idea of not trying to figure out why things are up or down that particular day or month. You can just sit back and enjoy the ride knowing that you are covered under all conditions.